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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  x                             Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

x		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

Carbylan Therapeutics, 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.
x		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, par value $0.001 per share, of Carbylan Therapeutics, Inc. (“Common Stock”)
		(2)		Aggregate number of securities to which transaction applies:   112,309,074 shares of Common Stock to be issued by Carbylan Therapeutics, Inc. (“Carbylan”) pursuant to that certain Share Purchase Agreement, dated as of June 15, 2016, by and among Carbylan, KalVista Pharmaceuticals Ltd. (“KalVista”), the shareholders of KalVista, and T. Andrew Crockett as the Seller Representative, assuming the exchange ratio determined based on information as to equity ownership as of August 19, 2016 and other assumptions discussed in this proxy statement, including the assumption that Carbylan’s equityholders will own approximately 19% of the combined company and that KalVista’s equityholders will own approximately 81% of the combined company.
		(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 112,309,074 shares of Common Stock multiplied by $0.55 per share (the average of the high and low trading prices of the Common Stock on The NASDAQ Global Market on August 19, 2016). In accordance with Section 14(g) of the Securities Exchange Act of 1933, as amended, the filing fee equals the product of 0.0001007 multiplied by the maximum aggregate value of the transaction.
		(4)		Proposed maximum aggregate value of transaction:   $61,769,990.80
		(5)		Total fee paid:   $6,220.24
¨		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 AUGUST 23, 2016

 

 

                    , 2016

Dear Stockholder:

You are invited to attend a special meeting of the stockholders of Carbylan Therapeutics, Inc., a Delaware corporation (“Carbylan”), to be held on             ,         , 2016 at              local time, at the offices of Latham & Watkins LLP, 140 Scott Drive, Menlo Park, California 94025.

As previously announced, on June 15, 2016, Carbylan, KalVista Pharmaceuticals Ltd., a private company limited by shares incorporated and registered in England and Wales (“KalVista”), the shareholders of KalVista (each a “Seller” and collectively, the “Sellers”) and T. Andrew Crockett, as the Seller Representative, solely for the purposes of being bound by certain provisions therein and solely in his capacity as the Seller Representative, entered into a Share Purchase Agreement (the “Share Purchase Agreement”), pursuant to which, among other things, each Seller will sell to Carbylan, and Carbylan will purchase from each Seller, all of the ordinary and preferred shares of KalVista (each a “KalVista Share” and collectively, the “KalVista Shares”) owned by such Seller in exchange for the issuance of a certain number of shares of Carbylan common stock. Carbylan and KalVista believe that the transaction will result in a pharmaceutical company focused on the discovery, development, and commercialization of small molecule protease inhibitors for diseases with significant unmet needs. KalVista has developed a proprietary portfolio of small molecule plasma kallikrein inhibitors targeting hereditary angioedema (“HAE”) and diabetic macular edema (“DME”).

At the closing of the transaction, the number of shares of Carbylan common stock to be issued in exchange for the KalVista Shares will be based upon the relative stipulated values of each of Carbylan and KalVista as determined pursuant to the Share Purchase Agreement, subject to adjustment to account for the effect of a reverse stock split of Carbylan common stock, at a ratio of one new share for every fourteen shares outstanding, to be implemented prior to the consummation of the transaction as discussed in the accompanying proxy statement. The stipulated value of Carbylan is subject to a potential downward adjustment based upon Carbylan’s net cash balance at the closing of the transaction. Assuming that no such adjustment is applicable, immediately following the closing of the transaction, KalVista equityholders are expected to hold approximately 81.0% of the outstanding common stock of Carbylan on a fully-diluted basis.

Shares of Carbylan common stock are currently listed on The NASDAQ Global Market (“NASDAQ”) under the symbol “CBYL.” Prior to consummation of the transaction, Carbylan 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 transaction, Carbylan will be renamed “KalVista Pharmaceuticals, Inc.” and expects to trade on NASDAQ under the symbol “KALV,” subject to the outcome of the proposals described in the accompanying proxy statement. On                     , 2016, the last trading day before the date of this proxy statement, the closing sale price of Carbylan common stock was $         per share.

Carbylan is holding a special meeting of its stockholders in order to obtain the stockholder approvals necessary to complete the transaction and related matters. At the Carbylan special meeting, Carbylan will ask its stockholders to approve the Share Purchase Agreement and issuance of Carbylan common stock pursuant to the Share Purchase Agreement, approve an amendment to Carbylan’s Amended and Restated Certificate of Incorporation effecting a reverse stock split of outstanding Carbylan common stock at a ratio of one new share for every fourteen shares outstanding and an amendment to Carbylan’s Amended and Restated Certificate of

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Incorporation changing the Carbylan corporate name to “KalVista Pharmaceuticals, Inc.,” and approve the adjournment of the special meeting in the event that there are not sufficient votes at the time of the special meeting to approve the other proposals, each as described in the accompanying proxy statement.

As described in the accompanying proxy statement, certain stockholders of Carbylan holding approximately 50% of the outstanding common stock of Carbylan and certain directors and officers of Carbylan holding options to purchase Carbylan common stock (collectively, the “Designated Carbylan Equityholders”) have entered into a support agreement with KalVista (the “Support Agreement”). The Support Agreement places certain restrictions on the transfer of Carbylan common stock held by the Designated Carbylan Equityholders and includes an agreement to vote in favor of the approval of the transactions contemplated by the Share Purchase Agreement and related matters and against competing acquisition proposals. Under specified circumstances described in the Support Agreement, the aggregate number of shares subject to the voting restrictions may be reduced from approximately 50% of the outstanding Carbylan common stock to 35%.

After careful consideration and consultation with its financial advisor and outside legal counsel, the Carbylan board of directors unanimously determined that the 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, Carbylan and its stockholders and unanimously approved and declared advisable the Share Purchase Agreement, the issuance of Carbylan 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.

Accordingly, the Carbylan board of directors unanimously recommends that you vote “FOR” the approval of the Share Purchase Agreement and issuance of Carbylan common stock pursuant to the Share Purchase Agreement, “FOR” the proposal to amend Carbylan’s Amended and Restated Certificate of Incorporation to effect a 14:1 reverse stock split of outstanding Carbylan common stock, “FOR” the proposal to amend Carbylan’s Amended and Restated Certificate of Incorporation to change Carbylan’s name to “KalVista Pharmaceuticals, Inc.” and “FOR” the proposal to adjourn the special meeting to solicit additional votes if there are not sufficient votes at the time of the special meeting to approve the other proposals.

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. You may vote by completing and mailing the enclosed proxy card or by instructing your broker, bank or nominee how to vote your shares. Voting by written proxy, or by instructing your broker, bank or nominee how to vote your shares, will ensure your shares are represented at the special meeting.

Sincerely,

David M. Renzi

President and Chief Executive Officer

Neither the U.S. Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the Share Purchase Agreement or issuance of Carbylan common stock pursuant to the Share Purchase Agreement, passed upon the merits or fairness of the transaction, or passed upon the adequacy or accuracy of the disclosure in the accompanying proxy statement. Any representation to the contrary is a criminal offense.

The accompanying proxy statement is dated                     , 2016 and is first being mailed to stockholders on or about                     , 2016.

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CARBYLAN THERAPEUTICS, INC.

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON                     , 2016

 

 

To the Stockholders of Carbylan Therapeutics, Inc.:

Carbylan Therapeutics, Inc., a Delaware corporation (“Carbylan”), will hold a special meeting of the stockholders of Carbylan on             ,         , 2016 at              local time, at the offices of Latham & Watkins LLP, 140 Scott Drive, Menlo Park, California 94025. Carbylan will consider and act on the following proposals at the special meeting:

 

1.

To approve the Share Purchase Agreement, dated as of June 15, 2016 (the “Share Purchase Agreement”), by and among Carbylan, KalVista Pharmaceuticals Ltd. (“KalVista”), the shareholders of KalVista (each a “Seller” and collectively, the “Sellers”), and T. Andrew Crockett, in his capacity as the Seller Representative (the “Seller Representative”) and the issuance of shares of Carbylan’s common stock, par value $0.001 per share (“Carbylan common stock”), pursuant to the terms of the Share Purchase Agreement (such proposal, the “Share Issuance Proposal”). Pursuant to the terms of the Share Purchase Agreement, Carbylan is expected to issue Carbylan common stock to the Sellers such that the Sellers will hold approximately 81% of Carbylan’s outstanding common stock, in the aggregate, and KalVista will become a wholly owned subsidiary of Carbylan;

 

2.

To approve and adopt an amendment to Carbylan’s Amended and Restated Certificate of Incorporation (the “Charter”) to effect a reverse stock split of Carbylan common stock, at a ratio of one new share for every fourteen shares outstanding, in the form attached as Annex C to the accompanying proxy statement (the “Reverse Stock Split Proposal”);

 

3.

To approve and adopt an amendment to the Charter to change the name of Carbylan to “KalVista Pharmaceuticals, Inc.,” contingent upon the closing of the transaction, in the form attached as Annex D to the accompanying proxy statement (the “Name Change Proposal”);

 

4.

To adjourn the special meeting to solicit additional votes to approve the Share Issuance Proposal, the Reverse Stock Split Proposal, or the Name Change Proposal, if necessary or appropriate (the “Adjournment Proposal”); and

 

5.

Any other business that may properly come before the special meeting and any adjournment(s) or postponement(s) thereof.

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

The Carbylan board of directors unanimously recommends that you vote (1) “FOR” the Share Issuance Proposal; (2) “FOR” the Reverse Stock Split Proposal; (3) “FOR” the Name Change Proposal; and (4) “FOR” the Adjournment Proposal. The approval by Carbylan stockholders of the Share Issuance Proposal is required to complete the transaction described in the accompanying proxy statement.

Only stockholders of record of shares of Carbylan common stock at the close of business on                     , 2016, 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 transaction, the special meeting or the accompanying proxy statement, need help voting your shares of Carbylan common stock, or would like additional copies, without charge, of the enclosed proxy statement or proxy card, please contact Carbylan’s proxy solicitor, Alliance Advisors, LLC, using the information below:

Alliance Advisors, LLC

200 Broadacres Drive, 3rd Floor

Bloomfield, NJ 07003

Stockholders May Call Toll-Free: 855-742-8276

Stockholders May Email: CBYL@allianceadvisorsllc.com

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Your vote is very important. It is important that your shares be represented and voted whether or not you plan to attend the special meeting in person. You may vote by completing and mailing the proxy card enclosed with the proxy statement, or if your shares are held in “street name,” meaning your shares are held of record by a broker, bank or other nominee, you may vote by instructing your broker, bank or nominee how to vote your shares using the voting instruction form furnished by your broker, bank or nominee. Submitting a proxy by mailing a proxy card or by instructing your broker, bank or nominee how to vote your shares will ensure your shares are represented at the special meeting. If you do not vote or do not instruct your broker, bank or nominee how to vote, it will not affect the passage of the Share Issuance Proposal or the Adjournment Proposal; however, broker non-votes will count as votes “AGAINST” the Reverse Stock Split Proposal and the Name Change Proposal.

Please vote promptly whether or not you expect to attend the Carbylan special meeting.

 

Newark, California

Dated:                     , 2016

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TABLE OF CONTENTS

 

SUMMARY			1
THE PARTIES INVOLVED IN THE TRANSACTION			1
THE TRANSACTION STRUCTURE			2
EXPECTED TIMING OF THE TRANSACTION			2
CONSIDERATION			2
EFFECT OF THE TRANSACTION ON STOCK OPTIONS AND EQUITY INCENTIVES			2
EXCHANGE RATIO; NET CASH CALCULATION			3
CARBYLAN BOARD RECOMMENDATION AND REASONS FOR THE TRANSACTION			3
OPINION OF CARBYLAN’S FINANCIAL ADVISOR			3
THE CARBYLAN SPECIAL MEETING			4
MARKET PRICE AND DIVIDEND INFORMATION			4
NO SOLICITATION; THIRD PARTY COMPETING PROPOSALS			5
CHANGES TO BOARD RECOMMENDATION			5
CONDITIONS TO CONSUMMATION OF THE TRANSACTION			5
TERMINATION OF THE SHARE PURCHASE AGREEMENT			6
TERMINATION FEE AND EXPENSES			6
SPECIFIC PERFORMANCE			6
SUPPORT AGREEMENT			7
LOCK-UP AGREEMENTS			7
REGISTRATION RIGHTS AGREEMENT			7
INTERESTS OF CARBYLAN’S DIRECTORS AND EXECUTIVE OFFICERS			7
EXECUTIVE OFFICERS AND DIRECTORS FOLLOWING THE SHARE PURCHASE			8
REGULATORY MATTERS			8
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION TO CARBYLAN STOCKHOLDERS			8
RISK FACTORS			8
NASDAQ GLOBAL MARKET LISTING			9
ANTICIPATED ACCOUNTING TREATMENT			10
NO APPRAISAL RIGHTS			10
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION AND THE SPECIAL MEETING			11
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION			17
SELECTED HISTORICAL FINANCIAL DATA OF CARBYLAN			17
SELECTED HISTORICAL FINANCIAL DATA OF KALVISTA			18
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA OF CARBYLAN AND KALVISTA			18
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA			20
DESCRIPTION OF CARBYLAN COMMON STOCK			21
MARKET PRICE AND DIVIDEND INFORMATION			25
RISK FACTORS			26
RISKS RELATED TO THE TRANSACTION			26
RISKS RELATED TO THE PROPOSED  14:1 REVERSE STOCK SPLIT			31
RISKS RELATED TO CARBYLAN			32
RISKS RELATED TO THE OWNERSHIP OF COMMON STOCK OF CARBYLAN			37
RISKS RELATED TO KALVISTA ’S FINANCIAL POSITION AND NEED FOR ADDITIONAL CAPITAL			41

 

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RISKS RELATED TO THE DISCOVERY AND DEVELOPMENT OF KALVISTA’S PRODUCT CANDIDATES			44
RISKS RELATED TO REGULATORY APPROVAL OF KALVISTA’S PRODUCT CANDIDATES AND OTHER LEGAL COMPLIANCE MATTERS			47
RISKS RELATED TO THE COMMERCIALIZATION OF KALVISTA’S PRODUCT CANDIDATES			52
RISKS RELATED TO KALVISTA ’S DEPENDENCE ON THIRD PARTIES			56
RISKS RELATED TO KALVISTA ’S INTELLECTUAL PROPERTY			58
RISKS RELATED TO EMPLOYEE MATTERS, MANAGING GROWTH AND MACROECONOMIC CONDITIONS			61
RISKS RELATED TO THE COMBINED COMPANY			63
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION			70
THE SPECIAL MEETING			71
GENERAL			71
DATE, TIME AND PLACE			71
PURPOSES OF THE CARBYLAN SPECIAL MEETING			71
RECOMMENDATION OF THE CARBYLAN BOARD OF DIRECTORS			71
STOCKHOLDERS ENTITLED TO VOTE ; RECORD DATE			71
QUORUM AND VOTE REQUIRED			72
VOTING BY STOCKHOLDERS			72
REVOCATION OF PROXIES			73
VOTING BY CARBYLAN’S DIRECTORS AND EXECUTIVE OFFICERS			73
SOLICITATION OF PROXIES			74
NO APPRAISAL RIGHTS			74
HOUSEHOLDING			74
TABULATION OF VOTES			74
ADJOURNMENTS AND POSTPONEMENTS			74
ATTENDING THE SPECIAL MEETING			75
NOTICE REGARDING AVAILABILITY OF PROXY MATERIALS			75
ASSISTANCE			75
THE TRANSACTION			76
THE TRANSACTION STRUCTURE			76
EXPECTED TIMING OF THE TRANSACTION			76
CONSIDERATION			76
EFFECT OF THE TRANSACTION ON STOCK OPTIONS AND EQUITY INCENTIVES			76
NET CASH CALCULATION			76
BACKGROUND OF THE TRANSACTION			77
RECOMMENDATION OF THE CARBYLAN BOARD OF DIRECTORS			84
REASONS FOR THE TRANSACTION			84
INTERESTS OF CARBYLAN’S DIRECTORS AND EXECUTIVE OFFICERS			87
OPINION OF CARBYLAN’S FINANCIAL ADVISOR			90
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION TO CARBYLAN STOCKHOLDERS			98
REGULATORY MATTERS			98
ANTICIPATED ACCOUNTING TREATMENT			99
NO APPRAISAL RIGHTS			99
TERMS OF THE SHARE PURCHASE AGREEMENT			100
EXPLANATORY NOTE REGARDING THE SHARE PURCHASE AGREEMENT			100
THE TRANSACTION STRUCTURE			100
CONSIDERATION			100

 

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EXCHANGE RATIO; NET CASH CALCULATION			101
EFFECT OF THE TRANSACTION ON STOCK OPTIONS AND EQUITY INCENTIVES			105
DIRECTORS AND OFFICERS OF CARBYLAN FOLLOWING THE TRANSACTION			105
AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF CARBYLAN			106
CONDITIONS TO THE CONSUMMATION OF THE TRANSACTION			106
REPRESENTATIONS AND WARRANTIES			107
NO SOLICITATION; THIRD PARTY COMPETING PROPOSAL			108
CHANGES TO BOARD RECOMMENDATION			110
MEETING OF CARBYLAN STOCKHOLDERS			111
COVENANTS; CONDUCT OF THE BUSINESSES PENDING THE CLOSING			111
INDEMNIFICATION AND INSURANCE			113
OTHER AGREEMENTS			114
TERMINATION OF THE SHARE PURCHASE AGREEMENT			115
TERMINATION FEE AND EXPENSES			116
REGULATORY APPROVALS			117
AMENDMENTS AND WAIVERS			118
SPECIFIC PERFORMANCE			118
THIRD PARTY BENEFICIARIES			118
AGREEMENTS RELATED TO THE SHARE PURCHASE AGREEMENT			119
SUPPORT AGREEMENT			119
LOCK-UP AGREEMENTS			120
REGISTRATION RIGHTS AGREEMENT			120
SHARE ISSUANCE PROPOSAL			121
REVERSE STOCK SPLIT PROPOSAL			122
NAME CHANGE PROPOSAL			129
ADJOURNMENT PROPOSAL			130
CARBYLAN’S BUSINESS			131
BACKGROUND			131
MANUFACTURING			132
INTELLECTUAL PROPERTY			132
GOVERNMENT REGULATION AND PRODUCT APPROVAL			133
RESEARCH & DEVELOPMENT EXPENSES			135
EMPLOYEES			135
EXECUTIVE OFFICERS OF CARBYLAN			135
KALVISTA’S BUSINESS			137
OVERVIEW			137
KALVISTA’S STRENGTHS			137
STRATEGY			138
PIPELINE CHART			139
PLASMA KALLIKREIN IN HAE AND DME			139
HEREDITARY ANGIOEDEMA			140
DIABETIC MACULAR EDEMA			142
COMPETITION			147
INTELLECTUAL PROPERTY			147
LEGAL PROCEEDINGS			148
FACILITIES			148
EMPLOYEES			148

 

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CARBYLAN’S MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS			149
OVERVIEW			149
FINANCIAL OVERVIEW			150
RESULTS OF OPERATIONS			152
LIQUIDITY AND CAPITAL RESOURCES			155
CONTRACTUAL OBLIGATIONS AND COMMITMENTS			158
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES			158
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2015 AND 2014			159
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT CARBYLAN’S MARKET RISK			162
KALVISTA’S MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS			163
OVERVIEW			163
RECENT DEVELOPMENTS			164
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES			166
RESULTS OF OPERATIONS			166
LIQUIDITY AND CAPITAL RESOURCES			167
CONTRACTUAL OBLIGATIONS AND COMMITMENTS			169
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT KALVISTA’S MARKET RISK			170
INTEREST RATE RISK			170
FOREIGN EXCHANGE RATE RISK			170
EFFECTS OF INFLATION			170
EXECUTIVE OFFICERS AND DIRECTORS FOLLOWING THE SHARE PURCHASE			171
BOARD OF DIRECTORS OF THE COMBINED COMPANY FOLLOWING THE CONSUMMATION OF THE TRANSACTION			173
CARBYLAN DIRECTOR COMPENSATION			177
CARBYLAN EXECUTIVE COMPENSATION			179
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CARBYLAN			184
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF KALVISTA			187
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION			189
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET			191
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS			192
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS			193
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION			194
WHERE YOU CAN FIND MORE INFORMATION			198
OTHER MATTERS			199
INDEX TO AUDITED CARBYLAN FINANCIAL STATEMENTS			F-1
INDEX TO AUDITED KALVISTA FINANCIAL STATEMENTS			F-51

 

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ANNEX A: SHARE PURCHASE AGREEMENT			A-1
ANNEX B: OPINION OF WEDBUSH SECURITIES INC.			B-1
ANNEX C: FORM OF CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF CARBYLAN THERAPEUTICS, INC. (REGARDING THE REVERSE STOCK SPLIT)			C-1
ANNEX D: FORM OF CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF CARBYLAN THERAPEUTICS, INC. (REGARDING CORPORATE NAME CHANGE)			D-1

 

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QUESTIONS AND ANSWERS ABOUT THE TRANSACTION

AND THE SPECIAL MEETING

The following section provides answers to frequently asked questions about the 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:	What is the transaction?

 

A:

Carbylan and KalVista have entered into a Share Purchase Agreement, dated as of June 15, 2016. The Share Purchase Agreement contains the terms and conditions of the proposed acquisition of KalVista by Carbylan. Under the Share Purchase Agreement, Carbylan will acquire all of the ordinary and preferred shares of KalVista. At the closing of the transaction, each issued and outstanding share of KalVista immediately prior to the closing of the transaction will be exchanged for a certain number of shares of Carbylan common stock based on the relative stipulated values of Carbylan and KalVista under the terms of the Share Purchase Agreement, as described in the section entitled “Terms of the Share Purchase Agreement—Exchange Ratio; Net Cash Calculation,” beginning on page 101 of this proxy statement, and subject to adjustment to account for a reverse stock split of Carbylan common stock, at a ratio of one new share for every fourteen shares outstanding (which is referred to herein as the “14:1 reverse stock split”), to be implemented prior to the consummation of the transaction. Following the transaction, KalVista will be a wholly owned subsidiary of Carbylan, and at closing, the Sellers are expected to hold approximately 81% of the outstanding Carbylan common stock. After the transaction, Carbylan will change its corporate name to “KalVista Pharmaceuticals, Inc.”

 

Q:	What will happen to Carbylan Options under the Share Purchase Agreement?

 

A:

The vesting of each outstanding Carbylan Option will accelerate immediately prior to closing, and at closing (i) if the Carbylan Option is “in-the-money,” it will be net exercised for Carbylan common stock (subject to an offset for withholding obligations) and (ii) if the Carbylan Option is not “in-the-money” it will be terminated for no consideration. A Carbylan Option will be considered “in-the-money” if it has an exercise price per share less than the Carbylan Closing Price. For more information on the treatment of Carbylan Options in the transaction, see the section entitled, “Terms of the Share Purchase Agreement—Effect of the Transaction on Stock Options and Equity Incentives,” beginning on page 105 of this proxy statement.

 

Q:	What will happen to Carbylan if, for any reason, the transaction does not close?

 

A:

If the transaction does not close for any reason, the Carbylan 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 Carbylan or continue to operate the business of Carbylan. If Carbylan decides to dissolve and liquidate its assets, Carbylan 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 Carbylan and setting aside funds for reserves.

If Carbylan were to continue its business, it would need to continue to develop Hydros-TA, despite the failed clinical trials and/or identify, acquire and develop other products or product candidates. In addition, as of August 19, 2016, the Carbylan workforce was comprised of three employees. If Carbylan decides to continue its business, Carbylan will need to add to its senior management team and to hire other personnel to lead and staff all of its necessary functions, especially its research, development and commercialization areas.

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

 

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Purchase Agreement—Termination of the Share Purchase Agreement,” beginning on pages 106 and 115, respectively. For more information on potential consequences for Carbylan stockholders should the transaction not close, see the section entitled “Risk Factors,” beginning on page 26 of this proxy statement.

 

Q:	Why are the two companies proposing the transaction?

 

A:

Carbylan and KalVista believe that the transaction will result in a pharmaceutical company focused on the discovery, development, and commercialization of small molecule protease inhibitors for diseases with significant unmet needs. KalVista has developed a proprietary portfolio of small molecule plasma kallikrein inhibitors targeting HAE and DME. For a discussion of Carbylan’s reasons for the transaction, Carbylan urges you to read the section entitled “The Transaction—Reasons for the Transaction,” beginning on page 84 of this proxy statement.

 

Q:	Why am I receiving this proxy statement?

 

A:

You are receiving this proxy statement because you have been identified as a stockholder of Carbylan as of the applicable record date, and you are entitled, as applicable, to vote at the Carbylan special meeting to approve the Share Purchase Agreement and issuance of shares of Carbylan common stock pursuant to the Share Purchase Agreement, among other matters. This document serves as a proxy statement of Carbylan used to solicit proxies for its special stockholder meeting. For more information on the special stockholder meeting, see the section entitled “The Special Meeting,” beginning on page 71 of this proxy statement.

 

Q:	What stockholder approvals are required to consummate the transaction?

 

A:	To consummate the transaction, Carbylan stockholders must approve the Share Purchase Agreement and the issuance of Carbylan common stock in the transaction.

The Carbylan stockholders’ approval of the transaction and the issuance of Carbylan common stock in the transaction requires the affirmative vote of the holders of a majority of the shares of Carbylan common stock having voting power present in person or represented by proxy at the Carbylan special meeting (excluding broker non-votes and abstentions).

Certain Carbylan stockholders who in the aggregate own approximately 50% of the outstanding shares of Carbylan common stock are parties to the Support Agreement with Carbylan and KalVista, whereby such stockholders agreed to vote in favor of approving the transaction and the issuance of Carbylan common stock in the transaction pursuant, subject to the terms of the Support Agreement. For a more complete description of the Support Agreement, Carbylan urges you to read the section entitled “Agreements Related to the Share Purchase Agreement—Support Agreement,” beginning on page 119 of this proxy statement.

 

Q:	What else is required to consummate the transaction?

 

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

 

•

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

 

•

performance of covenants in all material respects;

 

•

continued listing of Carbylan shares on NASDAQ;

 

•

absence of material adverse effect on either Carbylan or KalVista;

 

•

the continued effectiveness of the lock-up agreements entered into by each of the Sellers and certain stockholders of Carbylan;

 

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•

the continued effectiveness of the registration rights agreement entered into by certain Sellers and Carbylan;

 

•

at closing, Carbylan’s Net Cash, as defined in the Share Purchase Agreement, being equal to at least $25 million; and

 

•

reconstitution of the Carbylan board of directors and executive officers pursuant to the terms of the Share Purchase Agreement.

For a more complete description of the closing conditions under the Share Purchase Agreement, Carbylan urges you to read the section entitled “Terms of the Share Purchase Agreement—Conditions to the Consummation of the Transaction,” beginning on page 106 of this proxy statement.

 

Q:	What will KalVista shareholders receive in the transaction?

 

A:

At the closing of the transaction, each ordinary and preferred share of KalVista immediately prior to the closing of the transaction will be exchanged for a certain number of shares of Carbylan common stock based on the relative stipulated values of Carbylan and KalVista under the terms of the Share Purchase Agreement, as described in the section entitled “Terms of the Share Purchase Agreement—Exchange Ratio; Net Cash Calculation,” beginning on page 101 of this proxy statement.

 

Q:	Who will be the directors of Carbylan following the transaction?

 

A:

The combined company’s board of directors will initially be fixed at seven members, consisting of (i) two members designated by Carbylan, namely Albert Cha, M.D., Ph.D. and Arnold L. Oronsky and (ii) five members designated by KalVista, namely Richard Aldrich, as Chairman, T. Andrew Crockett, Joshua Resnick, Edward W. Unkart and Rajeev Shah. For more information on the leadership of the combined company following the transaction, see the section entitled “Executive Officers and Directors Following the Share Purchase,” beginning on page 171 of this proxy statement.

 

Q:	Who will be the executive officers of Carbylan immediately following the transaction?

 

A:

Immediately following the completion of the transaction, the executive management team of the combined company is expected to be composed of T. Andrew Crockett, serving as Chief Executive Officer, and Christopher Yea, Ph.D., 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 Share Purchase,” beginning on page 171 of this proxy statement.

 

Q:	What are the material U.S. federal income tax consequences of the transaction to Carbylan stockholders?

 

A:

Carbylan stockholders will not recognize gain or loss in connection with the transaction with respect to their shares of Carbylan common stock. For more information on the material U.S. federal income tax consequences of the transaction to Carbylan stockholders, see the section entitled “The Transaction—Material U.S. Federal Income Tax Consequences to Carbylan Stockholders,” beginning on page 98 of this proxy statement.

 

Q:	What risks should I consider in deciding whether to vote in favor of the issuance of shares in the transaction?

 

A:	You should carefully review the section entitled “Risk Factors,” beginning on page 26 of this proxy statement, which sets forth certain risks and uncertainties related to the transaction, including risks and

 

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uncertainties to which Carbylan, as an independent company, is subject, risks and uncertainties related to the ownership of Carbylan common stock, risks and uncertainties to which KalVista, as an independent company, is subject and risks and uncertainties to which the combined company’s business will be subject.

 

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

 

A:

Prior to the signing of the Share Purchase Agreement, the Carbylan board of directors and the Carbylan stockholders previously approved a series of alternate reverse stock splits whereby each outstanding 4, 5, 6, 7, 8, 9 or 10 shares of Carbylan common stock would be combined, converted and changed into one share of common stock. However, subsequent to the signing, and prior to the effectiveness of such reverse stock split, Carbylan determined, and KalVista agreed, to seek approval for an additional ratio to provide additional flexibility, and is proposing a 14:1 reverse stock split. The Carbylan board of directors believes that the completion of a 14:1 reverse stock split will cause the price of Carbylan common stock to increase which may encourage interest and trading in its common stock and may reduce the risk of a delisting of Carbylan common stock from NASDAQ. For more information on the reverse stock split, see the section entitled “Reverse Stock Split Proposal,” beginning on page 122 of this proxy statement.

 

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

 

A:

The Carbylan board of directors unanimously recommends that you vote (1) “FOR” the Share Issuance Proposal; (2) “FOR” the Reverse Stock Split Proposal; (3) “FOR” the Name Change Proposal; and (4) “FOR” the Adjournment Proposal. The approval by Carbylan stockholders of the Share Issuance Proposal is required to complete the transaction described in this proxy statement. For more information on the Carbylan board of directors’ recommendations to Carbylan stockholders regarding the proposals to be voted on at the special stockholder meeting, see the section entitled “The Transaction—Recommendation of the Carbylan Board of Directors,” beginning on page 84 of this proxy statement.

 

Q:	When do you expect the transaction to be consummated?

 

A:

Carbylan anticipates that the closing of the transaction will occur sometime soon after the Carbylan special meeting to be held on                     , 2016, but Carbylan 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 Transaction,” beginning on page 106, and “The Transaction—Expected Timing of the Transaction,” beginning on page 76, each in this proxy statement.

 

Q:	What do I need to do now?

 

A:

Carbylan urges you to read this proxy statement carefully, including its annexes, and to consider how the transaction affects you. You may vote by completing and mailing the proxy card enclosed with the proxy statement. Submitting a proxy by mailing a proxy card, or by instructing your broker, bank or nominee how to vote your shares, will ensure your shares are represented at the Carbylan special meeting. If you are a stockholder of record, you may vote in person by coming to the Carbylan special meeting and Carbylan will give you a ballot when you arrive; vote using the proxy card by simply marking, signing and dating your proxy card and returning it promptly in the postage-paid envelope provided; vote on the Internet, going to the website on the proxy card or voting instruction form to complete an electronic proxy card.

