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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 2015

Registration No. 333-206305

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3 to

FORM F-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Midatech Pharma PLC

(Exact name of registrant as specified in its charter)

 

 

 

England and Wales   2834   Not Applicable

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification No.)

65 Innovation Drive

Milton Park

Abingdon, Oxfordshire, OX14 4RQ, United Kingdom

Tel: +44 (0)1235 841 575

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

CT Corporation System

111 Eighth Avenue, 13th Floor

New York, New York 10011

Tel: (212) 894-8800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of communications to:

 

Mark Busch, Esq.

James Herriott, Esq.

K&L Gates LLP

47th Floor

Charlotte, NC 28202

Telephone: (704) 353-3140

Facsimile: (704) 331-7440

 

Samuel P. Williams, Esq.

Timothy W. Matthews, Esq.

Jason S. McCaffrey, Esq.

Brown Rudnick LLP

One Financial Center

Boston, MA 02111

Telephone: (617) 856-8200

Facsimile: (617) 856-8201

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

 

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)    ¨     
Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)    ¨     

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This proxy statement/prospectus shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

 

PRELIMINARY—SUBJECT TO COMPLETION, DATED OCTOBER 8, 2015

 

LOGO

 

 

8601 Six Forks Road, Suite 160

Raleigh, North Carolina 27615

(919) 872-5578

MERGER PROPOSED YOUR VOTE IS IMPORTANT

Dear Stockholders:

You are cordially invited to attend a special meeting of stockholders, referred to as the special meeting, of DARA BioSciences, Inc., referred to as DARA, to be held on [●], [●], 2015 at [●], local time, at [●].

The Board of Directors of Midatech Pharma PLC, referred to as Midatech, a company organized under the laws of England and Wales, and DARA have each approved an agreement and plan of merger, or the merger agreement, pursuant to which (i) a wholly owned subsidiary of Midatech will merge with and into DARA, referred to as the merger, with DARA surviving the merger as the wholly owned subsidiary of Midatech, referred to as the surviving corporation, and (ii) immediately following the merger, Midatech will cause the surviving corporation to merge with and into a wholly owned subsidiary of Midatech, referred to as the secondary merger, with such subsidiary surviving.

At the special meeting holders of DARA’s common stock will be asked to vote on a proposal to adopt the merger agreement. Holders of DARA’s common stock will also be asked to approve on an advisory, non-binding basis, the compensation that may be paid or become payable to DARA’s named executive officers in connection with the merger, and the agreements and understandings pursuant to which such compensation may be paid or become payable, and to approve adjournments of the special meeting, if necessary, to permit further solicitation of proxies in favor of the foregoing proposals.

If the merger is completed, DARA common stockholders will have the right, with respect to each of their shares of DARA common stock, to receive, without interest (i) 0.272 Midatech ordinary shares, subject to adjustment in accordance with the terms of the merger agreement, referred to as the per share stock consideration, plus (ii) one contingent value right, which represents the right to receive contingent payments if specified milestones are achieved within agreed time periods, plus (iii) cash in lieu of fractional Midatech American Depositary Receipts. All Midatech ordinary shares will be delivered to the holders of DARA common stock in the form of American Depositary Receipts, each representing the right to receive two Midatech ordinary shares. Each share of DARA’s issued and outstanding preferred stock will be converted into the right to receive, without interest, $1,000 in cash, plus an amount equal to any declared but unpaid dividends.

Midatech’s ordinary shares trade on the AIM Market of the London Stock Exchange plc under the symbol “MTPH.” DARA’s common stock is traded on the NASDAQ Capital Market under the symbol “DARA.” On October 7, 2015, the closing price per each Midatech ordinary shares was £2.63 and the closing price per share of DARA common stock was $0.84. As of [●], 2015, the last practicable trading day before the date of this proxy statement/prospectus, the implied value of the per share stock consideration was $[●] for each share of DARA common stock. The implied value of the per share stock consideration as of June 3, 2015, the last trading day before the day on which Midatech and DARA announced the execution of the merger agreement, was $1.22 per share of DARA common stock. Midatech intends for the American Depositary Receipts representing Midatech ordinary shares to be publicly traded in the United States and listed on The NASDAQ Stock Market LLC under the symbol “MTP” and quoted in United States dollars.

While Midatech is not currently a publicly traded company in the United States, it will be following the effectiveness of the Registration Statement on Form F-4 and issuance of American Depositary Receipts in connection with the consummation of the merger. Midatech will be an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2013 and is therefore eligible to take advantage of certain reduced reporting requirements otherwise applicable to other public companies.

This is a prospectus of Midatech relating to its offering of ordinary shares of Midatech to DARA stockholders in connection with the proposed merger and a proxy statement of DARA. This document contains important information about Midatech, DARA, the merger and the conditions that must be satisfied before the merger can occur. DARA encourages you to read this entire proxy statement/prospectus carefully, including the merger agreement, which is included as Annex A, and the section discussing “ Risk Factors ” relating to the merger, the CVRs, the American Depositary Receipts, the combined company, Midatech and DARA beginning on page 35.

DARA’s Board of Directors has unanimously approved the merger agreement and determined that the merger agreement and the transactions contemplated thereby are advisable, fair to, and in the best interests of, DARA and its stockholders.  Accordingly, the Board of Directors of DARA unanimously recommends that holders of its common stock vote “FOR” the proposal to adopt the merger agreement, “FOR” the proposal to approve, on an advisory, non-binding basis, the compensation that may be paid or become payable to DARA’s named executive officers in connection with the merger, and the agreements and understandings pursuant to which such compensation may be paid or become payable, and “FOR” the proposal to approve adjournments of the special meeting, if necessary, for the purpose of soliciting additional proxies in favor of the foregoing proposals.

As a holder of DARA common and preferred stock, you are entitled to exercise appraisal rights under the General Corporation Law of the State of Delaware, referred to as the DGCL, in connection with the merger if you take certain actions, meet certain conditions and fully comply with the requirements set forth under the DGCL, including that you do not vote (in person or by proxy) in favor of adoption of the merger agreement. See the “ The Merger—Appraisal Rights ” beginning on page 124. In addition, the text of the applicable appraisal rights provisions of Delaware law is included as  Annex E  to this proxy statement/prospectus.

Your vote is very important.  DARA cannot complete the merger unless the merger agreement is adopted by the affirmative vote of the holders of a majority of the outstanding shares of DARA common stock entitled to vote at the special meeting.  Holders of DARA’s preferred stock have no right to vote on any of the proposals. If you are a holder of DARA common stock, whether or not you expect to attend the special meeting in person, you are urged to submit your proxy as promptly as possible (1) through the Internet, (2) by telephone or (3) by marking, signing and dating the enclosed proxy card and returning it in the postage-paid envelope provided.  If you hold your shares in “street name,” you should instruct your broker how to vote in accordance with your voting instruction card. If you do not submit your proxy, do not instruct your broker how to vote your shares or do not vote in person at the special meeting, it will have the same effect as a vote against the adoption of the merger agreement.

On behalf of DARA’s Board of Directors, we thank you for your cooperation and continued support.

Sincerely,

[●]

David J. Drutz, M.D.

Executive Chairman

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the merger or the other transactions described in this proxy statement/prospectus, nor have any of them approved or disapproved of the issuance of Midatech ordinary shares to be issued in connection with the merger, or passed upon the accuracy or adequacy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense.

This proxy statement/prospectus is dated [●], 2015 and is first being mailed, along with the attached proxy card, to stockholders of DARA on or about [●], 2015.


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LOGO

8601 Six Forks Road, Suite 160

Raleigh, North Carolina 27615

(919) 872-5578

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held On [●], 2015

 

 

To the Stockholders of DARA BioSciences, Inc.:

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of DARA BioSciences, Inc., a Delaware corporation, referred to as DARA, will be held on [●], 2015 at [●] local time at [●], for the following purposes:

 

  1. Adoption of the Merger Agreement . To consider and vote on a proposal to adopt the Agreement and Plan of Merger, dated as of June 3, 2015, referred to as the merger agreement, by and among Midatech Pharma PLC, a public limited company organized under the laws of England and Wales, referred to as Midatech, Merlin Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Midatech, Duke Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Midatech, DARA and Shareholder Representative Services, LLC, a Colorado limited liability company, solely as representative of DARA stockholders, a copy of which is attached as Annex A to the proxy statement/prospectus accompanying this notice.

 

  2. Advisory Vote on Certain Compensatory Arrangements . To consider and vote on a proposal to approve, on an advisory, non-binding basis, the compensation that may be paid or become payable to DARA’s named executive officers in connection with the merger, and the agreements and understandings pursuant to which such compensation may be paid or become payable, as described in the section entitled “ The Merger—Golden Parachute Arrangements for DARA Named Executive Officers ” beginning on page 123.

 

  3. Adjournment . A proposal to approve any adjournments of the special meeting, if necessary, to solicit additional proxies in order to approve the foregoing proposals.

The DARA Board of Directors has determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable and in the best interests of DARA and its stockholders. The DARA Board of Directors unanimously recommends that holders of its common stock vote “FOR” the adoption of the merger agreement, “FOR” the proposal to approve, on an advisory, non-binding basis, the compensation that may be paid or become payable to DARA’s named executive officers in connection with the merger, and the agreements and understandings pursuant to which such compensation may be paid or become payable, and “FOR” the proposal to approve adjournments of the special meeting, if necessary, for the purpose of soliciting additional proxies in favor of the foregoing proposals.

Only holders of record of DARA’s common stock at the close of business on October 16, 2015 are entitled to notice of and to vote at the special meeting or any adjournment or postponement thereof. Your attention is directed to the proxy statement/prospectus accompanying this notice for a more complete statement regarding the matters proposed to be acted upon at the special meeting.

As a holder of DARA common and preferred stock, you are entitled to exercise appraisal rights under the General Corporation Law of the State of Delaware, referred to as the DGCL, in connection with the merger if you take certain actions, meet certain conditions and fully comply with the requirements set forth under the


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DGCL, including that you do not vote (in person or by proxy) in favor of adoption of the merger agreement. See the “ The Merger—Appraisal Rights ” beginning on page 124. In addition, the text of the applicable appraisal rights provisions of Delaware law is included as  Annex E  to the proxy statement/prospectus.

SO THAT YOUR SHARES OF COMMON STOCK WILL BE REPRESENTED WHETHER OR NOT YOU ATTEND THE SPECIAL MEETING, PLEASE SUBMIT A PROXY AS SOON AS POSSIBLE BY MAIL, BY TELEPHONE OR THROUGH THE INTERNET. INSTRUCTIONS ON THESE DIFFERENT WAYS TO SUBMIT YOUR PROXY ARE FOUND ON THE ENCLOSED PROXY FORM. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED AT THE SPECIAL MEETING. YOUR VOTE IS IMPORTANT, SO PLEASE VOTE YOUR SHARES OF COMMON STOCK AS SOON AS POSSIBLE.

By Order of the Board of Directors of DARA BioSciences, Inc.

 

[●]

Christopher Clement
President and Chief Executive Officer


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ABOUT THIS PROXY STATEMENT/PROSPECTUS

This proxy statement/prospectus, which forms part of a registration statement on Form F-4 filed with the U.S. Securities and Exchange Commission, referred to as the SEC, by Midatech Pharma PLC, referred to as Midatech, constitutes a prospectus of Midatech under Section 5 of the Securities Act of 1933, as amended, referred to as the Securities Act, with respect to the Midatech American Depositary Shares to be issued to stockholders of DARA BioSciences, Inc., referred to as DARA, pursuant to the merger. This proxy statement/prospectus also constitutes a proxy statement of DARA under Section 14(a) of the Securities Exchange Act of 1934, as amended, referred to as the Exchange Act. It also constitutes a notice of meeting with respect to the special meeting of DARA stockholders.

You should rely only on the information contained in this proxy statement/prospectus. No one has been authorized to provide you with information that is different from that contained in this proxy statement/prospectus. This proxy statement/prospectus is dated [●], 2015. You should not assume that the information contained in this proxy statement/prospectus is accurate as of any date other than that date. Neither the mailing of this proxy statement/prospectus to DARA stockholders nor the issuance by Midatech of American Depositary Shares in connection with the merger will create any implication to the contrary.

This proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation. Information contained in this proxy statement/prospectus regarding Midatech has been provided by Midatech and information contained in this proxy statement/prospectus regarding DARA has been provided by DARA.

CURRENCIES

In this proxy statement/prospectus, unless otherwise specified or the context otherwise requires:

 

    “$,” “USD,” “US$” and “U.S. dollar” each refer to the United States dollar; and

 

    “£,” “GBP,” “pence” and “p” each refer to the British pound sterling (or units thereof).

INDUSTRY AND MARKET DATA

In this proxy statement/prospectus, Midatech relies on and refers to information and statistics regarding market shares in the sectors in which it competes and other industry data. Midatech obtained this information and statistics from third party sources, such as independent industry publications, government publications or reports by market research firms, which information Midatech has supplemented where necessary with information from various other third party sources, discussions with Midatech customers and its own internal estimates taking into account publicly available information about other industry participants and Midatech management’s best view as to information that is not publicly available.


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TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

     1   

SUMMARY

     10   

THE MERGER

     12   

THE SPECIAL MEETING OF DARA STOCKHOLDERS

     24   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF MIDATECH

     27   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF DARA

     28   

SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     29   

COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA

     31   

COMPARATIVE PER SHARE MARKET PRICE AND SHARE INFORMATION

     32   

CURRENCIES AND EXCHANGE RATE INFORMATION

     34   

RISK FACTORS

     35   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     91   

DARA PROPOSALS

     92   

THE MERGER

     94   

STRUCTURE OF THE MERGER

     94   

MERGER CONSIDERATION

     94   

TREATMENT OF STOCK OPTIONS AND WARRANTS

     95   

ONCOGENERIX CONTINGENT CONSIDERATION SHARES

    
96
  

PURPOSE AND EFFECTS OF THE MERGER

     96   

OWNERSHIP OF COMBINED COMPANY AFTER MERGER

     96   

BACKGROUND OF THE MERGER

     97   

DARA’S REASONS FOR THE MERGER AND RECOMMENDATION OF DARA’S BOARD OF DIRECTORS

     103   

OPINION OF DARA’S FINANCIAL ADVISOR

     106   

CERTAIN DARA FINANCIAL INFORMATION PROVIDED TO AQUILO PARTNERS

     116   

MIDATECH’S REASONS FOR THE MERGER

     117   

INTERESTS OF DARA’S EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER

     119   

GOLDEN PARACHUTE ARRANGEMENTS FOR DARA NAMED EXECUTIVE OFFICERS

     123   

REGULATORY FILINGS AND APPROVALS

     124   

APPRAISAL RIGHTS

     124   

ACCOUNTING TREATMENT

     128   

STOCK EXCHANGE QUOTATION

     129   

DELISTING AND DEREGISTRATION OF DARA COMMON STOCK

     129   

MIDATECH MANAGEMENT FOLLOWING THE MERGER

     129   


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CLOSING AND EFFECTIVE TIME OF THE MERGER

     129   

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

     130   

MIDATECH’S STATUS AS A FOREIGN PRIVATE ISSUER UNDER THE EXCHANGE ACT

     130   

FINANCIAL INFORMATION

     132   

RESTRICTIONS ON SALES OF MIDATECH DEPOSITARY SHARES RECEIVED IN THE MERGER

     132   

LITIGATION RELATED TO THE MERGER

     132   

TAXATION

     133   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     133   

SCOPE OF DISCUSSION

     133   

CLASSIFICATION OF THE MERGER

     134   

CONSEQUENCES OF THE MERGERS TO DARA PREFERRED STOCKHOLDERS

     135   

CONSEQUENCES OF THE MERGERS TO DARA COMMON STOCKHOLDERS

     136   

PAYMENTS RECEIVED WITH RESPECT TO THE CVRS

     137   

CONSEQUENCES OF THE MERGERS TO DARA COMMON STOCKHOLDERS WHO EXERCISE STATUTORY APPRAISAL RIGHTS

     137   

CONSEQUENCES RELATING TO OWNERSHIP AND DISPOSITION OF MIDATECH DEPOSITARY SHARES

     138   

3.8% MEDICARE TAX ON “NET INVESTMENT INCOME”

     139   

INFORMATION REPORTING AND BACKUP WITHHOLDING

     139   

MATERIAL UNITED KINGDOM TAX CONSEQUENCES

     140   

DIVIDENDS

     140   

STAMP DUTY AND STAMP DUTY RESERVE TAX

     140   

THE COMPANIES

     141   

MIDATECH PHARMA PLC

     141   

MERLIN ACQUISITION SUB, INC.

     141   

DUKE ACQUISITION SUB, INC.

     141   

DARA BIOSCIENCES, INC.