 

Q:	If my Carbylan shares are held in “street name” by my broker, will my broker vote my shares for me?

 

A:

If your shares are held in “street name,” meaning your shares are held of record by a broker, bank or other agent, you should instruct your broker, bank or agent how to vote your shares. Unless your broker, bank or other agent has discretionary authority to vote on certain matters, your bank, broker or other agent will not

 

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be able to vote your shares of Carbylan common stock without instructions from you. Brokers are not expected to have discretionary authority to vote for the Share Issuance Proposal, the Reverse Stock Split Proposal or the Name Change Proposal. To make sure that your vote is counted, you should instruct your broker to vote your shares, following the procedures provided by your broker. For more information see the section entitled “The Special Meeting,” beginning on page 71 of this proxy statement.

 

Q:	What happens if I do not return a proxy card or otherwise provide proxy instructions, as applicable?

 

A:

If you are a Carbylan stockholder, the failure to return your proxy card or otherwise provide proxy instructions will have no effect on the Share Issuance Proposal and the Adjournment Proposal. However, such failure will have the same effect as a vote “AGAINST” the Reverse Stock Split Proposal and the Name Change Proposal. For more information, please see the section entitled “The Special Meeting,” beginning on page 71 of this proxy statement.

 

Q:	May I vote in person at the special meeting of stockholders of Carbylan?

 

A:

If your shares of Carbylan common stock are registered directly in your name with the Carbylan transfer agent, you are considered to be the stockholder of record with respect to those shares, and the proxy materials and proxy card are being sent directly to you by Carbylan. If you are a Carbylan stockholder of record, you may attend the special meeting of Carbylan stockholders and vote your shares in person. Even if you plan to attend the Carbylan special meeting in person, Carbylan requests that you sign and return the enclosed proxy to ensure that your shares will be represented at the Carbylan special meeting if you are unable to attend. If your shares of Carbylan common stock are held in a brokerage account or by another nominee, you are considered the beneficial owner of shares held in “street name,” and the proxy materials are being forwarded to you by your broker or other nominee together with a voting instruction card. As the beneficial owner, you are also invited to attend the special meeting of Carbylan stockholders. Because a beneficial owner is not the stockholder of record, you may not vote these shares in person at the Carbylan special meeting unless you obtain a proxy from the broker, trustee or nominee that holds your shares, giving you the right to vote the shares at the meeting. For more information see the section entitled “The Special Meeting,” beginning on page 71 of this proxy statement.

 

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

 

A:

The special meeting will be held on         , 2016 at              local time, at the offices of Latham & Watkins LLP, 140 Scott Drive, Menlo Park, California 94025. Subject to space availability, all Carbylan stockholders as of the record date, or their duly appointed proxies, may attend the meeting. Since seating is limited, admission to the meeting will be on a first-come, first-served basis. Registration and seating will begin at                     , local time. For more information see the section entitled “The Special Meeting,” beginning on page 71 of this proxy statement.

 

Q:	May I change my vote after I have submitted a proxy or provided proxy instructions?

 

A:	Carbylan stockholders of record, other than those Carbylan stockholders who are parties to the support agreement, may change their vote at any time before their proxy is voted at the Carbylan special meeting in one of three ways as follows:

 

•

submitting another properly completed proxy with a later date;

 

•

sending a written notice that such stockholder is revoking such stockholder’s proxy to Carbylan’s Corporate Secretary at 39899 Balentine Drive, Suite 200, Newark, California 94560; or

 

•

attending the special meeting and vote in person. Simply attending the special meeting will not, by itself, revoke your proxy.

 

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If you have instructed a broker, bank or other agent to vote your Carbylan shares, you must follow directions provided by such broker, bank or other agent to change those instructions. For more information see the section entitled “The Special Meeting,” beginning on page 71 of this proxy statement.

 

Q:	Who is paying for this proxy solicitation?

 

A:

Carbylan will bear the cost of soliciting proxies. Carbylan and KalVista will share the cost of printing and filing this proxy statement; provided, however, that KalVista’s share of such costs will not exceed $175,000. In addition to these mailed proxy materials, Carbylan directors, officers, employees and representatives may also solicit proxies in person, by telephone or by other means of communication. Directors, officers and employees will not be paid any additional compensation for soliciting proxies. Carbylan may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners. For more information see the section entitled “The Special Meeting,” beginning on page 71 of this proxy statement.

 

Q:	Who can help answer my questions?

 

A:	If you would like to request documents or other information from Carbylan, please contact Carbylan’s proxy solicitor, Alliance Advisors, LLC, using the information below:

Alliance Advisors, LLC

200 Broadacres Drive, 3rd Floor

Bloomfield, NJ 07003

Stockholders May Call Toll-Free: 855-742-8276

Stockholders May Email: CBYL@allianceadvisorsllc.com

 

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SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL INFORMATION

Selected Historical Financial Data of Carbylan

The following table summarizes Carbylan’s financial data as of the dates and for each of the periods indicated. The selected financial data as of December 31, 2015 and 2014 and for the years ended December 31, 2015 and 2014 are derived from the Carbylan audited financial statements and notes included in this proxy statement. The selected financial data as of June 30, 2016 and for the six months ended June 30, 2016 and 2015 are included in this proxy statement. This financial data should be read in conjunction with “Carbylan’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 149 of this proxy statement, and the financial statements. Carbylan’s historical results are not necessarily indicative of the results that may be expected in the future.

 

		Year ended December 31,								Six months ended June 30,
		2015				2014				2016				2015
		(in thousands, except share and per share amounts)
Statement of Operations Data:
License revenue		$	29			$	29			$	14			$	14
Operating expenses:
Research and development			16,199				8,294				4,480				8,406
General and administrative			4,866				3,412				4,146				2,176
Restructuring and lease termination charges			—				—				3,420				—
Impairment of long-lived assets			—				—				1,460				—
Total operating expenses			21,065				11,706				13,506				10,582
Loss from operations			(21,036	)			(11,677	)			(13,492	)			(10,568	)
Interest income			5				2				32				2
Interest expense			(1,188	)			(1,082	)			(493	)			(1,005	)
Net loss on extinguishment of convertible promissory notes			(3,177	)			—				—				(3,177	)
Other income (expense), net			550				(602	)			(3	)			552
Total other income (expense)			(3,810	)			(1,682	)			(464	)			(3,628	)
Net loss		$	(24,846	)		$	(13,359	)		$	(13,956	)		$	(14,196	)
Net loss per share attributable to common stockholders, basic and diluted		$	(1.30	)		$	(21.81	)		$	(0.53	)		$	(1.21	)(1)
Weighted average common shares outstanding, basic and diluted			19,082,604				612,525				26,333,558				11,772,606	(1)

 

(1)	Revised from a net loss of $1.13 per share and 12,568,098 weighted average common shares outstanding, basic and diluted, as previously reported

 

		December 31,								June 30,
		2015				2014				2016
		(in thousands)
Balance Sheet Data:
Cash and cash equivalents		$	53,723			$	3,897			$	36,819
Working capital			50,674				(2,506	)			36,028
Total assets			56,791				6,644				38,007
Loans payable			4,609				4,435				—
Convertible promissory notes			—				2,131				—
Derivative liability			—				1,495				—
Preferred stock warrant liability			—				463				—
Convertible preferred stock			—				39,556				—
Accumulated deficit			(72,621	)			(47,775	)			(86,577	)
Total stockholders’ equity (deficit)			49,310				(44,181	)			36,036

 

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Selected Historical Financial Data of KalVista

The following table summarizes KalVista’s selected financial data as of the dates and periods indicated. The selected financial data as of April 30, 2016 and 2015 and for the years then ended are derived from the KalVista audited financial statements prepared using GAAP, except earnings per share, which is unaudited, which are included in this proxy statement. The audit report on the financial statements for the years ended April 30, 2016 and 2015, which appears elsewhere herein, includes an explanatory paragraph related to KalVista’s ability to continue as a going concern. The financial data should be read in conjunction with “KalVista’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 163 and the KalVista financial statements and related notes appearing elsewhere in this proxy statement. The historical results are not necessarily indicative of results to be expected in any future period.

 

		Year Ended April 30,
		2016				2015
		(in thousands, except share and per share data)
Statements of Operations Data:
Grant income		$	2,133			$	1,804
Operating expenses
Research and development			14,661				8,285
General and administrative			2,653				1,608
Loss from operations			(15,181	)			(8,089	)
Interest income			50				19
Foreign currency exchange rate gain			1,661				—
Other income			2,034				844
Net loss			(11,436	)			(7,226	)
Income tax			—				—
Net loss after tax		$	(11,436	)		$	(7,226	)
Basic and diluted net loss per ordinary share*		$	(7.74	)		$	(10.18	)
Basic and diluted weighted average number of ordinary shares outstanding			2,031,113				904,637
*  Includes effect of accumulated preferred dividends of $4,278 and $1,984 for the periods ended April 30, 2016 and 2015, respectively
Balance Sheet Data:
Cash		$	21,764			$	2,526
Total assets			24,745				3,891
Related party payable			127				128
Total liabilities			3,249				1,840
Accumulated deficit			(37,252	)			(25,816	)
Total shareholders’ deficit			(37,112	)			(23,555	)

Selected Unaudited Pro Forma Condensed Combined Financial Data of Carbylan and KalVista

The following selected unaudited pro forma condensed combined financial data is intended to show how the transaction might have affected historical financial statements. Carbylan and KalVista unaudited pro forma condensed combined balance sheet data assume that the transaction took place on June 30, 2016 and reflects the acquisition of Carbylan by KalVista in the historical balance sheets at June 30, 2016. The Carbylan and KalVista unaudited pro forma condensed combined statement of operations data assume that the transaction took place on January 1, 2015 and combine the historical results of Carbylan and KalVista for the six months ended June 30, 2016 and the year ended December 31, 2015. The following should be read in conjunction with the section entitled “Unaudited Pro Forma Condensed Combined Financial Statements” beginning on page 189, Carbylan’s audited and unaudited financial statements and notes thereto included in this proxy statement beginning on page F-1, KalVista’s audited historical financial statements and the notes thereto beginning on page F-51, the sections entitled “Carbylan’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 149 and “KalVista’s Management’s Discussion and Analysis of Financial Condition and Results of

 

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Operations” beginning on page 163 and the other information contained in this proxy statement. The following information does not give effect to the proposed reverse stock split of Carbylan common stock described in the section entitled “Reverse Stock Split Proposal” beginning on page 122 of this proxy statement.

The unaudited pro forma condensed combined financial statements were prepared in accordance with the regulations of the SEC. The pro forma adjustments reflecting the completion of the transaction are based upon the application of the acquisition method of accounting in accordance with GAAP and upon the assumptions set forth in the unaudited pro forma condensed combined financial statements.

The historical financial data has been adjusted to give pro forma effect to events that are (i) directly attributable to the transaction, (ii) factually supportable and (iii) with respect to the statements of operations, expected to have a continuing impact on the combined results. The pro forma adjustments are preliminary and based on management’s estimates of the fair value and useful lives of the assets acquired and liabilities assumed and have been prepared to illustrate the estimated effect of the transaction and certain other adjustments.

The unaudited pro forma condensed 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. In addition, as explained in more detail in the accompanying notes to the unaudited pro forma condensed combined financial statements (see the section entitled “Unaudited Pro Forma Condensed Combined Financial Information” beginning on page 189), the preliminary transaction-date fair value of the identifiable assets acquired and liabilities assumed reflected in the unaudited pro forma condensed combined financial statements is subject to adjustment and may vary from the actual amounts that will be recorded upon completion of the transaction.

 

		Year Ended December 31, 2015				Six Months Ended June 30, 2016
		(in thousands, except per share data)
Unaudited Pro Forma Condensed Combined
Statements of Operations Data:
Grant income and license revenue		$	2,318			$	1,374
Operating expenses:
Research and development expenses			28,781				11,146
General and administrative expenses			7,132				4,598
Restructuring charges			—				3,420
Impairment of long-lived assets			—				1,460
Total operating expenses			35,913				20,624
Net interest income (expense)			(50	)			66
Foreign currency exchange rate gain			1,375				1,596
Other income			2,718				413
Loss on extinguishment of convertible promissory notes			(3,177	)			—
Net loss		$	(32,729	)		$	(17,175	)
Basic and diluted net loss per common share		$	(0.25	)		$	(0.12	)
						As of June 30, 2016
						(in thousands)
Unaudited Pro Forma Condensed Combined
Balance Sheet Data:
Cash and cash equivalents						$	54,701
Working capital							47,991
Total assets							58,986
Accumulated deficit							(20,297	)
Stockholders’ equity							48,011

 

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Comparative Historical and Unaudited Pro Forma Per Share Data

The information below reflects the historical net loss and book value per share of Carbylan and KalVista common stock and in comparison with the unaudited pro forma net loss and book value per share after giving effect to the transaction between Carbylan and KalVista. The unaudited pro forma net loss and book value per share does not give effect to the proposed reverse stock split of Carbylan common stock described in the section entitled “Reverse Stock Split Proposal” beginning on page 122 of this proxy statement.

The tables below should be read in conjunction with the audited and unaudited financial statements of Carbylan and the audited financial statements and unaudited financial information of KalVista included elsewhere in this proxy statement and the related notes and the unaudited pro forma condensed combined financial information.

 

CARBYLAN
		Six Months Ended June 30, 2016				Year Ended December 31, 2015
Historical Per Common Share Data:
Basic and diluted net loss per share		$	(0.53	)		$	(1.30	)
Book value per share		$	1.37			$	2.58
KALVISTA
		Six Months Ended June 30, 2016				Year Ended December 31, 2015
Historical Per Common Share Data:
Basic and diluted net loss per share		$	(4.18	)		$	(7.11	)
Book value per share		$	(18.69	)		$	(18.36	)
CARBYLAN AND KALVISTA
		Six Months Ended June 30, 2016				Year Ended December 31, 2015
Historical Per Common Share Data:
Basic and diluted net loss per share		$	(0.12	)		$	(0.25	)
Book value per share		$	0.35			$	—

 

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DESCRIPTION OF CARBYLAN COMMON STOCK

The following summary describes Carbylan’s capital stock and the material provisions of Carbylan’s Amended and Restated Certificate of Incorporation and Carbylan’s Amended and Restated Bylaws, and of the registration rights agreement, as described in the section entitled, “Agreements Related to the Share Purchase Agreement—Registration Rights Agreement,” beginning on page 120 of this proxy statement, and of the General Corporation Law of the State of Delaware (the “DGCL”). The following is only summary in nature and additional information may be found in the referenced documents.

General

Carbylan’s currently effective Amended and Restated Certificate of Incorporation authorizes 100,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share. As of August 19, 2016, there were outstanding:

 

•

26,344,104 shares of its common stock, held by 29 stockholders of record; and

 

•

2,165,554 shares of its common stock issuable upon exercise of outstanding stock options.

In connection with the transaction, Carbylan is proposing to consummate a 14:1 reverse stock split of its outstanding common stock.

Common Stock

Voting

Holders of Carbylan common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, including the election of directors, and do not have cumulative voting rights. Accordingly, the holders of a majority of the shares of Carbylan common stock entitled to vote in any election of directors can elect all of the directors standing for election.

Dividends

Subject to preferences that may be applicable to any then outstanding preferred stock, the holders of common stock are entitled to receive dividends, if any, as may be declared from time to time by the Carbylan board of directors out of legally available funds. Carbylan has never declared or paid cash dividends on its capital stock. If the transaction with KalVista closes, then the declaration and payment of any future dividends on Carbylan’s capital stock will be at the discretion of a new board of directors as reconstituted pursuant to the terms of the Share Purchase Agreement.

Liquidation

In the event of Carbylan’s liquidation, dissolution or winding up, holders of Carbylan common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of Carbylan’s debts and other liabilities and the establishment of appropriate reserves for potential future claims, subject to the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock that may be issued in the future.

Rights and Preferences

Holders of Carbylan common stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable to Carbylan common stock. The rights, preferences and privileges of the holders of Carbylan common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Carbylan preferred stock that Carbylan may designate and issue in the future.

 

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Fully Paid and Nonassessable

All outstanding shares of Carbylan common stock are, and the shares of common stock to be issued pursuant to the Share Purchase Agreement will be, fully paid and nonassessable.

Stock Options

As of August 19, 2016, there were 2,165,554 Carbylan Options outstanding at a weighted-average exercise price of $3.31 per share.

Registration Rights

Following the closing of this transaction, certain Sellers, or their transferees, will be entitled to the registration rights discussed in the section entitled, “Agreements Related to the Share Purchase Agreement—Registration Rights Agreement,” beginning on page 120 of this proxy statement.

Anti-Takeover Effects of Provisions of Carbylan’s Amended and Restated Certificate of Incorporation, Carbylan’s Amended and Restated Bylaws and Delaware Law

Delaware Anti-Takeover Law

Carbylan is subject to the provisions of Section 203 of the DGCL. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns, or did own within three years prior to the determination of interested stockholder status, 15% or more of the corporation’s voting stock.

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 bylaws resulting from a stockholders’ amendment approved by at least a majority of the outstanding voting shares. Carbylan has not opted out of these provisions. As a result, mergers or other takeover or change in control attempts of Carbylan may be discouraged or prevented. However, on June 14, 2016, the Carbylan board of directors approved the transaction contemplated by the Share Purchase Agreement, rendering Section 203 inapplicable to the transaction to the fullest extent permitted by applicable law.

Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws

Carbylan’s Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain certain provisions that are intended to enhance the likelihood of continuity and stability in the composition of the

 

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board of directors and which may have the effect of delaying, deferring or preventing a future takeover or change in control of Carbylan unless such takeover or change in control is approved by the board of directors.

These provisions include:

Classified Board. Carbylan’s Amended and Restated Certificate of Incorporation provides that the Carbylan board of directors is divided into three classes of directors, with the classes as nearly equal in number as possible. As a result, approximately one-third of the Carbylan board of directors is elected each year. The classification of directors has the effect of making it more difficult for stockholders to change the composition of the Carbylan board of directors. Carbylan’s Amended and Restated Bylaws also provide that, subject to any rights of holders of preferred stock to elect additional directors under specified circumstances, the number of directors is fixed exclusively pursuant to a resolution adopted by the Carbylan board of directors.

Action by Written Consent; Special Meetings of Stockholders. Carbylan’s Amended and Restated Certificate of Incorporation provides that stockholder action can be taken only at an annual or special meeting of stockholders and cannot be taken by written consent in lieu of a meeting. Carbylan’s Amended and Restated Bylaws also provide that, subject to any special rights of the holders of any series of preferred stock, and to the requirements of applicable law, special meetings of the stockholders can be called only by or at the direction of the board of directors pursuant to a resolution adopted by a majority of the total number of directors. Except as described above, stockholders are not permitted to call a special meeting or to require the board of directors to call a special meeting.

Removal of Directors. Carbylan’s Amended and Restated Bylaws provide that Carbylan directors may be removed only for cause by the affirmative vote of at least 66 ²/₃% of the voting power of Carbylan’s voting stock, voting together as a single class. This requirement of a supermajority vote to remove directors could enable a minority of Carbylan stockholders to prevent a change in the composition of the Carbylan board of directors.

Advance Notice Procedures. Carbylan’s Amended and Restated Bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of Carbylan stockholders, as described more fully in the section entitled “Other Matters,” beginning on page 199 of this proxy statement.

Super Majority Approval Requirements. The DGCL generally provides 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 bylaws, unless either a corporation’s certificate of incorporation or bylaws requires a greater percentage. Carbylan’s Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws provide that the affirmative vote of holders of at least 66 ²/₃% of the total votes eligible to be cast in the election of directors is required to amend, alter, change or repeal certain provisions of the Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws. This requirement of a supermajority vote to approve amendments to certain provisions of Carbylan’s Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws could enable a minority of Carbylan stockholders to exercise veto power over any such amendments.

Authorized but Unissued Shares. Carbylan’s authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of a majority of Carbylan common stock by means of a proxy contest, tender offer, merger or otherwise.

Exclusive Forum. Carbylan’s Amended and Restated Certificate of Incorporation provides that, to the fullest extent permitted by applicable law, the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on Carbylan’s behalf, (ii) any action asserting a claim

 

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of breach of a fiduciary duty owed by any Carbylan directors, officers or other employees to Carbylan or Carbylan stockholders, (iii) any action asserting a claim against Carbylan arising pursuant to any provision of the DGCL, Carbylan’s Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws, or (iv) any other action asserting a claim against Carbylan that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of Carbylan capital stock shall be deemed to have notice of and to have consented to the provisions of Carbylan’s Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws described above. Although Carbylan believes these provisions benefit Carbylan by providing increased consistency in the application of Delaware law for the specified types of actions and proceedings, the provisions may have the effect of discouraging lawsuits against Carbylan directors and officers. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with one or more actions or proceedings described above, a court could find the choice of forum provisions contained in Carbylan’s Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws to be inapplicable or unenforceable.

NASDAQ Listing

Carbylan common stock has been approved for listing on NASDAQ under the symbol “CBYL.” The Share Purchase Agreement requires Carbylan 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 Carbylan common stock being issued in the transaction to be approved for listing, subject to notice of issuance, on NASDAQ at or prior to the consummation of the transaction. Pursuant to these obligations, KalVista intends to file an initial listing application and certain notifications in connection with the transactions contemplated by the Share Purchase Agreement.

Transfer Agent and Registrar

The transfer agent and registrar for Carbylan common stock is American Stock Transfer & Trust Company, LLC. The transfer agent and registrar’s address is 620 15^th Avenue, Brooklyn, New York 11219.

 

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MARKET PRICE AND DIVIDEND INFORMATION

Carbylan common stock commenced trading on NASDAQ under the symbol “CBYL” on April 9, 2015. Prior to that date, there was no public trading market for Carbylan common stock. The table below provides the high and low closing prices of Carbylan common stock for the periods indicated, as reported by NASDAQ. KalVista is a private company, and its ordinary and preferred stock are not publicly traded. These per share prices do not give effect to the proposed 14:1 reverse stock split of Carbylan common stock, which is intended to be implemented prior to the consummation of the transaction.

 

		High				Low
Fiscal Year 2015 (ended December 31, 2015)
Second quarter (from April 9, 2015)		$	9.04			$	5.04
Third quarter		$	7.85			$	3.57
Fourth quarter		$	4.71			$	2.82
Fiscal Year 2016
First quarter		$	3.34			$	0.53
Second quarter		$	1.38			$	0.61
Third quarter (through August 19, 2016)		$	0.69			$	0.50

On June 14, 2016, the last trading day prior to the Carbylan board of directors’ approval of the transaction, the reported closing price for Carbylan common stock was $1.14. On                     , the latest practicable trading date before the filing of this proxy statement, the reported closing price of Carbylan common stock was $        .

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

Assuming approval of the Name Change Proposal and successful application for initial listing with the NASDAQ Stock Market LLC, following the consummation of the transaction, Carbylan common stock will be listed on NASDAQ and will trade under Carbylan’s new name, “KalVista Pharmaceuticals, Inc.” and new trading symbol, “KALV.”

As of                     , the record date for the Carbylan special meeting, Carbylan had approximately              holders of its common stock. As of                     , KalVista had              holders of record of its common stock and             holders of record of its preferred stock. For detailed information regarding the beneficial ownership of certain stockholders of Carbylan and KalVista upon consummation of the transaction, see the sections entitled “Security Ownership of Certain Beneficial Owners and Management of Carbylan,” beginning on page 184 of this proxy statement, and “Security Ownership of Certain Beneficial Owners and Management of KalVista,” beginning on page 187 of this proxy statement.

Dividends

Carbylan has never declared or paid cash dividends on its capital stock. Notwithstanding the foregoing, any determination to pay dividends subsequent to the transaction will be at the discretion of Carbylan’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 Carbylan’s then-current board of directors deems relevant.

KalVista has never declared or paid cash dividends on its capital stock. If the transaction does not occur, KalVista does not anticipate paying any cash dividends on its common stock in the foreseeable future, and KalVista intends to retain all available funds and any future earnings to fund the development and expansion of its business. Notwithstanding the foregoing, any determination to pay dividends subsequent to the transaction will be at the discretion of KalVista’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 KalVista’s then-current board of directors deems relevant.

 

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RISK FACTORS

The combined company will be faced with a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. In addition to the other information contained in this proxy statement, you should carefully consider the material risks described below before deciding how to vote your shares. The occurrence of any of the events or developments described below, and additional risks and uncertainties not presently known or currently deemed immaterial, could harm Carbylan’s, KalVista’s and/or the combined company’s business, financial condition, results of operations, cash flows, trading price of common stock and growth prospects.

Additional information on material risks related to Carbylan, which may affect the combined company, can be found in Carbylan’s Annual Report on Form 10-K, as updated by subsequent Quarterly Reports on Form 10-Q, all of which are filed with the SEC. You should also read and consider the other information in this proxy statement. Please see the section entitled “Where You Can Find More Information,” beginning on page  198 of this proxy statement.

Risks Related to the Transaction

The exchange ratio is not adjustable based on the market price of Carbylan common stock so the 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 set the exchange ratio for the KalVista ordinary and preferred shares, and the exchange ratio is only adjustable upward or downward based on Carbylan’s Net Cash at closing, as described more fully in the section entitled “Terms of the Share Purchase Agreement—Exchange Ratio; Net Cash Calculation,” beginning on page 101 of this proxy statement. Any changes in the market price of Carbylan common stock before the completion of the transaction will not affect the number of shares KalVista securityholders will be entitled to receive pursuant to the Share Purchase Agreement. Therefore, if before the completion of the transaction the market price of Carbylan common stock declines from the market price on the date of the Share Purchase Agreement, then KalVista securityholders could receive transaction consideration with substantially lower value. Similarly, if before the completion of the transaction the market price of Carbylan common stock increases from the market price on the date of the Share Purchase Agreement, then KalVista securityholders could receive transaction consideration with substantially more value for their shares of KalVista capital stock than the parties had negotiated for in the establishment of the exchange ratio. The Share Purchase Agreement does not include a price-based termination right. Because the exchange ratio does not adjust as a result of changes in the value of Carbylan common stock, for each one percentage point that the market value of Carbylan common stock rises or declines, there is a corresponding one percentage point rise or decline, respectively, in the value of the total transaction consideration issued to KalVista securityholders.

Carbylan’s Net Cash may be less than $27.5 million at the closing of the transaction, which could result in a decrease to Carbylan’s stipulated value and may lead to Carbylan stockholders owning a smaller percentage of the combined company or in the transaction not being consummated at all.

For purposes of the Share Purchase Agreement, Net Cash is subject to certain reductions, including, without limitation, indebtedness for borrowed money, certain severance obligations, unpaid transaction costs, accounts payable and certain financial obligations under Carbylan contracts. In the event the amount of Carbylan’s Net Cash is smaller or such reductions are greater than anticipated, Carbylan stockholders could hold a significantly smaller portion of the combined company following the consummation of the transaction, or the transaction might not be consummated. For more information on the calculation and consequences of Carbylan’s Net Cash at closing, see the section entitled “Terms of the Share Purchase Agreement—Exchange Ratio; Net Cash Calculation,” beginning on page 101 of this proxy statement.

 

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Failure to consummate the transaction may result in Carbylan paying a termination fee and/or expenses to KalVista and could harm the common stock price of Carbylan and future business and operations of Carbylan.

The 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 Transaction,” beginning on page 106 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 115 of this proxy statement. If the transaction is not consummated, Carbylan is subject to the following risks:

 

•

if the Share Purchase Agreement is terminated under certain circumstances, Carbylan will be required to pay KalVista a termination fee of $3.0 million and/or reimburse certain transaction expenses of KalVista, up to a maximum of $1.0 million;

 

•

the price of Carbylan common stock may decline and remain volatile; and

 

•

costs related to the transaction, such as legal and accounting fees which Carbylan estimates will total approximately $2.5 million, some of which must be paid even if the transaction is not completed.

In addition, if the Share Purchase Agreement is terminated and the Carbylan board of directors determines to seek another business combination, there can be no assurance that Carbylan will be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided by the Sellers in the transaction.

Carbylan and KalVista have a history of losses and may never achieve or sustain profitability and may not continue as a going concern.

Carbylan and KalVista have experienced operating losses over the last several years and may continue to incur losses and negative operating cash flows. Carbylan and KalVista have historically financed operations with proceeds from debt financings and the sale of equity securities. Carbylan and KalVista anticipate that the combined company will continue to incur net losses in the future. As a result, there can be no assurance that the combined company will achieve profitability or be capable of sustaining profitable operations. If the combined company is unable to reach and sustain profitability, it risks depleting working capital balances and may not continue as a going concern.

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

In general, either Carbylan or KalVista can refuse to complete the transaction if there is a material adverse change affecting the other party between June 15, 2016, the date of the Share Purchase Agreement, and the closing. However, certain types of changes do not permit either party to refuse to complete the transaction, even if such change could be said to have a material adverse effect on Carbylan or KalVista, including:

 

•

any effect resulting from the announcement or pendency of the transaction or any related transactions;

 

•

any effect resulting from or caused by Carbylan’s payment of severance and retention payments owned under existing employee plans, any amendment to the license agreement with Shanghai Jingfeng Pharmaceutical Co. Ltd. (“Jingfeng”) (including with respect to the forfeiture of Carbylan’s rights or benefits thereunder) or the winding down of Carbylan’s COR 1.1 clinical trials and the termination of all contracts made in connection with such trials;

 

•

any natural disaster or any act or threat of terrorism or war anywhere in the world, any armed hostilities or terrorist activities anywhere in the world, any threat or escalation or armed hostilities or terrorist

 

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activities anywhere in the world or any governmental or other response or reaction to any of the foregoing, to the extent that such natural disaster, act, threat, hostility or activity does not have a disproportionate effect on Carbylan or KalVista relative to other businesses operating in the same industry or geographic regions as Carbylan or KalVista, respectively;

 

•

any change in accounting requirements or principles or any change in applicable laws, rules or regulations or the interpretation thereof, to the extent that such change does not have a disproportionate effect on Carbylan or KalVista relative to other businesses operating in Carbylan’s or KalVista’s industry, respectively;

 

•

any adverse change, effect or occurrence attributable to general economic or political conditions or in the industries in which Carbylan and KalVista operate, to the extent that such change, effect or occurrence does not have a disproportionate effect on Carbylan or KalVista relative to other businesses operating in Carbylan’s or KalVista’s industry, respectively;

 

•

with respect to Carbylan, any change in the stock price or trading volume of Carbylan excluding any underlying effect that may have caused such change;

 

•

with respect to Carbylan, the termination, sublease or assignment of Carbylan’s facility lease, or failure to terminate, sublease or assign such lease;

 

•

continued losses from operations or decreases in cash balances of Carbylan or KalVista; and

 

•

with respect to KalVista, any rejection by a governmental body of a registration or filing by KalVista relating to certain intellectual property rights.

If material adverse changes occur and Carbylan and KalVista still complete the transaction, the combined company’s stock price may suffer. This in turn may reduce the value of the transaction to the stockholders of Carbylan.

Some Carbylan and KalVista officers and directors have interests in the transaction that are different from the interests of other stockholders and that may influence them to support or approve the transaction without regard to those interests.

Certain officers and directors of Carbylan and KalVista participate in arrangements that provide them with interests in the transaction that are different from other stockholders, including, among others, continued service as an officer or a director of the combined company, severance benefits, the acceleration of stock option vesting, continued indemnification and the potential ability to sell an increased number of shares of common stock of the combined company in accordance with Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”).