     141   

THE MERGER AGREEMENT

     142   

STRUCTURE OF THE MERGER

     142   

CLOSING AND EFFECTIVE TIME OF THE MERGER

     143   

MERGER CONSIDERATION

     143   

TREATMENT OF STOCK OPTIONS AND WARRANTS

     144   

ONCOGENERIX CONTINGENT CONSIDERATION SHARES

     145   

LISTING OF AMERICAN DEPOSITARY RECEIPTS

     145   

SURRENDER AND PAYMENT PROCEDURES

     145   

REPRESENTATIONS AND WARRANTIES

     147   

 

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CONDUCT OF BUSINESS BY DARA AND MIDATECH

     150   

BOARD RECOMMENDATION

     153   

REGISTRATION STATEMENT; DARA STOCKHOLDER MEETING

     155   

NO SOLICITATION OF TRANSACTIONS

     156   

EFFORTS TO CONSUMMATE THE MERGER

     157   

DIRECTORS AND OFFICER’S INDEMNIFICATION AND INSURANCE

     157   

INDEMNIFICATION OF MIDATECH

     158   

STOCKHOLDER REPRESENTATIVE

     158   

EMPLOYEE MATTERS

     160   

EMPLOYEE BONUS PLAN

     160   

KRN 5500

     160   

LISTING OF MIDATECH DEPOSITARY SHARES AND DELISTING OF DARA COMMON STOCK

     160   

CERTAIN OTHER COVENANTS

     161   

CONDITIONS TO COMPLETION OF THE MERGER

     161   

TERMINATION OF THE MERGER AGREEMENT

     163   

EFFECT OF TERMINATION

     163   

TERMINATION FEE AND EXPENSES

     164   

MISCELLANEOUS

     164   

VOTING AGREEMENT

     166   

DESCRIPTION OF THE CVRS

     167   

CVR AGREEMENT

     167   

CHARACTERISTICS OF CVRS; RESTRICTIONS ON TRANSFER

     167   

MILESTONE EVENTS AND PAYMENTS

     167   

BOARD OBSERVER

     169   

DISPUTE RIGHTS

     169   

EFFORTS COVENANT

     170   

AMENDMENT AND TERMINATION OF CVR AGREEMENT

     170   

OTHER PROVISIONS OF CVR AGREEMENT

     171   

THE SPECIAL MEETING OF DARA STOCKHOLDERS

     172   

DATE, TIME, AND PLACE

     172   

PURPOSE OF THE SPECIAL MEETING

     172   

RECOMMENDATION OF THE BOARD OF DIRECTORS OF DARA

     172   

RECORD DATE; STOCKHOLDERS ENTITLED TO VOTE

     172   

QUORUM REQUIREMENT

     172   

 

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STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

     173   

VOTES REQUIRED TO APPROVE THE PROPOSALS

     173   

FAILURE TO VOTE; ABSTENTIONS AND BROKER NON-VOTES

     173   

SUBMISSION OF PROXIES

     174   

REVOCATION OF PROXIES

     175   

SOLICITATION OF PROXIES

     175   

HOUSEHOLDING

     175   

MIDATECH’S OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     177   

OVERVIEW

     177   

FACTORS AFFECTING RESULTS OF OPERATIONS

     182   

COMPONENTS OF INCOME STATEMENT ITEMS

     183   

RESULTS OF OPERATIONS

     184   

LIQUIDITY AND CAPITAL RESOURCES

     186   

OFF-BALANCE SHEET ARRANGEMENTS

     189   

CONTRACTUAL OBLIGATIONS

     189   

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

     190   

RECENTLY ISSUED AND ADOPTED ACCOUNTING PRONOUNCEMENTS

     192   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     192   

DESCRIPTION OF MIDATECH’S BUSINESS

     195   

BUSINESS OVERVIEW

     195   

HISTORY AND DEVELOPMENT

     196   

COMPETITIVE STRENGTHS

     197   

MIDATECH’S STRATEGY

     199   

MARKET OVERVIEW

     200   

MIDATECH’S PLATFORM TECHNOLOGIES

     202   

PRODUCT CANDIDATES

     204   

COMMERCIAL AGREEMENTS, STRATEGIC PARTNERSHIPS AND COLLABORATIONS

     209   

COMMERCIAL OPERATIONS

     213   

RESEARCH AND DEVELOPMENT

     213   

INTELLECTUAL PROPERTY

     213   

GOVERNMENT REGULATIONS

     219   

COMPETITION

     221   

MANUFACTURING

     223   

ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

     225   

FACILITIES

     225   

 

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EMPLOYEES

     225   

LEGAL PROCEEDINGS

     226   

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

     227   

OVERVIEW

     227   

PRODUCT COMMERCIALIZATION AND THE MISSION PRODUCTS

     228   

KRN 5500 CLINICAL STAGE ASSET

     228   

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

     229   

RESULTS OF OPERATIONS

     233   

LIQUIDITY AND CAPITAL RESOURCES

     235   

INFORMATION REGARDING DARA

     236   

DESCRIPTION OF DARA’S BUSINESS

     236   

PRODUCT COMMERCIALIZATION AND THE MISSION PRODUCTS

     237   

COMPETITION

     240   

INTELLECTUAL PROPERTY

     241   

GOVERNMENTAL REGULATION

     242   

SALES AND MARKETING ACTIVITIES

     243   

RESEARCH AND DEVELOPMENT ACTIVITIES

     243   

EMPLOYEES

     244   

DESCRIPTION OF DARA’S PROPERTY

     244   

LEGAL PROCEEDINGS INVOLVING DARA

     244   

DESCRIPTION OF MIDATECH’S ORDINARY SHARES

     245   

GENERAL

     245   

DIVIDENDS

     245   

VOTING RIGHTS

     246   

GENERAL MEETING AND NOTICES

     246   

AMENDMENT TO ARTICLES OF ASSOCIATION

     247   

WINDING UP

     247   

PREEMPTIVE RIGHTS AND NEW ISSUANCE OF SHARES

     247   

DISCLOSURE OF OWNERSHIP INTERESTS IN SHARES

     248   

ALTERATION OF SHARE CAPITAL

     248   

TRANSFER OF SHARES

     249   

ANNUAL ACCOUNTS AND INDEPENDENT AUDITOR

     249   

LIABILITY OF MIDATECH AND ITS DIRECTORS AND OFFICERS

     250   

 

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TAKEOVER PROVISIONS

     250   

LOCK-IN AGREEMENTS

     251   

DESCRIPTION OF MIDATECH’S AMERICAN DEPOSITARY SHARES

     253   

NASDAQ LISTING OF MIDATECH DEPOSITARY SHARES

     253   

AMERICAN DEPOSITARY SHARES

     253   

HOLDING THE MIDATECH DEPOSITARY SHARES

     253   

DIVIDENDS AND OTHER DISTRIBUTIONS

     254   

DEPOSIT, WITHDRAWAL AND CANCELLATION

     255   

VOTING RIGHTS

     256   

FEES AND EXPENSES

     257   

PAYMENT OF TAXES

     259   

RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS, ETC.

     259   

AMENDMENT AND TERMINATION

     259   

BOOKS OF DEPOSITARY

     260   

LIMITATIONS ON OBLIGATIONS AND LIABILITY

     260   

REQUIREMENTS FOR DEPOSITARY ACTIONS

     262   

YOUR RIGHT TO RECEIVE THE SHARES UNDERLYING YOUR MIDATECH DEPOSITARY SHARES

     262   

PRE-RELEASE OF MIDATECH DEPOSITARY SHARES

     263   

DIRECT REGISTRATION SYSTEM

     263   

COMPARISON OF STOCKHOLDER RIGHTS

     264   

MANAGEMENT OF MIDATECH AFTER THE MERGER

     282   

MEMBERS OF THE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS OF MIDATECH

     282   

EXECUTIVE OFFICERS

     284   

THE MIDATECH BOARD OF DIRECTORS

     284   

COMMITTEES OF THE MIDATECH BOARD OF DIRECTORS

     284   

COMPENSATION OF THE NON-EXECUTIVE DIRECTORS OF THE MIDATECH BOARD OF DIRECTORS

     286   

COMPENSATION OF MIDATECH’S EXECUTIVE OFFICERS

     287   

EMPLOYMENT AGREEMENTS

     288   

EQUITY BENEFIT PLANS

     292   

RELATED PARTY TRANSACTIONS

     293   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF MIDATECH

     294   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF DARA

     296   

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     297   

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     302   

LEGAL MATTERS

     310   

EXPERTS

     310   

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANTS

     310   

FUTURE STOCKHOLDER PROPOSALS

     312   

OTHER MATTERS

     312   

EXCHANGE CONTROLS AND LIMITATIONS AFFECTING STOCKHOLDERS

     312   

ENFORCING CIVIL LIABILITIES

     312   

WHERE YOU CAN FIND MORE INFORMATION

     313   

ANNEX A – AGREEMENT AND PLAN OF MERGER

     A-i   

ANNEX B – FORM OF VOTING AGREEMENT

     B-1   

ANNEX C – FORM OF CVR AGREEMENT

     C-1   

ANNEX D – OPINION OF FINANCIAL ADVISOR

     D-1   

ANNEX E – SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW

     E-1   

INDEX TO FINANCIAL STATEMENTS OF MIDATECH

     F-1   

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF MIDATECH

     F-42   

INDEX TO FINANCIAL STATEMENTS OF MIDATECH PHARMA (WALES) LIMITED

     F-54   

INDEX TO FINANCIAL STATEMENTS OF DARA

     F-78   

PART II

     II-1   

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

The following questions and answers address briefly some questions you may have regarding the special meeting and the proposed merger. These questions and answers may not address all questions that may be important to you as a stockholder. Please refer to the more detailed information contained elsewhere in this proxy statement, as well as the additional documents referred to in this proxy statement/prospectus, including the Agreement and Plan of Merger, dated as of June 3, 2015, a copy of which is attached as  Annex A.

 

Q: Why am I receiving this document?

 

A: Midatech Pharma PLC, referred to as Midatech, and DARA BioSciences, Inc., referred to as DARA, have approved an Agreement and Plan of Merger dated as of June 3, 2015, referred to as the merger agreement, pursuant to which DARA will become a wholly owned subsidiary of Midatech, referred to as the merger. A copy of the merger agreement is attached to this proxy statement/prospectus as  Annex A . In order to complete the merger, DARA stockholders must vote to adopt the merger agreement. DARA will hold a special meeting of its stockholders to obtain this approval. This proxy statement/prospectus contains important information about the merger, the merger agreement, the special meeting of DARA stockholders, and other related matters, and you should read it carefully. The enclosed voting materials for the special meeting allow you to vote your shares of DARA common stock without attending the special meeting in person.

The parties are delivering this proxy statement/prospectus to you as a proxy statement of DARA, a prospectus of Midatech and notice of appraisal rights. It is a proxy statement because DARA’s Board of Directors is soliciting proxies from its common stockholders to vote on the approval of (i) the adoption of the merger agreement; (ii) the approval, on an advisory, non-binding basis, of the compensatory arrangements between DARA and its named executive officers providing for compensation in connection with the merger and the agreements and understandings pursuant to which such compensation may be paid or become payable, referred to as the Potential Payments Under Compensation Arrangements; and (iii) the approval of adjournments of the special meeting, if necessary, for the purpose of soliciting additional proxies in favor of the foregoing proposals if there are insufficient votes to approve such proposals, and your proxy will be used at the special meeting or at any adjournment of the special meeting. This document is a prospectus because Midatech will issue Midatech ordinary shares to the DARA common stockholders in the merger (in the form of American Depositary Receipts), and this prospectus contains information about those ordinary shares of Midatech. In addition, this document also constitutes a notice of appraisal rights because holders of DARA common stock and preferred stock are entitled to appraisal rights, provided they follow the procedures under Delaware law necessary to demand and perfect such rights.

 

Q: What will happen in the merger?

 

A: In the merger, Merlin Acquisition Sub, Inc., referred to as Merger Sub, a wholly owned subsidiary of Midatech, will merge with and into DARA, with DARA continuing as the surviving corporation, referred to as the merger. DARA, as the surviving corporation in the merger, will be merged with and into Duke Acquisition Sub, Inc., referred to as Secondary Merger Sub, a wholly owned subsidiary of Midatech, with Secondary Merger Sub surviving and continuing as a wholly owned subsidiary of Midatech, referred to as the secondary merger. The merger and secondary merger are referred to, collectively, as the mergers. In connection with the secondary merger, the name of the surviving entity will be changed to “DARA BioSciences, Inc.” As a result of the merger, DARA will no longer be publicly traded.

 

Q: What are the proposals on which I am being asked to vote?

 

A: Holders of DARA common stock are being asked to vote on the following proposals: (i) the adoption of the merger agreement, referred to as the merger proposal, (ii) to approve, on an advisory, non-binding basis, the Potential Payments Under Compensation Arrangements proposal; and (iii) to approve the adjournment of the special meeting, if necessary, for the purpose of soliciting additional proxies in favor of the foregoing proposals.

 

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Q. Does DARA’s Board of Directors recommend voting in favor of the proposals?

 

A. Yes. After careful consideration, DARA’s Board of Directors has unanimously determined that the merger agreement and the transactions contemplated thereby are advisable and in the best interests of DARA and its stockholders. As a result, DARA’s Board of Directors unanimously recommends that holders of its common stock vote “FOR” the merger proposal, “ FOR” approval, on an advisory, non-binding basis, of the Potential Payments Under Compensation Arrangements proposal and “FOR” the proposal to approve adjournments of the special meeting, if necessary, for the purpose of soliciting additional proxies in favor of the foregoing proposals.

 

Q. What vote is required to approve the proposals?

 

A. The merger agreement proposal must be approved by a majority of the outstanding shares of DARA common stock entitled to vote thereon. The Potential Payments Under Compensation Arrangements proposal must be approved by a majority of the votes cast by holders of DARA common stock. The proposal to adjourn the special meeting, if necessary, for the purpose of soliciting additional proxies, must be approved by the affirmative vote of the majority of shares of DARA common stock present in person or represented by proxy at the special meeting and entitled to vote on the record date, regardless of whether a quorum is present.

The advisory, non-binding vote on the Potential Payments Under Compensation Arrangements is a vote separate and apart from the vote to adopt the merger agreement. Accordingly, holders of DARA common stock may vote to adopt the merger agreement and vote not to approve the Potential Payments Under Compensation Arrangements and vice versa. In addition, because the vote on Potential Payments Under Compensation Arrangements is advisory in nature only, it will not be binding on DARA.

 

Q. What will I receive in the merger?

 

A. Common Stock. Other than excluded shares, as a result of the transaction, for each share of DARA common stock you own, you will receive, without interest, (i) 0.272 ordinary shares of Midatech, subject to adjustment in accordance with the terms of the merger agreement, referred to as the Per Share Stock Consideration, plus (ii) one contingent value right, referred to as CVRs, which represents the right to receive contingent payments if specified milestones are achieved within agreed time periods, subject to and in accordance with the terms and conditions of the Contingent Value Rights Agreement, in substantially the form included as Annex C to this proxy statement/prospectus, referred to as the CVR Agreement, to be entered into prior to the effective time of the merger, referred to as the Effective Time, by and among DARA, Shareholder Representative Services, LLC, solely as representative of the DARA stockholders, referred to as the Shareholder Representative, and a rights agent selected by Midatech with DARA’s approval, plus (iii) cash in lieu of fractional Midatech Depositary Shares (as defined herein). The CVR Agreement was approved by DARA’s Board of Directors in connection with its approval of the merger agreement. All Midatech ordinary shares to be issued in connection with the merger will be delivered to the holders of DARA common stock in the form of American Depositary Receipts, each representing the right to receive two Midatech ordinary shares, referred to as Midatech Depositary Shares. The Per Share Stock Consideration and one CVR, together with any cash to be paid in lieu of fractional shares of Midatech Depositary Shares to be issued, are referred to collectively as the Per Share Merger Consideration.

The merger agreement includes a collar provision under which the initial exchange ratio of 0.272 is subject to adjustment in the event the Exchange Ratio Market Value (as defined herein) determined one business day prior to closing of the merger, referred to as the Closing, is less than $1.08 or greater than $1.32. This ratio, as adjusted if necessary, is referred to as the Exchange Ratio. In such event, the Exchange Ratio shall be determined as follows: (i) if the Exchange Ratio Market Value is an amount less than $1.08, then the Exchange Ratio shall be equal to the quotient obtained by dividing $1.08 by the Exchange Ratio Market Value (subject to a maximum Exchange Ratio of 0.306) and (ii) if the Exchange Ratio Market Value is an

 

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amount greater than $1.32, then the Exchange Ratio shall be equal to the quotient obtained by dividing $1.32 by the Exchange Ratio Market Value (subject to a minimum Exchange Ratio of 0.249). As used herein, Exchange Ratio Market Value means 0.272, the initial Exchange Ratio, multiplied by a figure that represents the average of the weighted average mid-market trading price of Midatech ordinary shares on the AIM Market of the London Stock Exchange plc, referred to as the AIM Market or AIM, (as calculated by Bloomberg Screen AQR) for each of the 15 trading days ending on the day which is the business day immediately prior to the Effective Time, and then translated into U.S. dollars using the Bank of England’s daily spot exchange rate for the day which is the business day immediately prior to the Effective Time.

As used herein, “ excluded shares ” mean all shares held by DARA as treasury stock or any shares held by Midatech, Merger Sub, Secondary Merger Sub or any wholly owned subsidiary of Midatech or DARA, which will be cancelled, and any shares authorized but unissued, and shares owned by DARA stockholders who have perfected and not withdrawn a demand for, or lost their right to, appraisal with respect to such shares.

Preferred Stock . At the Effective Time, each share (other than excluded shares) of DARA’s issued and outstanding Series A Convertible Preferred Stock, Series B-2 Convertible Preferred Stock and Series C-1 Convertible Preferred Stock will be converted into the right to receive, without interest, $1,000 in cash, plus an amount equal to any declared but unpaid dividends (if any).

 

Q. What are the CVRs?

 

A. The CVRs represent the non-transferable contractual right to receive a cash payment from Midatech of up to $0.27 per CVR, or $5.7 million in the aggregate. The contingent payments become payable to the rights agent, for deposit into a fund established by the rights agent for subsequent distribution to the holders of the CVRs, upon the achievement of the milestones as follows:

 

    A payment will be made in 2017 if the following milestones are achieved:

 

    CVR holders will receive $0.07 per CVR if Gross Sales (as defined below) of Oravig and Gelclair (two drugs licensed by DARA) equal or exceed $15.0 million but are less than $16.5 million, in the aggregate, for the fiscal year ending December 31, 2016;

 

    $0.09 per CVR if Gross Sales of Gelclair and Oravig equal or exceed $16.5 million but are less than $18.0 million, in the aggregate, for the fiscal year ending December 31, 2016; or

 

    or $0.11 per CVR if Gross Sales of Gelclair and Oravig equal or exceed $18.0 million, in the aggregate, for the fiscal year ending December 31, 2016; and

 

    A payment will be made in 2018 if the following milestones are achieved:

 

    CVR holders will receive $0.11 per CVR if Gross Sales of Gelclair and Oravig equal or exceed $26.0 million but are less than $28.6 million, in the aggregate, for the fiscal year ending December 31, 2017;

 

    $0.13 per CVR if Gross Sales of Gelclair and Oravig equal or exceed $28.6 million but are less than $31.2 million, in the aggregate, for the fiscal year ending December 31, 2017; or

 

    or $0.16 per CVR if Gross Sales of Gelclair and Oravig equal or exceed $31.2 million, in the aggregate, for the fiscal year ending December 31, 2017.

If the minimum sales target in each of fiscal 2016 ($15 million in Gross Sales) or fiscal 2017 ($26 million in Gross Sales) is not met, then the holders of CVRs will not be entitled to receive payment for that year. The payment amounts per CVR shown above assume that none of DARA’s outstanding warrants for DARA common stock will be exercised. Currently none of DARA’s outstanding warrants are vested and in-the-money. If any of DARA’s warrants for common stock are exercised, the payment amounts per CVR will be less than the amounts shown above.

 

 

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In no event will payment be made with respect to more than a single milestone in fiscal year 2016 or 2017, as applicable. All of the milestone payments are subject to offset by Midatech with respect to indemnification claims made pursuant to the merger agreement.

As used herein, the terms:

 

    Gross Sales ” means those aggregate sales of Gelclair and Oravig by DARA’s successor, Midatech, their respective affiliates and certain other authorized sellers for fiscal year 2016 or fiscal year 2017 computed by, for each product, multiplying (i) the number of units of such product shipped and recognized in the final audited consolidated financial statements maintained in accordance with revenue recognition standards of accounting principles generally accepted in the United States or such other successor standard by (ii) the WAC for such product; and

 

    WAC ” means Wholesaler Acquisition Cost, which is the approved and published amount at which a product is sold to wholesalers and other customers in the pharmaceutical industry, as reported by the applicable manufacturer to First Databank.

The CVRs may not be sold, assigned, transferred, pledged or disposed of in any other manner, in whole or in part, other than in the limited circumstances specified in the CVR Agreement. In addition, the CVRs (i) will not be evidenced by a certificate or other instrument, (ii) will not have any voting or dividend rights and (iii) will not represent any equity or ownership interest in Midatech, any constituent company to the merger or any of their respective affiliates. No interest will accrue on any amounts payable in respect of the CVRs.

The CVR payment is neither secured nor guaranteed. The CVR payment, if any becomes due, is an unsecured general obligation of Midatech and is not guaranteed by Midatech or any of its affiliates.

For a more detailed description of the CVRs and the CVR Agreement, see “ Description of the CVRs ” beginning on page 167.

 

Q. What is an American Depositary Receipt?

 

A. An American Depositary Receipt, referred to as an ADR, is an ownership interest in the securities of a non-U.S. company deposited at a custodian bank. Midatech is a company incorporated in England and Wales that issues ordinary shares that are equivalent in many respects to common stock of a U.S. company. Each ADR will represent the right to receive two Midatech ordinary shares. Midatech ordinary shares are quoted in British pounds sterling on AIM. For a description of Midatech Depositary Shares, see “ Description of Midatech’s American Depositary Shares ” beginning on page 253.

 

Q. Will Midatech Depositary Shares be publicly traded in the United States?

 

A. Yes. It is a condition to the closing of the merger that Midatech Depositary Shares be listed on the NASDAQ Stock Market LLC, referred to as NASDAQ, subject to official notice of issuance. Midatech intends for the Midatech Depositary Shares to be publicly traded in the United States and listed on NASDAQ under the symbol “MTP” and quoted in United States dollars.

 

Q. What if I hold DARA stock options or warrants to purchase DARA common stock?

 

A.

Stock Options . Subject to certain exceptions, each outstanding and unexercised option to acquire DARA common stock, referred to as Stock Options, will become fully vested and exercisable immediately prior to the Effective Time. Stock Options that remain outstanding and unexercised at the Effective Time will be assumed by Midatech and will vest in accordance with their vesting schedule pursuant to the same material terms and conditions as set forth in the applicable agreement under which such Stock Option was granted immediately prior to the Effective Time, provided that at the Effective Time, (i) each Stock Option will be exercisable for that number of whole Midatech ordinary shares equal to the product of (A) the number of shares of DARA common stock that were issuable upon exercise of such Stock Option immediately prior to

 

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  the Effective Time, multiplied by (B) the Exchange Ratio, rounded down to the nearest whole number of Midatech ordinary shares, and (ii) the per share exercise price for each Midatech ordinary share issuable upon exercise of each Stock Option so converted will be equal to the quotient determined by dividing the exercise price per share of DARA common stock at which such Stock Option was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. All Midatech ordinary shares delivered to the holders of Stock Options will be delivered in the appropriate amount of Midatech Depositary Shares.

Warrants . Each outstanding and unexercised warrant to purchase shares of DARA common stock, referred to as Warrants, as of immediately prior to the Effective Time will be assumed or substituted by Midatech in accordance with the terms of such Warrant and, as of the Effective Time, (i) will be exercisable for (A) the number of whole Midatech ordinary shares equal to the product of the number of shares of DARA common stock that were issuable upon exercise of such Warrant immediately prior to the Effective Time, multiplied by the Exchange Ratio, rounded down to the nearest whole number of Midatech ordinary shares and (B) one CVR multiplied by the total number of shares of DARA common stock that were issuable upon exercise of such Warrants immediately prior to the Effective Time, and (ii) the per share exercise price for each Midatech ordinary share issuable upon exercise of Warrants so converted will be equal to the quotient determined by dividing the exercise price per share of DARA common stock at which such Warrant was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. All Midatech ordinary shares delivered to the holders of Warrants in connection with the merger will be delivered in the appropriate amount of Midatech Depositary Shares.

 

Q: What will happen to Midatech ordinary shares in the merger?

 

A: Each Midatech ordinary share outstanding held by a Midatech stockholder immediately before the merger will continue to represent one Midatech ordinary share after the Effective Time. Accordingly, Midatech stockholders will receive no consideration in the merger and the merger will not change the number of ordinary shares a Midatech stockholder currently owns.

However, after the merger, the current stockholders of a Midatech as a group will own a percentage of ownership of the combined company that is smaller than such stockholders’ percentage ownership of Midatech before the merger.

 

Q. What happens if the merger is not consummated?

 

A. If the merger agreement is not adopted by DARA stockholders or if the merger is not completed for any other reason, you will not receive any merger consideration for your shares of DARA common stock in connection with the merger. Instead, you will keep your shares of DARA common stock or preferred stock and DARA will remain a standalone company. If the merger agreement is terminated under certain circumstances, DARA may be required to pay Midatech a termination fee of $1.05 million or reimburse Midatech for its reasonable out of pocket expenses (not to exceed $525,000). For more information, see “ The Merger Agreement—Termination of the Merger Agreement ” on page 163.

 

Q. Are there risks associated with the merger?

 

A. Yes. In evaluating the merger, DARA stockholders should carefully consider the factors discussed in “ Risk Factors ” beginning on page 35.

 

Q. What are the material U.S. federal income tax consequences of the mergers to U.S. holders of DARA common stock?

 

A.

It is a condition to the completion of the mergers that DARA and Midatech each receive an opinion that, for U.S. federal income tax purposes, the mergers should qualify as a “reorganization” within the meaning of

 

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  Section 368(a) of the Internal Revenue Code of 1986, as amended, referred to as the Code. It is expected that the mergers should qualify as a “reorganization” within the meaning of Section 368(a) of the Code, although the conditions for reorganization treatment will not be known until the time of the mergers. If the mergers qualify as a “reorganization,” then a U.S. holder of DARA common stock or preferred stock that exchanges shares of DARA common stock for Midatech depositary shares, cash in lieu of fractional Midatech depositary shares, and CVRs would recognize gain (but not loss) in an amount equal to the lesser of (1) the sum of the fair market value of the CVRs received and cash received in lieu of fractional shares and (2) the amount by which the aggregate fair market value of the merger consideration received by the U.S. holder exceeds such U.S. holder’s adjusted tax basis in the DARA common stock exchanged.

If the mergers do not qualify as a “reorganization” within the meaning of Section 368(a) of the Code, DARA stockholders may be subject to U.S. federal, state, local, or other income taxes based upon the full value of the merger consideration.

For further discussion, see “ Taxation—Material U.S. Federal Income Tax Consequences ” beginning on page 133.

 

Q. What are the implications to DARA stockholders of Midatech being a “foreign private issuer?”

 

A. Following completion of the merger, Midatech will be subject to the reporting requirements under the Exchange Act applicable to foreign private issuers. Midatech will be required to file an annual report on Form 20-F with the SEC within four months after the end of each fiscal year. Midatech’s current fiscal year begins on January 1 and ends on December 31. In addition, Midatech will be required to furnish reports on Form 6-K to the SEC regarding certain information required to be publicly disclosed by Midatech by way of a Regulatory News Service, referred to as RNS, in the United Kingdom or filed with AIM, or regarding information distributed or required to be distributed by Midatech to its stockholders under the AIM Rules. Midatech will be exempt from certain rules under the Exchange Act, including the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations under Section 14 of the Exchange Act, and will not be required to comply with Regulation FD, which addresses certain restrictions on the selective disclosure of material information. In addition, among other matters, Midatech’s officers, directors and principal stockholders will be exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of Midatech ordinary shares. If Midatech loses its status as a foreign private issuer, it will no longer be exempt from such rules and, among other things, will be required to file periodic reports and financial statements as if it were a company incorporated in the United States.

 

Q. When do Midatech and DARA expect to complete the merger?

 

A. Midatech and DARA expect to complete the merger after all conditions to the merger in the merger agreement are satisfied or waived, including the receipt of DARA stockholder approval at the special meeting of stockholders of DARA, the approval for listing of the Midatech Depositary Shares on NASDAQ, and the receipt of all required regulatory approvals. See “ The Merger Agreement—Conditions to Completion of the Merger ” beginning on page 161. Midatech and DARA currently expect to complete the merger during the fourth quarter of 2015. However, because fulfillment of some of the conditions to completing the merger are outside of either company’s control, the parties cannot predict the actual timing or if the merger will be completed at all.

 

Q. Why am I being asked to cast an advisory, non-binding vote to approve the Potential Payments Under Compensation Arrangements Proposal?

 

A.

The Securities and Exchange Commission, referred to as the SEC, rules require that DARA seek an advisory, non-binding vote with respect to certain payments that will be made to DARA’s named executive officers by DARA in connection with the merger. See “ The Merger—Interests of DARA’s Directors and

 

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  Executive Officers and Directors in the Merger ” beginning on page 119 and “ DARA Proposals—Proposal 2: Advisory Vote on Potential Payments Under Compensation Arrangements ” beginning on page 92.

 

Q. What will happen if DARA stockholders do not approve the Potential Payments Under Compensation Arrangements proposal?

 

A. Pursuant to the terms of the merger agreement, approval of the Potential Payments Under Compensation Arrangements is not a condition to the completion of the merger. The vote with respect to the Potential Payments Under Compensation Arrangements is an advisory vote and will not be binding on DARA. Therefore, if the other requisite stockholder approvals are obtained and the merger is completed, the amounts payable under the Potential Payments Under Compensation Arrangements will still be paid to DARA’s named executive officers as long as any other conditions applicable thereto occur.

 

Q. Is there a stockholders meeting of Midatech in connection with the transactions contemplated by the merger agreement?

 

A. No. It is not a condition of the merger agreement that Midatech stockholders approve the proposed merger, nor is approval required under the AIM Rules.

 

Q: When and where is the special meeting?

 

A: The special meeting will take place on [●], 2015 at [●], local time, at [●].

 

Q: Who can vote and attend the special meeting?

 

A: All of DARA common stockholders of record as of the close of business on October 16, 2015, the record date for the special meeting, are entitled to receive notice of and attend the special meeting or any adjournments of the special meeting. Each share of DARA common stock entitles you to one vote on each matter properly brought before the special meeting. Holders of DARA preferred stock cannot vote on the proposals at the special meeting.

 

Q: How do I cast my vote if I am a record holder?

 

A: If you are a DARA common stockholder of record on the record date, you may vote in person at the special meeting, or by submitting your proxy by mail, telephone or Internet. If you wish to mail your proxy, you can submit your proxy by completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed, postage-paid envelope. If you wish to submit your proxy by telephone or Internet, you may do so by following the instructions on your proxy card.

 

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

 

A: No. If you hold your shares of DARA common stock in “street name” through a broker, bank or other nominee, your broker, bank or other nominee will not vote your shares unless you provide instructions on how to vote. You must obtain a proxy form from your broker, bank or other nominee that is the record holder of your shares and provide the record holder of your shares with instructions on how to vote your shares in accordance with the voting directions provided by your broker, bank or nominee.

 

Q: What if I abstain from voting or do not instruct my broker how to vote my shares?

 

A: Shares held by a DARA stockholder who indicates on an executed proxy card that he or she wishes to abstain from voting will count toward determining whether a quorum is present and will have the same effect as a vote  “AGAINST”  the merger proposal and the proposal to permit the proxies to adjourn the special meeting, but will have no effect on the advisory, non-binding proposal on the Potential Payments Under Compensation Arrangements.

 

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A broker “non-vote” occurs when a broker or other nominee holding shares for a beneficial owner signs and returns a proxy with respect to shares of common stock held in a fiduciary capacity (typically referred to as being held in “street name”) but does not vote on a particular matter because the nominee does not have the discretionary voting power with respect to that matter and has not received instructions from the beneficial owner. Under the rules that govern brokers who are voting with respect to shares held in street name, brokers have the discretion to vote such shares on routine matters but not on non-routine matters. The proposals that DARA stockholders are being asked to vote on at the special meeting are not considered routine matters and accordingly, brokers or other nominees may not vote without instructions. See “ The Special Meeting of DARA Stockholders ” beginning on page 24.

If a broker non-vote occurs, the broker non-vote will count for purposes of determining a quorum. A broker non-vote will have the same effect as a vote “ AGAINST ” the merger proposal and the proposal to permit the proxies to adjourn the special meeting, but will have no effect on the advisory, non-binding proposal on the Potential Payments Under Compensation Arrangements.

 

Q: How will proxy holders vote my shares?

 

A: If you properly submit a proxy prior to the special meeting, your shares of common stock will be voted as you direct. If you submit a proxy but no direction is otherwise made, your shares of common stock will be voted “FOR” the merger proposal, “FOR” the advisory, non-binding proposal on the Potential Payments Under Compensation Arrangements, and “FOR” the approval of any adjournments of the special meeting, if necessary, for the purpose of soliciting additional proxies in favor of the foregoing proposals.

 

Q: Can I change my vote after I have mailed my proxy card?

 

A: Yes. If you own shares of DARA common stock as a record holder, you may revoke a previously granted proxy at any time before it is exercised by filing with DARA’s Corporate Secretary a notice of revocation or a duly executed proxy bearing a later date or voting again by telephone or Internet or by attending the meeting and voting in person. Attendance at the special meeting will not, in itself, constitute revocation of a previously granted proxy. If you have instructed your broker, bank or nominee to vote your shares, the above described options for changing your vote do not apply and instead you should follow the instructions received from your broker, bank or other nominee to change your vote.

 

Q. Are any DARA stockholders already committed to vote in favor of any of the special meeting proposals?

 

A. Under a voting agreement with Midatech, which is attached as Annex B to this proxy statement/prospectus, the directors and named executive officers of DARA have agreed to vote all of their shares of DARA common stock in favor of the merger proposal and have granted to DARA a proxy to vote their shares in favor of the merger proposal. As of October 16, 2015, the record date, the parties to the voting agreement collectively beneficially owned (with sole or shared voting power) [●] shares, or [●]%, of the DARA common stock outstanding and entitled to vote at the special meeting. For more information, see “ Voting Agreement ” beginning on page 166.

 

Q. What should I do if I receive more than one set of voting materials for the special meeting?

 

A. You may receive more than one set of voting materials for the special meeting, including multiple copies of this proxy statement/prospectus and multiple proxy cards or voting instruction forms. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction form for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction form that you receive so that a vote is exercised for each relevant holding.

 

Q. What happens if I sell my shares of DARA common stock before the special meeting?

 

A.

The record date of the special meeting is earlier than the date of the special meeting and the date that the merger is expected to be completed. If you transfer your shares of DARA common stock after the record

 

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  date but before the special meeting, you will retain your right to vote at the special meeting, but will have transferred the right to receive the merger consideration to be received by DARA common stockholders in the merger. In order to receive the merger consideration, you must hold your shares through completion of the merger.

 

Q. Am I entitled to exercise appraisal rights under the General Corporation Law of the State of Delaware instead of receiving the merger consideration for my shares of DARA capital stock?

 

A. Yes. As a holder of DARA common or preferred stock, you are entitled to exercise appraisal rights under the General Corporation Law of the State of Delaware, referred to as the DGCL, in connection with the merger if you take certain actions, meet certain conditions and fully comply with the requirements set forth under the DGCL, including that you do not vote (in person or by proxy) in favor of adoption of the merger agreement. See the “ The Merger—Appraisal Rights ” beginning on page 124. In addition, the text of the applicable appraisal rights provisions of Delaware law is included as  Annex E  to this proxy statement/prospectus.

 

Q: Do I need to send in my DARA stock certificates now?

 

A: No. You should not send in your DARA stock certificates now. Following the merger, a letter of transmittal will be sent to DARA stockholders informing them where to deliver their DARA stock certificates in order to receive the merger consideration, including any cash in lieu of a fractional share of Midatech Depositary Shares. You should not send in your DARA common stock or preferred stock certificates prior to receiving this letter of transmittal.

 

Q: Who will solicit and pay the cost of soliciting proxies?