For example, Carbylan has entered into certain employment and severance benefits agreements with each of its executive officers that may result in the receipt by such executive officers of cash severance payments and other benefits with a total value of approximately $1.7 million (collectively, not individually, and excluding the value of any accelerated vesting of stock awards) and the acceleration of stock awards held by those officers, including Carbylan Options, based on data available as of August 19, 2016 and assuming a covered termination of employment of each executive officer’s employment as of such date. The closing of the transaction may result in the acceleration of vesting of a portion of the stock awards, including a portion of the 1,051,802 Carbylan Options held by the Carbylan executive officers and directors, whether or not there is a covered termination of such officer’s employment. For more information concerning the treatment of Carbylan Options in connection with the transaction, see the section entitled “Terms of the Share Purchase Agreement—Effect of the Transaction on Stock Options and Equity Incentives” beginning on page 105 of this proxy statement. In addition and for example, certain of KalVista’s directors and executive officers have options, subject to vesting, to purchase KalVista ordinary shares which shall be converted into and become Carbylan Options, certain of KalVista’s directors and executive officers are expected to become directors and executive officers of Carbylan upon the closing of the transaction and all of Carbylan’s directors and executive officers are entitled to certain indemnification and liability insurance coverage pursuant to the terms of the Share Purchase Agreement. These

 

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interests, among others, may influence the officers and directors of Carbylan and KalVista to support or approve the transaction. For more information concerning the interests of Carbylan executive officers and directors, see the section entitled “The Transaction—Interests of Carbylan’s Directors and Executive Officers” beginning on page 87 of this proxy statement.

The market price of the combined company’s common stock may decline as a result of the transaction.

The market price of Carbylan common stock may decline as a result of the transaction for a number of reasons, including if:

 

•

investors react negatively to the prospects of the combined company’s business and prospects from the transaction;

 

•

the effect of the transaction on the combined company’s business and prospects is not consistent with the expectations of financial or industry analysts; or

 

•

the combined company does not achieve the perceived benefits of the transaction as rapidly or to the extent anticipated by financial or industry analysts.

Carbylan stockholders may not realize a benefit from the transaction commensurate with the ownership dilution they will experience in connection with the transaction.

Carbylan 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 transaction. If the combined company is unable to realize the full strategic and financial benefits currently anticipated from the transaction, or if the costs incurred by Carbylan and KalVista in connection with the transaction exceed current expectations, Carbylan stockholders will have experienced substantial dilution of their ownership, voting and other interests in Carbylan 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 transaction, Carbylan 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 Carbylan and KalVista to make acquisitions, subject to certain exceptions relating to fiduciary duties, or complete other transactions that are not in the ordinary course of business pending completion of the transaction. As a result, if the transaction is not completed, the parties may be at a disadvantage to their competitors during that period. In addition, while the Share Purchase Agreement is in effect, each party is generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination, with any third party, subject to certain specified exceptions. Any such transactions could be favorable to Carbylan’s stockholders. For more information on covenants that restrict Carbylan’s and KalVista’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 Pending the Closing,” beginning on page 111 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 Carbylan and KalVista from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except in

 

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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 and that failure to cooperate with the proponent of the proposal could reasonably be considered a breach of the board’s fiduciary duties. In addition, if Carbylan or the Seller Representative terminates the Share Purchase Agreement under certain circumstances, including terminating because of a decision of the Carbylan board of directors to recommend a superior proposal, Carbylan would be required to pay a termination fee of $3.0 million, plus the reimbursement of up to $1.0 million in transaction expenses, to KalVista. This termination fee may discourage third parties from submitting alternative takeover proposals to Carbylan or KalVista or their stockholders, and may cause the respective boards of directors to be less inclined to recommend an alternative proposal.

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

The outstanding capital stock of KalVista 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 KalVista. Because the percentage of Carbylan equity to be issued to KalVista shareholders was determined based on negotiations between the parties, it is possible that the value of the Carbylan common stock to be received by KalVista shareholders will be less than the fair market value of KalVista, or Carbylan may pay more than the aggregate fair market value for KalVista.

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

Pursuant to NASDAQ’s Listing Rules, consummation of the 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 Carbylan and KalVista intend to obtain listing status for the combined company and maintain the same, no guarantees can be made about Carbylan’s and KalVista’s ability to do so.

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.

The announcement and pendency of the transaction could cause disruptions in Carbylan’s business and have an adverse effect on the market price of Carbylan common stock and/or the business, financial condition, results of operations or business prospects for Carbylan and/or KalVista.

The market price of Carbylan common stock may decline as a result of the announcement and pendency of the transaction for a number of reasons, including if investors react negatively to the prospects of the combined company’s business and prospects form the transaction. The announcement and pendency of the transaction could also disrupt Carbylan’s and/or KalVista’s businesses. For example, Carbylan and KalVista management may need to focus additional attention on the completion of the transaction and related matters, thereby diverting their attention from the day-to-day business operations of their respective companies. Should these disruptions occur, any of these matters could adversely affect the stock price of Carbylan or harm the financial condition, results of operations or business prospects of Carbylan and/or KalVista.

 

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The success of the proposed business combination of Carbylan and KalVista will depend in part on relationships with third parties, which relationships may be affected by third-party preferences or public attitudes about the transaction, and any adverse changes in these relationships could adversely affect Carbylan’s or KalVista’s business, financial condition or results of operations.

The success of the transaction will be in part dependent on the combined entity’s ability to maintain and renew the business relationships of both Carbylan and KalVista and to establish new business relationships. There can be no assurance that the management of either Carbylan or KalVista will be able to maintain such business relationships, or enter into or maintain new business contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important business relationships could have a material adverse effect on the business, financial condition or results of operations of Carbylan and KalVista.

Carbylan and KalVista may become involved in securities class action litigation or shareholder derivative litigation in connection with the 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 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.

If the conditions to the consummation of the transaction are not met, the transaction may not occur.

Even if the issuance of shares of Carbylan common stock in the transaction is approved by the stockholders of Carbylan, specified conditions must be satisfied or waived to complete the transaction. These conditions are set forth in the Share Purchase Agreement and described in the section entitled “Terms of the Share Purchase Agreement—Conditions to the Consummation of the Transaction” beginning on page 106 of this proxy statement. Carbylan and KalVista cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the transaction will not occur or will be delayed, and Carbylan and KalVista each may lose some or all of the intended benefits of the transaction.

If the transaction does not occur, Carbylan may fail to advance Hydros-TA or acquire or develop other products or product candidates on commercially reasonable terms, or at all, and Carbylan may be unable to conduct a viable operating business, Carbylan may elect to liquidate its remaining assets, and there can be no assurances as to the amount of cash available to distribute to stockholders after paying its debts and other obligations.

Risks Related to the Proposed 14:1 Reverse Stock Split

The reverse stock split may not increase the combined company’s stock price over the long term.

The principal purpose of the reverse stock split is to increase the per share market price of Carbylan common stock. It cannot be assured, however, that the reverse stock split will 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 Carbylan common stock, it cannot be assured that the reverse stock split will increase the market price of Carbylan 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 Carbylan 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 continued listing requirements for NASDAQ initially, it cannot be assured that it will continue to do so.

 

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

Although the Carbylan 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 Carbylan common stock.

The reverse stock split may lead to a decrease in the combined company’s overall market capitalization.

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. If the per share market price does not increase in proportion to the reverse stock split ratio, then the value of the combined company, as measured by its stock capitalization, will be reduced. In some cases, the per share stock price of companies that have effected reverse stock splits subsequently declined back to pre-reverse split levels, and accordingly, it cannot be assured that the total market value of Carbylan common stock will remain the same after the reverse stock split is effected, or that the reverse stock split will not have an adverse effect on Carbylan’s stock price due to the reduced number of shares outstanding after the reverse stock split.

Risks Related to Carbylan

Carbylan has a limited operating history, has incurred significant losses since Carbylan’s inception and Carbylan will incur losses in the future. Carbylan has only one product candidate in clinical trials and no product sales, which, together with Carbylan’s limited operating history, makes it difficult to assess Carbylan’s future viability.

Carbylan is a clinical-stage specialty pharmaceutical company with a limited operating history. Pharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. To date, Carbylan has focused substantially all of Carbylan’s efforts on Carbylan’s research and development activities on Carbylan’s lead product candidate, Hydros-TA. To date, Carbylan has not commercialized any products or generated any revenue from product sales. Carbylan is not profitable and has incurred losses in each year since Carbylan’s inception in 2004. Carbylan has only a limited operating history upon which to evaluate Carbylan’s business and prospects. In April 2016, Carbylan announced that Carbylan has suspended further clinical development of Hydros-TA and that Carbylan is actively pursuing a strategic transaction, including a merger or acquisition of the Company.

In addition in April 2016, Carbylan approved a restructuring plan effective as of April 15, 2016 resulting in a reduction in force affecting 14 of Carbylan’s 17 employees, including two executive officers. The restructuring plan is intended to reduce operational costs to preserve capital and streamline Carbylan’s operations as Carbylan pursues a strategic transaction. Non-executive employees directly affected by the reduction in force have been terminated as of April 15, 2016 and will be provided with severance payments and continuation of benefits for a limited term. The positions impacted are across all of Carbylan’s departments. As a result of the restructuring plan, Carbylan incurred one-time cash severance payments of approximately $0.3 million and an aggregate of $0.7 million in severance expenses, including the severance payments to the two executive officers. The charges associated with the restructuring plan were recorded in the quarter ended June 30, 2016.

Carbylan’s net losses for the six months ended June 30, 2016 and 2015 were $14.0 million and $14.2 million, respectively. As of June 30, 2016, Carbylan had an accumulated deficit of $86.6 million. To date, Carbylan has financed its operations primarily through the sale of equity securities and debt facilities. The amount of Carbylan’s future net losses will depend, in part, on the rate of its future expenditures and its ability to obtain funding through a strategic transaction.

 

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Carbylan’s history of net losses and Carbylan’s expectation of future losses, together with the company’s limited operating history, may make it difficult to evaluate Carbylan’s current business and predict its future performance. In addition, the net losses Carbylan incurs may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of Carbylan’s results of operations may not be a good indication of Carbylan’s future performance. In any particular quarter or quarters, Carbylan’s operating results could be below the expectations of securities analysts or investors, which could cause Carbylan’s stock price to decline.

If Carbylan does not successfully consummate the transaction with KalVista, Carbylan will require substantial additional funding and may need to curtail operations if Carbylan has insufficient capital.

To date, Carbylan has not generated any revenue from product sales, and Carbylan does not know when, or if, Carbylan will generate any revenue from product sales. While Carbylan has entered into a definitive Share Purchase Agreement with KalVista, Carbylan’s operating plan may change or the consummation of a transaction may be delayed or may not occur at all.

Based upon Carbylan’s current operating plan, Carbylan believes that its existing cash and cash equivalents will enable Carbylan to fund its operating expenses and capital requirements for at least the 12 months following June 30, 2016. Carbylan has based its estimates on assumptions that may prove to be wrong, and Carbylan may use its available capital resources sooner than Carbylan currently expects. However, if Carbylan’s current operating plans change, Carbylan may require substantial additional funding to operate.

If the transaction with KalVista is not consummated and Carbylan decides to continue its historical business operations, Carbylan may require substantial additional funding to operate.

Carbylan’s future capital requirements will depend on many factors, including:

 

•

Carbylan’s ability to establish and maintain collaboration partnerships, in-license/out-license or other similar arrangements and the financial terms of such agreements;

 

•

the costs of filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectual property rights, including litigation costs and the outcome of such litigation, including costs of defending any claims of infringement brought by others in connection with the development, manufacture or commercialization of Hydros-TA or any other future product candidates; and

 

•

the cost incurred in responding to disruptive actions by activist stockholders.

To the extent that Carbylan raises additional capital through the sale of equity or convertible debt securities, the ownership interests of Carbylan’s common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of Carbylan’s common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting Carbylan’s ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If Carbylan raises additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, Carbylan may have to relinquish valuable rights to Carbylan’s technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to Carbylan.

Additional funds may not be available when Carbylan needs them on terms that are acceptable to Carbylan, or at all. If adequate funds are not available to Carbylan on a timely basis, Carbylan may be required to curtail its operations.

 

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If Carbylan does not successfully consummate the transaction with KalVista, the Carbylan board of directors may decide to pursue a dissolution and liquidation of Carbylan. In such an event, the amount of cash available for distribution to Carbylan’s stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.

There can be no assurance that Carbylan can successfully consummate the transactions contemplated by the Share Purchase Agreement. If the transactions are not consummated, the Carbylan board of directors may decide to pursue a dissolution and liquidation of Carbylan. In such an event, the amount of cash available for distribution to Carbylan’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 Carbylan funds its operations in preparation for the consummation of the transaction with KalVista. Further, the Share Purchase Agreement contains certain termination rights for each party, and provides that, upon termination under specified circumstances, Carbylan may be required to pay KalVista a termination fee of $3.0 million and to reimburse certain expenses incurred by KalVista in an amount up to $1.0 which would further decrease Carbylan’s available cash resources. If the Carbylan board of directors were to approve and recommend, and Carbylan’s stockholders were to approve, a dissolution and liquidation of Carbylan, Carbylan 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 Carbylan stockholders. Carbylan’s commitments and contingent liabilities may include (i) regulatory and clinical obligations remaining under Carbylan’s COR1.1 trial; (ii) obligations under Carbylan’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 Carbylan; and (iii) potential litigation against Carbylan, and other various claims and legal actions arising in the ordinary course of business. As a result of this requirement, a portion of Carbylan’s assets may need to be reserved pending the resolution of such obligations. In addition, Carbylan may be subject to litigation or other claims related to a dissolution and liquidation of Carbylan. If a dissolution and liquidation were pursued, the Carbylan 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 Carbylan common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of Carbylan.

Carbylan’s business to date has been almost entirely dependent on the success of Hydros-TA, and Carbylan has recently decided to suspend further clinical development of Hydros-TA and devote all of Carbylan’s resources in pursuit of strategic alternatives, including the Share Purchase Agreement, which may not be successful.

To date, Carbylan has invested substantially all of its efforts and financial resources in the research and development of Hydros-TA, which is Carbylan’s only product candidate in clinical trials. Hydros-TA is a new approach to treating osteoarthritis (“OA”) pain in the knee by using a combination therapy treatment.

In February 2016, Carbylan announced that the Hydros-TA Phase 3 COR 1.1 clinical trial failed to meet its second co-primary endpoint. After reviewing the clinical data, Carbylan management began to investigate the financial impact on moving forward with a revised COR 1.2 clinical trial as well as variety of strategic alternatives that Carbylan could pursue to maximize stockholder value.

In March 2016, the Carbylan board of directors and management reviewed the timing and financial impact of revising the COR 1.2 clinical trial and feedback from key opinion leaders and third party consultants as well as a summary of Carbylan’s financial position, including current cash, forecasted cash runway, liabilities, net loss, forecasted cash balance and planned operations, and discussed the operational path forward for Carbylan, including the potential to revise the COR 1.2 trial design and move forward under the Carbylan’s current operational path, the potential to scale back all operations and run a modified COR 1.2 to conserve cash, the ability to cease all clinical operations and explore strategic alternatives, or the possibility of winding up operations and distributing the Carbylan’s existing cash to its shareholders. After consulting two financial

 

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advisory firms, the Carbylan board of directors determined to pursue a strategic transaction and directed Carbylan management to engage Wedbush to assist Carbylan in pursuing and evaluating strategic alternatives, and established a transaction committee (the “Transaction Committee”).

In April 2016, Carbylan announced that it has suspended further clinical development of Hydros-TA and that Carbylan is actively pursuing a strategic transaction, including a merger or acquisition of Carbylan.

In June 2016, Carbylan entered into a definitive Share Purchase Agreement with KalVista pursuant to which the shareholders of KalVista will become the majority owners of Carbylan.

There can be no assurance that the definitive Share Purchase Agreement with KalVista will be consummated. In addition, there can be no assurance that any transaction, involving Carbylan and/or its assets, that is consummated would enhance stockholder value. There also can be no assurance that Carbylan will conduct drug development activities in the future.

If Carbylan fails to continue to meet all applicable NASDAQ requirements and NASDAQ determines to delist Carbylan common stock, the delisting could adversely affect the market liquidity of Carbylan common stock and the market price of Carbylan common stock could decrease.

Carbylan common stock is listed on NASDAQ. In order to maintain Carbylan’s listing, Carbylan must file certain applications and notifications with NASDAQ, meet minimum financial and other requirements, including requirements for a minimum amount of capital, a minimum price per share and continued business operations so that Carbylan is not characterized as a “public shell company.” On July 28, 2016, Carbylan received a deficiency letter from the NASDAQ Listing Qualifications Department notifying Carbylan that, for the preceding 30 consecutive business days, the bid price for Carbylan common stock had closed below the minimum $1.00 per share requirement for continued inclusion on NASDAQ pursuant to NASDAQ Listing Rule 5450(a)(1). If Carbylan fails to continue to meet all applicable NASDAQ requirements, NASDAQ may determine to delist Carbylan common stock from NASDAQ. If Carbylan common stock is delisted for any reason, it could reduce the value of Carbylan common stock and its liquidity.

Carbylan is substantially dependent on its remaining employees to facilitate the consummation of a strategic transaction.

Carbylan’s ability to successfully complete a strategic transaction depends in large part on Carbylan’s ability to retain Carbylan’s remaining personnel, particularly David M. Renzi, Carbylan’s President and Chief Executive Officer, Marcee M. Maroney, Carbylan’s Vice President of Clinical Affairs, and John McKune, Carbylan’s Vice President of Finance. In order to retain these employees, the Carbylan board of directors approved an Executive Retention Bonus Plan in April 2016, which provides for grants of cash retention bonuses to the remaining eligible executive officers who continue employment with Carbylan through the earlier to occur of (i) the closing of a change in control, including the transaction with KalVista and (ii) March 8, 2017. However, despite Carbylan’s efforts to retain these members of Carbylan’s management, one or more may terminate their employment with Carbylan on short notice. The loss of the services of any of these employees could potentially harm Carbylan’s ability to consummate a strategic transaction, as well as fulfill Carbylan’s reporting obligations as a public company.

Carbylan may be involved in lawsuits to protect or enforce Carbylan’s patents or the patents of Carbylan’s licensors, which could be expensive, time-consuming and unsuccessful.

Competitors may infringe Carbylan’s patents or the patents of Carbylan’s licensors. To counter infringement or unauthorized use, Carbylan may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of Carbylan’s or Carbylan’s licensors is not valid, is unenforceable and/or is not infringed, or may refuse to stop the other party from using the technology at issue on the grounds that Carbylan’s patents do not cover the technology in

 

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question. A third-party defendant may also request post grant review or inter partes review by the United States Patent and Trademark Office (“USPTO”) of any patent Carbylan asserts. An adverse result in any litigation or defense proceedings could put one or more of Carbylan’s patents at risk of being invalidated or interpreted narrowly and could put Carbylan’s patent applications at risk of not issuing.

Interference proceedings provoked by third parties or brought by Carbylan may be necessary to determine the priority of inventions with respect to Carbylan’s patents or patent applications or those of Carbylan’s licensors. An unfavorable outcome could require Carbylan to cease using the related technology or to attempt to license rights to it from the prevailing party. Carbylan’s business could be harmed if the prevailing party does not offer Carbylan a license on commercially reasonable terms. Carbylan’s defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract Carbylan’s management and other employees. Carbylan may not be able to prevent, alone or with Carbylan’s licensors, misappropriation of Carbylan’s intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing Carbylan’s ability to protect its products.

As is the case with other biopharmaceutical companies, Carbylan’s success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involve both technological and legal complexity. Therefore, obtaining and enforcing biopharmaceutical patents is costly, time consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation, including the Leahy-Smith America Invents Act signed into law on September 16, 2011. That Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and new venues and opportunities for competitors to challenge patent portfolios. Because of that Act, the U.S. patent system is now a “first to file” system, which may make it more difficult to obtain patent protection for inventions and increase the uncertainties and costs surrounding the prosecution of Carbylan’s or its collaboration partners’ patent applications and the enforcement or defense of Carbylan’s or its collaboration partners’ issued patents, all of which could materially adversely affect Carbylan’s business, results of operations and financial condition.

The United States Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to Carbylan’s ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents once obtained. Depending on future actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken Carbylan’s ability to obtain new patents or to enforce Carbylan’s existing patents and patents that Carbylan might obtain in the future.

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

The USPTO and various foreign patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions to maintain patent applications and issued patents. Noncompliance with these requirements can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

Carbylan may not be able to enforce its intellectual property rights throughout the world.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending

 

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intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to life sciences. This could make it difficult for Carbylan to stop the infringement of its patents or the misappropriation of Carbylan’s other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties.

Proceedings to enforce Carbylan’s patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert Carbylan’s efforts and attention from other aspects of Carbylan’s business. Furthermore, while Carbylan intends to protect its intellectual property rights in expected significant markets, Carbylan cannot ensure that it will be able to initiate or maintain similar efforts in all jurisdictions in which Carbylan may wish to market its products. Accordingly, Carbylan’s efforts to protect its intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect Carbylan’s ability to obtain and enforce adequate intellectual property protection for Carbylan’s technology.

Carbylan may be subject to claims challenging the inventorship or ownership of Carbylan’s patents and other intellectual property.

Carbylan may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in Carbylan’s patents or other intellectual property. Carbylan may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in developing Carbylan’s product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If Carbylan fails in defending any such claims, in addition to paying monetary damages, Carbylan may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on Carbylan’s business. Even if Carbylan is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Obtaining and maintaining Carbylan’s patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and Carbylan’s 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. Carbylan has systems in place to remind Carbylan to pay these fees, and Carbylan 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. Carbylan employs reputable law firms and other professionals to help Carbylan 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, Carbylan’s competitors might be able to enter the market and this circumstance would have a material adverse effect on Carbylan’s business.

Risks Related to the Ownership of Common Stock of Carbylan

Carbylan’s stock price is volatile and Carbylan stockholders may not be able to resell shares of Carbylan common stock at or above the price they paid.

The trading price of Carbylan common stock is highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond Carbylan’s control. These factors include those discussed in this “Risk Factors” section of this proxy statement and others such as:

 

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announcements related to the transaction with KalVista;

 

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•

departures of key personnel;

 

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communications or notifications from NASDAQ regarding the potential delisting of Carbylan common stock as a result of a failure to meet NASDAQ listing requirements;

 

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announcements relating to collaboration partnerships or other strategic transactions undertaken by Carbylan;

 

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any intellectual property infringement actions in which Carbylan may become involved;

 

•

changes in financial estimates or recommendations by securities analysts;

 

•

trading volume of Carbylan common stock;

 

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sales of Carbylan common stock by Carbylan, Carbylan’s executive officers and directors or Carbylan stockholders in the future; and

 

•

general economic and market conditions and overall fluctuations in the United States equity markets.

In addition, the stock markets in general, and the markets for pharmaceutical, biopharmaceutical and biotechnology stocks in particular, have experienced extreme volatility that may have been unrelated to the operating performance of the issuer. These broad market fluctuations may adversely affect the trading price or liquidity of Carbylan common stock. In the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the issuer. If any of Carbylan’s stockholders were to bring such a lawsuit against Carbylan, Carbylan could incur substantial costs defending the lawsuit and the attention of Carbylan’s management would be diverted from the operation of Carbylan’s business, which could seriously harm Carbylan’s financial position. Any adverse determination in litigation could also subject Carbylan to significant liabilities.

An active, liquid and orderly market for Carbylan common stock may not develop or be sustained.

Carbylan completed its initial public offering in April 2015. Prior to that, there had been no public market for shares of Carbylan common stock. Following Carbylan’s initial public offering, the trading volume of Carbylan common stock on NASDAQ has been limited, and an active public market for Carbylan’s shares may not develop or, if it develops, be sustained. Carbylan cannot predict the extent in which investor interest in Carbylan will lead to the development of, or sustain an active trading market on NASDAQ or otherwise or how liquid that market might become. The lack of an active market may impair Carbylan stockholders’ ability to sell their shares at the time they wish to sell them or at a price that they consider reasonable. An inactive market may also impair Carbylan’s ability to raise capital by selling shares.

Carbylan incurs significant costs as a result of operating as a public company, and Carbylan’s management devotes substantial time to compliance initiatives. Carbylan may fail to comply with the rules that apply to public companies, including Section 404 of the Sarbanes-Oxley Act of 2002, which could result in sanctions or other penalties that would harm Carbylan’s business.

Carbylan incurs significant legal, accounting and other expenses as a public company, including costs resulting from public company reporting obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and regulations regarding corporate governance practices. The listing requirements of NASDAQ require that Carbylan satisfy certain corporate governance requirements relating to director independence, distributing annual and interim reports, stockholder meetings, approvals and voting, soliciting proxies, conflicts of interest and a code of conduct. Carbylan’s management and other personnel will need to devote a substantial amount of time to ensure that Carbylan complies with all of these requirements, and Carbylan will likely need to hire additional accounting and financial staff with appropriate public company reporting experience and technical accounting knowledge. Moreover, the reporting requirements, rules and

 

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regulations increase Carbylan’s legal and financial compliance costs and make some activities more time consuming and costly. Any changes Carbylan makes to comply with these obligations may not be sufficient to allow Carbylan to satisfy its obligations as a public company on a timely basis, or at all. These reporting requirements, rules and regulations, coupled with the increase in potential litigation exposure associated with being a public company, could also make it more difficult for Carbylan to attract and retain qualified persons to serve on the Carbylan board of directors or board committees or to serve as executive officers, or to obtain certain types of insurance, including directors’ and officers’ insurance, on acceptable terms.

Carbylan is subject to Section 404 of The Sarbanes-Oxley Act of 2002 (“Section 404”) and the related rules of the SEC which generally require Carbylan’s management and independent registered public accounting firm to report on the effectiveness of Carbylan’s internal control over financial reporting. Beginning with the second annual report that Carbylan will be required to file with the SEC, Section 404 requires an annual management assessment of the effectiveness of Carbylan’s internal control over financial reporting. However, for so long as Carbylan remains an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), Carbylan intends to take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404.

To date, Carbylan has never conducted a review of Carbylan’s internal control for the purpose of providing the reports required by these rules. During the course of Carbylan’s review and testing, Carbylan may identify deficiencies and be unable to remediate them before Carbylan must provide the required reports. Furthermore, if Carbylan has a material weakness in its internal control over financial reporting, Carbylan may not detect errors on a timely basis and Carbylan’s financial statements may be materially misstated. Carbylan or Carbylan’s independent registered public accounting firm may not be able to conclude on an ongoing basis that Carbylan has effective internal control over financial reporting, which could harm Carbylan’s operating results, cause investors to lose confidence in Carbylan’s reported financial information and cause the trading price of Carbylan’s stock to fall. In addition, as a public company Carbylan is required to file accurate and timely quarterly and annual reports with the SEC under the Exchange Act. Any failure to report Carbylan’s financial results on an accurate and timely basis could result in sanctions, lawsuits, delisting of Carbylan’s shares from NASDAQ or other adverse consequences that would materially harm Carbylan’s business.

If Carbylan fails to maintain proper internal controls, Carbylan’s ability to produce accurate financial statements or comply with applicable regulations could be impaired.

Pursuant to Section 404 of the Sarbanes-Oxley Act, Carbylan’s management is required annually to deliver a report that assesses the effectiveness of Carbylan’s internal control over financial reporting and, subject to exemptions allowed as an “emerging growth company,” Carbylan’s independent registered public accounting firm is required annually to deliver an attestation report on the effectiveness of Carbylan’s internal control over financial reporting. If Carbylan is unable to maintain effective internal control over financial reporting or if Carbylan’s independent registered public accounting firm is unwilling or unable to provide Carbylan with an attestation report on the effectiveness of internal control over financial reporting for future periods as required by Section 404 of the Sarbanes-Oxley Act, Carbylan may not be able to produce accurate financial statements, and investors may therefore lose confidence in Carbylan’s operating results, Carbylan’s stock price could decline and Carbylan may be subject to litigation or regulatory enforcement actions.

Carbylan does not intend to pay dividends on its common stock so any returns will be limited to the value of its stock.

Carbylan has never declared or paid any cash dividends on its common stock. Carbylan does not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the appreciation of their stock.

 

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Carbylan’s principal stockholders and management own a significant percentage of Carbylan’s stock and are able to exert significant control over matters subject to stockholder approval such as the issuance of shares of Carbylan common stock pursuant to the Share Purchase Agreement.

As of June 30, 2016, Carbylan’s executive officers, directors, holders of 5% or more of Carbylan’s capital stock and their respective affiliates beneficially owned approximately 67% of Carbylan’s outstanding voting stock. Therefore these stockholders have the ability to influence Carbylan through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval, including the approval of any merger, sale of assets, or other major corporate transaction, as well as the elections of directors and amendments of Carbylan’s organizational documents.

Provisions in Carbylan’s charter documents and under Delaware law could discourage the transaction or another transaction that stockholders may consider favorable and may lead to entrenchment of management.

Carbylan’s Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions that could significantly reduce the value of Carbylan’s shares to a potential acquirer or delay or prevent changes in control or changes in Carbylan’s management without the consent of the Carbylan board of directors. The provisions in Carbylan’s charter documents include the following:

 

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a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of the Carbylan board of directors;

 

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no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

 

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the exclusive right of the Carbylan board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on the Carbylan board of directors;

 

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the required approval of at least 66 2/3% of the shares entitled to vote to remove a director for cause, and the prohibition on removal of directors without cause;

 

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the ability of the Carbylan board of directors to authorize the issuance of shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

 

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the ability of the Carbylan board of directors to alter Carbylan’s bylaws without obtaining stockholder approval;

 

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the required approval of at least 66 2/3% of the shares entitled to vote at an election of directors to adopt, amend or repeal certain provisions of Carbylan’s bylaws and Carbylan’s Amended and Restated Certificate of Incorporation regarding the election and removal of directors;

 

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a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of Carbylan’s stockholders;

 

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the requirement that a special meeting of stockholders may be called only by or at the direction of the Carbylan board of directors pursuant to a resolution adopted by a majority of the total number of directors that the Carbylan board of directors would have if there were no vacancies, which may delay the ability of Carbylan stockholders to force consideration of a proposal or to take action, including the removal of directors; and

 

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advance notice procedures that stockholders must comply with in order to nominate candidates to the Carbylan board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of Carbylan.

In addition, these provisions would apply even if Carbylan were to receive an offer that some stockholders may consider beneficial.

 

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Carbylan is also subject to the anti-takeover provisions contained in Section 203 of the DGCL. Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directors has approved the transaction.

Claims for indemnification by Carbylan’s directors and officers may reduce Carbylan’s available funds to satisfy successful third-party claims against Carbylan and may reduce the amount of money available to Carbylan.

Carbylan’s Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws provide that Carbylan will indemnify Carbylan’s directors and officers, in each case to the fullest extent permitted by Delaware law.