 

A: DARA will bear the cost of soliciting proxies for the special meeting. DARA’s Board of Directors is soliciting your proxy on DARA’s behalf. DARA’s officers, directors and employees may solicit proxies by telephone, facsimile, mail or Internet or in person. They will not be paid any additional cash amounts for soliciting proxies. DARA has retained Alliance Advisors, LLC to assist in the solicitation of proxies, and will pay approximately $30,000, plus reimbursement of out-of-pocket expenses, to Alliance Advisors, LLC for its services. DARA will also request that banking institutions, brokerage firms, custodians, nominees, fiduciaries and other like parties forward the solicitation materials to the beneficial owners of shares of DARA common stock held of record by such person, and DARA will, upon request of such record holders, reimburse forwarding charges and out-of-pocket expenses.

 

Q: Who can help answer my other questions?

 

A: If you have more questions about the special meeting or the merger, you should contact DARA’s proxy solicitation agent, Alliance Advisors, LLC, as follows:

Alliance Advisors, LLC

200 Broadacre Drive, 3 rd Floor

Bloomfield, New Jersey 07003

In addition, stockholders may also contact Alliance Advisors, LLC by calling toll-free (855) 737-3174. If you hold shares of DARA common stock through a broker, bank or other nominee, you should also call your broker, bank or other nominee for additional information.

 

Q. Where can I find more information about DARA and Midatech?

 

A. You can find more information about DARA and Midatech from various sources described under “ Where You Can Find More Information ” beginning on page 313.

 

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SUMMARY

This summary highlights information contained elsewhere in this proxy statement/prospectus. It does not contain all of the information that may be important to you. You are urged to read carefully this entire proxy statement/prospectus, including the attached annexes, and the other documents to which this proxy statement/prospectus refers you in order for you to understand fully the proposed merger. See “Where You Can Find More Information” beginning on page 313. Each item in this summary refers to the page of this proxy statement/prospectus on which that subject is discussed in more detail.

The Companies

Midatech Pharma PLC

65 Innovation Drive

Milton Park, Abingdon

Oxfordshire OX14 4RQ

United Kingdom

+44 (0)1235 841 575

Midatech Pharma PLC, a public limited company organized under the laws of England and Wales under registered number 09216368, referred to as Midatech, is a specialty pharmaceutical company focused on the development and commercialization of multiple therapeutic products, using its nanomedicine and sustained release technologies, to enhance the delivery of medicines in major diseases with unmet medical need. These diseases include diabetes, certain cancers such as liver, pancreatic, ovarian and brain (glioblastoma), and neurological/ophthalmologic conditions. Midatech’s strategy is to develop its products in-house in rare cancers and with partners in other indications, and to accelerate growth of its business through strategic acquisition of complementary products and technologies.

As of and for the six months ended June 30, 2015, Midatech had total assets of £42.3 million, total revenues of £324,000, total liabilities of £5.1 million, and total equity of £37.1 million. Midatech’s ordinary shares are quoted on AIM under the symbol “MTPH.”

Merlin Acquisition Sub, Inc.

A wholly owned subsidiary of Midatech, Merlin Acquisition Sub, Inc., a Delaware corporation, referred to as Merger Sub, was formed exclusively for the purpose of completing the merger. Merger Sub’s separate corporate existence will cease upon completion of the merger and DARA will continue as the surviving corporation.

The address and telephone number for Merger Sub’s principal executive office is the same as for Midatech.

Duke Acquisition Sub, Inc.

A wholly owned subsidiary of Midatech, Duke Acquisition Sub, Inc., a Delaware corporation, referred to as Secondary Merger Sub, was formed exclusively for the purpose of completing the secondary merger. Following completion of the secondary merger, Secondary Merger Sub will change its name to “DARA BioSciences, Inc.”

The address and telephone number for Secondary Merger Sub’s principal executive office is the same as for Midatech.

 



 

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DARA BioSciences, Inc.

8601 Six Forks Road, Suite 160

Raleigh, North Carolina 27615

(919) 872-5578

DARA BioSciences, Inc., a Delaware corporation, referred to as DARA, is an oncology supportive care specialty pharmaceutical company dedicated to providing healthcare professionals a synergistic portfolio of medicines to help cancer patients adhere to their therapy and manage side effects arising from their cancer treatments.

As of and for the six months ended June 30, 2015, DARA had total assets of $11.9 million, net revenues of $1.6 million, total liabilities of $3.2 million and total stockholder equity of $8.7 million. DARA’s common stock is listed on the NASDAQ Capital Market under the symbol “DARA.”

Implications of Being an Emerging Growth Company and a Foreign Private Issuer (page 130)

Midatech will qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, referred to as the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements otherwise applicable generally to public companies, including, but not limited to:

 

    a requirement to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial conditions and results of operations disclosure;

 

    exemption from the auditor attestation requirement on effectiveness of Midatech’s internal controls over financial reporting;

 

    reduced disclosure about Midatech’s executive compensation arrangements; and

 

    no requirement for non-binding advisory votes on executive compensation or golden parachute arrangements.

Midatech may choose to take advantage of some, but not all, of the available benefits under the JOBS Act. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock or other interests. Midatech will be eligible to take advantage of these exemptions until it is no longer an emerging growth company. Midatech will remain an emerging growth company until the earliest of (i) the last day of the first fiscal year in which its annual gross revenues exceed $1.0 billion, (ii) the date that it becomes a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of its shares that are held by non-affiliates exceeds $700 million as of the last business day of Midatech’s completed second fiscal quarter, (iii) the date on which it has issued more than $1.0 billion in non-convertible debt securities during the preceding three-year period and (iv) the last day of Midatech’s fiscal year containing the fifth anniversary of the date on which its ordinary shares (and the Midatech Depositary Shares represented thereby) are offered in connection with completion of the merger.

Further, following completion of the merger, Midatech will be subject to the reporting requirements under the Exchange Act applicable to foreign private issuers. The content and timing of reports and notices that Midatech files with and furnishes to the SEC differ in several respects from the reports and notices that DARA, and other United States domestic issuers, currently file. Midatech will be required to file an annual report on Form 20-F with the SEC within four months after the end of each fiscal year, but will not be required to issue quarterly reports, proxy statements that comply with the requirements applicable to United States domestic reporting companies, or individual executive compensation information that is as detailed as that required of United States domestic reporting companies. In addition, Midatech will not be required to file Current Reports on Form 8-K as frequently or as promptly as United States domestic reporting companies, but it will be required to furnish reports on Form 6-K to the SEC regarding certain information required to be publicly disclosed by

 



 

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Midatech by way of a Regulatory News Service, referred to as RNS, in the United Kingdom or filed with AIM, or regarding information distributed or required to be distributed by Midatech to its stockholders under the AIM Rules. Midatech may also, and intends to, present financial statements in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board, referred to as IFRS, instead of pursuant to accounting principles generally accepted in the United States, referred to as GAAP.

Midatech will be exempt from certain rules under the Exchange Act, including the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations under Section 14 of the Exchange Act, and will not be required to comply with Regulation FD, which addresses certain restrictions on the selective disclosure of material information. In addition, among other matters, Midatech’s officers, directors and principal stockholders will be exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of Midatech ordinary shares. These exemptions and leniencies will reduce the frequency and scope of information and protections available to you in comparison to those applicable to a United States domestic reporting companies. Midatech intends to take advantage of the exemptions available to it as a foreign private issuer after it no longer qualifies as an emerging growth company.

Although Midatech, as a foreign private issuer, is exempt from the rules under the Exchange Act regarding the furnishing of annual reports, the rules of NASDAQ require Midatech to distribute to the holders of its Midatech Depositary Shares an annual report containing audited financial statements a reasonable period of time before Midatech’s annual meeting of share owners. Midatech currently furnishes holders of its ordinary shares with its Annual Report and Accounts which contain audited financial statements prepared in conformity with IFRS, and a discussion of Midatech’s financial results similar to the management’s discussion and analysis contained in DARA’s Annual Reports on Form 10-K. Midatech also furnishes those holders with semi-annual interim reports, which include unaudited interim financial information prepared in conformity with IFRS, and notices of meetings of share owners and related documents in accordance with the AIM Rules and United Kingdom corporate governance principals.

For more information, and certain risks related to Midatech’s status as an emerging growth company and a foreign private issuer, see “ Risk Factors ” beginning on page 35, “ The Merger—Implications of Being an Emerging Growth Company ” on page 130, “ The Merger—Midatech’s Status as a Foreign Private Issuer Under the Exchange Act ” beginning on page 130 and “ Midatech’s Operating and Financial Review and Prospects ” beginning on page 177.

The Merger

The Agreement and Plan of Merger, dated as of June 3, 2015, referred to as the merger agreement, by and among Midatech, Merger Sub, Secondary Merger Sub, DARA and Shareholder Representative Services, LLC, a Colorado limited liability corporation, solely as representative of the DARA stockholders, referred to as the Shareholder Representative, is included as Annex A to this proxy statement/prospectus. You are encouraged to carefully read the merger agreement in its entirety because it is the principle legal agreement that governs the merger.

Structure of the Merger (page 94)

Subject to the terms and conditions of the merger agreement and in accordance with Delaware law, Merger Sub, a wholly owned subsidiary of Midatech, will be merged with and into DARA, with DARA continuing as the surviving corporation, referred to as the merger. The effective time of the merger is referred to as the Effective Time. Immediately after the Effective Time, DARA, as the surviving corporation in the merger, will be merged with and into Secondary Merger Sub, a wholly owned subsidiary of Midatech, with Secondary Merger Sub surviving and continuing as a wholly owned subsidiary of Midatech, referred to as the secondary merger. In this proxy statement/prospectus, the merger and secondary merger are sometimes collectively referred to as the

 



 

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transaction or the mergers, and Secondary Merger Sub, which is the surviving entity following the secondary merger, is sometimes referred to as the surviving entity. It is intended that the secondary merger will be effected immediately after the Effective Time without further approval, authorization or direction from or by any of the parties to the merger agreement.

Immediately following the secondary merger, the name of the surviving entity will be changed to “DARA BioSciences, Inc.”

Merger Consideration (page 94)

Common Stock. Other than excluded shares, as a result of the transaction, DARA common stockholders will have the right, with respect to each of their outstanding shares of DARA common stock, par value $0.01 per share, referred to as common stock, to receive, without interest, (i) 0.272 ordinary shares, nominal value 0.005p per share, referred to as ordinary shares, of Midatech, subject to adjustment in accordance with the terms of the merger agreement, referred to as the Per Share Stock Consideration, plus (ii) one contingent value right, referred to as CVRs, which represents the right to receive contingent payments if specified milestones are achieved within agreed time periods, subject to and in accordance with the terms and conditions of the Contingent Value Rights Agreement, in substantially the form included as Annex C to this proxy statement/prospectus referred to as the CVR Agreement, to be entered into prior to the effective time of the merger, referred to as the Effective Time, by Midatech, DARA, the Shareholder Representative and a rights agent selected by Midatech with DARA’s approval, plus (iii) cash in lieu of fractional Midatech Depositary Shares (as defined herein). The CVR Agreement was approved by DARA’s Board of Directors in connection with its approval of the merger agreement. All Midatech ordinary shares to be issued in connection with the merger will be delivered to the holders of DARA common stock in the form of American Depositary Receipts, each representing the right to receive two Midatech ordinary shares, referred to as Midatech Depositary Shares. The Per Share Stock Consideration and one CVR, together with any cash to be paid in lieu of fractional shares of Midatech Depositary Shares to be issued, are referred to collectively as the Per Share Merger Consideration.

In lieu of receiving any fractional shares of Midatech Depositary Shares, holders of common stock will receive from Midatech an amount of cash, without interest, less the amount of any withholding taxes, equal to the product of (x) such fraction, multiplied by (y) the U.S. dollar equivalent of the closing price of a Midatech ordinary share underlying the Midatech Depositary Shares on the AIM Market on the last trading day preceding the day the merger is consummated, referred to as the Closing Date.

The merger agreement includes a collar provision under which the initial exchange ratio of 0.272 is subject to adjustment in the event the Exchange Ratio Market Value (as defined herein) determined one business day prior to closing of the merger, referred to as the Closing, is less than $1.08 or greater than $1.32. This ratio, as adjusted if necessary, is referred to as the Exchange Ratio. In such event, the Exchange Ratio shall be determined as follows: (i) if the Exchange Ratio Market Value is an amount less than $1.08, then the Exchange Ratio shall be equal to the quotient obtained by dividing $1.08 by the Exchange Ratio Market Value (subject to a maximum Exchange Ratio of 0.306) and (ii) if the Exchange Ratio Market Value is an amount greater than $1.32, then the Exchange Ratio shall be equal to the quotient obtained by dividing $1.32 by the Exchange Ratio Market Value (subject to a minimum Exchange Ratio of 0.249).

As used herein, Exchange Ratio Market Value means 0.272, the initial Exchange Ratio, multiplied by a figure that represents the average of the weighted average mid-market trading price of Midatech ordinary shares on AIM (as calculated by Bloomberg Screen AQR) for each of the 15 trading days ending on the day which is the business day immediately prior to the Effective Time, and then translated into U.S. dollars using the Bank of England’s daily spot exchange rate for the day which is the business day immediately prior to the Effective Time.

 



 

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As used herein, “ excluded shares ” mean all shares held by DARA as treasury stock or any shares held by Midatech, Merger Sub, Secondary Merger Sub or any wholly owned subsidiary of Midatech or DARA, which will be cancelled, and any shares authorized but unissued, and shares owned by DARA stockholders who have perfected and not withdrawn a demand for, or lost their right to, appraisal with respect to such shares.

Preferred Stock. At the Effective Time, each share (other than excluded shares) of DARA’s issued and outstanding Series A Convertible Preferred Stock, Series B-2 Convertible Preferred Stock and Series C-1 Convertible Preferred Stock will be converted into the right to receive, without interest, $1,000 in cash, plus an amount equal to any declared but unpaid dividends (if any).

The CVRs (page 167)

The CVRs will be governed by the terms of the CVR Agreement, which will be entered prior to the Effective Time.

The CVRs represent the non-transferable contractual right to receive a cash payment from Midatech of up to $5.7 million in the aggregate. The contingent payments become payable to the rights agent, for deposit into a fund established by the rights agent for subsequent distribution to the holders of the CVRs, upon the achievement of the milestones as follows:

 

    A payment will be made in 2017 if the following milestones are achieved:

 

    CVR holders will receive $0.07 per CVR if Gross Sales (as defined below) of Oravig and Gelclair (two drugs licensed by DARA) equal or exceed $15.0 million but are less than $16.5 million, in the aggregate, for the fiscal year ending December 31, 2016;

 

    $0.09 per CVR if Gross Sales of Gelclair and Oravig equal or exceed $16.5 million but are less than $18.0 million, in the aggregate, for the fiscal year ending December 31, 2016; or

 

    or $0.11 per CVR if Gross Sales of Gelclair and Oravig equal or exceed $18.0 million, in the aggregate, for the fiscal year ending December 31, 2016; and

 

    A payment will be made in 2018 if the following milestones are achieved:

 

    CVR holders will receive $0.11 per CVR if Gross Sales of Gelclair and Oravig equal or exceed $26.0 million but are less than $28.6 million, in the aggregate, for the fiscal year ending December 31, 2017;

 

    $0.13 per CVR if Gross Sales of Gelclair and Oravig equal or exceed $28.6 million but are less than $31.2 million, in the aggregate, for the fiscal year ending December 31, 2017; or

 

    or $0.16 per CVR if Gross Sales of Gelclair and Oravig equal or exceed $31.2 million, in the aggregate, for the fiscal year ending December 31, 2017.

If the minimum sales target in each of fiscal 2016 ($15 million in Gross Sales) or fiscal 2017 ($26 million in Gross Sales) is not met, then the holders of CVRs will not be entitled to receive payment for that year. The payment amounts per CVR shown above assume that none of DARA’s outstanding warrants for DARA common stock will be exercised. Currently none of DARA’s outstanding warrants are vested and in-the-money. If any of DARA’s warrants for common stock are exercised, the payments amounts per CVR will be less than the amounts shown above.

In no event will payment be made with respect to more than a single milestone in fiscal year 2016 or 2017, as applicable. All of the milestone payments are subject to offset by Midatech with respect to indemnification claims made pursuant to the merger agreement.

 



 

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As used herein, the terms:

 

    Gross Sales ” means those aggregate sales of Gelclair and Oravig by DARA’s successor, Midatech, their respective affiliates and certain other authorized sellers for fiscal year 2016 or fiscal year 2017 computed by, for each product, multiplying (i) the number of units of such product shipped and recognized in the final audited consolidated financial statements maintained in accordance with revenue recognition standards of accounting principles generally accepted in the United States, referred to as GAAP, or such other successor standard by (ii) the WAC for such product; and

 

    WAC ” means Wholesaler Acquisition Cost, which is the approved and published amount at which a product is sold to wholesalers and other customers in the pharmaceutical industry, as reported by the applicable manufacturer to First Databank.

Oravig is an orally dissolving buccal tablet product acquired from Onxeo S.A. and owned by DARA, the contents of which include miconazale, and which is currently sold under the registered trademark “ORAVIG” and licensed by DARA pursuant to a commercialization agreement with Onxeo S.A. Gelclair is a bioadherent gel currently indicated for the management and relief of pain associated with oral mucositis (a condition characterized by erythema and oral lesions) and is a product that DARA has exclusive license rights in the United States, the contents of which include polyvinlypyrolidone and sodium hyaluronate, and which is currently sold under the registered trademark “GELCLAIR” and licensed by DARA pursuant to a license agreement with Helsinn Healthcare SA.

Midatech has agreed to use commercially reasonable efforts to achieve the milestones, subject to certain limitations agreed to in the CVR Agreement.

The CVRs may not be sold, assigned, transferred, pledged, encumbered or disposed of in any other manner, in whole or in part, other than in the limited circumstances specified in the CVR Agreement. In addition, the CVRs (i) will not be evidenced by a certificate or other instrument, (ii) will not have any voting or dividend rights and (iii) will not represent any equity or ownership interest in Midatech, any constituent company to the merger or any of their respective affiliates. No interest will accrue on any amounts payable in respect of the CVRs.