In addition, as permitted by Section 145 of the DGCL, Carbylan’s Amended and Restated Bylaws and Carbylan’s indemnification agreements that Carbylan has entered into with Carbylan’s directors and officers provide that:

 

•

Carbylan will indemnify Carbylan’s directors and officers for serving Carbylan in those capacities or for serving other business enterprises at Carbylan’s request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful;

 

•

Carbylan may, in Carbylan’s discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law;

 

•

Carbylan is required to advance expenses, as incurred, to Carbylan’s directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification

 

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Carbylan will not be obligated pursuant to Carbylan’s Amended and Restated Bylaws to indemnify a person with respect to proceedings initiated by that person against Carbylan or Carbylan’s other indemnitees, except with respect to proceedings authorized by the Carbylan board of directors or brought to enforce a right to indemnification;

 

•

the rights conferred in Carbylan’s Amended and Restated Bylaws are not exclusive, and Carbylan is authorized to enter into indemnification agreements with Carbylan’s directors, officers, employees and agents and to obtain insurance to indemnify such persons; and

 

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Carbylan may not retroactively amend Carbylan’s amended and restated bylaw provisions to reduce Carbylan’s indemnification obligations to directors, officers, employees and agents.

Risks Related to KalVista’s Financial Position and Need For Additional Capital

KalVista has incurred significant losses since its inception. KalVista expects to incur losses over the next several years and may never achieve or maintain profitability.

Since inception, KalVista has incurred significant operating losses. KalVista’s net loss was $11,436,163 for the fiscal year ended April 30, 2016. As of April 30, 2016, KalVista had an accumulated deficit of $37,252,387. KalVista has focused primarily on its discovery efforts and developing its product candidates. KalVista has recently initiated clinical development of its lead product candidates, KVD818, for the treatment of HAE, and KVD001, for the treatment of DME, and expects that it will be many years, if ever, before KalVista has a product candidate ready for commercialization. To date, KalVista has financed its operations primarily through private placements of its preferred stock. KalVista expects to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses KalVista incurs may fluctuate significantly from quarter to quarter. KalVista anticipates that its expenses will increase substantially if and as KalVista:

 

•

continues clinical development of its product candidates;

 

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•

seeks to identify additional product candidates;

 

•

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

 

•

initiates clinical trials for its product candidates;

 

•

seeks marketing approvals for 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

 

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incurs increased costs as a result of operating as a public company.

To become and remain profitable, KalVista 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 KalVista may obtain marketing approval. KalVista 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 KalVista does achieve profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis. KalVista’s failure to become and remain profitable would decrease the value of the company and could impair its ability to raise capital, maintain its discovery and preclinical 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 KalVista could also cause stockholders to lose all or part of their investment.

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

KalVista is an early stage clinical development company. KalVista commenced active operations in May 2011 and its operations to date have been limited to organizing and staffing the company, business planning, raising capital, acquiring and developing the technology, identifying potential product candidates, undertaking preclinical studies and early stage clinical studies of its most advanced product candidates, KVD001, which KalVista is planning to advance into Phase 2 clinical trials, and KVD818, which recently initiated its Phase 1 clinical trial. KalVista 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 takes an average of about 10 to 15 years to develop one new medicine from the time it is discovered to when it is available for treating patients. Consequently, any predictions made about KalVista’s future success or viability based on its short operating history to date may not be as accurate as they could be if KalVista had a longer operating history.

In addition, as a new business, KalVista may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. KalVista will need to transition from a company with a research focus to a company capable of supporting commercial activities. KalVista may not be successful in such a transition.

 

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

KalVista expects its expenses to increase in parallel with its ongoing activities, particularly as it continues its discovery and preclinical development collaborations to identify new clinical candidates and initiate clinical trials of, and seek marketing approval for, its product candidates. In addition, if KalVista obtains marketing approval for any of its product candidates, KalVista expects to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Furthermore, upon the closing of the transaction, KalVista expects to incur additional costs associated with operating as a public company. Accordingly, KalVista will need to obtain substantial additional funding in connection with its continuing operations. If KalVista is unable to raise capital when needed or on attractive terms, KalVista would be forced to delay, reduce or eliminate its discovery and preclinical development programs or any future commercialization efforts.

Based upon current operating plans, KalVista expects that its existing cash balance, along with net cash held by Carbylan upon consummation of the transaction, will be able to fund the operations of the combined company through the first calendar quarter of 2018.

 

•

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

 

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

 

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

 

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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 KalVista receives marketing approval;

 

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

 

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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 KalVista 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. KalVista’s commercial revenues, if any, will be derived from sales of products that it does not expect to be commercially available for many years, if at all. Accordingly, KalVista will need to continue to rely on additional financing to achieve its business objectives. Adequate additional financing may not be available to KalVista on acceptable terms, or at all.

Raising additional capital may cause dilution to KalVista’s stockholders, including purchasers of common stock in this transaction, restrict its operations or require it to relinquish rights to its technologies or product candidates.

Until such time, if ever, as KalVista can generate substantial product revenues, KalVista expects to finance its cash needs through a combination of equity offerings and debt financings. KalVista does not have any committed external source of funds. To the extent that KalVista 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.

 

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KalVista cannot be certain that additional funding will be available on acceptable terms, or at all. If KalVista 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.

Risks Related to the Discovery and Development of KalVista’s Product Candidates

KalVista is very early in its development efforts and has only two drug candidates, KVD001 and KVD818, in clinical development. If KalVista or its collaborators are unable to successfully develop and commercialize KVD001 or KVD818, or one of KalVista’s related compounds, or if it experiences significant delays in doing so, the business will be materially harmed.

KalVista currently does not have any products that have gained regulatory approval. KalVista has invested substantially all of its efforts and financial resources in identifying potential drug candidates and funding its preclinical and clinical studies. KalVista’s ability to generate product revenues, which it does not expect will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization of KVD001, KVD818 and additional similar product candidates. As a result, the business is substantially dependent on KalVista’s ability to complete the development of and obtain regulatory approval for KVD001 and KVD818.

KalVista 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 biopharmaceutical area. For example, to execute its business plan, KalVista will need to successfully:

 

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execute KVD001 and KVD818 development activities;

 

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move other product candidates into development;

 

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obtain required regulatory approvals for the development and commercialization of KVD001, KVD818 or other product candidates;

 

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maintain, leverage and expand its intellectual property portfolio;

 

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

 

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gain market acceptance for KVD001, KVD818 and other product candidates;

 

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

 

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

If KalVista is unsuccessful in accomplishing these objectives, KalVista may not be able to successfully develop and commercialize KVD001, KVD818 or other product candidates, and its business will suffer.

Clinical drug development involves a lengthy and expensive process, with an uncertain outcome. KalVista may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of its product candidates.

KalVista has only recently commenced clinical development of its lead product candidates KVD001 and KVD818 and the risk of failure for all of its product candidates is high. Before obtaining marketing approval from regulatory authorities for the sale of any product candidate, KalVista 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 may not be predictive

 

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of the results of later-stage clinical trials, and interim results of a clinical trial do not necessarily predict final results. 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 KalVista’s product candidates will prove effective or safe in humans or will receive regulatory approval.

KalVista 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 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. KalVista 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:

 

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delay or failure in reaching agreement with the MHRA, FDA or a comparable foreign regulatory authority on a trial design that KalVista 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;

 

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

 

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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;

 

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

 

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

 

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clinical sites and investigators deviating from trial protocol, failing to conduct the trial in accordance with regulatory requirements, or dropping out of a trial;

 

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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 clinical research organizations (“CROs”) and other third parties;

 

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

 

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the number of patients required for clinical trials of its product candidates may be larger than KalVista 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;

 

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

 

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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;

 

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

 

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regulators or institutional review boards (“IRBs”) may require that KalVista 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;

 

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

 

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•

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

 

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there may be changes in governmental regulations or administrative actions.

If KalVista is required to conduct additional clinical trials or other testing of its product candidates beyond those that it currently contemplates, if KalVista 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, KalVista may:

 

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be delayed in obtaining marketing approval for its product candidates;

 

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not obtain marketing approval at all;

 

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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;

 

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

 

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

KalVista’s product development costs will also increase if it experiences delays in testing or marketing approvals. KalVista 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 KalVista 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 KalVista 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.

KalVista may not be able to initiate or continue clinical trials for its product candidates if KalVista is unable to locate and enroll a sufficient number of eligible patients to participate in these trials to demonstrate safety and efficacy. KalVista has just initiated the first clinical trials with KVD818 and plans to initiate the second clinical trials with KVD001 in the future, and it does not know whether the planned or ongoing clinical trial will enroll subjects in a timely fashion, require redesign of essential trial elements or be completed on its projected schedule. In particular, because KalVista is focused on patients with HAE, which is a rare disease, its ability to enroll eligible patients in trials for KVD818 may be limited or may result in slower enrollment than KalVista anticipates. In addition, competitors have ongoing clinical trials for product candidates that treat the 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. KalVista’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:

 

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the eligibility criteria for the study in question;

 

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

 

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the efforts to facilitate timely enrollment in clinical trials;

 

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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;

 

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the patient referral practices of physicians;

 

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

 

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

 

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feedback from the 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;

 

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decisions by the MHRA, FDA, IRBs, a comparable foreign regulatory authority or KalVista, 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

 

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

Enrollment delays in KalVista’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, KalVista may need to abandon or limit its development of some of its product candidates.

If its product candidates are associated with undesirable effects in preclinical or clinical trials or have characteristics that are unexpected, KalVista 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. Two drug-related adverse events were reported in the Phase 1 clinical trial of KVD001. Both were considered also related to study procedures. However, additional or more severe side effects may be identified through further clinical studies. These or other drug-related side effects could affect patient recruitment or the ability of enrolled subjects to complete the trial or result in potential product liability claims.  Any of these occurrences may harm its business, financial condition and prospects significantly.

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

If KalVista is not able to obtain, or if there are delays in obtaining, required regulatory approvals, it will not be able to commercialize its product candidates, and its ability to generate revenue will be materially impaired.

KalVista’s product candidates must be approved by the FDA pursuant to a new drug application (“NDA”) in the United States and by the European Medicines Agency (the “EMA”) and 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 many 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 KalVista from commercializing the product candidate. KalVista has not received approval to market any of its product candidates from regulatory authorities in any jurisdiction. KalVista has no experience in filing and supporting the applications necessary to gain marketing approvals and expect to rely on third party CROs to assist it 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. KalVista’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

 

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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 KalVista ultimately obtains may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

If KalVista 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.

KalVista may seek orphan drug exclusivity for some of its product candidates, and KalVista may be unsuccessful.

Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a disease with a patient population of fewer than 200,000 individuals in the United States.

Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes the EMA or the FDA from approving another marketing application for the same drug for the same indication during the period of exclusivity. The applicable period is seven years in the United States and ten years in Europe. The European exclusivity period can be reduced to six years if a drug no longer meets the criteria for orphan drug designation or if the drug is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA or EMA determines that the request for designation was materially defective, if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.

Even if KalVista obtains orphan drug exclusivity for a product candidate, that exclusivity may not effectively protect the product candidate from competition because different drugs can be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently approve a different drug for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care.

A fast track designation by the FDA, even if granted for any of its product candidates, may not lead to a faster development or regulatory review or approval process and does not increase the likelihood that its product candidates will receive marketing approval.

KalVista does not currently have fast track designation for any of its product candidates but may seek such designation. If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply for FDA fast track designation. The FDA has broad discretion whether or not to grant this designation. Even if KalVista believes a particular product candidate is eligible for this designation, it cannot assure that the FDA would decide to grant it. Even if it does receive fast track designation, KalVista may not experience a faster development process, review or approval compared to conventional FDA procedures. The FDA may withdraw fast track designation if it believes that the designation is no longer supported by data from its clinical development program. Many drugs that have received fast track designation have failed to obtain drug approval.

 

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A breakthrough therapy designation by the FDA, even if granted for any of its product candidates, may not lead to a faster development or regulatory review or approval process, and does not increase the likelihood that its product candidates will receive marketing approval.

KalVista does not currently have breakthrough therapy designation for any of its product candidates but may seek such designation. A breakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For drugs that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor can help to identify the most efficient path for development.

Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if KalVista believes, after completing early clinical trials, that one of its product candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. In any event, the receipt of a breakthrough therapy designation for a product candidate may not result in a faster development process, review or approval compared to drugs considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if one or more of its product candidates qualify as breakthrough therapies, the FDA may later decide that such product candidates no longer meet the conditions for qualification.

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

In order to market and sell its products in the European Union and many other jurisdictions, KalVista 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 MHRA or FDA approval. The regulatory approval process outside the United Kingdom and United States generally includes all of the risks associated with obtaining, respectively, 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. KalVista 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 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. KalVista 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 KalVista 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 KalVista 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.

KalVista’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 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, current good manufacturing practices (“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 authority, 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

 

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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 KalVista 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 KalVista’s products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

 

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restrictions on such products, manufacturers or manufacturing processes;

 

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restrictions on the labeling or marketing of a product;

 

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restrictions on product distribution or use;

 

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requirements to conduct post-marketing studies or clinical trials;

 

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warning or untitled letters;

 

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withdrawal of the products from the market;

 

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

 

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recall of products;

 

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fines, restitution or disgorgement of profits or revenues;

 

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suspension or withdrawal of marketing approvals;

 

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refusal to permit the import or export of its products;

 

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product seizure; or

 

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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 KalVista to obtain marketing approval of and commercialize its product candidates and affect the prices KalVista 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 KalVista 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:

 

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

 

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

 

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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;

 

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

 

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extension of manufacturers’ Medicaid rebate liability;

 

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expansion of eligibility criteria for Medicaid programs;

 

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

 

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

 

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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. These new laws may result in additional reductions in Medicare and other healthcare funding.

KalVista 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 payors. The implementation of cost containment measures or other healthcare reforms may prevent KalVista 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. KalVista 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 KalVista 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, KalVista 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.

 

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If KalVista 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.

KalVista is subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. KalVista’s operations involve the use of hazardous and flammable materials, including chemicals and biological materials. KalVista’s operations also produce hazardous waste products. KalVista generally contracts with third parties for the disposal of these materials and wastes. KalVista cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from its use of hazardous materials, KalVista could be held liable for any resulting damages, and any liability could exceed its resources. KalVista also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and regulations.

Although KalVista maintain workers’ compensation insurance to cover it for costs and expenses it may incur due to injuries to its employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. KalVista does not maintain insurance for environmental liability or toxic tort claims that may be asserted against it in connection with its storage or disposal of biological, hazardous or radioactive materials.

In addition, KalVista 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 discovery, preclinical development or production efforts. KalVista’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 KalVista’s Product Candidates

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

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

 

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

 

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

 

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the convenience and ease of administration compared to alternative treatments;

 

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

 

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the strength of its marketing and distribution support;

 

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

 

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

 

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the prevalence and severity of any side effects; and

 

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

 

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

KalVista 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, KalVista 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 KalVista may not be successful in doing so. If its product candidates receive regulatory approval, KalVista 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 KalVista obtains approval to market. With respect to the commercialization of all or certain of its product candidates, KalVista 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 KalVista is unable to enter into such arrangements when needed on acceptable terms or at all, KalVista 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 KalVista 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 KalVista may incur significant additional losses.

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

The development and commercialization of new drug products is highly competitive. KalVista faces competition with respect to its current product candidates, and will face competition with respect to any product candidates that KalVista 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 KalVista 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 KalVista’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 hereditary angioedema and diabetic macular edema, including many major pharmaceutical and biotechnology companies.

In HAE, KalVista expects to face competition from several FDA-approved therapeutics, including Cinryze, marketed by Shire in the United States and Europe for the prevention of angioedema attacks in adults and adolescents; Firazyr, marketed by Shire in the United States, Europe and certain other geographic territories for the treatment of acute angioedema attacks in adult patients; Kalbitor, an injectable plasma kallikrein inhibitor marketed by Shire for the resolution of acute attacks in adolescent and adult HAE patients; Berinert, marketed by CSL Behring for the treatment of acute abdominal, facial or laryngeal attacks of HAE in adults and adolescents; and Ruconest, marketed by Pharming Group in Europe and Salix Pharmaceuticals in the United States for the treatment of acute angioedema attacks in adult patients. KalVista is also aware of companies, including Shire, Biocryst Pharmaceuticals, and Global Blood Therapeutics that are engaged in the clinical development of other product candidates, including a plasma kallikrein monoclonal antibody and oral plasma kallikrein inhibitors for the treatment of HAE patients.

 

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In DME, KalVista expects to face competition from several FDA-approved therapeutics, including anti-VEGF therapies Lucentis, marketed by Roche and Novartis, Eylea, marketed by Regeneron, and off label use of Avastin from Roche. KalVista also faces competition from various corticoid steroids including extended release formulations lluvien, marketed by Alimera, and Ozurdex, marketed by Allergan. KalVista also expects to compete with generic corticosteroids such as acetonide, fluocinolone, and dexamethasone. KalVista is also aware of a number of other companies who have product candidates in early clinical trials including Novartis, GlaxoSmithKline, Boehringer Ingelheim, Roche, Regeneron, Ohr Pharmaceutical, Aerpio Therapeutics, and Allegro Ophthalmics although KalVista is not aware that any of these therapies target plasma kallikrein.

KalVista’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 KalVista may develop. In addition, its ability to compete may be affected in many cases by insurers or other third party payors seeking to encourage the use of generic products. Generic products are expected to become available over the coming years, potentially creating pricing pressure. If its product candidates achieve marketing approval, KalVista expects that they will be priced at a significant premium over competitive generic products.

Many of the companies against which KalVista is competing or against which KalVista 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 KalVista 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 KalVista 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, KalVista’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 payors is essential for most patients to be able to afford expensive treatments. Sales of KalVista’s product candidates will depend substantially, both domestically and abroad, on the extent to which the costs of KalVista’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 payors. If reimbursement is not available, or is available only to limited levels, KalVista 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 KalVista 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 payors 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 KalVista’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 KalVista 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 varying price

 

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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 KalVista 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 payors, 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 KalVista’s product candidates. KalVista 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 payors 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 KalVista could cause it to incur substantial liabilities and to limit commercialization of any products that KalVista may develop.

KalVista 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 KalVista 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:

 

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

 

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injury to its reputation and significant negative media attention;

 

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withdrawal of clinical trial participants;

 

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significant costs to defend the related litigation;

 

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substantial monetary awards to trial participants or patients;

 

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loss of revenue;

 

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

 

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the inability to commercialize any products that KalVista may develop.

KalVista currently holds $8,000,000 in product liability insurance coverage in the aggregate, with a per incident limit of $8,000,000, which may not be adequate to cover all liabilities that KalVista may incur. KalVista 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. KalVista may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

 

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Risks Related to KalVista’s Dependence on Third Parties

Future discovery and preclinical development collaborations may be important to KalVista. If KalVista is unable to maintain these collaborations, or if these collaborations are not successful, its business could be adversely affected.

For some of its product candidates, KalVista may in the future determine to collaborate with pharmaceutical and biotechnology companies for development of products. KalVista faces significant competition in seeking appropriate collaborators. KalVista’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 KalVista is unable to reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, KalVista 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, KalVista 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 KalVista may enter into may involve the following risks:

 

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

 

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collaborators may not perform their obligations as expected;

 

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

 

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

 

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

 

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product candidates discovered in collaboration with KalVista 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;

 

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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 KalVista with respect to product candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive;

 

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collaborators may not properly maintain or defend its intellectual property rights or intellectual property rights licensed to KalVista 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 KalVista to potential litigation;

 

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

 

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

 

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

If KalVista’s collaborations do not result in the successful development of products or product candidates, product candidates could be delayed and KalVista 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.

KalVista 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 KalVista 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.

KalVista does not own or operate facilities for the manufacture of its product candidates, and it does not have any manufacturing personnel. KalVista currently has no plans to build its own clinical or commercial scale manufacturing capabilities. KalVista relies, and expects to continue to rely, on third parties for the manufacture of its product candidates for preclinical and clinical testing. KalVista will rely on third parties as well for commercial manufacture if any of its product candidates receive marketing approval. This reliance on third parties increases the risk that KalVista 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. KalVista does not currently have arrangements in place for redundant supply. If current suppliers cannot supply KalVista with its Phase 2 requirements as agreed, KalVista 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.

KalVista 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.

KalVista also expect 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.

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

 

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

 

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

 

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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 KalVista.

Third party manufacturers may not be able to comply with cGMP, regulations or similar regulatory requirements outside the United States. KalVista’s failure, or the failure of its third party manufacturers, to comply with applicable regulations could result in sanctions being imposed on KalVista, 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.

KalVista’s product candidates and any products that KalVista 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 KalVista.

KalVista’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 KalVista’s Intellectual Property

If KalVista 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 KalVista’s, and its ability to successfully commercialize its technology and products may be impaired.

KalVista’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. KalVista 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 compositions of matter and methods of use.

The patent prosecution process is expensive and time-consuming, and KalVista may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. KalVista 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 KalVista 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 KalVista 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 in some cases not at all. Therefore, KalVista 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. KalVista’s pending and future patent applications may not result in patents being issued

 

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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 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 KalVista’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, KalVista may be subject to a third party preissuance 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 KalVista, 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 KalVista to license, develop or commercialize current or future product candidates.

Even if KalVista’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. KalVista’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 KalVista’s ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of KalVista’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, KalVista’s owned and licensed patent portfolio may not provide it with sufficient rights to exclude others from commercializing products similar or identical to KalVista’s.

The risks described elsewhere pertaining to its patents and other intellectual property rights also apply to the intellectual property rights that KalVista licenses, and any failure to obtain, maintain and enforce these rights could have a material adverse effect on its business. In some cases KalVista 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 KalVista believes are necessary or desirable in order to obtain, maintain and enforce the licensed patents. Any inability on KalVista’s part to protect adequately its intellectual property may have a material adverse effect on its business, operating results and financial position.

 

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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. KalVista 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. KalVista 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, KalVista’s competitors might be able to enter the market and this circumstance would have a material adverse effect on its business.

KalVista 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 KalVista’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, KalVista may be required to file infringement claims, which can be expensive and time consuming. Any claims KalVista asserts against perceived infringers could provoke these parties to assert counterclaims against it alleging that KalVista infringes their patents. In addition, in a patent infringement proceeding, a court may decide that a patent of KalVista’s is invalid or unenforceable, in whole or in part, construe the patent’s claims narrowly or refuse to stop the 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. KalVista 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 KalVista 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.

KalVista 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 KalVista’s products. It may be necessary for KalVista 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 KalVista 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 KalVista 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.

KalVista’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

 

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pharmaceutical industries. KalVista 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 KalVista based on existing patents or patents that may be granted in the future.

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

If KalVista 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, KalVista also relies on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain its competitive position. KalVista 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. KalVista 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 KalVista enters into such agreements, any of these parties may breach the agreements and disclose its proprietary information, including its trade secrets, and KalVista 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, KalVista would have no right to prevent them, or those to whom they communicate them, from using that technology or information to compete with KalVista. If any of its trade secrets were to be disclosed to or independently developed by a competitor, KalVista’s competitive position would be harmed.

Risks Related to Employee Matters, Managing Growth and Macroeconomic Conditions

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

KalVista is highly dependent on the research and development, clinical and business development expertise of T. Andrew Crockett, its co-founder and Chief Executive Officer, Christopher Yea, Ph.D., its Chief Development Officer, and Edward Feener, Ph.D., its co-founder and anticipated Chief Scientific Officer, as well as the other principal members of its management, scientific and clinical team. Although KalVista has entered into employment letter agreements with its executive officers, each of them may terminate their employment with it at any time. KalVista 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 KalVista’s success. The loss of the services of its executive officers or other key employees could impede the achievement of KalVista’s research, development and commercialization objectives and seriously

 

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harm KalVista’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 KalVista’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 KalVista 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. KalVista also experiences competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, KalVista relies on consultants and advisors, including scientific and clinical advisors, to assist it in formulating its discovery and preclinical development and commercialization strategy. KalVista’s consultants and advisors may be employed by employers other than KalVista and may have commitments under consulting or advisory contracts with other entities that may limit their availability to provide services to KalVista. If KalVista is unable to continue to attract and retain high quality personnel, its ability to pursue its growth strategy will be limited.

KalVista expects to expand its development and regulatory capabilities and potentially implement sales, marketing and distribution capabilities, and as a result, KalVista may encounter difficulties in managing its growth, which could disrupt its operations.

KalVista 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, KalVista 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 and the limited experience of its management team in managing a company with such anticipated growth, KalVista 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.

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

KalVista’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 KalVista cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact its business.

KalVista’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 KalVista relies are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Furthermore, KalVista has little or no control over the security measures and computer systems of its third-party collaborators. While KalVista 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 KalVista may incur substantial costs to attempt to recover or reproduce the data. If any disruption or security

 

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breach resulted in a loss of or damage to its data or applications, or inappropriate disclosure of confidential or proprietary information, KalVista could incur liability and/or the further development of its product candidates could be delayed.

Risks Related to the Combined Company

The combined company will incur losses for the foreseeable future and might never achieve profitability.

The combined company may never become profitable, even if the combined company is able to complete clinical development for one or more product candidates and eventually commercialize such product candidates. The combined company will need to successfully complete significant research, development, testing and regulatory compliance activities that, together with projected general and administrative expenses, is expected to result in substantial increased operating losses for at least the next several years. Even 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 will need to obtain additional funding necessary to support its operations.

Carbylan and KalVista do not know when, or if, the combined company will generate any revenue, and both parties do not expect to generate significant revenue unless and until the combined company obtains regulatory approval of and commercializes one of its current or future product candidates. It is anticipated that the combined company will continue to incur losses for the foreseeable future, and that losses will increase as the combined company continues the development of, and seeks regulatory approvals for, its product candidates, and begins to commercialize any approved products. Based upon current operating plans, it is expected the proceeds from KalVista’s private placement, along with net cash held by Carbylan upon consummation of the transaction, will be able to fund the operations of the combined company through the first calendar quarter of 2018. The combined company will require additional capital to complete the development and commercialization of KVD001 and KVD818, if approved, and may also need to raise additional funds to pursue other development activities related to additional product candidates.

Until such time, if ever, as the combined company can generate substantial revenues, it expects to finance its cash needs through a combination of equity or debt financings, collaborations, strategic partnerships or licensing arrangements. However, additional capital may not be available on reasonable terms, if at all. To the extent that the combined company raises additional capital through the sale of stock or convertible debt securities, the ownership interest of its stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of its common stockholders. Debt financing, if available, may involve agreements that include increased fixed payment obligations and covenants limiting or restricting the combined company’s ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends, selling or licensing intellectual property rights, and other operating restrictions that could adversely affect its ability to conduct its business. If the combined company raises additional funds through collaborations, strategic partnerships, or licensing arrangements with third parties, it may have to relinquish valuable rights to KVD001 and KVD818 or its other product candidates, including its other technologies, future revenue streams, or research programs, or grant licenses on terms that may not be favorable to it. 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 or grant rights to develop and commercialize KVD001 and KVD818 or its other product candidates even if it would otherwise prefer to develop and commercialize such product candidates itself.

 

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Carbylan and KalVista expect Carbylan’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 Carbylan common stock to fluctuate include:

 

•

the ability of the combined company to obtain regulatory approvals for KVD001 and KVD818 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;

 

•

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

 

•

adverse publicity relating to the HAE and DME markets, including with respect to other products and potential products in such markets;

 

•

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.

 

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After this 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 this transaction, the combined company’s executive officers and directors, combined with its stockholders who, following the consummation of the transaction, are expected to individually own more than 5% of its outstanding common stock are expected to, in the aggregate, beneficially own shares representing approximately 74.3% 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.

The failure to integrate successfully the businesses of KalVista and Carbylan 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 Carbylan and KalVista. 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 KalVista;

 

•

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 KalVista 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. For example, not all members of the combined company’s management team have previously managed and operated a public company. The executive officers and other personnel of the combined company will need to devote substantial time to gaining expertise

 

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regarding operations as a public company and compliance with applicable laws and regulations. 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 financial statements in accordance with GAAP.

During the audit of KalVista’s financial statements for the years ended April 20, 2015 and 2016 two material weaknesses were identified in its internal control over financial reporting. Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis.

The following material weaknesses in internal controls over financial reporting were identified:

Process and Systems of Controls: KalVista did not have a process and system of controls in place that took into account the fair value of the ordinary shares as contemplated in GAAP. Instead they relied upon the valuation agreed with the UK tax authorities for tax purposes, which does not represent fair value as defined by GAAP.

Process and Systems of Controls: KalVista did not adequately identify expenditures incurred at or near year-end and appropriately accrue for such expenditures absent invoices received from vendors.

KalVista has implemented and is continuing to implement measures designed to improve its internal control over financial reporting to address the underlying causes of these material weaknesses, including the hiring of a Chief Financial Officer and other accounting personnel and establishing new accounting and financial reporting procedures, policies and processes to have in place an appropriate level of internal control over financial reporting. However, KalVista 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 or that these measures will significantly improve or remediate the material weaknesses described above. If KalVista or the combined company is unable to successfully remediate the existing material weaknesses in KalVista’s (or following the consummation of the transaction, the combined company’s) internal control 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 KalVista’s or the combined company’s, internal controls may distract the officers and employees of KalVista 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

 

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operating costs and harm the business. In addition, investors’ perceptions that the internal controls of KalVista 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.

Anti-takeover provisions in the combined company’s charter documents and under Delaware law could make an acquisition of the combined company more difficult and may prevent attempts by the combined company stockholders to replace or remove the combined company management.

Provisions in the combined company’s certificate of incorporation and bylaws, which are identical to Carbylan’s certificate of incorporation and bylaws, may delay or prevent an acquisition or a change in management. These provisions include a classified board of directors. In addition, because the combined company will be incorporated in Delaware, it is governed by the provisions of Section 203 of the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding combined company voting stock from merging or combining with the combined company. Although Carbylan and KalVista believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirors to negotiate with the combined company’s board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by the combined company’s stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing members of management.

Carbylan and KalVista 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 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 operations following the transaction for several reasons. The pro forma financial statements have been derived from the historical financial statements of Carbylan and KalVista 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 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 Condensed Combined Financial Information” beginning on page 189 of this proxy statement.

 

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

If existing stockholders of Carbylan and KalVista 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 transaction, the combined company is expected to have outstanding at least 9,903,798 shares of common stock, after taking into account the effect of the 14:1 reverse split. As of immediately following the closing of the transaction, approximately 941,200 shares of common stock will be freely tradable, without restriction, in the public market.

The lock-up agreements entered into between each of Carbylan and KalVista and certain of each other’s securityholders provide that the shares subject to the lock-up restrictions will be released from such restrictions 180 days from the closing date of the transaction. Based on shares outstanding as of August 19, 2016 and assuming that the 14:1 reverse stock split will be consummated prior to the closing of the transaction and a registration statement covering the resale of the shares of Carbylan common stock issuable in connection with the transaction is in effect, up to an additional approximately 8,713,985 shares of common stock will be eligible for sale in the public market. Nearly all of these shares will be 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.

KalVista has dedicated substantially all of its resources to the research and development of its product candidates. At present, KalVista is focusing its resources on KVD001 and KVD818 while strategically conducting development activities on the remainder of its other future product candidates. KalVista’s primary product candidates, KVD001 and KVD818, are currently in the early stages of clinical development. The combined company may not develop any product candidates suitable for commercialization.

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;

 

•

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.

 

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The net operating loss carryforwards and other tax attributes of the combined company may also be subject to limitations as a result of ownership changes.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” (generally defined as a greater than 50 percentage point cumulative change (by value) in the equity ownership of certain stockholders over a rolling three-year period) is subject to limitations on its ability to utilize its pre-change net operating losses (“NOLs”) to offset future taxable income. Carbylan experienced an ownership change in December 2005 that limited Carbylan’s use of approximately $0.3 million of the NOLs available to Carbylan for federal income tax purposes as of June 30, 2016. The transaction will result in an ownership change for Carbylan and, accordingly, Carbylan’s net operating loss carryforwards and certain other tax attributes will be subject to further limitations on their use after the transaction. The Section 382 limitation on Carbylan’s net operating losses and other tax attributes would be significantly reduced (possibly to zero), unless Carbylan or the combined company satisfies a “continuity of business enterprise” requirement throughout the two years following the Closing Date of the transaction. Additional ownership changes in the future could result in additional limitations on Carbylan’s and the combined company’s net operating loss carryforwards (some of which changes may be outside of Carbylan’s, KalVista’s and the combined company’s control). Consequently, even if the combined company achieves profitability, it may not be able to utilize a material portion of Carbylan’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.