The CVR payment is neither secured nor guaranteed. The CVR payment, if any becomes due, is an unsecured general obligation of Midatech and is not guaranteed by Midatech or any of its affiliates.

A copy of the form of CVR Agreement is included as Annex C to this proxy statement/prospectus. For a more detailed description of the CVRs and the CVR Agreement, see “ Description of the CVRs ” beginning on page 167.

Treatment of Stock Options and Warrants (page 144); Oncogenerix Contingent Consideration Shares (page 145)

Stock Options . Subject to certain exceptions, each outstanding and unexercised option to acquire DARA common stock, referred to as Stock Options, will become fully vested and exercisable immediately prior to the Effective Time. Stock Options that remain outstanding and unexercised at the Effective Time will be assumed by Midatech and will vest in accordance with their vesting schedule pursuant to the same material terms and conditions as set forth in the applicable agreement under which such Stock Option was granted immediately prior to the Effective Time, provided that at the Effective Time, (i) each Stock Option will be exercisable for that number of whole Midatech ordinary shares equal to the product of (A) the number of shares of DARA common stock that were issuable upon exercise of such Stock Option immediately prior to the Effective Time, multiplied by (B) the Exchange Ratio, rounded down to the nearest whole number of Midatech ordinary shares, and (ii) the per share exercise price for each Midatech ordinary share issuable upon exercise of each Stock Option so

 



 

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converted will be equal to the quotient determined by dividing the exercise price per share of DARA common stock at which such Stock Option was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. All Midatech ordinary shares delivered to the holders of Stock Options will be delivered in the appropriate amount of Midatech Depositary Shares.

Warrants . Each outstanding and unexercised warrant to purchase shares of DARA common stock, referred to as Warrants, as of immediately prior to the Effective Time will be assumed or substituted by Midatech in accordance with the terms of such Warrant and, as of the Effective Time, (i) will be exercisable for (A) the number of whole Midatech ordinary shares equal to the product of the number of shares of DARA common stock that were issuable upon exercise of such Warrant immediately prior to the Effective Time, multiplied by the Exchange Ratio, rounded down to the nearest whole number of Midatech ordinary shares and (B) one CVR multiplied by the total number of shares of DARA common stock that were issuable upon exercise of such Warrants immediately prior to the Effective Time, and (ii) the per share exercise price for each Midatech ordinary share issuable upon exercise of Warrants so converted will be equal to the quotient determined by dividing the exercise price per share of DARA common stock at which such Warrant was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. All Midatech ordinary shares delivered to the holders of Warrants in connection with the merger will be delivered in the appropriate amount of Midatech Depositary Shares.

Oncogenerix Contingent Consideration Shares. Pursuant to the terms of that certain Agreement and Plan of Merger, dated as of January 17, 2012, referred to as the Oncogenerix Merger Agreement, by and among Oncogenerix, Inc., referred to as Oncogenerix, certain stockholders of Oncogenerix, Christopher Clement, in his capacity as stockholder representative, DARA and Oncogenerix Acquisition Corporation, on January 17, 2012, DARA acquired Oncogenerix, referred to as the Oncogenerix Merger. In addition to the merger consideration payable by DARA upon the closing of the Oncogenerix Merger, the former stockholders of Oncogenerix are entitled to receive up to 1,114,560 shares of DARA common stock, referred to as the Oncogenerix Contingent Consideration Shares, based upon, among other things, DARA’s achievement of certain revenue milestones, ranging from $5 million to $20 million of customer revenue, or market capitalization milestones, ranging from a market capitalization of $75 million to at least $200 million, during the 60 months following the closing of the Oncogenerix Merger. In addition, if a change of control of DARA were to occur during the 60 months following the closing of the Oncogenerix Merger, and DARA were to have a marketed product (as such term is defined the Oncogenerix Merger Agreement) at such time, which it currently has, then all of the Oncogenerix Contingent Consideration Shares would become payable. The occurrence of the Effective Time will constitute a change in control under the Oncogonerix Merger Agreement.

At the Effective Time, pursuant to the terms of the merger agreement, each right to receive an Oncogenerix Contingent Consideration Share reserved for issuance pursuant to the terms of the Oncogenerix Merger Agreement, will become payable to the holder of such right, and each such Oncogenerix Contingent Consideration Share will be converted into the right to receive the Per Share Merger Consideration. Each of Mr. Clement and David Benharris, each an executive officer of DARA, will be entitled to 34,507 Oncogenerix Contingent Consideration Shares. See “ The Merger—Interests of DARA’s Executive Officers and Directors in the Merger ” beginning on page 119.

 



 

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Comparative Per Share Market Price and Share Information (page 32)

Midatech ordinary shares are quoted on AIM under the symbol “MTPH.” DARA common stock is listed on the NASDAQ Capital Market under the symbol “DARA.” The following table sets forth the closing sales prices of a Midatech ordinary share (as reported on AIM) and of DARA common stock (as reported on the NASDAQ Capital Market), each on June 3, 2015, the last trading day before the day on which Midatech and DARA announced the execution of the merger agreement, and on [●], 2015, the last practicable trading day before the date of this proxy statement/prospectus.

 

     Midatech Ordinary Share
Price per Share (1)
     DARA Common
Stock Price per Share
     DARA Equivalent Stock Price
Per Share (2)
 

June 3, 2015

   $ 4.50       $ 0.81       $ 1.22   

[●], 2015

   $ [●]       $ [●]       $ [●]   

 

(1) Midatech ordinary share price (rounded to the nearest whole cent) as at the close of trading on June 3, 2015 and [●], 2015 of £2.93 and £[●], respectively, converted into U.S. dollars at the daily noon buying rates, as published by the Federal Reserve Bank of New York, on June 3, 2015 and [●], 2015, respectively.
(2) The DARA equivalent stock prices were calculated by multiplying the share price of each Midatech ordinary share on each date by the initial Exchange Ratio of 0.272.

The market prices of Midatech ordinary shares and DARA common stock will fluctuate before the special meeting and before the merger is completed. You should obtain current market quotations from a newspaper, the Internet or your broker or banker.

Recommendation of DARA’s Board of Directors (page 103)

The Board of Directors of DARA has determined that the merger agreement and the transactions contemplated thereby are advisable and in the best interests of DARA and its stockholders. The Board of Directors of DARA unanimously recommends that the DARA stockholders vote:

 

    FOR ” the adoption of the merger agreement, referred to as the merger proposal;

 

    FOR ” the approval, on an advisory, non-binding basis, of the compensatory arrangements between DARA and its named executive officers providing for compensation in connection with the merger and the agreements and understandings pursuant to which such compensation may be paid or become payable, referred to as the Potential Payments Under Compensation Arrangements; and

 

    FOR ” approval of adjournments of the special meeting, if necessary, for the purpose of soliciting additional proxies in favor of the foregoing proposals.

For additional information see “ The Merger Agreement—Board Recommendation ” beginning on page 153.

In making its recommendation, the DARA Board of Directors considered those matters set forth under the heading “ The Merger —DARA’s Reasons for the Merger and Recommendation of DARA’s Board of Directors ” beginning on page 103.

Opinion of DARA’s Financial Advisor (page 106)

In connection with the merger, the DARA Board of Directors received an oral opinion, subsequently confirmed by delivery of a written opinion dated June 3, 2015, from DARA’s financial advisor, Aquilo Partners, LP, referred to as Aquilo Partners, as to the fairness, from a financial point of view and as of the date of such opinion, to the DARA stockholders of the Per Share Merger Consideration to be received by the DARA stockholders pursuant to the merger agreement. The full text of Aquilo Partners’ written opinion is attached to this proxy statement/prospectus as Annex D . DARA stockholders are encouraged to read Aquilo Partners’

 



 

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opinion carefully in its entirety for a description of the assumptions made, procedures followed, matters considered, qualifications and limitations on the review undertaken by Aquilo Partners. Aquilo Partners’ opinion was provided for the benefit of the DARA Board of Directors in connection with, and for the purpose of, its evaluation of the Per Share Merger Consideration to be received by DARA from a financial point of view and does not address any other aspect of the merger. The opinion does not address the relative merits of the merger as compared to other business strategies or transactions that might be available with respect to DARA or DARA’s underlying business decision to effect the merger. The opinion does not constitute a recommendation to any stockholder as to how to vote or act with respect to the merger.

Interests of DARA’s Executive Officers and Directors in the Merger (page 119)

When you consider the DARA Board of Directors recommendation that DARA common stockholders vote in favor of the proposals described in this proxy statement/prospectus, you should be aware that some DARA directors and executive officers may have interests that may be different from, or in addition to, DARA stockholders’ interests, including their receipt of change in control benefits under existing DARA employment arrangements and accelerated vesting of DARA equity-based awards.

Employee Bonus Plan (page 160)

In connection with the consummation of the merger, Midatech will set aside an aggregate of $300,000 to establish an employee bonus plan to be offered to employees of DARA who become employees of Midatech following the Closing.

For more information on the employee bonus plan, see “ The Merger Agreement—Employee Bonus Plan ” on page 160.

Appraisal Rights (page 124)

Under Delaware law, record holders of DARA common stock and preferred stock who do not vote in favor of the adoption of the merger agreement and who properly demand and perfect appraisal rights and hold their shares continuously from the date of making the demand through the Effective Time will be entitled to seek appraisal for, and obtain payment in cash for the judicially determined fair value of, their shares of DARA capital stock if the merger is completed in lieu of receiving the merger consideration. This value could be more than, the same as, or less than the value of the merger consideration. The relevant provisions of the General Corporation Law of the State of Delaware, referred to as the DGCL, are included as Annex E to this proxy statement/prospectus. You are encouraged to read these provisions carefully and in their entirety. Moreover, due to the complexity of the procedures for exercising the right to seek appraisal, DARA stockholders who are considering exercising such rights are encouraged to seek the advice of legal counsel. Failure to strictly comply with these provisions will result in loss of the right of appraisal. STOCKHOLDERS WHO HOLD THEIR SHARES IN BROKERAGE OR BANK ACCOUNTS OR OTHER NOMINEE FORMS, AND WHO WISH TO EXERCISE APPRAISAL RIGHTS, SHOULD CONSULT WITH THEIR BROKERS, BANKS AND NOMINEES, AS APPLICABLE, TO DETERMINE THE APPROPRIATE PROCEDURES FOR THE BROKER, BANK OR OTHER NOMINEE HOLDER TO MAKE A DEMAND FOR APPRAISAL OF THOSE SHARES. A PERSON HAVING A BENEFICIAL INTEREST IN SHARES HELD OF RECORD IN THE NAME OF ANOTHER PERSON, SUCH AS A BROKER, BANK OR OTHER NOMINEE, MUST ACT PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW PROPERLY AND IN A TIMELY MANNER THE STEPS NECESSARY TO PERFECT APPRAISAL RIGHTS.

For additional information, please see the section titled “ The Merger—Appraisal Rights ” beginning on page 124.

 



 

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Accounting Treatment (page 128)

In accordance with IFRS, and in particular, with IFRS 3, Business Combinations , the combination qualifies as the acquisition of DARA by Midatech. In particular, on the date at which control over DARA is acquired, the identifiable assets acquired and liabilities assumed will be recognized in Midatech’s consolidated balance sheet at fair value. The difference between the acquisition consideration and the net fair value at the acquisition date of the identifiable assets acquired and liabilities assumed, net of any non-controlling interest in the DARA group, if positive will be recognized as goodwill, or if negative will be recognized in the consolidated statement of comprehensive income. The acquisition consideration is defined as the sum of the acquisition date fair values of the assets transferred, the liabilities assumed on acquisition and any equity instruments issued. The shares that will be issued by Midatech as part of the merger will be recognized at fair value on the acquisition date.

Certain Material U.S. Federal Income Tax Consequences of the Mergers (page 133)

It is a condition to the completion of the mergers that DARA and Midatech each receive an opinion that, for U.S. federal income tax purposes, the mergers should qualify as a “reorganization” within the meaning of Section 368(a) of the Code. It is expected that mergers should qualify as a “reorganization” within the meaning of Section 368(a) of the Code, although the conditions for reorganization treatment will not be known until the time of the mergers. If the mergers qualify as a “reorganization,” then a U.S. holder (as defined herein) of DARA common stock that exchanges shares of DARA common stock for Midatech depositary shares, cash in lieu of fractional Midatech depositary shares, and CVRs would recognize gain (but not loss) in an amount equal to the lesser of (1) the sum of the fair market value of the CVRs received and cash received in lieu of fractional shares and (2) the amount by which the aggregate fair market value of the merger consideration received by the U.S. holder exceeds such U.S. holder’s adjusted tax basis in the DARA common stock exchanged.

If the mergers do not qualify as a “reorganization” under Section 368(a) of the Code, then a U.S. holder of DARA common stock would recognize gain or loss in an amount equal to the difference, if any, between (1) the amount realized and (2) such holder’s tax basis in the DARA common stock exchanged.

You should read the section entitled “ Taxation—Material U.S. Federal Income Tax Consequences ” beginning on page 133 for a more complete discussion of the U.S. federal income tax consequences of the mergers. Tax matters can be complicated, and the tax consequences of the mergers to a particular holder will depend on your particular tax situation.

You should consult your tax advisor to determine the specific consequences of the mergers to you.

Certain Material United Kingdom Tax Consequences of the Mergers (page 140)

Dividends . Midatech will not be required to withhold tax at source in the United Kingdom from any dividend payments made in respect of Midatech Depositary Shares.

A holder of Midatech Depositary Shares who is resident outside the United Kingdom for tax purposes and who holds the Midatech Depositary Shares by way of investment will not generally be liable to tax in the United Kingdom with respect to any dividends received from Midatech but would also not be able to claim payment from Her Majesty’s Revenue and Customs, referred to as HM Revenue and Customs, of any part of any tax credit attaching to such dividend (save to the extent provided for under the terms of any double taxation convention between the United Kingdom and the country in which such shareholder is resident).

Stamp Duty and Stamp Duty Reserve Tax. No United Kingdom stamp duty or stamp duty reserve tax will be payable on (i) the transfer of the Midatech ordinary shares underlying the Midatech Depositary Shares to the depositary, or (ii) the issue of the Midatech Depositary Shares or their delivery into Euroclear or other electronic systems for holding of securities. This is provided that, at the date such transfer or issue takes effect, the

 



 

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Midatech ordinary shares are admitted to trading on the AIM Market but not listed on the Official List of the United Kingdom Listing Authority or any other market.

No United Kingdom stamp duty or stamp duty reserve tax will be payable on the transfer of the Midatech ordinary shares underlying the Midatech Depositary Shares once they are issued into Euroclear or other electronic systems for holding of securities where such transfer is effected in electronic book entry form in accordance with the provisions of Euroclear or other electronic systems for holding of securities.

Voting Agreement (page 166)

On June 3, 2015, Midatech entered into voting agreements with the named executive officers and directors of DARA, pursuant to which such officers and directors, among other things and subject to the terms and conditions thereof, agreed to vote in favor of the approval of all proposals submitted by DARA in connection with the merger and against any alternative business combination transaction, provided, however, that the agreement to vote terminates should the DARA Board of Directors change its recommendation with respect to the merger or terminates the merger agreement. As of October 16, 2015, the record date, the officers and directors subject to the voting agreements beneficially owned, in the aggregate, [●] shares of common stock, which represented approximately [●]% of the issued and outstanding shares of common stock on such date. See “ Voting Agreement ” on page 166.

Listing of Midatech Ordinary Shares and Delisting of DARA Common Stock (page 160)

Midatech has applied to have the Midatech Depositary Shares to be issued in the merger approved for listing on NASDAQ under the symbol “MTP.” If the merger is completed, DARA common stock will no longer be listed on the NASDAQ Capital Market and will be deregistered under the Exchange Act and DARA will no longer file periodic reports with the SEC.

Conditions to Completion of the Merger (page 161)

Each party’s obligations to effect the merger is subject to the satisfaction or waiver of mutual conditions, including the following:

 

    receipt of the DARA stockholder approval in accordance with Delaware law;

 

    all regulatory approvals required to consummate the transactions contemplated by the merger agreement having been obtained and in full force and effect;

 

    the effectiveness of, and the absence of any stop order with respect to, the registration statement on Form F-4 (of which this proxy statement/prospectus forms a part) and the registration statement on Form F-6;

 

    the absence of any law, injunction, judgment or ruling prohibiting the consummation of the merger or making consummation of the merger illegal; and

 

    the approval for listing on NASDAQ, subject to official notice of issuance, of the Midatech Depositary Shares issuable in connection with the merger.

The obligations of Midatech and Merger Sub to effect the merger are subject to the satisfaction or waiver of the following additional conditions:

 

    the representations and warranties of DARA being true and correct, subject to certain de minimis inaccuracies and certain materiality thresholds, as of the date of the merger agreement and as of the Closing Date;

 

    DARA having performed in all material respects all covenants and agreements required to be performed by it under the merger agreement or prior to the Closing Date;

 



 

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    each non-employee director of DARA and, if requested in writing by Midatech, of each subsidiary of DARA, in each case must have resigned or been removed in his or her capacity as a director, effective as of, or prior to, the Closing;

 

    the absence of a material adverse effect on DARA since the date of the merger agreement;

 

    less than 10.0% of the total shares of DARA common stock and preferred stock, taken as a whole, outstanding as of the record date, shall have properly exercised appraisal rights pursuant to Section 262 of the DGCL;

 

    DARA shall have delivered a certificate signed by officers of DARA that it is not, nor has been within five years of the date of the certification, a “United States real property holding corporation,” as such term is defined under the Code; and

 

    DARA must have received the opinion of its own counsel or Brown Rudnick LLP that the transaction should qualify as a reorganization within the meaning of Section 368(a) of the Code for United States federal income tax purposes.

The obligations of DARA to effect the merger are subject to the satisfaction or waiver of the following additional conditions:

 

    the representations and warranties of Midatech being true and correct, subject to certain de minimis inaccuracies and certain materiality thresholds, as of the date of the merger agreement and as of the Closing Date;

 

    Midatech having performed in all material respects all covenants and agreements required to be performed by it under the merger agreement or prior to the Closing Date;

 

    the absence of a material adverse effect on Midatech since the date of the merger agreement; and

 

    Midatech must have received the opinion of its own counsel or K&L Gates LLP that the transaction should qualify as a reorganization within the meaning of Section 368(a) of the Code for United States federal income tax purposes.

Termination of the Merger Agreement (page 163)

The merger agreement may be terminated any time before the Effective Time by the written consent of Midatech and DARA.

The merger agreement may also be terminated prior to the Effective Time by either Midatech or DARA if:

 

    the Closing has not been consummated on or before December 31, 2015 (which date is referred to as the Termination Date and was extended in accordance with certain conditions set forth in the merger agreement from November 15, 2015);

 

    any governmental authority issues an order, decree or ruling, enacts a law or takes any other action (that is final and non-appealable) having the effect of permanently enjoining, restraining or otherwise prohibiting the merger or making the merger illegal in the United Kingdom or the United States; or

 

    the DARA stockholders fail to give the necessary approvals at the special meeting or adjournments thereof.

The merger agreement may also be terminated prior to the Effective Time by Midatech if:

 

    DARA has materially breached any of its representations, warranties, covenants or obligations, which breach would result in the failure to satisfy by the Termination Date one or more of conditions of DARA to the merger, and such breach cannot be or has not been cured within 30 days of written notice thereof having been received by Midatech, subject to certain restrictions; or

 



 

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    if DARA experiences a material adverse effect (as such term is defined herein).

Further, the merger agreement may also be terminated by Midatech under any of the following circumstances, collectively referred to as a DARA Termination:

 

    DARA effects a Change in Recommendation (as such term is defined herein) to the DARA stockholders to adopt the merger agreement;

 

    DARA fails to include in the proxy statement/prospectus its recommendation to the DARA stockholders to adopt the merger agreement;

 

    the DARA Board of Directors approves, endorses or recommends any acquisition proposal (as such term is defined herein);

 

    DARA fails to publicly reaffirm its recommendation to DARA stockholders to adopt the merger agreement upon request of Midatech; or

 

    DARA or any of its subsidiaries or representatives breaches, in any material respect, its non-solicitation covenant or board recommendation covenant.

The merger agreement may be terminated prior to the Effective Time by DARA if:

 

    Midatech has materially breached any of its representations, warranties, covenants or obligations, which breach would result in the failure to satisfy by the Termination Date one or more conditions of Midatech to the merger, and such breach cannot be or has not been cured within 30 days of written notice thereof having been received by DARA, subject to certain restrictions; or

 

    DARA changes its recommendation to the DARA stockholders to adopt the merger agreement in order to accept an acquisition proposal, in compliance with the terms of the merger agreement, and its pays to Midatech a termination fee of $1.05 million within the timeframe provided.

Termination Fee and Expenses (page 164)

Fee and Expenses. All costs and expenses incurred in connection with the merger agreement and the transactions contemplated thereby will be paid by the party incurring such expense, whether or not the merger is consummated.

Notwithstanding the foregoing, DARA has agreed to reimburse Midatech up to $525,000 of Midatech’s reasonable and documented costs and expenses incurred in connection with the merger agreement and the transactions contemplated thereby in the event the merger agreement is terminated by Midatech due to the occurrence of material adverse effect on DARA, but only to the extent that such material adverse effect pertains to (i) the termination of DARA’s license with respect to Oravig, or Gelclair, or (ii) the occurrence of certain other specified actions related to Oravig and Gelclair.

Termination Fee . DARA has agreed to pay to Midatech a termination fee of $1.05 million under any of the following circumstances:

 

    if the merger agreement is terminated pursuant to a DARA Termination;

 

    if DARA terminates the merger agreement and changes its recommendation to the DARA stockholders to adopt the merger agreement in order to accept an acquisition proposal, in compliance with the terms of the merger agreement, and its pays to Midatech the termination fee; or

 

   

(A) if the merger agreement is terminated (i) by Midatech, if there shall have been a material breach of any of DARA’s representations, warranties, covenants or obligations, which breach would result in the failure to satisfy by the Termination Date one or more conditions of DARA to the merger, and such breach cannot be or has not been cured within 30 days of written notice thereof having been received

 



 

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by Midatech; (ii) by either party, if DARA stockholders fail to approve the merger proposal at the special meeting or any adjournments thereof; or (iii) by either party, if the merger shall not have been consummated by the Termination Date (subject to certain exceptions), and in any such case, an acquisition proposal (including a previously communicated acquisition proposal) has been publicly announced or otherwise communicated to a member of the senior management or the Board of Directors of DARA (or any person shall have publicly announced or communicated a bona fide intention, whether or not conditional, to make any acquisition proposal) at any time after the date of the merger agreement and prior to receipt of the approval of merger proposal by DARA’s stockholders at the special meeting, in the case of clause (ii), or the Terminate Date, in the case of clauses (i) and (iii) above; and (B) within 12 months after the date of such termination, DARA enters into a definitive agreement to consummate, or consummates, any acquisition transaction (as such term is defined herein).

No Solicitation of Transactions (page 156)

The merger agreement contains detailed provisions that prohibit DARA and its subsidiaries, directors, officers, employees and representatives from, directly or indirectly, soliciting, initiating or knowingly encouraging, inducing or facilitating an alternative acquisition proposal from a third party or engaging in discussions or negotiations with a third party with respect to proposals to acquire significant interests in DARA. The merger agreement does not, however, prohibit DARA’s Board of Directors from considering and recommending to DARA stockholders an alternative acquisition proposal from a third party if specified conditions are met, including the payment of a termination fee as required under the merger agreement.

Indemnification of Midatech (page 158)

All representations and warranties made by DARA in the merger agreement will survive until the termination of the CVR Agreement in accordance with its terms, and all covenants, obligations and agreements of DARA to be performed after the Effective Time will survive until the termination of the CVR Agreement in accordance with its terms or for the period specified in the merger agreement.

From and after the Closing Date and until the expiration of the CVR Agreement, and subject to the terms, conditions and limitations set forth in the merger agreement, DARA stockholders will indemnify, hold harmless and defend Midatech and its officers, directors and affiliates against any adverse consequences (as defined herein) resulting from or arising out of (i) any misrepresentation or breach of DARA’s representation or warranties (as of the date made or as of the Closing Date, as applicable, except such representation or warranty that expressly relates to a specified date, the misrepresentation or breach of which will be determined with reference to such specified date) or (ii) any breach or non-fulfillment of any covenant, agreement or obligation to be performed by DARA prior to the Closing pursuant to the merger agreement. DARA stockholders will not, however, be liable for any adverse consequences unless and until the aggregate amount of adverse consequences exceed $225,000, whereupon DARA stockholders will only be liable for the portion of adverse consequences exceeding such amount. In this case, Midatech and its officers, directors and affiliates will be entitled to indemnification for all losses incurred by them that are in excess of this amount, subject to a limit on DARA’s stockholders maximum aggregate liability of the aggregate amount of unpaid payments otherwise payable by Midatech pursuant to the CVR Agreement to holders of the CVRs from time to time. Any adverse consequences payable to Midatech pursuant to the merger agreement will be satisfied solely by an offset against payments otherwise payable by Midatech pursuant to the CVR Agreement, if any, to holders of the CVRs, severally and not jointly and on a pro-rata basis. The indemnification discussed herein is the sole and exclusive remedy of Midatech and its officers, directors and affiliates, other than for claims for or based on willful material misconduct or intentional fraud by DARA. For more information see “The Merger Agreement—Indemnification of Midatech ” beginning on page 158.

 



 

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Comparison of Stockholder Rights (page 264)

As a result of the merger, the holders of DARA common stock will become holders of Midatech Depositary Shares. Following the merger, DARA stockholders will have different rights as holders of Midatech Depositary Shares than they had as DARA stockholders due to the differences between the laws of the jurisdiction of incorporation, which, in the case of DARA is the State of Delaware, and the certificate of incorporation and bylaws of DARA, and that of the jurisdiction of incorporation of Midatech, which is England and Wales, and the articles of association of Midatech. See “ Comparison of Stockholder Rights ” beginning on page 264. For a copy of DARA’s current certificate of incorporation or bylaws, see “ Where You Can Find More Information ” beginning on page 313. Midatech’s articles of association are included as an exhibit to the registration statement of which the proxy statement/prospectus is a part.

Stock Ownership of Directors and Executive Officers of DARA

At the close of business on the record date, directors and executive officers of DARA and their affiliates were entitled to vote [●] shares of DARA common stock, or approximately [●]% of the shares of DARA common stock outstanding and entitled to vote on that date. As noted previously, each of DARA’s directors and officers has entered into a voting agreement obligating them to vote in favor of the approval of all proposals submitted by DARA in connection with the merger and against any alternative business combination transaction unless the DARA Board of Directors has changed its recommendation with respect to the merger or terminated the merger agreement.

Litigation Related to the Merger (page 132)

DARA, its individual Board of Directors, Midatech, Merger Sub and Secondary Merger Sub are named as defendants in purported class action lawsuits, referred to as stockholder actions, brought by alleged DARA stockholders challenging DARA’s proposed merger with Midatech. The complaints allege, among other things, that (i) each member of DARA’s Board of Directors breached his or her fiduciary duties to DARA and its stockholders by authorizing the sale of DARA to Midatech; (ii) the merger does not maximize value to DARA stockholders; and (iii) Midatech, Merger Sub, Secondary Merger Sub and DARA aided and abetted the breaches of fiduciary duty allegedly committed by the members of the DARA Board of Directors. In addition, one amended complaint alleges that Midatech’s Registration Statement on Form F-4, as filed on August 11, 2015, omits or misstates certain material information. The stockholder actions seek class action certification and equitable relief, including judgments enjoining the defendants from consummating the merger on the agreed-upon terms.

DARA and Midatech believe the claims asserted by the plaintiffs to be without merit.

For more information, see “ Risk Factors—Lawsuits have been filed against DARA, members of the DARA Board of Directors, Merger Sub, Secondary Merger Sub, and Midatech challenging the merger, and an unfavorable judgment or ruling in these lawsuits could prevent or delay the consummation of the merger, and result in substantial costs ” on page 39.

The Special Meeting of DARA Stockholders

The Special Meeting (page 172)

The special meeting will be held on [●], 2015 at [●], local time, at [●].

Purpose of the Special Meeting (page 172)

At the special meeting, DARA stockholders will be asked to approve:

 

    the merger proposal;

 

    the Potential Payments Under Compensation Arrangement proposal; and

 



 

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    a proposal to adjourn the special meeting, if necessary, for the purpose of soliciting additional proxies in favor of the foregoing proposals.

Record Date; Stockholders Entitled to Vote (page 172)

DARA has fixed the close of business on October 16, 2015 as the record date for determining the DARA stockholders entitled to receive notice of and to vote at the special meeting. Only holders of record of DARA common stock on the record date are entitled to receive notice of and vote at the special meeting, and any adjournment thereof.

Each share of DARA common stock is entitled to one vote on each matter brought before the special meeting. On the record date, there were [●] shares of DARA common stock issued and outstanding.

Quorum Requirement (page 172)

Under Delaware law and DARA’s bylaws, a quorum of DARA’s stockholders at the special meeting is necessary to transact business. The presence of holders representing a majority of the shares of DARA common stock issued and outstanding on the record date and entitled to vote at the special meeting will constitute a quorum for the transaction of business at the special meeting.

All of the shares of DARA common stock represented in person or by proxy at the special meeting, including abstentions, will be treated as present for purposes of determining the presence or absence of a quorum at the special meeting.

Votes Required to Approve the Proposals (page 173)

DARA’s proposals require different percentages of votes in order to approve them:

 

    In order to approve the merger proposal, the affirmative vote of the majority of outstanding shares of DARA common stock entitled to vote on the proposal must be obtained.

 

    In order to approve the Potential Payments Under Compensation Arrangements proposal, the affirmative vote of the majority of total votes cast by the holders of DARA common stock on the proposal must be obtained.

 

    In order to approve the proposal to permit the proxies to adjourn the special meeting, including for the purpose of soliciting additional proxies, the affirmative vote of the majority of shares of DARA common stock present in person or represented by proxy at the special meeting and entitled to vote on the record date must be obtained, regardless of whether a quorum is present.

The vote on the Potential Payments Under Compensation Arrangements is a vote separate and apart from the vote to adopt the merger agreement. Because the vote on Potential Payments Under Compensation Arrangements is advisory in nature only, it will not be binding on DARA. The approval of the merger proposal is a condition to the Closing.

Failure to Vote; Abstentions and Broker Non-Votes (page 173)

Subject to the foregoing, no vote will be cast on any proposal at the special meeting on behalf of any stockholder of record who does not cast a vote on such matter. However, if the stockholder properly submits a proxy prior to the special meeting, his or her shares of common stock will be voted as he or she directs. If he or she submits a proxy but no direction is otherwise made, the shares of common stock will be voted “ FOR ” the merger proposal, “ FOR ” the advisory, non-binding proposal on the Potential Payments Under Compensation Arrangements, and “ FOR ” the approval of any adjournments of the special meeting, if necessary, for the purpose of soliciting additional proxies in favor of the foregoing proposals.

 



 

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Shares held by a stockholder who indicates on an executed proxy card that he or she wishes to abstain from voting will count toward determining whether a quorum is present and will have the same effect as a vote “ AGAINST ” the merger proposal and the proposal to permit proxies to adjourn the special meeting, but will have no effect on the advisory, non-binding proposal on the Potential Payments Under Compensation Arrangements.

Broker non-votes may occur when a person holding shares through a bank, broker or other nominee does not provide instructions as to how the shares should be voted, and the bank, broker or nominee lacks discretionary authority to vote on a particular proposal. If a broker non-vote occurs, the broker non-vote will count for purposes of determining a quorum. Any broker non-vote will have the same effect as a vote “ AGAINST ” the merger proposal and the proposal to permit the proxies to adjourn the special meeting, but will have no effect on the advisory, non-binding proposal on the Potential Payments Under Compensation Arrangements.

 



 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF MIDATECH

The following table sets forth certain of Midatech’s consolidated financial data. The selected historical consolidated financial data as of and for the years ended December 31, 2014 and 2013 is derived from Midatech’s audited consolidated financial statements, which are included elsewhere in this proxy statement/prospectus.

The selected historical consolidated financial data as of June 30, 2015 and for the six months ended June 30, 2015 and 2014 is derived from Midatech’s unaudited consolidated financial statements, which are included elsewhere in this proxy statement/prospectus, except for the statement of financial position data as of June 30, 2014, which has been taken from management’s internal accounting records, and has been prepared on the same basis as the audited financial statements included elsewhere in this proxy statement/prospectus. In the opinion of Midatech’s management, the unaudited data reflects all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of results as of and for these periods. The historical results are not necessarily indicative of results to be expected in any future period and the results for the six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the full fiscal year.

Q Chip Acquisition

Midatech’s financial and operating data for fiscal 2014 and 2013 were not adjusted to reflect the full year effect of Midatech’s acquisition of Q Chip on December 8, 2014, its effective acquisition date, whereas statement of financial position data and subsequent periods include contributions from Q Chip. Thus Midatech’s financial and operating data for fiscal 2014 and 2013 are not fully comparable in this proxy statement/prospectus.

The selected historical consolidated financial data presented below should be read in conjunction with “ Midatech’s Operating and Financial Review and Prospects ” beginning on page 177. and Midatech’s consolidated financial statements and the related notes thereto, which are included elsewhere in this proxy statement/prospectus. The selected historical consolidated financial data in this section are not intended to replace Midatech’s financial statements and the related notes thereto.

 

(£’s in thousands, except share and per share data; all from continuing
operations)
  As of and for the
Six Months Ended
June 30,
    As of and for the
Year Ended
December 31,
 
    2015     2014     2014     2013  
    (unaudited)              

Consolidated Statement of Comprehensive Income Data:

       

Revenue

    324        36        157        147   

Loss from operations

    (5,266     (3,086     (9,947     (4,499

Loss before tax

    (5,250     (3,174     (10,100     (4,883

Loss after tax attributable to the owners of the parent

    (4,894     (2,798     (9,082     (4,084

Total other comprehensive (loss) income, net of tax

    (60     (20     (151     5   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss attributable to the owners of the parent

    (4,954     (2,818     (9,233     (4,079

Loss Per Share Data:

       

Basic and diluted loss per ordinary share—pence

    (18p     (39p     (101p     (71p

Cash dividends declared per ordinary share

    —          —          —          —     

Weighted average number of ordinary shares used

    27,800,459        7,115,721        9,026,347        5,715,576   

Consolidated Statement of Financial Position Data:

       

Non-Current Assets

    15,436        1,115        15,035        1,079   

Current Assets

    26,832        2,644        31,628        4,095   

Cash and cash equivalents

   
24,343
  
    1,868        30,325        2,387   

Total Assets

    42,268        3,759        46,663        5,174   

Non-Current Liabilities

   
1,764
  
    2,219        1,842        2,119   

Borrowings

    1,410        2,219        1,488        2,119   

Current Liabilities

    3,376        2,110        2,832        2,295   

Total Liabilities

    5,140        4,329        4,674        4,414   

Total Equity

    37,128        (570     41,989        760   

Total Equity and Liabilities

    42,268        3,759        46,663        5,174   

 



 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF DARA

The following table sets forth a summary of certain of DARA’s selected consolidated financial information for the calendar years ended December 31, 2010 through December 31, 2014, derived from audited financial statements of DARA. The financial information as of and for the six months ended June 30, 2015 and June 30, 2014 are derived from unaudited financial statements and, in the opinion of DARA’s management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data for those dates. The results of operations for the six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2015. You should not assume the results of operations for any past periods indicate results for any future period.