 

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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 Carbylan or on Carbylan’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 Carbylan, but not KalVista, because Carbylan, unlike KalVista, is a public company subject to the reporting requirements of the Exchange Act), that do not directly or exclusively relate to historical facts, including, without limitation, statements regarding the structure, timing and completion of the proposed transaction; Carbylan’s continued listing on NASDAQ prior to and after the proposed transaction; expectations regarding the capitalization, resources and ownership structure of the combined company; expectations regarding the sufficiency of the combined 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 combined company; the safety, efficacy and projected development timeline and commercial potential of any product candidates; the executive officer and board structure of the combined company; and the expectations regarding voting by Carbylan 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. All forward-looking statements contained in this proxy statement speak only as of the date on which they were made. Stockholders are cautioned that any forward-looking statements are not guarantees of future performance. Actual results could differ materially from those anticipated as a result of various factors. These statements are based on current expectations and assumptions that are subject to risks and uncertainties.

For a discussion of the factors that may cause Carbylan, KalVista 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 risk associated with the ability of Carbylan and KalVista to complete the transaction and the effect of the transaction on the business of Carbylan, KalVista and the combined company, see the section entitled “Risk Factors,” beginning on page 26 of this proxy statement.

If any of these risks or uncertainties materializes or any of these assumptions proves incorrect, the results of Carbylan, KalVista 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. Carbylan and KalVista do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any statement is made or to reflect the occurrence of unanticipated events, except as required by law.

 

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THE SPECIAL MEETING

General

Your proxy is solicited on behalf of the Carbylan board of directors for use at the special meeting of stockholders to be held on                     , 2016, at              local time, at the offices of Latham & Watkins LLP, 140 Scott Drive, Menlo Park, California 94025, or at any continuation, postponement or adjournment thereof, for the purposes discussed in this proxy statement and in the accompanying Notice of Special Meeting and any business properly brought before the special meeting. Proxies are solicited to give all stockholders of record an opportunity to vote on matters properly presented at the special meeting.

Date, Time and Place

Carbylan will hold the special meeting on                     , 2016, at              local time, at the offices of Latham & Watkins LLP, 140 Scott Drive, Menlo Park, California 94025. On or about                     , 2016, Carbylan commenced mailing this proxy statement and the enclosed form of proxy to Carbylan’s stockholders entitled to vote at Carbylan’s special meeting.

Purposes of the Carbylan Special Meeting

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

 

1.

the Share Issuance Proposal;

 

2.

the Reverse Stock Split Proposal;

 

3.

the Name Change Proposal; and

 

4.

the Adjournment Proposal.

Recommendation of the Carbylan Board of Directors

 

•

The Carbylan board of directors has determined and believes that the issuance of Carbylan common stock in the transactions contemplated by the Share Purchase Agreement is fair to, advisable, and in the best interests of, Carbylan and its stockholders and has approved such items. The Carbylan board of directors recommends that Carbylan stockholders vote “FOR” the Share Issuance Proposal.

 

•

The Carbylan board of directors has determined and believes that it is fair to, advisable, and in the best interests of, Carbylan and its stockholders to effect a 14:1 reverse stock split, and has approved such reverse stock split. The Carbylan board of directors recommends that Carbylan stockholders vote “FOR” the Reverse Stock Split Proposal.

 

•

The Carbylan board of directors has determined and believes that it is fair to, advisable, and in the best interests of, Carbylan and its stockholders to change the name of Carbylan to “KalVista Pharmaceuticals, Inc.” and has approved such name change. The Carbylan board of directors recommends that Carbylan stockholders vote “FOR” the Name Change Proposal.

 

•

The Carbylan 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 Issuance Proposal or the Name Change Proposal is fair to, advisable, and in the best interests of, Carbylan and its stockholders and has approved and adopted the proposal. The Carbylan board of directors recommends that Carbylan stockholders vote “FOR” the Adjournment Proposal.

Stockholders Entitled to Vote; Record Date

Only holders of record of Carbylan common stock at the close of business on the record date,                    , 2016, are entitled to notice of, and to vote at, the Carbylan special meeting. There were approximately         

 

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holders of record of Carbylan common stock at the close of business on the record date. At the close of business on the record date,                shares of Carbylan common stock were issued and outstanding. Each share of Carbylan common stock entitles the holder thereof to one vote on each matter submitted for stockholder approval. See the section entitled “Security Ownership of Certain Beneficial Owners and Management of Carbylan” beginning on page 184 of this proxy statement for information regarding persons known to the management of Carbylan to be the beneficial owners of more than 5% of the outstanding shares of Carbylan common stock.

Quorum and Vote Required

A quorum of stockholders is necessary to hold the special meeting. The required quorum for the transaction of business at the special meeting will exist when the holders of a majority of the shares of Carbylan common stock entitled to vote at the special meeting are represented either in person or by proxy. If a quorum is not present at the special meeting, Carbylan expects that the special meeting will be adjourned to solicit additional proxies. Abstentions and “broker non-votes,” discussed below, count as shares present for establishing a quorum. A “broker non-vote” occurs when a nominee holding shares for a beneficial owner returns a valid proxy but does not vote on a particular proposal because the nominee does not have discretionary voting authority and has not received instructions from the beneficial owner of the shares. Brokers, banks and other nominees will not have discretionary authority on the Share Issuance Proposal, the Reverse Stock Split Proposal or the Name Change Proposal.

You may vote “FOR” or “AGAINST,” or you may “ABSTAIN” from voting on, the Share Issuance Proposal. Approval of the Share Issuance Proposal requires the affirmative vote of the majority of the shares of Carbylan 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 the Share Issuance Proposal.

You may vote “FOR” or “AGAINST,” or you may “ABSTAIN” from voting on, the Reverse Stock Split Proposal. Approval of the Reverse Stock Split Proposal requires the affirmative vote of the holders of a majority of the outstanding shares of Carbylan common stock 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 that proposal.

You may vote “FOR” or “AGAINST,” or you may “ABSTAIN” from voting on, the Name Change Proposal. Approval of the Name Change Proposal requires the affirmative vote of the holders of a majority of the outstanding shares of Carbylan common stock entitled to vote at the special meeting. Because the vote on the Name Change 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 that proposal.

You may vote “FOR” or “AGAINST,” or you may “ABSTAIN” from voting on, the Adjournment Proposal. The Adjournment Proposal will be approved if a majority of the shares of Carbylan common stock, present in person or represented by proxy and entitled to vote on the subject matter, vote in favor of the proposal, whether or not a quorum is present. Broker non-votes and abstentions will have no effect on the Adjournment Proposal.

A list of the record holders of Carbylan common stock will be available for review for any purpose germane to the special meeting at 39899 Balentine Drive, Suite 200, in Newark, California, during regular business hours for a period of ten days before the special meeting and will also be available at the special meeting.

Voting by Stockholders

If you are a stockholder of record of Carbylan as of the record date referred to above, you may vote in person at the Carbylan special meeting or vote by proxy using the enclosed proxy card. Whether or not you plan

 

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to attend the Carbylan special meeting, Carbylan urges you to vote by proxy to ensure your vote is counted. You may still attend the Carbylan special meeting and vote in person if you have already voted by proxy. As a stockholder of record:

 

•

To vote in person, come to the Carbylan special meeting and Carbylan will give you a ballot when you arrive;

 

•

To vote using the proxy card, simply mark, sign and date your proxy card and return it promptly in the postage-paid envelope provided; if you return your signed proxy card to Carbylan before the Carbylan special meeting, Carbylan will vote your shares as you direct;

 

•

To vote on the Internet, go to the website on the proxy card or voting instruction form to complete an electronic proxy card; you will be asked to provide the company number and control number from the enclosed proxy card; your vote must be received by                     , 2016, at              Pacific Time to be counted.

If your Carbylan shares are held by your broker as your nominee, that is, in “street name,” the enclosed voting instruction card is sent by the institution that holds your shares. Please follow the instructions included on that proxy card regarding how to instruct your broker to vote your Carbylan shares. If you do not give instructions to your broker, your broker can vote your Carbylan shares with respect to “discretionary” items but not with respect to “non-discretionary” items. Discretionary items are proposals considered routine under the rules of NASDAQ on which your broker may vote shares held in “street name” in the absence of your voting instructions. On non-discretionary items for which you do not give your broker instructions, the Carbylan shares will be treated as broker non-votes. It is anticipated that the Share Issuance Proposal, the Reverse Stock Split Proposal and the Name Change Proposal will be non-discretionary items.

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 Carbylan common stock executes and returns a proxy and does not specify otherwise, the shares represented by that proxy will be voted “FOR” the Share Issuance Proposal; “FOR” the Reverse Stock Split Proposal; “FOR” the Name Change Proposal; and “FOR” the Adjournment Proposal in accordance with the recommendation of the Carbylan board of directors.

Revocation of Proxies

Carbylan stockholders of record, other than those Carbylan stockholders who have executed support agreements, may change their vote at any time before their proxy is voted at the special meeting in one of three ways. First, a stockholder of record of Carbylan can send a written notice to the Secretary of Carbylan stating that the stockholder would like to revoke its proxy. Second, a stockholder of record of Carbylan can submit new proxy instructions either on a new proxy card or via the Internet. Third, a stockholder of record of Carbylan can attend the Carbylan special meeting and vote in person. Attendance alone will not revoke a proxy. If a Carbylan stockholder of record or a stockholder who owns Carbylan shares in “street name” has instructed a broker to vote its shares of Carbylan common stock, the stockholder must follow directions received from its broker to change those instructions.

Voting by Carbylan’s Directors and Executive Officers

As of                 , 2016, the current directors and executive officers of Carbylan owned     % of the outstanding shares of Carbylan stock entitled to vote at the Carbylan special meeting. The directors and executive officers of Carbylan owning these shares are subject to support agreements. Each stockholder that entered into a support agreement has agreed to vote all shares of Carbylan common stock owned as of the record date in favor of the Share Purchase Agreement and the transactions contemplated by the Share Purchase Agreement, including the issuance of Carbylan common stock in the transaction, the approval of any proposal to adjourn or postpone the meeting to a later date, if there are not sufficient votes for the Share Issuance Proposal, the Reverse Stock

 

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Split Proposal and the Name Change Proposal on the date on which such meeting is originally held, and any other matter necessary to consummate the transactions contemplated by the Share Purchase Agreement that are considered and voted upon by Carbylan’s stockholders and against any “acquisition proposal,” as defined in the Share Purchase Agreement. As of                     , 2016, Carbylan is not aware of any affiliate of KalVista owning any shares of Carbylan common stock entitled to vote at the Carbylan special meeting.

Solicitation of Proxies

In addition to solicitation by mail, the directors, officers, employees and agents of Carbylan may solicit proxies from Carbylan stockholders by personal interview, telephone, telegram or otherwise. Carbylan and KalVista will share equally the costs of printing and filing this proxy statement and proxy card. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of Carbylan common stock for the forwarding of solicitation materials to the beneficial owners of Carbylan common stock. Carbylan will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials. Carbylan has retained Alliance Advisors, LLC to assist it in soliciting proxies using the means referred to above. Carbylan will pay Alliance Advisors, LLC fees of $10,000, plus reimbursement of out-of-pocket expenses.

No Appraisal Rights

Holders of Carbylan 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

In accordance with a notice sent to certain stockholders of Carbylan common stock who share a single address, only one copy of this proxy statement is being sent to that address unless Carbylan has received contrary instructions from any stockholder at that address. This practice, known as “householding,” is designed to reduce Carbylan’s printing and postage costs. However, if any stockholder residing at such an address wishes to receive a separate copy of this proxy statement, he or she may contact Carbylan Therapeutics, Inc. (Attn: Corporate Secretary, 39899 Balentine Drive, Suite 200, Newark, California 94560) or Alliance Advisors, LLC, Carbylan’s proxy solicitor, using the information below. Any such stockholder may also contact Carbylan Therapeutics, Inc. (Attn: Corporate Secretary, 39899 Balentine Drive, Suite 200, Newark, California 94560) or Alliance Advisors, LLC if he or she would like to receive separate proxy statements in the future. If you are receiving multiple copies of Carbylan’s proxy statement, you may request householding in the future by contacting Alliance Advisors, LLC, using the information below:

Alliance Advisors, LLC

200 Broadacres Drive, 3rd Floor

Bloomfield, NJ 07003

Stockholders May Call Toll-Free: 855-742-8276

Stockholders May Email: CBYL@allianceadvisorsllc.com

Tabulation of Votes

Votes will be counted by the inspector of election appointed for the meeting, who will separately count “FOR” and “AGAINST” votes, abstentions and broker non-votes.

Adjournments and Postponements

Any adjournment or postponement of the special meeting (e.g., an adjournment required because of the absence of a quorum) would be voted upon pursuant to the discretionary authority granted by the proxy. If the

 

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special meeting is adjourned or postponed, Carbylan 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 Carbylan board of directors fixes a new record date for the special meeting.

Attending the Special Meeting

You may attend the special meeting and Carbylan will give you a ballot when you arrive. Please note, however, that if your shares are held in “street name,” by a broker, bank or other nominee, and you wish to vote at the special meeting, you must bring to the special meeting a legal proxy from the record holder of the shares (your broker, bank or nominee) authorizing you to vote at the special meeting.

Notice Regarding Availability of Proxy Materials

Any person, including any beneficial owner, to whom this proxy statement is delivered may request copies of this proxy statement or other information concerning us, without charge, by written request to Carbylan Therapeutics, Inc. (Attn: Corporate Secretary, 39899 Balentine Drive, Suite 200, Newark, California 94560), or Alliance Advisors, LLC (at the address or phone number listed below), or through the Investors section of Carbylan’s website, www.carbylan.com, or from the SEC through the SEC website at the address provided above. If you have questions about the special meeting or the transaction with KalVista after reading this proxy statement, or if you would like additional copies of this proxy statement or the proxy card, please contact Carbylan’s proxy solicitor, Alliance Advisors, LLC, using the information below:

Alliance Advisors, LLC

200 Broadacres Drive, 3rd Floor

Bloomfield, NJ 07003

Stockholders May Call Toll-Free: 855-742-8276

Stockholders May Email: CBYL@allianceadvisorsllc.com

Assistance

If you need assistance in completing your proxy card or have questions regarding the special meeting, please contact Carbylan’s proxy solicitor, Alliance Advisors, LLC, using the information below:

Alliance Advisors, LLC

200 Broadacres Drive, 3rd Floor

Bloomfield, NJ 07003

Stockholders May Call Toll-Free: 855-742-8276

Stockholders May Email: CBYL@allianceadvisorsllc.com

 

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THE TRANSACTION

The Transaction Structure

Upon the terms and subject to the conditions set forth in the Share Purchase Agreement, Carbylan will acquire all of the ordinary and preferred shares of KalVista in exchange for the issuance to the Sellers of a certain number of shares of Carbylan common stock based on the relative stipulated values of Carbylan and KalVista under the terms of the Share Purchase Agreement, subject to adjustment to account for the proposed 14:1 reverse stock split. KalVista’s Series A and Series B preferred shares will automatically convert into ordinary shares immediately prior to the closing on a 1-to-1 basis and this conversion will not include additional ordinary shares in respect of the cumulative preferred dividends which have been waived by the preferred shareholders for the purposes of the transaction. The issuance of Carbylan common stock to the Sellers will not be registered with the SEC and such shares will bear a customary restricted stock legend. Following the transaction, KalVista will be a wholly owned subsidiary of Carbylan, and the Sellers shall own a majority stake in Carbylan.

Expected Timing of the Transaction

Unless the Share Purchase Agreement is earlier terminated pursuant to its terms, the transaction will be consummated at the offices of Latham & Watkins LLP, 140 Scott Drive, Menlo Park, California 94025, 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 transaction, as described in the section entitled “Terms of the Share Purchase Agreement—Conditions to the Consummation of the Transaction,” beginning on page 106 of this proxy statement.

Consideration

In exchange for all of the ordinary and preferred shares of KalVista, Carbylan will issue to the Sellers a number of shares of Carbylan common stock determined by the relative stipulated values of Carbylan and KalVista, as described in the section entitled “Terms of the Share Purchase Agreement—Exchange Ratio; Net Cash Calculation,” beginning on page 101 of this proxy statement, subject to adjustment to account for the proposed 14:1 reverse stock split.

Effect of the Transaction on Stock Options and Equity Incentives

The vesting of all outstanding Carbylan Options will accelerate immediately prior to closing, and at closing (i) all outstanding Carbylan Options with an exercise price per share that is less than the Carbylan Closing Price will be automatically net exercised for a number of shares of Carbylan common stock (subject to an offset for withholding obligations) calculated by dividing (a) the product of (1) the total number of shares subject to such Carbylan Option and (2) the excess of the Carbylan Closing Price over the exercise price per share by (b) the Carbylan Closing Price and (ii) all Carbylan Options with an exercise price per share equal to or greater than the Carbylan Closing Price will be terminated for no consideration.

KalVista grants equity awards pursuant to the KalVista Plan. In connection with the transaction, each outstanding and unvested KalVista option will be converted into a Carbylan Option having an equivalent economic value and such converted awards will continue to vest on their original schedule (to the extent individual equity award holders consented to the rollover and removal of vesting acceleration as applied to their stock options).

Net Cash Calculation

“Net Cash” is defined in the Share Purchase Agreement as (a) Carbylan’s cash (excluding restricted cash) and cash equivalents and marketable securities, minus (b) the sum of (without duplication) (i) Carbylan’s

 

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accounts payable and accrued expenses and Carbylan’s other current liabilities payable in cash, (ii) Carbylan transaction expenses (e.g., costs, fees and expenses incurred in connection with the transaction, change of control payments, retention payments, etc.), (iii) indebtedness, (iv) severance payments, termination benefits or other obligations relating to termination of employees or service providers prior to, or planned as of, the time of closing, (v) any costs or expenses associated with the termination or winding down of Carbylan’s current business operations, including with respect to the termination of any existing or planned Carbylan preclinical or clinical research or similar research or operations, (vi) any payable or other obligation related to Carbylan’s real estate lease obligations or the termination thereof (net of any rights of Carbylan to receive payments relating to the properties subject to such lease obligations under a sublease or otherwise), and (vii) an accrual or reserve for potential claims or litigation brought or initiated against Carbylan, its directors or officers or its underwriters in an amount equal to the greater of (A) $1,000,000 (net of any amounts paid in settlement or costs, fees or other expenses paid by Carbylan in connection with such claims or litigation prior to the date of determination) or (B) the amount required to be reserved under GAAP in Carbylan’s financial statements for such claims or litigation.

If Carbylan’s Net Cash at the closing is equal to or greater than $27.5 million (the “Net Cash Floor”), then Carbylan’s Net Cash will be deemed to be $30 million for purposes of determining Carbylan’s stipulated value; provided that the Net Cash Floor will be reduced by $13,333 for each day that elapses following September 1, 2016 without the transaction being consummated.

If Carbylan’s Net Cash exceeds $31 million at the closing, Carbylan will dividend to its stockholders any Net Cash in excess of $31 million and Carbylan’s Net Cash will be deemed to be $30 million for purposes of determining Carbylan’s stipulated value. Carbylan does not anticipate making a dividend prior to the closing and anticipates that its Net Cash at the closing will be less than $31 million.

Background of the Transaction

The Carbylan board of directors and Carbylan’s executive management regularly review Carbylan’s operating and strategic plans, both near-term and long-term, as well as various strategic alternatives in an effort to enhance stockholder value. These reviews and discussions have focused on, among other things, the opportunities and risks associated with Carbylan’s business and financial condition, potential partnering opportunities and strategic relationships, and other strategic options.

On January 29 and January 30, 2016, a select group of Carbylan management, which included Mr. David Renzi, Ms. Marcee Maroney and Dr. David Gravett, reviewed the results of Carbylan’s Phase 3 COR 1.1 clinical trial, a multi-center, international, randomized, double-blind, three-arm trial that enrolled 560 patients with grade two and grade three osteoarthritis of the knee, comparing treatment with Hydros-TA to treatment with Hydros and with triamcinolone acetonide (“TA”) on a standalone basis. The results of the trial indicated that Hydros-TA met the first of its two primary endpoints, demonstrating a statistically significant improvement from baseline in the Western Ontario and McMaster Universities Arthritis Index (“WOMAC”) A pain score at week 2 versus Hydros. However, patients in the TA arm continued to show an unexpected significant reduction in pain through 26 weeks. Given the comparable effectiveness at 26 weeks, COR1.1 did not meet its second primary endpoint.

On January 31, 2016, the Carbylan board of directors held a meeting in which the Carbylan management presented the results of the COR 1.1 clinical trial, including a summary of the statistical analysis on the co-primary endpoints, secondary endpoints, safety data and summaries of sub-analysis completed on a post-hoc basis. During the course of the discussion, Carbylan management presented potential explanations for the unexpected significant reduction in pain through 26 weeks in the TA arm. The Carbylan board of directors together with Carbylan management also discussed the investor communication plan and press release. After reviewing the clinical data, the Carbylan board of directors requested that Carbylan management continue to investigate the clinical data, clinical risks and probability of success as well as the financial requirements to move forward with a revised clinical development pathway.

 

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On February 1, 2016, following the close of trading, Carbylan publicly announced that the Hydros-TA Phase 3 COR 1.1 clinical trial failed to meet its second co-primary endpoint. On February 2, 2016, the share price of Carbylan’s stock closed at $0.66 per share, as compared to $2.47 per share at the close of market on the preceding day prior to the public announcement.

On February 4, 2016, the Carbylan board of directors held a meeting with members of Carbylan management and representatives of Latham & Watkins LLP (“Latham & Watkins”) present. At the meeting, Carbylan management reviewed the financial impact of continuing clinical trials and clinical development plans as well as a variety of strategic alternatives. Following this review, the Carbylan board of directors directed Carbylan devote substantially all of its resources to determine if there was a viable clinical development path for Hydros-TA, including further analysis of the COR 1.1 clinical study data, engaging key opinion leaders to analyze the clinical data, conduct a financial analysis to understand the financial impact of a revised clinical development pathway and begin initiating conversations with potential financial advisory firms in order to engage such firms for purposes of evaluating several strategic alternatives.

Between February 4, 2016 and February 29, 2016, Carbylan management conducted additional analysis of the COR 1.1 data and discussed the data with numerous key opinion leaders and expert consultants in the design and conduct of pain management clinical trials. Carbylan management prepared revised study design criteria for COR 1.2 and alternative clinical pathways for the development of Hydros-TA. In addition Carbylan management prepared a financial forecast and models and projections for various operating scenarios, including continuing the development of Hydros-TA under the current operation structure, operating the business as a standalone enterprise with a potential operational restructuring, reducing headcount and pursing a strategic transaction and liquidation of the company. Carbylan management also requested proposals from various financial advisors with regard to representing the company for purposes of financial and strategic advice.

On March 1, 2016, the Carbylan board of directors held a meeting with members of Carbylan management and representatives of Latham & Watkins present. At the meeting Carbylan management reviewed with the Carbylan board of directors the timing and financial impact of moving forward with an updated COR 1.2 clinical trial and feedback from key opinion leaders and third party consultants as well as a summary of Carbylan’s financial position, including current cash, forecasted cash runway, liabilities, net loss, forecasted cash balance and planned operations. During the meeting, the Carbylan board of directors discussed the operational path forward for Carbylan, including the potential to revise the COR 1.2 trial design and move forward under Carbylan’s current operational path, to scale back operations and run a modified COR 1.2 clinical trial to conserve cash, to cease all clinical operations and explore strategic alternatives, or to wind up operations and distribute Carbylan’s remaining cash to its stockholders. Also during the meeting, the Carbylan board of directors invited representatives of Wedbush and another financial advisory firm to present on the background, capabilities, transaction history and strategic benefits of each such firm with respect to their ability to assist similarly situated clients in identifying and evaluating potential strategic alternatives. Following such presentations, the Carbylan board of directors determined to prioritize the exploration and evaluation of a strategic transaction and directed Carbylan management to engage Wedbush to assist Carbylan in evaluating and pursuing strategic alternatives. The Carbylan board of directors also established the Transaction Committee consisting of Dr. Albert Cha, Guy Nohra, David Renzi, Steven L. Basta and David Saul to oversee a potential strategic transaction process. With the exception of Mr. Renzi, all members of the Transaction Committee qualify as “independent” directors in accordance with NASDAQ listing requirements.

On March 8, 2016, Carbylan formally engaged Wedbush to advise on strategic alternatives for Carbylan in order to maximize stockholder value.

Between March 8, 2016 and March 16. 2016, Wedbush conducted an analysis and confidential outreach to ascertain potential strategic interest for a transaction with Carbylan.

 

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On March 17, 2016, Carbylan issued a press release announcing that Carbylan had engaged Wedbush to advise on strategic alternatives for Carbylan aimed to enhance stockholder value, including the potential for an acquisition, merger, strategic partnership or other strategic transaction.

Between March 2016 and June 2016, Carbylan management, through representatives of Wedbush, actively contacted 154 companies who were identified by Carbylan management, with the assistance of Wedbush, as being reasonably expected to have a potential interest in pursuing discussions concerning a strategic alternatives involving Carbylan. During this period, Carbylan management had discussions and meetings with 46 of the 154 companies, and received indications of interest from 22 of the 46 companies, including KalVista, Company A, Company B and Company C.

On March 23, 2016, representatives of Wedbush contacted Company A, a preclinical stage, privately-held company to gauge Company A’s interest in a potential strategic transaction involving Carbylan. Company A’s management team agreed to meet with Carbylan’s management team to discuss Company A’s business and a potential strategic transaction involving Carbylan.

On April 4, 2016, representatives of Wedbush reached out to Jefferies LLC, KalVista’s financial advisor, and proposed a meeting between Carbylan’s and KalVista’s management teams to discuss KalVista’s business and a potential strategic transaction involving Carbylan and KalVista.

Also on April 4, 2016, representatives of Wedbush contacted Company B, a clinical stage, privately-held company to gauge Company B’s interest in a potential strategic transaction involving Carbylan.

On April 5, 2016, the Transaction Committee held a meeting with members of Carbylan management and representatives of Wedbush and Latham & Watkins present. At the meeting, representatives of Wedbush provided the Transaction Committee with an update regarding the strategic transaction process and discussed various criteria and considerations that should be applied in order to evaluate and rank potential strategic partners. Following discussions, the Transaction Committee directed Wedbush to continue contacting potential strategic transaction partners to gauge their interest in a potential transaction involving Carbylan.

On April 7, 2016, Carbylan and Company A executed a mutual confidentiality agreement which included a customary standstill provision with a two-year term in favor of Carbylan in order to facilitate due diligence and further discussions between the parties regarding a potential strategic transaction between the two companies.

On April 8, 2016, representatives of Wedbush contacted Company C, a clinical stage, privately-held company to gauge Company C’s interest in a potential strategic transaction involving Carbylan.

Also on April 8, 2016, members of Company A’s management held an in-person meeting with Carbylan’s management to provide an overview of Company A’s business and product candidates and to discuss a potential strategic transaction involving Carbylan and Company A. Between April 8, 2016 and May 31, 2016, Carbylan and Company A and each of their representatives shared documentation, reviewed information and held discussions for the purpose of conducting diligence on each of the respective companies.

On April 11, 2016, Carbylan and KalVista executed a mutual confidentiality agreement which included a customary standstill provision with a two-year term in favor of Carbylan in order to facilitate due diligence and further discussions between the parties regarding a potential strategic transaction between the two companies.

Later on April 11, 2016, T. Andrew Crockett, Chief Executive Officer of KalVista, held a telephonic meeting with Carbylan’s management to provide an overview of KalVista’s business and product candidates and to discuss a potential strategic transaction between Carbylan and KalVista. Between April 11, 2016 and June 14, 2016, Carbylan and its representatives and KalVista and its representatives shared documentation, reviewed information and held discussions for the purpose of conducting diligence on each of the two companies.

 

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On April 12, 2016, the Carbylan board of directors held a meeting with members of Carbylan management and representatives of Wedbush and Latham & Watkins present. At the meeting, representatives of Wedbush provided the Carbylan board of directors with an update regarding the various outreach efforts that Wedbush had made in order to gauge the potential for interest in a strategic transaction with Carbylan and the potential to identify a partner for a strategic transaction and a potential buyer for Hydros-TA. Representatives of Wedbush discussed an unsolicited indication on interest it received from a third party, which was initially determined by management to not be a viable strategic partner, and also presented a proposed ranking of potential strategic partners based on the criteria and considerations identified by the Transaction Committee and the Carbylan board of directors. Following discussions, the Carbylan board of directors determined that the indication of interest was not favorable nor a viable strategic partner and directed Wedbush to prioritize a possible strategic merger transaction and to identify a potential buyer for Hydros-TA as a secondary effort. The Carbylan board of directors also directed Wedbush and management to commence a formal indication of interest process with the strategic partners identified and presented to the Carbylan board of directors during the Wedbush presentation at the meeting. In addition, at the meeting, the Carbylan board of directors approved a restructuring plan effective as of April 15, 2016 and the cessation of all development activities for Hydros-TA, other than limited activities related to the wind down of COR 1.1, in order to reduce operational costs and preserve capital and streamline the company’s operations as it pursued a strategic transaction. The restructuring plan resulted in a reduction in force affecting 14 of 17 employees, including two executive officers. Following the meeting, representatives of Wedbush sent letters to 28 companies encouraging each of those companies to provide a written non-binding indication of interest with respect to a possible strategic transaction involving Carbylan.

Also on April 12, 2016, Carbylan and Company C executed a mutual confidentiality agreement which included a customary standstill provision with a two-year term in favor of Carbylan in order to facilitate due diligence and further discussions between the parties regarding a potential strategic transaction between the two companies.

On April 14, 2016, members of Company C’s management held a telephonic meeting with Carbylan’s management to provide an overview of Company C’s business and product portfolio and to discuss a potential strategic transaction involving Carbylan and Company C. Between April 14, 2016 and June 14, 2016, Carbylan and its representatives and Company C and its representatives shared documentation, reviewed information and held discussions for the purpose of conducting diligence on each of the two companies.

On April 15, 2016, Carbylan issued a press release announcing that Carbylan had suspended further clinical development of Hydros-TA and reduced its workforce in connection with such suspension, and that Carbylan was actively pursuing a strategic transaction, including a merger or acquisition of Carbylan.

On April 19, 2016, representatives of Wedbush sent a letter to Company C encouraging Company C to provide a written non-binding indication of interest with respect to a possible strategic transaction involving Carbylan.

On April 20, 2016, representatives of Company A held in-person meetings with members of Carbylan’s management, members of the Carbylan board of directors and other representatives of Carbylan’s principal stockholders to provide further information with respect to Company A’s clinical programs and to further discuss a potential strategic transaction involving Carbylan and Company A.

On April 22, 2016, Mr. Crockett held a telephonic meeting with members of Carbylan’s management, members of the Carbylan board of directors and other representatives of Carbylan’s principal stockholders to provide further information with respect to KalVista’s clinical programs and to further discuss a potential strategic transaction involving Carbylan and KalVista.

Between April 22, 2016 and April 28, 2016, representatives of Wedbush received written non-binding indications of interest from 20 parties, including KalVista, Company A and Company C summarizing the key terms of a potential strategic transaction between those parties and Carbylan. Also on April 25, 2016, Company B informed representatives of Wedbush that Company B would not be pursuing a strategic transaction at that time.

 

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On April 27, 2016, the Transaction Committee held a meeting with members of Carbylan management and representatives of Wedbush and Latham & Watkins present. At the meeting, representatives of Wedbush provided the Carbylan board of directors with an update regarding the strategic transaction process and indicated that Wedbush had received written indications of interests from 20 additional parties, including KalVista, Company A and Company C with respect to a possible strategic transaction involving Carbylan. 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 of Carbylan ascribed by each such party, whether each such party anticipated a simultaneous equity investment, the current Carbylan stockholders’ anticipated ownership of the resulting entity and the number of directors anticipated to remain on the board of directors of the resulting entity. The Transaction Committee also considered and discussed the businesses of each such party including, among other things, 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. Following discussions, the Transaction Committee directed Carbylan’s management and representatives to focus on exploring a potential strategic transaction with KalVista and Company A by circulating an initial draft of an acquisition agreement to such parties while continuing to review potential strategic transaction with other parties.

On April 29, 2016, representatives of Wedbush delivered an initial draft of a proposed acquisition agreement which had been prepared by Latham & Watkins with input from Carbylan management, to both KalVista and Company A.

On May 9, 2016, Mr. Renzi and Mr. Crockett met in-person and further expressed interest in a strategic transaction involving Carbylan and KalVista.

On May 11, 2016, representatives of Wedbush received an email from Company B reversing its prior communication regarding its lack of interest in a strategic transaction with Carbylan and indicating that Company B was interested in pursuing a strategic transaction with Carbylan.

On May 13, 2016, Carbylan and Company B executed a mutual confidentiality agreement, which included a customary standstill provision in favor of Carbylan which terminated upon the execution of the Share Purchase Agreement, in order to facilitate due diligence and further discussions between the parties regarding a potential strategic transaction between the two companies.

Also on May 13, 2016, Carbylan received a revised draft of an acquisition agreement from Company A, and the next day, on May 14, 2016, Carbylan received a revised draft of the Share Purchase Agreement from KalVista.

On May 16, 2016, Carbylan and Company A held a telephonic meeting to review financial diligence matters and discuss the timing and proposed terms of a strategic transaction involving Carbylan and Company A.

On May 18, 2016, the Carbylan board of directors held a meeting with members of Carbylan management and representatives of Wedbush and Latham & Watkins, present. At the meeting, Carbylan management provided the Carbylan board of directors with an update of the strategic transaction process including recent discussions between Carbylan and KalVista, Company A and Company C. Representatives of Wedbush also reviewed for the Carbylan board of directors the key terms of each written indications of interest that it received with respect to a potential strategic transaction involving Carbylan. Such terms including the proposed valuation of each party, the valuation of Carbylan ascribed by each party, whether each such party anticipated a simultaneous equity investment, the current Carbylan stockholders’ anticipated ownership of the entity resulting from the strategic transaction and the number of directors anticipated to remain on the board of directors of the resulting entity. Carbylan’s management also provided an overview of the businesses of each such party including, among other things, the status and progress of clinical trials of each such party, the anticipated timing of the commercialization of each parties’ products, market opportunity and the experience of the management

 

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team of each party. The Carbylan board of directors then discussed the relative strengths and concerns relating to certain parties that had submitted an indication of interest and the terms of such indication of interest. Following the discussion, based on the factors discussed by the Carbylan board of directors, the Carbylan board of directors directed Wedbush and management to prioritize further discussions and negotiations with KalVista, Company A and Company C, with KalVista being given the highest priority and the highest ranking. The Carbylan board of directors further authorized Latham & Watkins to provide an initial draft of a proposed transaction agreement to Company C and directed Wedbush to inform Company A that its valuation terms would need to improve substantially in order for Company A to remain in the process.

On May 19, 2016, representatives of Latham & Watkins met telephonically with representatives of Fenwick & West LLP (“Fenwick”) to discuss the terms of the Share Purchase Agreement and the structure of a transaction with KalVista.

On May 20, 2016, members of Company B’s management held a telephonic meeting with members of Carbylan’s management to provide an overview of Company B’s business and product candidates and to discuss a potential strategic transaction involving Carbylan and Company B. Between May 20, 2016 and June 14, 2016, Carbylan and its representatives and Company B and its representatives shared documentation, reviewed information and held discussions for the purpose of conducting diligence on each of the two companies.

On May 23, 2016, representatives of Latham & Watkins emailed a revised draft of the Share Purchase Agreement to representatives of Fenwick, which among other things, clarified that all of the KalVista shareholders would agree to sell their KalVista ordinary shares and left open for discussion the amount of net cash that Carbylan was required to have at the closing.

On May 24, 2016, Company A provided representatives of Wedbush with a revised written non-binding indication of interest and indicated that its willingness to proceed with a potential strategic transaction involving Carbylan was contingent upon an exclusivity period of 14 days.

On May 25, 2016, representatives of Carbylan’s management as well as representatives of Wedbush and Latham & Watkins met with Company C’s management to review financial and intellectual property diligence matters and discuss the timing and proposed terms of a strategic transaction involving Carbylan and Company C.

On May 26, 2016, following a telephonic meeting between the management and directors of Carbylan and Company B’s management, as directed by the Carbylan board of directors, representatives of Wedbush sent a letter to Company B encouraging Company B to provide a written non-binding indication of interest with respect to a possible strategic transaction involving Carbylan.

On May 31, 2016, representatives of Wedbush received a written non-binding indication of interest from Company B summarizing key terms of a potential strategic transaction between Carbylan and Company B.

On June 1, 2016, the Carbylan board of directors held a meeting with members of Carbylan management and representatives of Wedbush and Latham & Watkins present. At the meeting, Carbylan management provided the Carbylan board of directors with an update regarding the strategic transaction process including the progress of discussions with KalVista, Company A, Company B and Company C as well as Company A’s request for exclusivity. Representatives of Wedbush reviewed for the Carbylan board of directors the key terms of the indications of interest received from Company A, Company B and Company C. Members of Carbylan management noted that the valuation metrics and post-closing percentage ownership of Carbylan’s stockholders contemplated by Company A’s revised indication of interest was still far below others received by Carbylan. Carbylan management also considered that Company C had provided proposed terms which were materially less favorable to Carbylan and its stockholders than the current terms proposed by KalVista and that Company C had provided proposed terms for a transaction agreement which were materially less favorable to Carbylan than terms of the proposed transaction agreement with KalVista and that Company C failed to prioritize diligence properly.

 

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The Carbylan board of directors together with members of Company management also discussed an unsolicited indication on interest it received from a third party on May 30, 2016 and determined that the terms of such indication of interest was less favorable than the potential transaction with KalVista. Following the presentation, the Carbylan board of directors authorized and directed management and Wedbush to provide a proposed draft of a transaction agreement to Company B and to continue negotiating and finalizing a transaction agreement with KalVista. The Carbylan board of directors further directed management and Wedbush to prioritize the foregoing actions ahead of further discussions or negotiations with Company A and Company C.

On June 2, 2016, representatives of Wedbush delivered an initial draft of a proposed transaction agreement to Company B.

On June 5, 2016, representatives of Fenwick delivered a draft exclusivity agreement to representatives of Latham and KalVista indicated that its willingness to proceed with a potential transaction involving Carbylan was contingent upon an exclusivity period of 14 days as set forth in the exclusivity agreement.

On June 6, 2016, the Carbylan board of directors held a telephonic meeting with members of Carbylan management and representatives of Wedbush and Latham & Watkins present. At the meeting, Carbylan management provided the Carbylan board of directors with an update regarding the strategic transaction process including the progress of discussions with KalVista, Company B and Company C as well as KalVista’s request for exclusivity. Representatives of Wedbush reviewed for the Carbylan board of directors the key terms of potential transactions involving KalVista, Company B and Company C. The Carbylan board of directors discussed the terms of each potential transaction as well as the business, assets and management of each of KalVista, Company B and Company C and concluded that a potential transaction with KalVista provided Carbylan stockholders a meaningful equity ownership stake and an attractive opportunity for value appreciation in a biopharmaceutical company with promising clinical assets and substantial upside potential as compared to a strategic transaction with Company B and Company C. Following discussions, the Carbylan board of directors approved Carbylan’s entry into an exclusivity period with KalVista and directed management and its representatives to negotiate and finalize a definitive Share Purchase Agreement with KalVista.

On June 7, 2016, Carbylan executed an exclusivity agreement with KalVista agreeing not to negotiate a strategic transaction with any other party for a period ending on June 13, 2016 with an automatic extension through June 15, 2016 under certain specified circumstances.

Later on June 7, 2016, representatives of Latham & Watkins received an unsolicited revised draft of a proposed transaction agreement from Company B.

On June 13, 2016 the Carbylan board of directors held a telephonic meeting with members of Carbylan management and representatives of Wedbush and Latham & Watkins present. Representatives of Wedbush and Latham & Watkins provided an update regarding the current status of the strategic transaction process. Representatives of Latham & Watkins led a discussion with the Carbylan board of directors regarding its fiduciary duties. Representatives of Wedbush reviewed its preliminary financial analysis of the exchange ratio governing the number of shares of Carbylan common stock to be exchanged for each share of KalVista capital stock, and responded to questions from the Carbylan board of directors regarding its financial analysis. Representatives of Latham & Watkins also reviewed with the Carbylan board of directors the proposed structure of the contemplated transaction with KalVista and the terms of the draft Share Purchase Agreement.

On June 14, 2016, the Carbylan board of directors held a telephonic meeting with members of Carbylan management and representatives of Wedbush and Latham & Watkins present. During the meeting, representatives of Latham & Watkins reviewed with the Carbylan board of directors the terms of the Share Purchase Agreement and the fiduciary duties of the Carbylan board of directors in the context of the proposed transaction. During the presentations, the Carbylan board of directors asked questions and discussed the provisions of the Share Purchase Agreement and related documentation. After the presentations and discussions,

 

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the Carbylan board of directors unanimously (i) determined that the transaction, the issuance of shares of Carbylan common stock pursuant to the transaction and the other transactions contemplated by the Share Purchase Agreement are fair to, advisable and in the best interests of Carbylan and its stockholders, (ii) approved the issuance of shares of Carbylan common stock pursuant to the transaction, the Share Purchase Agreement and the other transactions contemplated thereby, (iii) approved and declared advisable the Share Purchase Agreement and the transactions contemplated thereby, and (iv) resolved to recommend that the Carbylan stockholders vote to approve the issuance of shares of Carbylan common stock in the transaction pursuant to the terms of the Share Purchase Agreement.

On June 15, 2016, the Share Purchase Agreement was entered into among Carbylan, KalVista, the Sellers and the Seller Representative, and the support agreement, lock-up agreements and registration right agreements were entered into by the relevant parties. Later that day, Carbylan and KalVista issued a joint press release announcing the execution of the Share Purchase Agreement before the opening of trading in Carbylan common stock on June 15, 2016.

Recommendation of the Carbylan Board of Directors

The Carbylan board of directors has determined and believes that each of the Share Issuance Proposal, the Reverse Stock Split Proposal, the Name Change Proposal and the Adjournment Proposal is fair to, advisable, and in the best interests of Carbylan and its stockholders and has approved such items. The Carbylan board of directors recommends that Carbylan stockholders vote “FOR” each of the Share Issuance Proposal, the Reverse Stock Split Proposal, the Name Change Proposal and the Adjournment Proposal. For more information on the Carbylan board of directors’ recommendation see the section entitled “The Special Meeting—Recommendation of the Carbylan Board of Directors,” beginning on page 71 of this proxy statement, and the section entitled “Terms of the Share Purchase Agreement—Changes to Board Recommendation,” beginning on page 110 of this proxy statement.

Reasons for the Transaction

As noted above, the Carbylan board of directors and executive management team have regularly reviewed and discussed Carbylan’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 Carbylan’s business and financial condition and strategic relationships and other strategic options. In particular, recent setbacks in the clinical development of Carbylan’s Hydros-TA assets have prompted the Carbylan board of directors to focus on alternative means for providing returns to stockholders.

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

 

•

The Carbylan board of directors believes, based in part on the judgment, advice and analysis of Carbylan management with respect to the potential strategic, financial and operational benefits of the transaction (which judgment, advice and analysis was informed in part by the business, technical, financial, accounting and legal due diligence investigation performed by Carbylan on KalVista), that KalVista’s portfolio of small molecule plasma kallikrein inhibitors represents a sizeable market opportunity, and may provide new medical benefits for patients and returns for investors.

 

•

The Carbylan board of directors also reviewed with the management of Carbylan the current plans of KalVista for developing its product portfolio to confirm the likelihood that the combined company would possess sufficient financial resources to allow the management team to focus on the continued

 

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development and anticipated commercialization of KalVista’s portfolio of small molecule plasma kallikrein inhibitors. The Carbylan 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 Carbylan public company structure with the KalVista business to raise additional funds in the future, if necessary.

 

•

The Carbylan board of directors also considered the valuation and business prospects of all the potential strategic transaction candidates. In particular, their collective view was that KalVista was the most attractive candidate because of its small molecule plasma kallikrein inhibitor platform and the promising product candidates KalVista was developing in the field of HAE and DME. After considering the comprehensive diligence review that Carbylan management had completed of three other prospective transaction partners, the board concluded that the transaction with KalVista would create a publicly traded company focused on improving patient access to important medicines that would create more value for Carbylan’s stockholders than any of the other proposals that the board had received.

 

•

The Carbylan board of directors concluded that the transaction would provide existing Carbylan stockholders a significant opportunity to participate in the potential growth of the combined company following the transaction.

 

•

The Carbylan board of directors considered the strength of the balance sheet of the combined company resulting from KalVista’s current cash reserves in addition to the approximately $27.5 to 30.0 million that is expected to be retained by Carbylan upon completion of the transaction.

 

•

The Carbylan board of directors also considered 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 Carbylan and KalVista.

 

•

The Carbylan board of directors considered the financial analyses of Wedbush, including its opinion to the board of directors as to the fairness to the Carbylan stockholders, from a financial point of view and as of the date of the opinion, of the exchange ratio in connection with the transaction, as more fully described below under the caption “The Transaction—Opinion of Carbylan’s Financial Advisor,” beginning on page 90 in this proxy statement.

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

 

•

the failure of Hydros-TA to meet the second co-primary endpoint in Carbylan’s Phase 3 COR 1.1 clinical trial;

 

•

the clinical development and sequential risks associated with continuing to develop Hydros-TA, including additional pivotal clinical studies tied to complete and substantive additional cases;

 

•

the loss of the operational capabilities of Carbylan, and the risks associated with continuing to operate Carbylan 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 Carbylan’s senior management and financial advisors to solicit strategic alternatives for Carbylan to the transaction, including the discussions that Carbylan management, Carbylan’s representatives and the Carbylan 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 Carbylan common stock; and

 

•

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

 

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

 

•

the number of shares of Carbylan common stock to be issued in the transaction will be fixed as long as Carbylan’s Net Cash at the closing of the transaction does not fall below the Net Cash Floor prior to closing (which Net Cash Floor is $27.5 million unless the transaction closes after September 1, 2016, in which case the Net Cash Floor will be reduced by $13,333 for each day that elapses following September 1, 2016 without the transaction being consummated), and thus the relative percentage ownership of Carbylan stockholders and KalVista shareholders immediately following the completion of the transaction is similarly fixed (and will only adjust if Carbylan’s Net Cash falls below the Net Cash Floor;

 

•

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

 

•

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

 

•

the reasonableness of the potential termination fee of $3.0 million and related reimbursement of certain transaction expenses of up to $1.0 million, which could become payable by Carbylan if the Share Purchase Agreement is terminated in certain circumstances;

 

•

the agreement by all of the KalVista shareholders to enter into the Share Purchase Agreement and sell their KalVista shares to Carbylan in exchange for Carbylan 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 Carbylan board of directors also considered a variety of risks and other countervailing factors related to entering into the transaction, including:

 

•

the $3.0 million termination fee and/or up to $1.0 million in related expenses payable by Carbylan upon the occurrence of certain events and the potential effect of such termination fee in deterring other potential acquirors from proposing an alternative transaction that may be more advantageous to Carbylan 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 Carbylan common stock resulting from the announcement of the transaction;

 

•

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

 

•

the risk to the business of Carbylan, operations and financial results in the event that the transaction is not consummated;

 

•

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

 

•

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

 

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The foregoing information and factors considered by the Carbylan board of directors are not intended to be exhaustive but are believed to include all of the material factors considered by the Carbylan board of directors. In view of the wide variety of factors considered in connection with its evaluation of the transaction and the complexity of these matters, the Carbylan 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 Carbylan board of directors may have given different weight to different factors. The Carbylan board of directors conducted an overall analysis of the factors described above, including thorough discussions with, and questioning of, the Carbylan management team and the legal and financial advisors of Carbylan, and considered the factors overall to be favorable to, and to support, its determination.

Interests of Carbylan’s Directors and Executive Officers

In considering the recommendation of the Carbylan board of directors that the stockholders vote to approve the Share Issuance Proposal in connection with the Share Purchase Agreement, the stockholders should be aware that Carbylan’s directors and executive officers may have interests in the transaction that are different from, or in addition to, the interests of Carbylan’s other stockholders generally. The members of the Carbylan 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 transaction, and in recommending to the stockholders that the Share Issuance Proposal be approved. See the sections entitled “The Transaction—Recommendation of the Carbylan Board of Directors” and “The Transaction—Reasons for the Transaction” beginning on pages 71 and 84, respectively, of this proxy statement. The stockholders should take these interests into account in deciding whether to vote “FOR” the Share Issuance Proposal. These interests are described in more detail below, and certain of them are quantified in the narrative and the table below.

Treatment of Carbylan Options

Under the Share Purchase Agreement, as of immediately prior to the effective time of the transaction, the vesting of all outstanding Carbylan Options will accelerate in full immediately prior to the time of closing, and at closing (i) all Carbylan Options that are outstanding and have an exercise price per share that is less than the Carbylan Closing Price will be automatically net exercised for a number of shares of Carbylan common stock (subject to an offset for withholding obligations) calculated by dividing (a) the product of (1) the total number of shares subject to such Carbylan Option and (2) the excess of the Carbylan Closing Price over the exercise price per share by (b) the Carbylan Closing Price and (ii) all Carbylan Options with an exercise price per share equal to or greater than the Carbylan Closing Price will be terminated for no consideration.

For an estimate of the amounts that would be payable as Carbylan common stock to each of Carbylan’s named executive officers on settlement of their unvested and accelerated Carbylan Options, see the section entitled “—Quantification of Payments and Benefits to Carbylan’s Named Executive Officers” beginning on page 89 of this proxy statement. Carbylan estimates that the amount that would be payable as Carbylan common stock to Carbylan’s executive officers as a group and Carbylan’s non-employee directors as a group for their Carbylan Options, whether vested or unvested, assuming that the transaction were completed on August 19, 2016 is $87,167 and $2,363, respectively. The amounts above are determined using a per share Carbylan Closing Price of $0.71 and the other assumptions set forth in footnote 2 of the table under the section entitled “—Quantification of Payments and Benefits to Carbylan’s Named Executive Officers” beginning on page 89 of this proxy statement.

Letter Agreements with Carbylan’s Executive Officers

Employment Letter Agreements with Carbylan’s Current Executive Officers

Carbylan has entered into standard employment or letter agreements with each of its executive officers (the “Executive Agreements”), other than Dr. Ramiya who is a named executive officer whose employment with Carbylan was terminated on April 15, 2016. Each of the Executive Agreements provide for a base salary, target

 

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annual incentive compensation and standard benefits, including, with respect to certain of the offer letters, severance benefits in the event such executive officer experiences certain qualifying terminations outside of a change in control. Carbylan and KalVista have agreed to honor the commitments under each of the Executive Agreements. Pursuant to the Executive Agreements, if the executive’s employment is terminated by Carbylan without cause or by the executive for good reason (as such terms are defined in the applicable Executive Agreement) within the period of time commencing on a change in control (which will include the transaction) (or three months prior to a change in control for Mr. Renzi) and ending one year following the consummation of such change in control, the executive will be entitled to (1) continued payment of the executive’s base salary for a period of 12 months (for Mr. Renzi) or 6 months (for all other executive officers) following such termination of employment, (2) payment of the executive’s COBRA premiums until the earliest of 12 months (for Mr. Renzi) or 6 months (for all other executive officers) following such termination of employment, the date on which he or she becomes eligible for group health insurance coverage through a new employer, or the date he or she ceases to be eligible for COBRA continuation coverage for any reason, and (3) accelerated vesting of all of his or her stock options. In addition, for all executive officers except Mr. Renzi, the executive will also be eligible to receive a pro-rated bonus payment for the year in which his or her employment terminates, with such bonus amount to be based upon the achievement of the bonus objectives prior to such termination or resignation of employment. Carbylan’s obligation to provide Carbylan’s executive officers with any severance payments or other benefits under their Executive Agreements is conditioned on the executive signing and not revoking a separation agreement and effective release of claims in Carbylan’s favor. Mr. Renzi is also subject to a 12-month post-termination non-solicitation of employees, independent contractor and consultants.

For an estimate of the value of the payments and benefits described above under each of the Employment Agreements that would be payable to Carbylan’s named executive officers, see the section entitled “—Quantification of Payments and Benefits to Carbylan’s Named Executive Officers” beginning on page 89 of this proxy statement. Carbylan estimates that the aggregate amount that would be payable to Carbylan’s executive officers as a group under each of their Employment Agreements, assuming that the transaction were completed on August 19, 2016 is $1.7 million (not including the value of accelerated Carbylan Options, which is disclosed in the section above). The amounts above are determined using the assumptions set forth in footnotes 1 and 3 of the table under the section entitled “—Quantification of Payments and Benefits to Carbylan’s Named Executive Officers” beginning on page 89 of this proxy statement.

Separation Agreement with Premchandran Ramiya, Ph.D.

Dr. Ramiya, one of Carbylan’s named executive officers for 2015, was terminated in April 2016. In connection with his termination, Dr. Ramiya entered into an agreement with Carbylan that provides for him continued payment of his base salary for a period of 6 months and payment of his COBRA premiums until the earliest of 6 months, the date on which he becomes eligible for group health insurance coverage through a new employer, or the date he ceases to be eligible for COBRA continuation coverage for any reason. Dr. Ramiya also received accelerated vesting of his option awards that would have vested during the six-month period following his termination date.

Retention Plan

In April 2016, Carbylan adopted the Retention Plan, which provides for grants of cash retention bonuses to Carbylan’s executive officers, except for Dr. Ramiya, who remain with Carbylan through the earlier to occur of (i) the closing of a change in control (which will include the transaction) and (ii) March 8, 2017 (such earlier date, the “Retention Date”). Under the terms of the Retention Plan, each participant will be eligible to receive a cash bonus equal to four months of the applicable executive’s base salary, payable in a cash lump sum shortly following the Retention Date. To obtain a bonus under the Retention Plan, an executive officer must remain an Carbylan employee through the applicable Retention Date. If the employment of any eligible executive officer is terminated prior to a Retention Date, then no bonus shall be payable except that this forfeiture provision will not apply if the executive is terminated for other than cause or resigns for good reason (each, as defined in the

 

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Retention Plan). In addition, if the applicable Retention Date is as a result of the consummation of change in control and an executive officer accepts comparable employment with the acquirer following the change in control, then no retention bonus will be payable. Executive officers must execute and not revoke a release of claims to receive any bonus under the Retention Plan. The retention bonuses will not be offset by or reduce any other payment or benefit payable to a participant by Carbylan.

For an estimate of the value of the payments and benefits described above under the Retention Plan to each of Carbylan’s named executive officers, see the section entitled “—Quantification of Payments and Benefits to Carbylan’s Named Executive Officers” beginning on page 89 of this proxy statement. Carbylan estimates that the aggregate amount that would be payable to Carbylan’s executive officers as a group under the Retention Plan is $303,500.

Indemnification of Directors and Officers

Carbylan has entered into indemnification agreements with each of its directors and executive officers. These agreements, among other things, require Carbylan 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 Carbylan or at Carbylan’s direction, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. Carbylan also maintains an insurance policy that insures its directors and officers against certain liabilities, including liabilities arising under applicable securities laws.

Quantification of Payments and Benefits to Carbylan’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 Carbylan’s named executive officers may receive in connection with the transaction, assuming that the transaction was consummated and such executive officer experienced a qualifying termination on August 19, 2016. The amounts below are determined using a per share price of the Carbylan Closing Price of $0.71, which represents the average closing market price of Carbylan’s securities over the first five business days following the first public announcement of the transaction. As 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 ($)(3)				Total ($)
David Renzi		$	576,000			$	77,374			$	38,000			$	691,374
Marcee Maroney		$	250,000			$	9,793			$	16,000			$	275,793
Premchandran Ramiya, Ph.D.(4)		$	136,000				0			$	20,000			$	156,000

 

(1)

Amount represents the cash severance that each named executive officer is eligible to receive under his or her Executive Agreement, as well as the named executive officer’s retention bonus under the Retention Plan, other than for Dr. Ramiya, whose employment with Carbylan was terminated in April 2016 and is not eligible for severance or a retention bonus.

Cash severance would be payable in substantially equal installments upon a “double trigger” qualifying termination, as described above in “—Letter Agreements with Carbylan’s Executive Officers” beginning on page 87 of this proxy statement, where the named executive officer is terminated without cause or resigns for good reason (each as defined in the applicable Executive Agreement) during the period of time commencing on the transaction (or 3 months before the transaction for Mr. Renzi) and ending on the first anniversary of the closing of the transaction. The amount constitutes 12 months of Mr. Renzi’s and 6 months of Ms. Maroney’s base salary. Carbylan does not anticipate any annual discretionary cash bonuses related to the fiscal year 2016.

 

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Under the Retention Plan, upon the closing of the transaction, each named executive officer, other than Dr. Ramiya, will be entitled to a lump sum cash payment equal to four months of such named executive officer’s base salary. Payment of bonuses pursuant to the Retention Plan would be based on a “single trigger,” the closing of the transaction, subject to the named executive officer remaining employed with Carbylan through the closing of the transaction.

The following table quantifies each separate form of cash compensation included in the aggregate total reported in the column.

 

Name		Base Salary Component of Severance ($)				Bonus Component of Severance ($)				Retention Bonus ($)
David Renzi		$	432,000				0			$	144,000
Marcee Maroney		$	150,000				0			$	100,000

 

(2)

Pursuant to the terms and conditions of the Executive Agreements, in connection with a qualifying termination each named executive officer, other than Dr. Ramiya, would be entitled to full accelerated vesting of each of such named executive officer’s then outstanding Carbylan Options upon a “double trigger” qualifying termination as described in footnote (1) above within the period of time commencing on the transaction (or, for Mr. Renzi, 3 months prior to the closing of the transaction) and ending one year following the closing of the transaction, each named executive officer. In addition, pursuant to the terms of the Share Purchase Agreement and as described in the section entitled “—Treatment of Carbylan Options” beginning on page 87 of this proxy statement, each of such named executive officer’s Carbylan Options outstanding immediately prior to the closing of the transaction will vest and each Carbylan Option that has an exercise price per share less than the Carbylan Closing Price will be automatically net exercised for shares of Carbylan common stock in accordance with the terms of the Share Purchase Agreement.

The value of the unvested and accelerated Carbylan Options is the difference between the value of $0.71 per share and the exercise price of the Carbylan Option, multiplied by the number of unvested shares subject to the Carbylan Option as of August 19, 2016, consistent with the methodology applied under SEC Regulation M-A Item 1011(b) and Regulation S-K Item 402(t)(2). The amounts in this column for the unvested and accelerated Carbylan Options do not reflect any taxes payable by the named executive officers.

 

(3)

Under each individual Executive Agreement, upon a “double trigger” qualifying termination as described in footnote (1) above within the period of time commencing on the closing of the transaction (or, for Mr. Renzi, 3 months prior to the closing of the transaction) and ending one year following the closing of the transaction, each named executive officer, other than Dr. Ramiya ,whose employment with Carbylan was terminated in April 2016, is entitled to a monthly payment equal to the cost of any COBRA continuation coverage elected by the name executive officer to the same extent Carbylan paid for such benefits prior to the executive’s termination for up to 12 months for Mr. Renzi and 6 months for Ms. Maroney.

 

(4)

Dr. Ramiya’s employment with Carbylan was terminated in April 2016. In connection with his termination, Dr. Ramiya entered into an agreement with Carbylan that provides for him continued payment of his base salary for a period of 6 months, which the full amount is represented in the cash severance column above even though he has already received $91,000 payments, and payment of his COBRA premiums for up to 6 months, which is represented in the perquisites/benefits column above even though he has already received $13,675 in COBRA payments. Dr. Ramiya also received accelerated vesting of his option awards that would have vested during the six month period following his termination date. Dr. Ramiya does not currently hold any outstanding Carbylan Options.

Opinion of Carbylan’s Financial Advisor

Scope of the Assignment

In March 2016, the Carbylan 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

 

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transaction, as provided in the Share Purchase Agreement, was fair to the stockholders of Carbylan from a financial point of view. At the June 13, 2016 meeting of the Carbylan board of directors, Wedbush rendered its oral opinion, subsequently confirmed by delivery of a written opinion dated June 15, 2016, to the Carbylan 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 Carbylan 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 Carbylan board of directors (in its capacity as such) in connection with its evaluation of the transaction. Wedbush’s opinion did not address Carbylan’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 Carbylan, or as to the likelihood of the consummation of the transaction, and did not constitute a recommendation to the Carbylan board of directors as to how to act or to any Carbylan stockholder or any other person as to how to vote with respect to the transaction or any other matter. The following summary of Wedbush’s opinion is qualified in its entirety by reference to the full text of such opinion.

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 June 13, 2016;

 

•

reviewed certain publicly available business and financial information relating to Carbylan and KalVista, respectively;

 

•

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

 

•

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

 

•

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 KalVista, 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 Carbylan and its legal counsel.

In addition, Wedbush held discussions with the management of Carbylan and KalVista 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 Carbylan, KalVista 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 Carbylan and KalVista that such information was reasonably prepared on bases reflecting the best currently available estimates and judgments of management of Carbylan or KalVista, as applicable. Wedbush did not express any view as to the reasonableness of such financial information or the assumptions on which it was based.

 

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Wedbush further relied on the assurances of Carbylan’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 Carbylan in connection with a potential liquidation of Carbylan prepared by management of Carbylan and estimated equity values of Carbylan upon liquidation prepared by management of Carbylan, 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 Carbylan or KalVista. Further, as the Carbylan board of directors was aware, KalVista’s management did not provide Wedbush with, and Wedbush did not otherwise have access to, financial forecasts regarding KalVista’s business, other than certain operating expense forecasts for the three years ended December 31, 2018, and, accordingly, Wedbush did not perform either a discounted cash flow analysis or any multiples-based analyses with respect to KalVista. With respect to the operating expense forecasts of KalVista, upon the advice of Carbylan and KalVista, Wedbush assumed that such projections were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of KalVista as to the future operating expenses of KalVista and that KalVista 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 Carbylan, KalVista, 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.

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 Carbylan’s and KalVista’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 Carbylan 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 Carbylan 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 Carbylan and KalVista 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 Carbylan based on Wedbush’s experience, expertise, reputation and familiarity with Carbylan. The Carbylan 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 Carbylan, or any class of such persons, whether relative to the exchange ratio or otherwise, or with respect to the fairness of any such compensation.