The summary historical consolidated financial data presented below should be read in conjunction with “ DARA ’s Management Discussion and Analysis of Financial Condition and Results of Operations ” beginning on page 227 and its consolidated financial statements and the related notes thereto for the periods presented included elsewhere in this proxy statement/prospectus. The summary historical consolidated financial data in this section are not intended to replace DARA’s financial statements and the related notes thereto.

 

($’s in thousands, except share and

per share data)

  As of and for the six
months ended June 30,
    As of and for the years ended December 31,  
  2015     2014     2014     2013     2012     2011     2010  
    (unaudited)        

Operating Data:

             

Net revenues

  $ 1,643.0      $ 570.9      $ 1,886.5      $ 419.3      $ 53.6      $ —        $ —     

Costs and expenses

  $ 7,460.9      $ 6,104.5      $ 11,286.7      $ 10,908.6      $ 9,690.7      $ 6,761.9      $ 6,484.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

  $ (5,817.9   $ (5,533.6   $ (9,400.2   $ (10,489.3   $ (9,637.1   $ (6,761.9   $ (6,484.8

Other (expense) income

  $ (17.3   $ 194.4      $ 162.7      $ 150.1      $ 596.9      $ 90.2      $ 492.9   

Income tax (expense) benefit

  $ —        $ —        $ —        $ (28.6   $ 1,299.8      $ 194.4      $ —     

Consolidated net loss

  $ (5,835.2   $ (5,339.2   $ (9,237.5   $ (10,367.8   $ (7,740.4   $ (6,477.3   $ (5,991.9

Loss attributable to noncontrolling interest

  $ —        $ 98.1      $ 236.4      $ 402.8      $ 429.4      $ 306.7      $ 339.5   

Loss attributable to controlling interest

  $ (5,835.2   $ (5,241.1   $ (9,001.1   $ (9,965.0   $ (7,311.0   $ (6,170.6   $ (5,652.4

Loss Per Share Data:

             

Basic and diluted net loss per common share attributable to controlling interest

  $ (0.30   $ (0.58   $ (0.63   $ (1.94   $ (3.02   $ (5.99   $ (9.02

Shares used in computing basis and diluted net loss per common share

    19,755,595        8,980,945        14,305,431        5,132,256        2,422,077        1,030,203        626,345   

Balance Sheet Data:

             

Cash and cash equivalents

  $ 7,004.7      $ 15,882.8      $ 12,026.6      $ 3,425.5      $ 6,496.5      $ 1,179.2      $ 5,478.4   

Working capital

  $ 5,139.7      $ 14,477.3      $ 10,028.5      $ 2,213.6      $ 5,006.0      $ 594.9      $ 4,915.7   

Total assets

  $ 11,876.8      $ 20,333.2      $ 17,752.5      $ 7,988.1      $ 11,692.1      $ 1,852.3      $ 6,443.0   

Total current liabilities

  $ 3,105.4      $ 2,059.7      $ 3,745.3      $ 1,675.1      $ 2,038.9      $ 868.0      $ 914.8   

Total stockholders’ equity

  $ 8,692.1      $ 17,475.9      $ 13,916.1      $ 5,562.0      $ 8,993.0      $ 959.1      $ 5,197.2   

 



 

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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following selected unaudited pro forma condensed combined financial information is based on the historical financial data of Midatech, Q Chip Limited and DARA, and has been prepared to illustrate the effects of the acquisitions of Q Chip Limited and DARA.

The unaudited pro forma combined statement of financial position of the Midatech group is based on the unaudited statement of financial position of the Midatech group as at June 30, 2015, and has been prepared to illustrate the effect of the proposed acquisition of DARA on the statement of financial position of the Midatech group as if it had been completed on such date. The acquisition of Q Chip Limited, renamed Midatech Pharma (Wales) Limited on January 23, 2015 (referred to in this section only as Midatech Pharma Wales or MPW) occurred on December 8, 2014, and therefore Midatech Pharma Wales is already included in the consolidated financial statements as of and for the period ended June 30, 2015.

The unaudited pro forma combined income statement of the Midatech group is based on the audited consolidated statement of comprehensive income of the Group for the year ended December 31, 2014, and the unaudited consolidated statement of comprehensive income for the six months ended June 30, 2015, and has been prepared to illustrate the effect of the acquisitions on the consolidated statement of comprehensive income of the Group for both periods as if as they had been completed on January 1, 2014. For purposes of the consolidated statement of comprehensive income for the year ended December 31, 2014, an adjustment has been made to the historical Midatech Pharma Wales financial data to eliminate revenues and expenses included twice in the pro forma combined statement of comprehensive income data.

The pro forma financial statements are presented in British pounds sterling and in accordance with IFRS. DARA financial data has been converted into IFRS. Additionally, DARA financial data has been converted from U.S. dollars into British pounds sterling at the spot rate on June 30, 2015 for the statement of financial position, and at average rates over the relevant periods for the income statements. The following rates of exchange were used as quoted on an Oanda internet website, a Canadian-based foreign exchange company providing currency conversion, online retail foreign exchange trading, online foreign currency transfers, and forex information:

 

Period

   GBP to
USD
 

Spot rate at June 30, 2015

   $ 1.5717   

Average rate for the six months ended June 30, 2015

   $ 1.5232   

Average rate for the twelve months ended December 31, 2014

   $ 1.6476   

The unaudited pro forma condensed combined financial information is provided for informational purposes only, is subject to a number of uncertainties and assumptions, does not purport to represent what the combined company’s actual performance or financial position would have been if the merger had occurred on the dates indicated, and does not purport to indicate financial position or results of operations as of any future date or for any future period. Please refer to the following information in conjunction with this unaudited pro forma condensed combined financial information: the accompanying notes to the unaudited pro forma condensed combined financial information, Midatech’s consolidated financial statements for the years ended December 31, 2014 and 2013 and the accompanying notes thereto, Midatech’s unaudited consolidated financial statements for the six months ended June 30, 2015 and 2014 and the accompanying notes thereto, the consolidated financial statements of Midatech Pharma Wales for the years ended December 31, 2014 and 2013 and the accompanying notes thereto, each included elsewhere in this proxy statement/prospectus, DARA’s consolidated financial statements for the three years ended December 31, 2014, 2013 and 2012 and the accompanying notes thereto, and DARA’s unaudited condensed consolidated financial statements for the six months ended June 30, 2015 and 2014 and the accompanying notes thereto, each included elsewhere in this proxy statement/prospectus, “ DARA’s Management Discussion and Analysis of Financial Condition and Results of Operations ” and “ Midatech’s

 



 

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Operating and Financial Review and Prospects ” included elsewhere in this proxy statement/prospectus and from DARA’s Annual Report on Form 10-K for the year ended December 31, 2014 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2015.

See also the “ Unaudited Pro Forma Condensed Combined Financial Information ” and notes thereto beginning on page 297.

 

(£’s in thousands, except share and per share data)   Pro Forma
Combined for
the Year Ended
December 31,
2014
     Pro Forma
Combined for
the Six
Months Ended
June 30, 2015
 

Combined Pro Forma Statement of Income Data:

    

Revenue

    1,627         1,403   

Gross profit

    1,358         1,134   

Research and development costs

    (6,122      (2,304

Loss from operations

    (18,476      (9,218

Loss for the period

    (17,423      (8,984

Loss per share (£)

    (0.91      (0.27

Weighted average shares outstanding (in thousands of shares)

    19,218         33,249   

 

     Pro Forma
Combined as at
June 30, 2015
 
(£’s in thousands)       

Combined Pro Forma Statement of Financial Position Data:

  

Non-current assets

     37,227   

Current assets

     28,129   

Total assets

     65,356   

Non-current liabilities

     7,156   

Current liabilities

     4,788   

Total liabilities

     11,944   

Total equity

     53,412   

 



 

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COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA

The following table sets forth selected per share data for Midatech and DARA separately on a historical basis. It also includes unaudited pro forma combined per share data for Midatech, which combines the data of Midatech and DARA on a pro forma basis giving effect to the merger. This data does not give effect to any anticipated synergies, operating efficiencies or costs savings that may be associated with the merger. This data also does not include any integration costs the companies may incur related to the merger as part of combining the operations of the companies. This data has been prepared in accordance with IFRS and should be read in conjunction with Midatech’s and DARA’s historical consolidated financial statements and accompanying notes included in Midatech’s audited financial statements, which are included elsewhere in this proxy statement/prospectus, and DARA’s Annual Report on Form 10-K for the year ended December 31, 2014. See also the “ Unaudited Pro Forma Condensed Combined Financial Information ” and notes thereto beginning on page 297.

 

     As of and for the
Year Ended
December 31,
2014
     As of and for the
Six Months
Ended June 30,
2015 (2)
 

Midatech Historical Per Share Data: (1)

     

Net loss per basic and diluted ordinary share

   $ (1.57    $ (0.28

Cash dividends per share

     —           —     

Book value per share

   $ 7.25       $ 2.10   

Midatech Unaudited Pro Forma Combined Per Share Data: (1)

     

Net loss per basic and diluted ordinary share

   $ (1.42    $ (0.42

Cash dividends per share

     —           —     

Book value per share(2)

   $ 4.33       $ 2.53   

 

     As of and for the
Year Ended
December 31,
2014
     As of and for the
Six Months Ended
June 30,

2015
 

DARA Historical Per Share Data:

     

Net loss per share of common stock:

     

Basic and diluted

   $ (0.63    $ (0.30

Cash dividends per share

     —           —     

Book value per diluted share

   $ 0.97       $ 0.44   

 

(1) Midatech’s results as reported in British pounds sterling have been converted into U.S. dollar using a year end exchange rate of £1.00 = $1.5578 and a June 30, 2015 exchange rate of £1.00 = $1.5727, each of which represents the daily noon buying rate, as published by the Federal Reserve Bank of New York, on December 31, 2014 and June 30, 2015, respectively.
(2) Book value per share uses equity on a pro forma basis at June 30, 2015, divided by weighted average pro forma shares outstanding at December 31, 2014.

 



 

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COMPARATIVE PER SHARE MARKET PRICE AND SHARE INFORMATION

Midatech’s ordinary shares are quoted on the AIM Market under the symbol “MTPH.” Shares of DARA’s common stock are listed for trading on the NASDAQ Capital Market under the symbol “DARA.”

Historical Market Price and Dividend Information. The following table sets forth, for the periods indicated, the high and low sales prices per Midatech ordinary share, as reported on AIM, and DARA common stock, as reported on NASDAQ. Neither Midatech nor DARA has ever paid any cash dividends and have no plans to pay any cash dividends in the foreseeable future.

On June 2, 2015, the last trading day before the execution of the merger agreement, the closing price of a Midatech ordinary share on AIM was £2.93. On [●], 2015, the last practicable trading day prior to the date of this proxy statement/prospectus, the closing price of a Midatech ordinary share on AIM was £[●].

On June 2, 2015, the last trading day before the execution of the merger agreement, the closing price of DARA’s common stock on the NASDAQ Capital Market was $0.82. On [●], 2015, the last practicable trading day prior to the date of this proxy statement/prospectus, the closing price of DARA’s common stock on the NASDAQ Capital Market was $[●].

On [●], 2015, the last practicable trading day prior to the date of this proxy statement/prospectus, there were [●] ordinary shares of Midatech outstanding and [●] shares of DARA common stock outstanding. As of such date, Midatech had [●] holders of record of its ordinary shares and DARA had [●] holders of record of its common stock.

 

     Midatech (1)      DARA  
     High      Low      High      Low  

Year ended December 31, 2010 (2)

     —           —         $ 6.53       $ 0.32   

Year ended December 31, 2011

     —           —         $ 4.29       $ 0.88   

Year ended December 31, 2012

     —           —         $ 2.77       $ 0.62   

Year ended December 31, 2013

           

March 31

     —           —         $ 6.00       $ 3.80   

June 30

     —           —         $ 5.20       $ 2.60   

September 30

     —           —         $ 3.58       $ 2.35   

December 31

     —           —         $ 3.75       $ 2.25   

Annual

     —           —         $ 6.00       $ 2.25   

Year ended December 31, 2014

           

March 31

     —           —         $ 4.40       $ 2.50   

June 30

     —           —         $ 3.01       $ 1.02   

September 30

     —           —         $ 1.64       $ 1.02   

December 31

   £ 2.85       £ 2.60       $ 1.09       $ 0.74   

Annual

   £ 2.85       £ 2.60       $ 4.40       $ 0.74   

Year ended December 31, 2015

           

March 31

   £ 3.30       £ 2.65       $ 1.05       $ 0.70   

June 30

   £ 3.20       £ 2.60       $ 1.03       $ 0.67   

September 30

   £ 3.05       £ 2.65       $ 0.94       $ 0.78   

December 31 (through October)

           

Monthly Prices:

           

April 2015

   £ 3.06       £ 2.60       $ 0.87       $ 0.68   

May 2015

   £ 2.96       £ 2.84       $ 0.87       $ 0.67   

June 2015

   £ 3.20       £ 2.85       $ 1.03       $ 0.75   

July 2015

   £ 3.05       £ 2.75       $ 0.92       $ 0.80   

August 2015

   £ 2.85       £ 2.65       $ 0.94       $ 0.78   

September 2015

   £ 2.73       £ 2.63       $ 0.94       $ 0.78   

October 2015 (through October 7)

   £ 2.65       £ 2.63       $ 0.88       $ 0.81   

 



 

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(1) Midatech ordinary shares began trading on AIM on December 8, 2014. Prior to that, no established market for Midatech ordinary shares existed.
(2) On May 12, 2010, DARA effected a one-for-16 reverse stock split of DARA’s common stock. On February 10, 2014, DARA effected a one-for-five reverse stock split of DARA’s common stock. All per share information included has been retroactively restated to effect the reverse stock splits.

Recent Closing Prices and Comparative Market Price Information . The following table sets forth the closing sales prices of a Midatech ordinary share (as reported on AIM) and of DARA common stock (as reported on the NASDAQ Capital Market), each on June 3, 2015, the last trading day before the day on which Midatech and DARA announced the execution of the merger agreement, and on [●], 2015, the last practicable trading day before the date of this proxy statement/prospectus.

 

     Midatech Ordinary Share
Price per Share (1)
     DARA Common
Stock Price per Share
     DARA Equivalent Stock Price
Per Share (2)
 

June 3, 2015

   $ 4.50       $ 0.81       $ 1.22   

[●], 2015

   $ [●    $ [●    $ [●

 

(1) The Midatech ordinary share price (rounded to the nearest whole cent) as at the close of trading on June 3, 2015 and [●], 2015 of £2.93 and £[●], respectively, converted from British pounds sterling into U.S. dollars at the daily noon buying rates, as published by the Federal Reserve Bank of New York, on June 3, 2015 and [●], 2015, respectively.
(2) The DARA equivalent stock prices were calculated by multiplying the per share price of Midatech ordinary shares on each date by the initial Exchange Ratio of 0.272.

The market prices of Midatech ordinary shares and DARA common stock will fluctuate before the special meeting and before the merger is completed. You should obtain current market quotations from a newspaper, the Internet or your broker or banker.

 



 

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CURRENCIES AND EXCHANGE RATE INFORMATION

The following table shows, for the periods indicated, information concerning the exchange rate between the British pound sterling and the U.S. dollar. This information is provided solely for your information, and Midatech and DARA do not represent that the British pound sterling could be converted into U.S. dollars at these rates or at any other rate. These rates are not the rates used by Midatech in the preparation of its consolidated financial statements included in this proxy statement/prospectus.

The data provided in the following table is expressed in U.S. dollars per British pound sterling and is based on noon buying rates published by the Federal Reserve Bank of New York for the British pound sterling. On June 3, 2015, the last trading day before the merger agreement was announced, the exchange rate between the U.S. dollar and the British pound sterling expressed in U.S. dollars per British pound sterling was £1.00 = $1.5351. On [●], 2015, the last trading day prior to the date of this proxy statement/prospectus, the exchange rate was £1.00 = $[●].

 

     High ($)      Low ($)  

Recent Monthly Data

  

October 2015 (through October 2, 2015)

     1.5216         1.5162   

September 2015

     1.5573         1.5116   

August 2015

     1.5731         1.5362   

July 2015

     1.5634         1.5353   

June 2015

     1.5882         1.5187   

May 2015

     1.5772         1.5118   

April 2015

     1.5485         1.4648   

 

     Average
Rate ($) (1)
 

Annual Data (12-month period ended December 31)

  

2014

     1.6461   

2013

     1.5667   

2012

     1.5924   

2011

     1.6105   

2010

     1.5414   

 

(1) The average rates were calculated by taking the simple average of the daily noon buying rates, as published by the Federal Reserve Bank of New York, on the last day of each month during the period.

 



 

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RISK FACTORS

In addition to the other information included in this proxy statement/prospectus, including the matters addressed in the section of the proxy statement/prospectus entitled “Cautionary Note Regarding Forward-Looking Statements” you should carefully consider the following risk factors before deciding how to vote on the proposals presented at the special meeting. If the merger agreement is adopted and the contemplated transactions close, you will receive Midatech Depositary Shares and CVRs. There are risks to owning Midatech Depositary Shares and CVRs. The risks and uncertainties described below are not the only risks and uncertainties the parties may face. Additional risks and uncertainties not presently known to the parties, or that the parties currently consider immaterial could also negatively affect the business, financial condition, results of operations, prospects, profits and stock prices of Midatech, DARA or the combined company. If any of the risks described below actually occur, the business, financial condition, results of operations, prospects, profits and stock prices of Midatech, DARA or the combined company could be materially adversely affected, which could adversely affect the likelihood of any payments being made under the CVRs. See “Where You Can Find More Information” beginning on page 313.

Risks Related to the Merger

Because the market price of Midatech’s ordinary shares will fluctuate, DARA stockholders will not know until the effective time the value of the consideration they will receive in the merger.