 

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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 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 Carbylan 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.

Carbylan 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. Carbylan has also agreed to pay Wedbush as additional fee of $1.35 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, Carbylan 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 provided to Carbylan services unrelated to the transaction in connection with Carbylan’s initial public offering in April 2015, for which it received fees in the amount of approximately $1.31 million. In the two years prior to the date of its opinion, Wedbush has not provided any services to KalVista. Wedbush may in the future provide investment banking and financial advisory services to Carbylan, KalVista and their respective affiliates for which services Wedbush would expect to receive compensation.

In the ordinary course of its business, Wedbush and its affiliates may actively trade the common stock of Carbylan or other instruments or obligations of Carbylan 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 Carbylan or such other instruments or obligations of Carbylan.

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 Carbylan;

 

•

Liquidation Value Analysis with respect to Carbylan;

 

•

Public Company Market Valuation Analysis with respect to KalVista;

 

•

Precedent Merger and Acquisition Transaction Analysis with respect to KalVista; and

 

•

Precedent Initial Public Offering Analysis with respect to KalVista.

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.

 

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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 matters, many of which are beyond the control of Carbylan, KalVista 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 Carbylan management’s view that a discounted cash flow analysis was not an appropriate method of valuing Carbylan because Carbylan 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 KalVista because Wedbush was not provided, and Wedbush did not otherwise have access to, financial forecasts regarding KalVista’s business, other than certain operating expense forecasts for the three years ending December 31, 2018. Further, Wedbush believed that such analyses were not appropriate because KalVista 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 June 13, 2016 and is not necessarily indicative of current market conditions.

Public Market Equity Value Analysis—Carbylan

Using publicly available information, Wedbush noted that the volume weighted average trading price for the Carbylan common stock was $1.16 per share on June 13, 2016, $1.20 per share for the one week ended June 13, 2016 and $1.08 per share for the one month ended June 13, 2016. Based upon these volume weighted average trading prices for the Carbylan common stock and the number of fully diluted outstanding shares of Carbylan common stock as provided by management of Carbylan, Wedbush calculated Carbylan’s equity value as approximately $28.8 million to $32.2 million.

Liquidation Value Analysis—Carbylan

Wedbush reviewed information prepared by Carbylan management regarding Carbylan’s liquidation value. Based upon Carbylan’s cash balance of approximately $47.0 million as of April 30, 2016 and Carbylan 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 Carbylan management estimated that Carbylan would have a liquidation value of approximately $29.8 million as of June 30, 2017.

Public Company Market Valuation Analysis—KalVista

Wedbush reviewed publicly available information relating to the following publicly-traded companies with an aggregate market capitalization under $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 June 13, 2016 did not have human efficacy data (the “Phase 1 Companies”), which criteria were applied to select for companies similar to KalVista:

 

•

Blueprint Medicines;

 

•

MyoKardia;

 

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•

Voyager Therapeutics;

 

•

Proteostasis;

 

•

AGTC;

 

•

Regenxbio;

 

•

Corvus;

 

•

Dimension Therapeutics;

 

•

ProQR;

 

•

Zynerba; and

 

•

Dicerna.

Wedbush noted that, although such companies had certain financial and operating characteristics that could be considered similar to those of KalVista, none of the companies had the same management, make-up, technology, size or mix of business as KalVista and, accordingly, there were inherent limitations on the applicability of such companies to the valuation analysis of KalVista.

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 June 13, 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 June 13, 2016 ($ in millions)
		Phase 1 Companies
Mean		$	267.9
Median		$	273.1

Wedbush calculated the implied ownership of holders of Carbylan common stock in the combined company based upon the $35.0 million value attributed to the Carbylan common stock and the $149.2 million value attributed to the KalVista 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:

 

		Implied Ownership
		Mean ($267.9)				Median ($273.1M)				Purchase Agreement ($184.2M)
KalVista			88	%			89	%			81	%
Carbylan			12	%			11	%			19	%

Wedbush noted that the implied ownership percentage of holders of Carbylan common stock based upon the $35.0 million value attributed to the Carbylan common stock and the $149.2 million value attributed to the KalVista 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 KalVista described above.

Precedent Merger and Acquisition Transaction Analysis—KalVista

Wedbush reviewed publicly available information relating to the following acquisitions of private companies in the biopharmaceutical industry considered by Wedbush to be similar to KalVista, which had Preclinical and Phase 1 product candidates (and no product candidates beyond Phase 1 or Phase 1/2) that did not

 

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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 less than $1.0 billion and announced between January 2014 and May 2016 (the “Selected Transactions”):

 

Announcement Date		Target		Acquiror
March 23, 2016		Padlock Therapeutics		Bristol-Myers Squibb
January 27, 2016		Fluorinov Pharma		Trillium Therapeutics
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.
June 2, 2015		X-BODY		Juno Therapeutics
May 6, 2015		EpiTherapeutics		Gilead Sciences
May 6, 2015		Abeona Therapeutics		PlasmaTech
August 11, 2014		Alpine Biosciences		Oncothyreon
August 1, 2014		BIKAM Pharmaceuticals		Shire plc
May 1, 2014		Fibrotech Therapeutics Pty		Shire plc
April 29, 2014		iPierian		Bristol-Myers Squibb
February 17, 2014		CoStim Pharmaceuticals		Novartis AG

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 KalVista, none of such companies had the same management, make-up, technology, size or mix of business as KalVista and, accordingly, there were inherent limitations on the applicability of such companies to the valuation analysis of KalVista. 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 on the sum of upfront and future contingent payments at announcement). The results of this analysis are summarized as follows:

 

		Valuation ($ in millions)
Mean		$	288.5
Median		$	204.6

Wedbush calculated the implied ownership of holders of Carbylan common stock in the combined company based upon the $35.0 million value attributed to the Carbylan common stock and the $149.2 million value attributed to the KalVista 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:

 

		Implied Ownership
		Mean ($288.5M)				Median ($204.6M)				Purchase Agreement ($184.2M)
KalVista			89	%			85	%			81	%
Carbylan			11	%			15	%			19	%

Wedbush noted that the implied ownership percentage of holders of Carbylan common stock based upon the $35.0 million value attributed to the Carbylan common stock and the $149.2 million value attributed to the KalVista 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 KalVista described above.

 

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Precedent Initial Public Offering Analysis—KalVista

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 $30.0 million in gross proceeds, and which priced between January 2014 and May 2016 (the “Phase 1 IPOs”), which criteria were applied to select for companies similar to KalVista:

 

Pricing Date		Issuer
March 22, 2016		Corvus
February 10, 2016		Proteostasis
November 10, 2015		Voyager
October 28, 2015		MyoKardia
October 21, 2015		Dimension
June 16, 2015		Nivalis
May 6, 2015		aTyr
July 31, 2014		Loxo Oncology
July 23, 2014		Immune Design

Wedbush noted that although such companies had certain financial and operating characteristics that could be considered similar to those of KalVista, none of the companies had the same management, make-up, technology, size or mix of business as KalVista and, accordingly, there were inherent limitations on the applicability of such companies to the valuation analysis of KalVista. 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. The results of this analysis are summarized as follows:

 

		Pre-Money Valuation ($ in millions)
		Phase 1 IPOs
Mean		$	200.1
Median		$	218.2

Wedbush calculated the implied ownership of holders of Carbylan common stock in the combined company based upon the $35.0 million value attributed to the Carbylan common stock and the $149.2 million value attributed to the KalVista 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:

 

		Implied Ownership Based on Phase 1 IPOs
		Mean   ($200.1M)				Median   ($218.2M)				Purchase Agreement   ($184.2M)
KalVista			85	%			86	%			81	%
Carbylan			15	%			14	%			19	%

Wedbush noted that the implied ownership percentage of holders of Carbylan common stock based upon the $35.0 million value attributed to the Carbylan common stock and the $149.2 million value attributed to the KalVista 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 KalVista described above.

 

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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 Carbylan, KalVista 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 Carbylan 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 Carbylan 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.

The terms of the transaction were determined through arm’s-length negotiations between Carbylan and KalVista and were approved by the Carbylan board of directors. Although Wedbush provided advice to the Carbylan board of directors during the course of these negotiations, the decision to enter into the Share Purchase Agreement was solely that of the Carbylan board of directors. Wedbush did not recommend any specific consideration to Carbylan or the Carbylan 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 Carbylan board of directors were among a number of factors taken into consideration by the Carbylan 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 Carbylan Stockholders

The transaction will not result in any taxable gain or loss for U.S. federal income tax purposes to any Carbylan stockholder in his or her capacity as a Carbylan stockholder. Carbylan stockholders who are also stockholders of KalVista should consult their own tax advisors as to the tax consequences of them participating in the transaction with respect to their KalVista stock.

Regulatory Matters

Neither Carbylan nor KalVista is required to make any filings or to obtain approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the transaction contemplated by the Share Purchase Agreement. In the United States, Carbylan must comply with applicable federal and state securities laws and NASDAQ rules and regulations in connection with the issuance of shares of Carbylan common stock in the transaction, including the filing with the SEC of this proxy statement.

Pursuant to the terms of the Share Purchase Agreement, Carbylan, KalVista and the Sellers must use commercially reasonable efforts to file or otherwise submit, as soon as practicable after the date of the Share Purchase Agreement, all applications, notices, reports and other documents reasonably required to be filed by Carbylan, KalVista or the Sellers to any nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature, any federal, state, local, municipal, foreign or other government, any

 

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governmental or quasi-governmental court or tribunal, regulatory body, administrative agency or bureau, commission or authority or other body exercising similar powers or authority of any nature, including any governmental division, department, agency, commission, instrumentality, official, ministry, fund, foundation, center, organization, unit, body or entity and any court or other tribunal, and for the avoidance of doubt, any taxing authority, or any self-regulatory organization, including NASDAQ, with respect to the transactions contemplated by the Share Purchase Agreement, and to submit promptly any additional information requested by any of the foregoing.

Anticipated Accounting Treatment

The transaction will be treated by Carbylan as a reverse acquisition under the acquisition method of accounting in accordance with accounting principles generally accepted in the United States. For accounting purposes, KalVista is considered to be acquiring Carbylan in this transaction. Management of Carbylan and KalVista have made a preliminary estimate of the purchase price calculated as described in Note 2 to the section entitled “Unaudited Pro Forma Condensed Combined Financial Information,” beginning on page 189 of this proxy statement. The net tangible and intangible assets acquired and liabilities assumed in connection with the transaction are recorded at their estimated transaction date fair values. 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. A final determination of these estimated fair values, which cannot be made prior to the completion of the transaction, will be based on the actual net tangible and intangible assets of Carbylan that exist as of the date of completion of the transaction.

No Appraisal Rights

Holders of Carbylan 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 Carbylan, KalVista, 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 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 Carbylan, on the one hand, and KalVista 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 Carbylan, KalVista and the Sellers do not believe that these disclosure schedules contain information required to be publicly disclosed under the 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 Carbylan, KalVista or the Sellers, because they were made as of specific dates, may be intended merely as a risk allocation mechanism among Carbylan, KalVista and the Sellers and are modified by the disclosure schedules.

The Transaction Structure

Upon the terms and subject to the conditions set forth in the Share Purchase Agreement, Carbylan will acquire all of the ordinary and preferred shares of KalVista in exchange for the issuance to the Sellers of a number of shares of Carbylan common stock pursuant to the exchange ratio as set forth in the Share Purchase Agreement and below in the section entitled “Terms of the Share Purchase Agreement—Exchange Ratio; Net Cash Calculation.”

The issuance of Carbylan common stock to the Sellers will not be registered with the SEC and such shares will bear a customary restricted stock legend. Carbylan and certain Sellers have entered into the registration rights agreement (as discussed more fully below) which provides certain registration rights to such Sellers for the resale of the shares of Carbylan common stock issued to such Sellers.

Following the transaction, KalVista will be a wholly owned subsidiary of Carbylan, and based on current expectations regarding Carbylan’s Net Cash at closing, the Sellers are expected to hold approximately 81% of the outstanding shares of Carbylan common stock on a fully-diluted basis, and the current Carbylan equityholders are expected to own approximately 19% of the outstanding shares of Carbylan common stock on a fully-diluted basis.

Consideration

At the closing of the transaction each Seller will deliver to Carbylan share certificates (or an indemnity for any lost share certificate(s)) in respect of KalVista shares, duly executed stock transfers in favor of Carbylan and

 

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powers of attorney appointing Carbylan as such Seller’s attorney in respect of such shares until Carbylan is registered in KalVista’s register of members, and in exchange therefor, Carbylan will deposit with its transfer agent stock certificates representing the number of shares of Carbylan common stock that the Sellers have the right to receive pursuant to the terms of the Share Purchase Agreement and will deliver to the Seller Representative written evidence from Carbylan’s transfer agent of the issuance to each Seller of the number of shares of Carbylan common stock such Seller has the right to receive pursuant to the terms of the Share Purchase Agreement.

The number of shares of Carbylan common stock that the Sellers will have the right to receive will be 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; Net Cash Calculation.”

The market value of the shares of Carbylan common stock issued pursuant to the Share Purchase Agreement will depend on the market value of the shares of Carbylan common stock at the time the transaction closes, and could vary significantly from the market value on the date of this proxy statement.

No fractional shares of Carbylan 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.

Exchange Ratio; Net Cash Calculation

The number of shares of Carbylan common stock that the Sellers will receive at closing in exchange for such Sellers’ KalVista shares is determined pursuant to the exchange ratio, which, as set forth in the Share Purchase Agreement, is based upon the relative stipulated values of each of Carbylan and KalVista.

Exchange Ratio

The “exchange ratio” (“ER”) will be calculated based on the following formula:

 

ER =		PCCS × KAP
		KFDS

where,

PCCS = the Post-Closing Carbylan Shares (defined below);

KAP = the KalVista Allocation Percentage (defined below); and

KFDS = the KalVista Fully-Diluted Shares, or the total number of issued shares of KalVista on a fully-diluted basis immediately prior to the closing.

The Post-Closing Carbylan Shares will be calculated based on the following formula and rounded down to the nearest whole number:

 

PCCS =		CFDS
		CAP

where,

CFDS = the Carbylan Fully-Diluted Shares, or the total number of outstanding shares of Carbylan on a fully-diluted basis immediately prior to the closing; and

CAP = the Carbylan Allocation Percentage (defined below).

 

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The KalVista Allocation Percentage will be calculated based on the following formula:

 

KAP =		KSV
		AV

where,

KSV = KalVista’s stipulated value pursuant to the terms of the Share Purchase Agreement, which is fixed at $149,210,526.32; and

AV = the Aggregate Value, or the sum of Carbylan’s stipulated value and KalVista’s stipulated value under the terms of the Share Purchase Agreement.

The Carbylan Allocation Percentage will be calculated based on the following formula:

 

CAP =		CSV
		AV

where,

CSV = Carbylan’s stipulated value pursuant to the terms of the Share Purchase Agreement, which is equal to the sum of (a) $5.0 million and (b) Carbylan’s Net Cash (as defined below); and

AV = the Aggregate Value, or the sum of Carbylan’s stipulated value and KalVista’s stipulated value.

Net Cash

Net Cash is defined as (a) Carbylan’s cash, cash equivalents and marketable securities, minus (b) the sum of (without duplication) (i) Carbylan’s accounts payable, accrued expenses and other current liabilities payable in cash, (ii) Carbylan’s transaction expenses (e.g., costs, fees and expenses incurred in connection with the transaction, change of control payments, retention payments, etc.), (iii) indebtedness, (iv) severance payments, termination benefits or other obligations relating to the termination, or planned termination, of employees or service providers prior to the time of closing, (v) any costs or expenses associated with the termination or winding down of Carbylan’s current business operations, including with respect to the termination of any existing or planned preclinical or clinical research or similar research or operations, (vi) any payables or other obligations related to Carbylan’s real estate lease obligations or the termination thereof (net of any rights of Carbylan to receive payments relating to the properties subject to such lease obligations under a sublease or otherwise), and (vii) any accrual or reserve for potential claims or litigation brought or initiated against Carbylan, its directors or officers or its underwriters in an amount equal to the greater of (A) $1,000,000 (net of any amounts paid in settlement or costs, fees or other expenses paid by Carbylan in connection with such claims or litigation prior to the date on which Net Cash is determined) or (B) the amount required to be reserved under GAAP in Carbylan’s financial statements for such claims or litigation.

If Carbylan’s Net Cash at closing is equal to or greater than the $27.5 million Net Cash Floor, then Carbylan’s Net Cash will be deemed to be $30.0 million for purposes of determining Carbylan’s stipulated value; provided that the $27.5 million Net Cash Floor will be reduced by $13,333 for each day that elapses following September 1, 2016 without the transaction being consummated.

Prior to the closing, if Carbylan’s Net Cash is greater than $31 million, Carbylan will dividend any amounts in excess of $31.0 million to its then-current stockholders and Carbylan’s Net Cash will be deemed to be $30.0 million for purposes of determining Carbylan’s stipulated value.

Examples

For illustrative purposes only, four example scenarios calculating the exchange ratio are described below. These have assumed, solely for the hypothetical calculations set forth in this section, that: (i) 26,344,104 shares

 

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of Carbylan common stock are outstanding on a fully-diluted basis prior to the execution of the 14:1 reverse stock split, and 1,881,007 shares of Carbylan common stock are outstanding on a fully-diluted basis immediately following the effect of the 14:1 reverse stock split but prior to closing; and (ii) 27,615,826 shares of KalVista are in issue on a fully-diluted basis immediately prior to closing. For the purposes of this illustration, we assumed that no Carbylan Options will be net exercised for shares of Carbylan common stock pursuant to the terms of the Share Purchase Agreement.

Case 1: The closing occurs prior to September 1, 2016 and at that time, Carbylan’s Net Cash is $30 million.

In this case, Carbylan’s stipulated value will be the sum of $5 million and its Net Cash of $30 million, or $35 million. The Aggregate Value will be the sum of Carbylan’s stipulated value of $35 million and KalVista’s stipulated value of $149,210,526.32, or $184,210,526.32.

The Carbylan Allocation Percentage will be the ratio of Carbylan’s stipulated value of $35 million to the Aggregate Value of $184,210,526.32, or approximately 19.0%.

The KalVista Allocation Percentage will be the ratio of KalVista’s stipulated value of $149,210,526.32 to the Aggregate Value of $184,210,526.32, or approximately 81.0%.

The Post-Closing Carbylan Shares will be the ratio of Carbylan’s fully-diluted pre-closing shares of 1,881,722 (after taking into account the effect of the 14:1 reverse stock split) to the Carbylan Allocation Percentage of 19.0% (rounded down to the nearest whole number), or 9,903,798.

The exchange ratio will thus be the Post-Closing Carbylan Shares of 9,903,798, multiplied by the KalVista Allocation Percentage of approximately 81.0%, and divided by KalVista’s fully-diluted pre-closing shares of 27,615,826, or approximately 0.2905. In the aggregate, KalVista shareholders will receive that number of shares of Carbylan common stock equal to the exchange ratio of approximately 0.2905 multiplied by KalVista’s fully-diluted pre-closing shares of 27,615,826, or 8,022,077. Each Seller will receive her pro rata percentage of the total KalVista issuance.

Case 2: The closing occurs prior to September 1, 2016 and at that time, Carbylan’s Net Cash is $27.5 million.

In this case, Carbylan’s Net Cash is equal to the Net Cash Floor (as defined above) and Carbylan’s Net Cash will be adjusted for the purposes of calculating Carbylan’s stipulated value to $30 million. Carbylan’s stipulated value will thus be the sum of $5 million and its Net Cash for purposes of calculating Carbylan’s stipulated value of $30 million, or $35 million. The Aggregate Value will be the sum of Carbylan’s stipulated value of $35 million and KalVista’s stipulated value of $149,210,526.32, or $184,210,526.32.

The Carbylan Allocation Percentage will be the ratio of Carbylan’s stipulated value of $35 million to the Aggregate Value of $184,210,526.32, or approximately 19.0%.

The KalVista Allocation Percentage will be the ratio of KalVista’s stipulated value of $149,210,526.32 to the Aggregate Value of $184,210,526.32, or approximately 81.0%.

The Post-Closing Carbylan Shares will be the ratio of Carbylan’s fully-diluted pre-closing shares of 1,881,722 (after taking into account the effect of the 14:1 reverse stock split) to the Carbylan Allocation Percentage of 19.0% (rounded down to the nearest whole number), or 9,903,798.

The exchange ratio will thus be the Post-Closing Carbylan Shares of 9,903,798, multiplied by the KalVista Allocation Percentage of approximately 81.0%, and divided by KalVista’s fully-diluted pre-closing shares of 27,615,826, or approximately 0.2905. In the aggregate, KalVista shareholders will receive that number of shares of Carbylan common stock equal to the exchange ratio of approximately 0.2905 multiplied by KalVista’s fully-diluted pre-closing shares of 27,615,826, or 8,022,077. Each Seller will receive her pro rata percentage of the total KalVista issuance.

 

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Case 3: The closing occurs on October 1, 2016 and at that time, Carbylan’s Net Cash is $27.2 million.

Because Carbylan’s Net Cash at the closing is greater than the Net Cash Floor, Carbylan’s Net Cash will be adjusted for the purposes of calculating Carbylan’s stipulated value to $30 million. Carbylan’s stipulated value will thus be the sum of $5 million and its Net Cash for purposes of calculating Carbylan’s stipulated value of $30 million, or $35 million. The Aggregate Value will be the sum of Carbylan’s stipulated value of $35 million and KalVista’s stipulated value of $149,210,526.32, or $184,210,526.32.

The Carbylan Allocation Percentage will be the ratio of Carbylan’s stipulated value of $35 million to the Aggregate Value of $184,210,526.32, or approximately 19.0%.

The KalVista Allocation Percentage will be the ratio of KalVista’s stipulated value of $149,210,526.32 to the Aggregate Value of $184,210,526.32, or approximately 81.0%.

The Post-Closing Carbylan Shares will be the ratio of Carbylan’s fully-diluted pre-closing shares of 1,881,722 (after taking into account the effect of the 14:1 reverse stock split) to the Carbylan Allocation Percentage of 19.0% (rounded down to the nearest whole number), or 9,903,798.

The exchange ratio will thus be the Post-Closing Carbylan Shares of 9,903,798, multiplied by the KalVista Allocation Percentage of approximately 81.0%, and divided by KalVista’s fully-diluted pre-closing shares of 26,490,036, or approximately 0.3028. In the aggregate, KalVista shareholders will receive that number of shares of Carbylan common stock equal to the exchange ratio of approximately 0.3028 multiplied by KalVista’s fully-diluted pre-closing shares of 26,490,036, or 8,022,077. Each Seller will receive her pro rata percentage of the total KalVista issuance.

Case 4: The closing occurs on October 1, 2016 and at that time, Carbylan’s Net Cash is $25 million.

In this case, because the closing occurs after September 1, 2016, the Net Cash Floor (as defined above) is reduced by $13,333 for each day that elapses following September 1, 2016 without the transaction being consummated. Here, because 30 days will have elapsed following September 1, 2016 without the transaction being consummated, the Net Cash Floor will be reduced from $27.5 million by $399,990.00 (the product of 30 and $13,333) to $27,100,010.00.

Although the Net Cash Floor is reduced in this case, Carbylan’s Net Cash is below the reduced Net Cash Floor, and as a result, Carbylan’s stipulated value will be the sum of $5 million and its Net Cash of $25 million, or $30 million. The Aggregate Value will be the sum of Carbylan’s stipulated value of $30 million and KalVista’s stipulated value of $149,210,526.32, or $179,210,526.32.

The Carbylan Allocation Percentage will be the ratio of Carbylan’s stipulated value of $30 million to the Aggregate Value of $179,210,526.32, or approximately 16.7%.

The KalVista Allocation Percentage will be the ratio of KalVista’s stipulated value of $149,210,526.32 to the Aggregate Value of $179,210,526.32, or approximately 83.3%.

The Post-Closing Carbylan Shares will be the ratio of Carbylan’s fully-diluted pre-closing shares of 1,881,772 (after taking into account the effect of the 14:1 reverse stock split) to the Carbylan Allocation Percentage of 16.7% (rounded down to the nearest whole number), or 11,240,811.

The exchange ratio will thus be the Post-Closing Carbylan Shares of 157,371,358, multiplied by the KalVista Allocation Percentage of approximately 83.3%, and divided by KalVista’s fully-diluted pre-closing shares of 26,490,036, or approximately 0.3533. In the aggregate, KalVista shareholders will receive that number of shares of Carbylan common stock equal to the exchange ratio of approximately 0.3533 multiplied by KalVista’s fully-diluted pre-closing shares of 26,490,036, or 9,359,090. Each Seller will receive her pro rata percentage of the total KalVista issuance.

 

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Effect of the Transaction on Stock Options and Equity Incentives

Carbylan Options

Prior to the closing of the transaction, the vesting of each unexpired and unexercised Carbylan Option will be accelerated in full. Effective as of the time of closing, each outstanding and unexercised Carbylan Option having an exercise price per share less than the Carbylan Closing Price will be automatically exercised in full and, in exchange therefor, the holder of any such automatically exercised Carbylan Option will receive a number of shares of Carbylan common stock calculated by dividing the product of the total number of shares of Carbylan common stock previously subject to such Carbylan Option and the excess of the Carbylan Closing Price over the exercise price per share of Carbylan common stock previously subject to such Carbylan Option by the Carbylan Closing Price. Each outstanding and unexercised Carbylan option that has an exercise price equal to or greater than the Carbylan Closing Price will be terminated and cease to exist as of immediately prior to the time of closing for no consideration.

KalVista Equity Incentives

The Share Purchase Agreement requires KalVista to apply to Her Majesty’s Revenue and Customs (“HMRC”) for confirmation that the tax-favored status of the options and other rights to purchase shares of KalVista ordinary shares issued by KalVista will not be affected by an amendment to disapply the acceleration of vesting pursuant to KalVista’s Enterprise Management Incentives Scheme (the “EMI Plan”) in relation to the transaction.

The HMRC confirmation was obtained, and as a result, each outstanding and unvested KalVista option will be converted into a Carbylan option having an equivalent economic value and vesting schedule.

Directors and Officers of Carbylan Following the Transaction

The combined company’s board of directors will initially be fixed at seven members, consisting of (i) two members designated by Carbylan, namely Albert Cha, M.D., Ph.D. and Arnold L. Oronsky, Ph.D. and (ii) five members designated by KalVista, namely Richard Aldrich, as Chairman, T. Andrew Crockett, Joshua Resnick, Edward W. Unkart and Rajeev Shah.

Immediately following the completion of the transaction, the executive management team of the combined company is expected to be composed of T. Andrew Crockett, serving as Chief Executive Officer and Christopher Yea, Ph.D., serving as Chief Development Officer.

In accordance with Carbylan’s certificate of incorporation and bylaws, the Carbylan board of directors currently consists of nine 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 transaction. At Carbylan’s most recent annual stockholders meeting, held in 2016, Class I directors were elected. As a result, the term of the Class I directors of the combined company is set to expire upon the election and qualification of successor directors at the Carbylan annual stockholders meeting in 2019, and the terms of the Class II and Class III 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 Carbylan are currently as follows:

 

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Class I directors (term ending in 2019): Albert Cha, M.D., Ph.D., Guy P. Nohra and David J. Saul;

 

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Class II directors (term ending in 2017): Steven L. Basta, David M. Clapper and Reza Zadno, Ph.D.; and

 

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Class III director (term ending in 2018): Keith A. Katkin, David M. Renzi and Edward W. Unkart.

 

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The combined company’s board of directors will initially be fixed at seven members, consisting of (i) two members designated by Carbylan, Albert Cha, M.D., Ph.D. and Arnold L. Oronsky, Ph.D. and (ii) five members designated by KalVista, namely Richard Aldrich, as Chairman, who currently is the founder and a partner of Longwood Fund (which will own approximately 4.7% of the combined company’s outstanding shares of common stock immediately following the consummation of the transaction), Joshua Resnick, M.D. who currently is a partner at SV Life Sciences (which it and its affiliates will own approximately 33.1% of the combined company’s outstanding shares of common stock immediately following the consummation of the transaction), Rajeev Shah who currently is a managing director and portfolio manager at RA Capital Management (which will own approximately 6.2% of the combined company’s outstanding shares of common stock immediately following the consummation of the transaction), Edward W. Unkart and T. Andrew Crockett, who will continue as the Chief Executive Officer of the combined company following the consummation of the transaction.

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:

 

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Class I directors (term ending 2019): T. Andrew Crockett, Rajeev Shah and Joshua Resnick, M.D.;

 

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Class II directors (term ending 2017): Richard Aldrich and Edward W. Unkart; and

 

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Class III directors (term ending 2018): Albert Cha, M.D., Ph.D and Arnold L. Oronsky, Ph.D.

Amendment to the Amended and Restated Certificate of Incorporation of Carbylan

Stockholders of record of Carbylan common stock on the record date for the special meeting will also be asked to approve the amendment to the Amended and Restated Certificate of Incorporation of Carbylan to change the name of the corporation from “Carbylan Therapeutics, Inc.” to “KalVista Pharmaceuticals, Inc.” upon consummation of the transaction, which requires the affirmative vote of holders of a majority of the outstanding common stock on the record date for the special meeting.

Conditions to the Consummation of the Transaction

Each party’s obligation to consummation the transaction is subject to the satisfaction or waiver by each of the parties, at or prior to the transaction, of various conditions, which include the following:

 

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the absence of any temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the transaction by any court of competent jurisdiction or other governmental entity of competent jurisdiction, and no law, statute, rule, regulation, ruling or decree will be in effect which has the effect of making the consummation of the transaction illegal;

 

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the approval of the issuance of Carbylan common stock by the holders of a majority of the shares of outstanding Carbylan common stock;

 

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the continued listing of Carbylan common stock on NASDAQ, the approval of the listing of additional shares of Carbylan common stock on NASDAQ, and the approval for listing on NASDAQ of the shares to be issued in the transaction; and

 

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the absence of any pending, or overtly threatened in writing, legal proceeding by any governmental body.

In addition, Carbylan’s and the Sellers’ obligations to consummate the transaction are further subject to the satisfaction or waiver by that party of the following additional conditions:

 

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the truth and correctness of all representations and warranties of the other party in the Share Purchase Agreement on the date of the Share Purchase Agreement and on the closing date of the transaction with the same force and effect as if made on the date on which the transaction is to be completed or, if such representations and warranties address matters as of a particular date, then as of that particular date,

 

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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 material adverse effect;

 

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the performance or compliance in all material respects of the other party or parties to the Share Purchase Agreement with all of its or their covenants and obligations in the Share Purchase Agreement; and

 

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the delivery by the other party or parties of certain customary closing deliverables required under the Share Purchase Agreement.

In addition, the obligation of Carbylan to consummate the transaction is further subject to the satisfaction or waiver of the following conditions:

 

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the continuing full force and effect of the lock-up agreements previously executed by the Sellers;

 

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the termination by KalVista of certain agreements with KalVista’s current shareholders; and

 

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the absence of any continuing KalVista material adverse effect (as such term is defined in the Share Purchase Agreement).

In addition, the obligations on the part of the Sellers to consummate the transaction are further subject to the satisfaction or waiver of the following conditions:

 

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the continuing full force and effect of the lock-up agreements previously executed by each of the Carbylan directors, officers and certain significant stockholders;

 

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Carbylan’s Net Cash at closing equaling or exceeding $25 million;

 

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the reconstitution of the Carbylan board of directors and executive officers as provided by the Share Purchase Agreement’s terms;

 

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the continuing full force and effect of the Registration Rights Agreement (which is discussed more fully below in the section entitled “Agreements Related to the Share Purchase Agreement—Registration Rights Agreement,” beginning on page 119); and

 

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the absence of any continuing Carbylan material adverse effect (as such term is defined in the Share Purchase Agreement).

Representations and Warranties

The Share Purchase Agreement contains customary representations and warranties of Carbylan and KalVista for a transaction of this type relating to, among other things: corporate organization, authority, power and similar corporate matters; subsidiaries (specifically that KalVista has no subsidiaries); capitalization; financial statements, and with respect to Carbylan, documents filed with the SEC and the accuracy of information contained in those documents; material changes or events; title to assets; real property and leaseholds; intellectual property; the validity of material contracts to which the parties or their subsidiaries are a party and absence of any violation, default or breach to such contracts; liabilities; regulatory compliance, permits and restrictions; tax matters; employee and labor matters and benefit plans; environmental matters; insurance; legal proceedings and orders; authority to enter into the Share Purchase Agreement and the related agreements; transactions with affiliates; with respect to Carbylan, votes required for consummation of the transaction and approval of the proposals that will come before the special meeting; except as otherwise specifically identified in the Share Purchase Agreement, the fact that the consummation of the transaction would not contravene or require the consent of any third party; with respect to Carbylan, bank accounts and deposits; any brokerage or finder’s fee or other fee or commission in connection with the transaction; with respect to Carbylan, the valid issuance in the transaction of the Carbylan common stock; with respect to Carbylan, the inapplicability of Section 203 of the DGCL; and the absence of representations and warranties of the other parties except for those representations and warranties contained in the Share Purchase Agreement.

 

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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, with respect to Sellers that are entities; capacity with respect to Sellers that are individuals; non-contravention; third-party consents; legal and beneficial ownership of and good title to the KalVista shares; legal proceedings and orders; any brokerage or finder’s fee or other fee or commission in connection with the transaction; 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 transaction; access to information about Carbylan and KalVista; resale restrictions; tax matters; 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 transaction, but their accuracy forms the basis of one of the conditions to the obligations of Carbylan, KalVista and the Sellers to consummate the transaction.

No Solicitation; Third Party Competing Proposal

Each of Carbylan and KalVista agreed that, except as described below, Carbylan and KalVista will not, nor will either party authorize or permit any of the officers, directors, affiliates, employees, investment bankers, attorneys, accountants, representatives, advisors or other agents retained by it to, directly or indirectly:

 

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solicit, initiate or knowingly encourage, induce or facilitate any “acquisition proposal,” as defined below;

 

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furnish any non-public information regarding itself to any person in connection with or in response to an acquisition proposal or inquiry, indication of interest or request for information that could reasonably be expected to lead to an acquisition proposal;

 

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engage in discussions or negotiations with any person with respect to any acquisition proposal or inquiry, indication of interest or request for information that could reasonably be expected to lead to an acquisition proposal;

 

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approve, endorse or recommend any acquisition proposal;

 

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execute or enter into any letter of intent or similar document or any contract contemplating or otherwise relating to an “acquisition transaction,” as defined below;

 

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amend or grant any waiver or release under any confidentiality, standstill or similar agreement, other than to either Carbylan or KalVista; or

 

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publicly propose to do any of the foregoing.

An “acquisition proposal” means any offer or proposal, whether written or oral contemplating or otherwise relating to any “acquisition transaction,” as defined below.

An “acquisition transaction” means any transaction or series of transactions involving:

 

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any merger, consolidation, amalgamation, share exchange, business combination, issuance or acquisition of securities, reorganization, recapitalization, tender offer, exchange offer or other similar transaction: in which Carbylan or KalVista is a constituent corporation, in which any individual, entity, governmental body or “group,” as defined under applicable securities laws, directly or indirectly acquires beneficial or record ownership of securities representing more than 15% of the outstanding securities of any class of voting securities of Carbylan or KalVista, or in which Carbylan or KalVista issues securities representing more than 15% of the outstanding voting securities of any class of its voting securities;

 

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any sale, lease, exchange, transfer, license, acquisition or disposition of any business or assets that constitute or account for 15% or more of the book value or the fair market value of the assets of Carbylan or KalVista; and

 

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any liquidation or dissolution of Carbylan or KalVista.

However, before obtaining the stockholder approval required to consummate the transaction, Carbylan and its representatives may furnish information to, and may enter into discussions or negotiations with, any third party in response to a bona fide written acquisition proposal, which the Carbylan board of directors determines in good faith, after consultation with its financial advisor and outside legal counsel, constitutes or is reasonably likely to result in a “superior offer,” as defined below, if:

 

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such acquisition proposal did not result from a breach of the no solicitation provisions of the Share Purchase Agreement described above;

 

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The Carbylan board of directors concludes in good faith, based on the advice of outside legal counsel, that the failure to take such action is reasonably likely to result in a breach of the fiduciary duties of the Carbylan board of directors under applicable legal requirements;

 

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Carbylan gives KalVista at least three business days’ prior written notice of the identity of the third party and of Carbylan’s intention to furnish information to, or enter into discussions or negotiations with, such third party before furnishing any information or entering into discussions or negotiations with such third party;

 

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Carbylan receives from the third party an executed confidentiality agreement containing provisions at least as favorable to such party as those contained in the confidentiality agreement between Carbylan and KalVista; and

 

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at the same time as furnishing any information to a third party, Carbylan furnishes the same information to KalVista (to the extent not previously furnished).

A “superior offer” means an unsolicited bona fide written offer by a third party to enter into a merger, consolidation, amalgamation, share exchange, share purchase, business combination, issuance of securities, acquisition of securities, reorganization, recapitalization, tender offer, exchange offer or other similar transaction as a result of which either Carbylan’s or KalVista’s stockholders prior to such transaction in the aggregate cease to own at least 50% of the voting securities of the entity surviving or resulting from such transaction, or the ultimate parent entity thereof, or in which a person or “group,” as defined under applicable securities laws, directly or indirectly acquires beneficial or record ownership of securities representing 50% or more of the party’s capital stock, or a sale, exchange transfer, exclusive license, acquisition or disposition of any business or other disposition of at least 50% of the assets of the party, in a single transaction or a series of related transactions that was not obtained or made as a direct or indirect result of a breach, or violation, of the Share Purchase Agreement, and is on terms and conditions that the board of directors of the party receiving the offer determines in good faith, based on such matters that the board of directors deems relevant, as well as any written offer by the parties to the Share Purchase Agreement to amend the terms of the Share Purchase Agreement, and following consultation with its outside legal counsel and financial advisor:

 

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is reasonably likely to be more favorable, from a financial point of view, to that party’s stockholders than the terms of the transactions contemplated by the Share Purchase Agreement; and

 

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is reasonably capable of being consummated.

An offer will not be a superior offer if any financing required to consummate the transaction contemplated by such offer is not committed and is not reasonably capable of being obtained by such third party, or if the consummation of such transaction is contingent on any such financing being obtained.

The Share Purchase Agreement also provides that Carbylan will promptly advise KalVista of the status and terms of, and keep KalVista fully informed with respect to, any acquisition proposal or any inquiry, indication of

 

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interest or request for information that could reasonably be expected to lead to an acquisition proposal or any change or proposed change to that acquisition proposal or inquiry, indication of interest or request for information that could reasonably be expected to lead to an acquisition proposal. Carbylan must also provide KalVista at least one business day’s written notice of any meeting of the Carbylan board of directors, or any committee of the Carbylan board of directors, at which any acquisition proposal or any inquiry, indication of interest or request for information that could reasonably be expected to lead to an acquisition proposal will be considered.

Changes to Board Recommendation

Pursuant to the Share Purchase Agreement, the Carbylan board of directors has agreed to recommend that Carbylan’s stockholders vote to approve the issuance of Carbylan common stock in the transaction and to use commercially reasonable efforts to solicit such approval as promptly as practicable, including by causing this proxy statement to be filed with the SEC. Further, the Carbylan board of directors and any of its committees shall not withdraw or modify, or publicly propose to withdraw or modify, such recommendation in a manner adverse to KalVista or the Sellers, nor adopt, approve or recommend, or publicly propose to adopt, approve or recommend, any “acquisition proposal,” as defined in the above section entitled, “Terms of the Share Purchase Agreement—No Solicitation; Third Party Competing Proposal.”

However, before obtaining the stockholder approval required to consummate the transaction, subject to compliance with the Share Purchase Agreement described in the above section entitled, “Terms of the Share Purchase Agreement—No Solicitation; Third Party Competing Proposal,” the Carbylan board of directors may withhold, amend, withdraw or modify its recommendation that the Carbylan stockholders vote to approve the issuance of Carbylan common stock in the transaction if, but only if, after receiving an acquisition proposal, and on account of such acquisition proposal:

 

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the Carbylan board of directors reasonably determines in good faith, based on such matters as it deems relevant following consultation with its outside legal counsel and financial advisors, that the failure to withhold, amend, withdraw or modify such recommendation would result in a breach of its fiduciary duties under applicable laws;

 

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the Seller Representative receives written notice from Carbylan confirming that the Carbylan board of directors has determined to change its recommendation that the Carbylan stockholders vote to approve the issuance of Carbylan common stock in the transaction at least four business days in advance of such change, which notice will include a description in reasonable detail of the reasons for such recommendation change, and written copies of any relevant proposed transaction agreements with any party making a potential “superior offer,” as defined in the above section entitled, “Terms of the Share Purchase Agreement—No Solicitation; Third Party Competing Proposal”;

 

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Carbylan has, and has caused its financial and outside legal counsel to, during the four business days prior to withdrawing, amending or modifying the Carbylan board of directors’ recommendation that the Carbylan stockholders vote to approve the issuance of Carbylan common stock in the transaction, negotiate with the Seller Representative in good faith to make such adjustments to the terms and conditions of the Share Purchase Agreement so that such acquisition proposal ceases to constitute a superior offer; and

 

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if the Seller Representative has delivered Carbylan a written offer to alter the terms or conditions of the Share Purchase Agreement during the notice period, the Carbylan board of directors must have reasonably determined in good faith, based on such matters as it deems relevant following consultation with its outside legal counsel and financial advisors, that the failure to withhold, amend, withdraw or modify its recommendation that the Carbylan stockholders vote to approve the issuance of Carbylan common stock in the transaction would still result in a breach of its fiduciary duties under applicable laws (after taking into account such alterations of the terms and conditions of the Share Purchase Agreement).

 

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In the event of any material amendment to any superior offer, including any revision in the amount, form or mix of consideration Carbylan’s stockholders would receive as a result of such superior offer, the Carbylan board of directors is required to provide the Seller Representative with notice of such material amendment and the period to provide notice of the Carbylan board of directors’ change of recommendation will be extended, if applicable, to ensure that at least three business days remain following such notification during which Carbylan and KalVista will comply again with the requirement to negotiate in good faith to make such adjustments to the terms and conditions of the Share Purchase Agreement so that such acquisition proposal ceases to constitute a superior offer. The Carbylan board of directors cannot make a change in its recommendation regarding the transaction prior to the end of such notice period as so extended.

Meeting of Carbylan Stockholders

The Share Purchase Agreement requires Carbylan to take all action necessary under applicable laws to call, give notice of and hold a meeting of the holders of Carbylan common stock to vote on the issuance of Carbylan common stock in the transaction. Such meeting will be held as promptly as practicable after this proxy statement has been cleared by the SEC. Carbylan is further required to take reasonable measures to ensure that all proxies solicited in connection with the meeting of Carbylan stockholders are solicited in compliance with all applicable laws. These requirements are binding on Carbylan, notwithstanding any change in the Carbylan board of directors’ recommendation that the Carbylan stockholders vote to approve the issuance of Carbylan common stock in the transaction or the submission of any “superior offer” or “acquisition proposal,” each as defined in the above section entitled, “Terms of the Share Purchase Agreement—No Solicitation; Third Party Competing Proposal.”

Covenants; Conduct of the Businesses Pending the Closing

KalVista agreed that 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, and to take other agreed-upon actions. KalVista also agreed that, subject to certain limited exceptions, without the written consent of Carbylan, it will not, during the period prior to closing of the transaction:

 

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declare, accrue, set aside or pay any dividend or make any other distribution in respect of any shares or make any reduction of its paid-up share capital; or repurchase, redeem or otherwise reacquire any shares of capital stock or other securities;

 

•

sell, allot, issue, grant, pledge or otherwise dispose of or create any encumbrance over, in respect of KalVista: any capital stock or other security; any option, warrant or right to acquire any capital stock or other security; or any instrument convertible into or exchangeable for capital stock or other security;

 

•

amend the certificate of incorporation, bylaws or other charter or organizational documents of KalVista, or effect or be a party to any merger, consolidation, share exchange, business combination, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction;

 

•

form any subsidiary or acquire any equity interest or other interest in any other entity or enter into a joint venture with any other entity;

 

•

lend money to any person, incur or guarantee any indebtedness for borrowed money; issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities, or guarantee any debt securities of others;

 

•

other than in the ordinary course of business, adopt, establish or enter into any employee plan; cause or permit any employee plan to be amended other than as required by law and other than the amendment contemplated by the Share Purchase Agreement; hire any new employees, consultants or independent contractors; or pay any bonus or make any profit-sharing or similar payment to, or materially increase the amount of the wages, salary, commissions, fringe benefits or other compensation or remuneration payable to, any of its directors, officers or employees;

 

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•

other than in the ordinary course of business, acquire 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 KalVista;

 

•

make any capital or other expenditures with respect to property, plant or equipment materially in excess of the amounts set forth in KalVista’s annual operating plan;

 

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make any material changes in accounting methods, principles or practices, or materially change any assumption underlying, or method of calculating, any bad debt, contingency or other reserve;

 

•

enter into any material transaction outside the ordinary course of business in excess of $1 million individually or in the aggregate;

 

•

sell, lease or otherwise irrevocably dispose of any of its material assets or properties, or grant any encumbrance with respect to such assets or properties, except, in each case, in the ordinary course of business;

 

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sell, assign, transfer, license, sublicense or otherwise dispose of any material intellectual property owned, licensed, or controlled by KalVista that is necessary for the operation of the business of KalVista as presently conducted; or

 

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make, change or revoke any material tax election; file any material amendment to any tax return; adopt or change any accounting method in respect of taxes; change any annual tax accounting period; enter into any tax allocation agreement, tax sharing agreement or tax indemnity agreement; enter into any closing agreement with respect to any tax; settle or compromise any claim, notice, audit report or assessment in respect of material taxes; apply for or enter into any ruling from any tax authority with respect to taxes; surrender any right to claim a material tax refund; or consent to any extension or waiver of the statute of limitations period applicable to any material tax claim or assessment.

Carbylan agreed that it will conduct its business in the ordinary course, with a view toward winding down its current operations, consistent with past practices and in compliance with all applicable laws, regulations and certain contracts, and to take other agreed-upon actions. Carbylan also agreed that, subject to certain limited exceptions, without the consent of KalVista, it will not, during the period prior to the closing of the transaction:

 

•

declare, accrue, set aside or pay any dividend or make any other distribution in respect of any shares or make any reduction of its paid-up share capital; or repurchase, redeem or otherwise reacquire any shares of capital stock or other securities;

 

•

sell, create, allot, issue, grant, pledge or otherwise dispose of or encumber any capital stock or other security;

 

•

amend any of its organizational documents, or effect or be a party to any merger, consolidation, share exchange, business combination, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction;

 

•

form any subsidiary or acquire any equity interest or other interest in any other entity or enter into a joint venture with any other entity;

 

•

incur or suffer to exist any indebtedness for borrowed money, or guarantee any such indebtedness of another person;

 

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adopt, establish or enter into any employee plan; pay any bonus or make any profit-sharing or similar payment to, or increase the amount of the wages, salary, commissions, fringe benefits or other compensation or remuneration payable to, any of its employees, directors or consultants; increase the severance or change of control benefits offered to any current or new employees, directors or consultants; or hire any new employees, consultants or independent contractors;

 

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acquire 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 Carbylan;

 

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sell, assign, lease, license, sublicense or otherwise dispose of or encumber any material properties or assets, or any of Carbylan’s intellectual property;

 

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make any capital or other expenditures with respect to property, plant or equipment;

 

•

make any changes in accounting methods, principles or practices, or method of calculating, any bad debt, contingency or other reserve;

 

•

knowingly waive, release or assign any material rights or claims, including any write-off or other compromise of any of Carbylan’s accounts receivable;

 

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enter into any transaction or enter into, modify or amend any contract relating to research, development, clinical trial, manufacturing, distribution, supply, marketing or co-promotion of any of Carbylan’s products in excess of $10,000;

 

•

initiate, compromise or settle any legal proceeding;

 

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open any new facility or office; or

 

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make, change or revoke any material tax election; file any material amendment to any tax return; adopt or change any accounting method in respect of taxes; change any annual tax accounting period; enter into any tax allocation agreement, tax sharing agreement or tax indemnity agreement; enter into any closing agreement with respect to any tax; settle or compromise any claim, notice, audit report or assessment in respect of material taxes; apply for or enter into any ruling from any tax authority with respect to taxes; surrender any right to claim a material tax refund; or consent to any extension or waiver of the statute of limitations period applicable to any material tax claim or assessment.

Indemnification and Insurance

Pursuant to the Share Purchase Agreement, Carbylan, KalVista and the Sellers agreed that, from the consummation of the transaction through the sixth anniversary of such consummation, the combined company will indemnify and hold harmless each person who has been at any time prior to the consummation of the transaction a director or officer of Carbylan or KalVista 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 a director or officer of Carbylan or KalVista, whether asserted or claimed prior to, at or after the consummation of the transaction, in each case, to the fullest extent permitted under the DGCL for directors or officers of Delaware corporations. Each such director or officer will be entitled to advancement of expenses incurred in the defense of any such claim, action, suit, proceeding or investigation from the combined company upon receipt by the combined company from such director or officer of a request therefor. Such director or officer to whom expenses are advanced must provide an undertaking to the combined company, 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 provisions of the combined company’s organizational documents with respect to indemnification, advancement of expenses and exculpation of present and former directors and officers of Carbylan that were set forth in Carbylan’s organizational documents at the time the Share Purchase Agreement was executed will not be amended, modified or repealed for a period of six years from the consummation of the transaction in a manner that would adversely affect the rights of individuals who, at or prior to the consummation of the transaction, were officers or directors of Carbylan.

From and after the consummation of the transaction, the combined company will fulfill and honor in all respects the obligations of KalVista to each person who has at any time prior to consummation of the transaction been a director or officer of KalVista with respect to claims arising out of matters occurring at or prior to the consummation of the transaction to the extent provided in any indemnification agreement between KalVista and such director or officer or pursuant to any indemnification provisions under KalVista’s organizational documents.

 

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From and after the consummation of the transaction, the combined company will pay all expenses, including reasonable attorneys’ fees, that are incurred by any person who has been at any time prior to the consummation of the transaction, a director or officer of Carbylan or KalVista in connection with their successful enforcement of the rights pursuant to the terms of the Share Purchase Agreement.

In the event Carbylan or any of its successors or assigns consolidates with, merges into or transfers all or substantially all of its properties and assets to any other individual, corporation, (including any non-profit corporation), partnership (including any general partnership), limited partnership or limited liability partnership, joint venture, estate, trust, company, including any company limited by shares, limited liability company or joint stock company, firm, society or other enterprise, association, organization or entity, and each of its successors, and Carbylan is not the continuing or surviving corporation or entity of such consolidation or transaction then, and in each such case, proper provision will be made so that the successors and assigns of Carbylan will succeed to the obligations regarding indemnification and insurance under the Share Purchase Agreement discussed in this section.

Other Agreements

Carbylan, KalVista and the Sellers have additionally agreed to use commercially reasonable efforts to take all actions necessary to consummate the transactions contemplated by the Share Purchase Agreement, and to:

 

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make all filings and other submissions, if any, and give all notices, if any, required to be made and given in connection with the transactions contemplated by the Share Purchase Agreement;

 

•

use commercially reasonable efforts to obtain each consent, if any, required to be obtained pursuant to any applicable law, any of KalVista’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 KalVista’s material contracts to remain in full force and effect;

 

•

use commercially reasonable efforts to lift any injunction prohibiting, or any other legal bar to, any of the transactions contemplated by the Share Purchase Agreement; and

 

•

use commercially reasonable efforts to satisfy the conditions to consummation of the Share Purchase Agreement.

However, Carbylan, KalVista and the Sellers will not have any obligation pursuant to the Share Purchase Agreement to:

 

•

dispose of or transfer any material assets;

 

•

except as otherwise contemplated in the Share Purchase Agreement, discontinue offering any product or service;

 

•

license or otherwise make available to any person any intellectual property;

 

•

hold separate any assets or operations;

 

•

make any commitment regarding future operations; or

 

•

contest any legal proceeding relating to the transactions contemplated by the Share Purchase Agreement, if such party determines in good faith that contesting such legal proceeding would not be advisable.

 

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In addition, Carbylan, KalVista and the Sellers have agreed that:

 

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Carbylan will 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 Carbylan common stock being issued in the transaction to be approved for listing, subject to notice of issuance, on NASDAQ at or prior to the closing of the transaction;

 

•

promptly following the final determination of Net Cash, as discussed in the section entitled “Terms of the Share Purchase—Exchange Ratio; Net Cash Calculation,” beginning on page 101 of this proxy statement and in any event, prior to the closing of the transaction, Carbylan will take all actions reasonably necessary to dividend to its stockholders any Net Cash in excess of $31,000,000;

 

•

Carbylan will take all action necessary to reconstitute the Carbylan board of directors 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 Carbylan Following the Transaction,” beginning on page 105 of this proxy statement;

 

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KalVista will use its commercially reasonable efforts to terminate at or prior to the closing of the transaction certain agreements between KalVista and certain KalVista investors;

 

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Carbylan and KalVista 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 transaction or its effects on the employment, compensation or benefits of its employees; and

 

•

prior to the closing of the transaction, Carbylan will take all such steps as may be required to cause any acquisitions of Carbylan common stock and any Carbylan Options in connection with the transaction, by each individual who is reasonably expected to become subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to Carbylan, to be exempt under Rule 16b-3 promulgated under the Exchange Act.

Termination of the Share Purchase Agreement

The Share Purchase Agreement may be terminated before the consummation of the transaction, whether before or after the required stockholder approvals to complete the transaction have been obtained, as set forth below:

 

•

by mutual written consent duly authorized by the Seller Representative and the board of directors of Carbylan;

 

•

by either Carbylan or the Seller Representative if the transaction has not been consummated by December 15, 2016 (the “Outside Date”); provided, however, that this right to terminate the Share Purchase Agreement will not be available to Carbylan if Carbylan’s action or failure to act, or to the Seller Representative, if any action or failure to act by KalVista or any Seller, has been a principal cause of the failure of the transaction to occur on or before such date and such action or failure to act constitutes a breach of the Share Purchase Agreement, provided, further, that this right to terminate is extendable for an additional 60 days if a request for additional information has been made by any government authority or in the event that the SEC has not cleared this proxy statement by the Outside Date;

 

•

by Carbylan or the Seller Representative 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 transaction;

 

•

by Carbylan or the Seller Representative if the stockholders of Carbylan do not approve the transaction or the issuance of Carbylan common stock in the transaction at the Carbylan special meeting (including any adjournments and postponements thereof), but Carbylan may not terminate the Share Purchase

 

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Agreement pursuant to this provision if the failure to obtain the approval of Carbylan stockholders was caused by the action or failure to act of Carbylan and such action or failure to act constitutes a material breach by Carbylan of the Share Purchase Agreement;

 

•

by the Seller Representative, at any time prior to the approval by Carbylan’s stockholders of the transaction and the issuance of the shares of Carbylan common stock, if:

 

•

the Carbylan board of directors fails to recommend that the stockholders of Carbylan vote to approve the transaction and the issuance of Carbylan common stock or withdraws or modifies its recommendation in a manner adverse to KalVista;

 

•

Carbylan fails to include in this proxy statement such recommendation;

 

•

the Carbylan board of directors or any of its committees approves, endorses or recommends any acquisition proposal, as defined in the section entitled “The Share Purchase Agreement—No Solicitation; Third Party Competing Proposal” in this proxy statement;

 

•

Carbylan enters into any letter of intent or similar document or any contract relating to any acquisition proposal, other than a confidentiality agreement permitted pursuant to the Share Purchase Agreement;

 

•

Carbylan or any its directors or officers willfully and intentionally breaches the no solicitation provisions set forth in the Share Purchase Agreement;

 

•

KalVista, after Carbylan receives an acquisition proposal, tender offer or exchange offer, requests in writing that the Carbylan board of directors re-confirm its recommendation and the Carbylan board of directors fails to do so within ten business days after receiving such request;

 

•

a tender offer or exchange offer is commenced, other than by KalVista or an affiliate of KalVista, and the Carbylan board of directors, or any of its committees, recommends that the Carbylan stockholders tender their shares in such tender or exchange offer or fails within ten business days of such offer’s commencement to recommend against such offer (each of the above clauses is referred to as a “Carbylan triggering event”); or

 

•

by Carbylan or KalVista if the other party has breached any of its representations, warranties, covenants or agreements contained in the Share Purchase Agreement or if any representation or warranty of the other party has become inaccurate, in either case such that the conditions to the closing of the transaction would not be satisfied as of time of such breach or inaccuracy, but if such breach or inaccuracy is curable, then the Share Purchase Agreement will not terminate pursuant to this provision as a result of a particular breach or inaccuracy until the earlier of the expiration of a 30-day period after delivery of written notice of such breach or inaccuracy and the breaching party ceasing to exercise commercially reasonable efforts to cure such breach, if such breach has not been cured.

In the event that Carbylan or the Seller Representative terminates the Share Purchase Agreement before the 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. However, terminating the Share Purchase Agreement cannot relieve any party to the Share Purchase Agreement for its fraud or from any liability of such party for any intentional and material breach of any representation, warranty, covenant, obligation or other provision contained in the Share Purchase Agreement.

Termination Fee and Expenses

Generally, 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 transaction is consummated, except that Carbylan and KalVista are to share equally all fees and expenses, up to a maximum of $175,000 payable by KalVista, in relation to the printing and filing with the SEC this proxy statement and any amendments or supplements thereto.

 

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However, Carbylan must pay KalVista a nonrefundable termination fee of $3.0 million if:

 

•

prior to the termination of the Share Purchase Agreement, an “acquisition proposal,” as defined in the section entitled “The Share Purchase Agreement—No Solicitation; Third Party Competing Proposal” in this proxy statement, is publicly announced, disclosed or otherwise communicated to the Carbylan board of directors, such acquisition proposal is not withdrawn and within 12 months after the date that the Share Purchase Agreement is terminated, Carbylan enters into a definitive agreement with respect to an “acquisition transaction,” as defined in the section entitled “The Share Purchase Agreement—No Solicitation; Third Party Competing Proposal” in this proxy statement, that results or would result in any third party beneficially owning securities of Carbylan representing more than 50% of the voting power of the outstanding securities of Carbylan or owning or exclusively licensing tangible or intangible assets representing more than 50% of the fair market value of the assets of Carbylan; and the Share Purchase Agreement is terminated by:

 

•

Carbylan or the Seller Representative because the stockholders of Carbylan do not approve the transaction or the issuance of Carbylan common stock in the transaction (i.e., the Share Issuance Proposal) at the Carbylan special meeting (including any adjournments and postponements thereof); or

 

•

the Seller Representative because Carbylan has breached any of its representations, warranties, covenants or agreements contained in the Share Purchase Agreement; and

 

•

the Share Purchase Agreement is terminated by KalVista at any time prior to the approval of the transaction and the issuance of Carbylan common stock in the transaction by the stockholders of Carbylan because of a Carbylan triggering event, as defined above in the section entitled “The Share Purchase Agreement—Termination of the Share Purchase Agreement”;

In addition, Carbylan must reimburse KalVista for expenses incurred by KalVista in connection with the Share Purchase Agreement and the transactions contemplated thereby, up to a maximum of $1.0 million, if:

 

•

Carbylan or the Seller Representative terminate the Share Purchase Agreement because the stockholders of Carbylan do not approve the transaction or the issuance of Carbylan common stock in the transaction (ie. the Share Issuance Proposal) at the Carbylan special meeting (including any adjournments and postponements thereof); or

 

•

the Share Purchase Agreement is terminated by KalVista at any time prior to the approval of the transaction and the issuance of Carbylan common stock in the transaction by the stockholders of Carbylan because of a Carbylan triggering event, as defined above in the section entitled “The Share Purchase Agreement—Termination of the Share Purchase Agreement.”

Carbylan must also reimburse KalVista for any reasonable costs and expenses, including attorneys’ fees, plus interest, incurred in connection with the collection of the termination fee or expenses discussed above.

KalVista, the Sellers and the Seller Representative agreed that the termination fee and expense reimbursements described in this section of this proxy statement are the sole and exclusive remedy against Carbylan following a termination of the Share Purchase Agreement.

Regulatory Approvals

Neither Carbylan nor KalVista 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 transaction contemplated by the Share Purchase Agreement. In the United States, Carbylan must comply with applicable federal and state securities laws and NASDAQ rules and regulations in connection with the issuance of shares of Carbylan common stock in the transaction, including the filing with the SEC of this proxy statement.

Pursuant to the terms of the Share Purchase Agreement, Carbylan, KalVista and the Sellers must use commercially reasonable efforts to file or otherwise submit, as soon as practicable after the date of the Share

 

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Purchase Agreement, all applications, notices, reports and other documents reasonably required to be filed by Carbylan, KalVista or the Sellers to any nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature, any federal, state, local, municipal, foreign or other government, any governmental or quasi-governmental court or tribunal, regulatory body, administrative agency or bureau, commission or authority or other body exercising similar powers or authority of any nature, including any governmental division, department, agency, commission, instrumentality, official, ministry, fund, foundation, center, organization, unit, body or entity and any court or other tribunal, and for the avoidance of doubt, any taxing authority, or any self-regulatory organization, including NASDAQ, with respect to the transactions contemplated by the Share Purchase Agreement, and to submit promptly any additional information requested by any of the foregoing.

Amendments and Waivers

The Share Purchase Agreement may be amended by the parties at any time, except that after the Share Purchase Agreement has been adopted and approved by the stockholders of Carbylan, no amendment which by law requires further approval by the stockholders of Carbylan will be made without such further approval, and except that any amendment, waiver or termination of the Share Purchase Agreement that would adversely affect the rights and obligations of Novo A/S, one of the Sellers, under the Share Purchase Agreement requires the prior written approval of Novo A/S. All amendments of the Share Purchase Agreement require a writing signed by the Seller Representative, Novo A/S and Carbylan in order to be effective.

No failure or delay on the part of Carbylan, KalVista or any Seller to exercise, nor any single or partial exercise of, any power, right, privilege or remedy under the Share Purchase Agreement will operate as a waiver of such power, right, privilege or remedy, nor preclude any other or further exercise of any power, right, privilege or remedy under the Share Purchase Agreement. All waivers of any claim, power, right, privilege or remedy under the Share Purchase Agreement require an express written waiver duly executed and delivered on behalf of the waiving party, and all such written waivers are inapplicable and ineffective except in the specific instance in which given.

Specific Performance

Carbylan, KalVista 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. Therefore, Carbylan, KalVista 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 in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which such party is entitled at law or in equity. Further, each of Carbylan, KalVista and the Sellers waived any bond, surety or other security that might be required in connectio