If the market price for each Midatech ordinary shares increases between the time of the special meeting and the closing of the merger, DARA stockholders will receive Midatech ordinary shares that have a market value that is greater than the market value of such shares at the time of the special meeting. If the price for each Midatech ordinary share decreases between the time of the special meeting and the effective time of the merger, DARA stockholders will receive Midatech ordinary shares at closing that have a market value that is less than the market value of such shares at the time of the special meeting. Therefore, in certain circumstances the Exchange Ratio will be adjusted in part based on the market value of a Midatech ordinary share prior to the completion of the merger, DARA shareholders cannot be sure at the time of the special meeting of the actual value of the consideration that will be paid to DARA shareholders upon completion of the merger.

Under the terms of the Merger Agreement, the Exchange Ratio, which determines the amount of ordinary shares of Midatech each DARA shareholder will receive, is initially set at 0.272, but may be adjusted to as high as 0.306 or as low as 0.246. The exact value will be calculated based on the figure which represents the average of the weighted average mid-market trading price of Midatech ordinary shares on AIM for each of the 15 business days ending on the business day immediately prior to the closing of the merger. Therefore, the exact amount and value of Midatech Depositary Shares that you will receive will not be calculated until just prior to the closing of the merger. See “ The Merger—Merger Consideration ” beginning on page 94.

There can be no assurance that the merger will be consummated. Failure to complete the merger could have an adverse effect on Midatech’s or DARA’s stock price, business, financial condition, results of operations or prospects.

The merger is subject to the satisfaction or waiver of certain closing conditions summarized in the section in this proxy statement/prospectus entitled “ The Merger Agreement—Conditions to Completion of the Merger ” beginning on page 161 and set forth in the merger agreement attached to and included in this proxy statement/prospectus as Annex A . There can be no assurance that each of the conditions will be satisfied. In addition, in certain circumstances, each party may be entitled to terminate the merger agreement. If the conditions are not satisfied or waived in a timely manner and the merger is delayed, the parties may lose some or all of the intended or perceived benefits of the merger, which could cause the parties’ stock prices to decline and harm their respective businesses.

 

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If the merger is not completed for any reason, including as a result of DARA stockholders failing to adopt the merger agreement, the ongoing businesses of Midatech and DARA may be adversely affected and Midatech and DARA would be subject to a number of risks, including the following:

 

    DARA may be required, under certain circumstances, to pay Midatech a termination fee of $1.05 million or reimburse Midatech for certain expenses;

 

    Midatech and DARA are subject to certain restrictions on the conduct of their businesses prior to completing the merger, which may adversely affect their abilities to execute certain of their respective business strategies;

 

    Midatech and DARA have incurred and will continue to incur significant costs and fees associated with the proposed merger;

 

    Midatech and DARA may experience negative reactions from the financial markets, including negative impacts on their stock prices;

 

    Midatech and DARA may experience negative reactions to the termination of the merger from customers, clients, business partners, lenders and employees;

 

    The market prices of Midatech and DARA shares may decline to the extent that the current market prices reflects any market assumption that the merger will be completed;

 

    Matters relating to the merger (including integration planning) will require substantial commitments of time and resources by Midatech and DARA management, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to Midatech and DARA as independent companies;

 

    Midatech and DARA may not be able to continue their respective operations without significant capital, which may not be available on favorable terms, if at all; and

 

    neither DARA nor Midatech would realize any of the anticipated benefits of having completed the merger.

In addition, Midatech and DARA could be subject to litigation related to any failure to complete the merger or related to any enforcement proceeding commenced against Midatech or DARA to perform its obligations under the merger agreement. If the merger is not completed, these risks may materialize and may adversely affect Midatech or DARA’s businesses, financial condition, results of operations, prospects, profits and stock prices.

The merger agreement limits DARA’s ability to pursue alternatives to the merger.

The merger agreement contains provisions that make it more difficult for DARA to sell its business to a party other than Midatech during the period between signing and the closing of the merger. These provisions include the general prohibition on DARA soliciting any alternative acquisition proposal (as defined in the section titled “ The Merger Agreement—No Solicitation of Transactions ” beginning on page 156) or offer for a competing transaction, the requirement that DARA pay a termination fee of $1.05 million if the merger agreement is terminated in specified circumstances and the requirement that DARA submit the merger agreement to a vote of DARA stockholders even if the DARA Board of Directors changes its recommendation, subject to certain exceptions. Additionally, in certain circumstances if the merger is not completed, DARA may be required to reimburse Midatech for up to $525,000 of Midatech’s reasonable and documented expenses in connection with the merger agreement and the transactions contemplated thereby. See “ The Merger Agreement—Termination of the Merger Agreement ” beginning on page 163 and “ The Merger Agreement—Registration Statement; DARA Stockholder Meeting ” beginning on page 155.

These provisions may discourage a third party that might have an interest in acquiring all or a significant part of DARA from considering or proposing an acquisition even if it were prepared to pay consideration with a

 

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higher per share consideration than the current proposed Per Share Merger Consideration. Furthermore, the termination fee may result in a potential competing acquirer proposing to pay a lower per share price to acquire DARA than it might otherwise have proposed to pay.

Midatech and DARA expect to incur significant one-time costs associated with the merger that could affect the period-to-period operating results of the combined company following the completion of the merger.

Midatech and DARA anticipate that they will incur one-time charges of approximately £2.5 million and $2.3 million, respectively, as a result of costs associated with the merger. The parties will not be able to quantify the exact amount of these charges or the period in which it will be incurred until after the merger is completed. Some of the factors affecting the costs associated with the merger include the timing of the completion of the merger and the resources required in integrating DARA and Midatech. The amount and timing of this charge could adversely affect the combined company’s period-to-period operating results, which could result in a reduction in the market price of Midatech’s ordinary shares and Midatech Depositary Shares.

Estimates as to the future value of the combined company are inherently uncertain. You should not rely on such estimates without considering all of the information contained in this proxy statement/prospectus.

Any estimates as to the future value of the combined company, including estimates regarding the price at which the ordinary shares of the combined company will trade following the merger, are inherently uncertain. The future value of the combined company will depend upon, among other factors, the combined company’s ability to achieve projected revenue and earnings expectations and to realize the anticipated synergies described in this proxy statement/prospectus, all of which are subject to the risks and uncertainties described in this proxy statement, including these risk factors. Accordingly, you should not rely upon any estimates as to the future value of the combined company, or the price at which the ordinary shares of the combined company will trade following the merger, whether made before or after the date of this proxy statement/prospectus by DARA’s or Midatech’s respective management or affiliates or others, without considering all of the information contained in this proxy statement/prospectus.

The merger agreement contains certain obligations to indemnify Midatech that could result in substantial offsets to any payments made to you under the CVR Agreement.

After the consummation of the merger, each DARA stockholder, whether or not he or she votes in favor of the merger, will be liable for the indemnification of Midatech, and its officers, directors, and affiliates, referred to collectively as the Indemnified Parties, against any adverse consequences resulting from or arising out of a breach of DARA’s representations or warranties contained in the merger agreement (as of the date made or as of the Closing Date, as applicable) or covenants, agreements, or obligations contained in the merger agreement that are to be performed by DARA prior to the Closing. Any damages or other costs resulting from adverse consequences payable to Midatech will be satisfied solely by an offset against payments otherwise payable to DARA stockholders under the CVR Agreement. Additionally, DARA stockholders will not be liable for any adverse consequences unless and until the aggregate amount of adverse consequences exceed $225,000. In this case, the Indemnified Parties will be entitled to indemnification for all losses incurred by them that are in excess of this amount, but in no event will the liability exceed the aggregate amount of unpaid payments otherwise payable by Midatech to the DARA stockholders under the CVR Agreement. Therefore, there can be no assurance that the amount payable to DARA stockholders under the CVR Agreement will not be reduced in whole or in part due to the indemnification and expense claims of Midatech in accordance with the merger agreement.

Midatech may fail to realize some or all of the anticipated benefits of the proposed merger, which may adversely affect the value of each Midatech ordinary share and, consequently, the Midatech Depositary Shares.

The success of the merger will depend, in part, on Midatech’s ability to realize the anticipated benefits and cost savings from combining Midatech and DARA. However, to realize these anticipated benefits and cost

 

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savings, the businesses of Midatech and DARA must be successfully combined and the two companies’ respective operations, technologies and personnel must be integrated following the closing of the merger. If Midatech is not able to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits and cost savings of the merger may not be realized fully or at all or may take longer to realize than expected and the value of each Midatech ordinary share and, consequently, the Midatech Depositary Shares may be adversely affected. In addition, the overall integration of the businesses is a complex, time-consuming and expensive process that, without proper planning and effective and timely implementation, could significantly disrupt Midatech’s operations following closing.

DARA has operated and, until the closing, will continue to operate independently of Midatech. It is possible that the integration process could result in the loss of key employees and other senior management, the disruption of DARA’s business or adversely affect DARA’s ability to maintain its business operations, or otherwise achieve the anticipated benefits of the merger.

Specifically, risks in integrating DARA into Midatech’s operations to realize the anticipated benefits of the merger include, among other things, the failure to:

 

    effectively coordinate efforts to communicate Midatech’s capabilities and products following closing;

 

    compete effectively for additional opportunities expected to be available to Midatech following closing;

 

    integrate and harmonize financial reporting and information technology systems of Midatech and DARA;

 

    retain Midatech’s and DARA’s relationships with other companies;

 

    integrate the Midatech and DARA senior management teams;

 

    retain and integrate key Midatech and DARA employees;

 

    coordinate operations across time zones, continents and cultures;

 

    manage the diversion of management’s attention from business matters to integration issues;

 

    retain customers; and

 

    combine Midatech’s business and management culture with the business and management culture of DARA.

In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Actual cost synergies, if achieved at all, may be lower than expected and may take longer to achieve than anticipated. If Midatech is not able to adequately address these challenges, it may be unable to successfully integrate its operations with DARA’s operations, or to realize the anticipated benefits of the integration following the closing. The anticipated benefits and synergies assume a successful integration and are based on projections, which are inherently uncertain, and other assumptions. Even if integration is successful, anticipated benefits and synergies may not be achieved. An inability to realize the full extent of, or any of, the anticipated benefits of the merger, as well as any delays encountered in the integration process, could have an adverse effect on the business and results of operations of the combined company, which may affect the value of each Midatech ordinary share and, consequently, the Midatech Depositary Shares after closing.

Further, Midatech’s ability to sell Oravig and Gelclair (each of which contribute to the achievement of the sales milestones as specified in the CVR Agreement) and Midatech’s ability to discharge its obligations under the CVRs may be diminished if the integration of Midatech and DARA is unsuccessful, takes longer than expected or fails to achieve the financial benefits to the extent anticipated by Midatech.

 

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DARA stockholders may decide to sell their common stock or Midatech Depositary Shares received in the merger, which could cause a decline in their respective market prices.

Some United States holders of DARA common stock may be disinclined to own shares of a company that is organized and has its primary listing outside of the United States. This could result in the sale of DARA shares prior to the completion of the merger or the sale of Midatech Depositary Shares received in the merger. In addition, the market price of DARA common stock and of a Midatech ordinary share may be adversely affected by arbitrage activities occurring prior to the completion of the merger. These sales, or the prospects of such sales in the future, could adversely affect the market price for, and the ability to sell in the market, shares of DARA common stock before the merger is completed and Midatech Depositary Shares after the merger is completed. They may also reduce the Exchange Ratio.

Lawsuits have been filed against DARA, members of the DARA Board of Directors, Merger Sub, Secondary Merger Sub, and Midatech challenging the merger, and an unfavorable judgment or ruling in these lawsuits could prevent or delay the consummation of the merger, and result in substantial costs.

DARA, its directors, Merger Sub, Secondary Merger Sub and Midatech have been named in purported stockholder class action complaints, each filed in Delaware state court. The complaints generally allege, among other things, that (i) each member of DARA’s Board of Directors breached his or her fiduciary duties to DARA and its stockholders by authorizing the sale of DARA to Midatech, (ii) the merger does not maximize value to DARA stockholders; and (iii) Midatech, Merger Sub, Secondary Merger Sub and DARA aided and abetted the breaches of fiduciary duty allegedly committed by the members of the DARA Board of Directors. In addition, one amended complaint alleges that Midatech’s Registration Statement on Form F-4, as filed on August 11, 2015, omits or misstates certain material information. The plaintiffs are seeking, among other things, to enjoin the defendants from consummating the merger on the agreed-upon terms.

The nature of litigation is inherently uncertain and costly. One of the conditions to the closing of the merger is that there not be any legal prohibition preventing the consummation of the merger, which would include the injunction sought by the plaintiffs in this case if it were to be granted. As a result, if the plaintiffs are successful in obtaining the injunction they seek, the merger may be blocked or delayed, and there could be substantial costs to DARA and/or Midatech. It is possible that other similar lawsuits may be filed in the future. DARA cannot estimate any possible loss from this or similar future litigation at this time. DARA has obligations under certain circumstances to hold harmless and indemnify each of the defendant directors against judgments, fines, settlements and expenses related to claims against such directors and otherwise to the fullest extent permitted under Delaware law and DARA’s certificate of incorporation, bylaws and contractual agreements with its directors. Although DARA has insurance which is designed to cover the costs of defense over a defined self-insured retention along with any damages that may ultimately be awarded for covered claims, DARA may not be protected by the policies. Additionally, if DARA’s insurance underwriters determine that the claims are not fully covered by DARA’s policies, DARA may not be able to rely on insurance to cover the costs of litigation or any financial damages which could be awarded by the Delaware state court, either of which could be significant and have a material adverse impact on DARA’s operations and financial condition.

DARA stockholders will have a reduced ownership and voting interest after the merger and will exercise less influence over management of the combined company.

DARA’s stockholders currently have the right to vote in the election of the Board of Directors of DARA and on other matters affecting DARA. Upon the completion of the merger, each DARA stockholder will become a stockholder of Midatech with a percentage ownership of the combined organization that is much smaller than the DARA stockholders’ percentage ownership of DARA. It is expected that the former stockholders of DARA, as a group, will receive shares in the merger constituting approximately 16% of the outstanding Midatech ordinary shares immediately after the merger. Because of this, DARA’s stockholders will have less influence on the management and policies of Midatech than they now have on the management and policies of DARA.

 

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The merger may not be completed if certain conditions to the merger are not satisfied or waived or if the merger agreement is terminated by the parties in accordance with its terms.

The merger agreement is subject to a number of conditions that must be fulfilled in order to complete the merger. Those conditions include, but are not limited to: the adoption of the merger agreement by DARA stockholders, receipt of any required regulatory approvals, absence of orders prohibiting the completion of the merger, the effectiveness of the registration statement of which this proxy statement/prospectus is a part, as well as the registration statement on Form F-6 with respect to the Midatech Depositary Shares, the receipt of approval for the listing of the Midatech Depositary Shares on NASDAQ, subject to official notice of issuance, the continued accuracy of the representations and warranties by both parties, the performance by both parties of their covenants and agreements, and the receipt by both parties of legal opinions from their respective tax counsels.

In addition, DARA and Midatech may mutually agree to terminate the merger agreement at any time and one or both parties may terminate the merger agreement in a variety of circumstances. See “ The Merger Agreement—Termination of the Merger Agreement ” beginning on page 163.

DARA will be subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effect of the merger on employees, suppliers, customers and other third parties may have an adverse effect on DARA. These uncertainties may impair DARA’s ability to attract, retain and motivate key personnel until the merger is completed and for a period of time thereafter, and could cause customers, suppliers and others that deal with DARA to seek to change existing business relationships with DARA. These disruptions could have an adverse effect on the ability of Midatech to achieve the sales milestones specified in the CVR Agreement or discharge its obligations under the CVRs. DARA employee retention and recruitment may be particularly challenging prior to the Effective Time, as employees and prospective employees may experience uncertainty about their future roles with the combined company.

The pursuit of the merger and the preparation for any integration may place a significant burden on management and internal resources of DARA. Any significant diversion of management attention away from ongoing business and any difficulties encountered in the transaction and integration process could affect the financial results of DARA and, following the merger, the combined company. In addition, the merger agreement requires that DARA operate in the ordinary course of business consistent with past practice and restricts DARA from taking certain actions prior to the Effective Time or termination of the merger agreement. These restrictions may prevent DARA from pursuing attractive business opportunities that may arise prior to the completion of the merger. See “ The Merger Agreement—Conduct of Business by DARA and Midatech ” on page 150.

DARA’s executive officers and directors may have financial interests in the merger that are different from, or in addition to, the interests of DARA stockholders.

Executive officers and directors of DARA negotiated the merger agreement, and the DARA Board of Directors approved and recommended that DARA’s stockholders adopt the merger agreement. These executive officers and directors may have interests in the merger that are different from, or in addition to, those of DARA stockholders generally. These interests may include, but are not limited to, the continued employment of certain executive officers of DARA by Midatech, the treatment of equity awards held by directors and executive officers of DARA in the merger (including the accelerated vesting of equity awards), the vesting and accelerated payment of certain benefits and the indemnification of former DARA directors and executive officers by Midatech. The receipt of compensation or other benefits in connection with the merger may influence these persons in making their recommendation that you vote in favor of the adoption of the merger agreement. Stockholders should be aware of these interests when considering such recommendation. Please see “ The Merger—Interests of DARA’s Executive Officers and Directors in the Merger ” beginning on page 119.

 

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The market prices of Midatech ordinary shares and Midatech Depositary Shares after the merger may be affected by factors different from those currently affecting the shares of Midatech or DARA.

Upon completion of the merger, holders of DARA common stock will become holders of Midatech ordinary shares (in the form of Midatech Depositary Shares). The businesses of Midatech and DARA differ in important respects and, accordingly, the results of operations of the combined company and the market price of Midatech ordinary shares following the merger may be affected by factors different from those currently affecting the independent results of operations of Midatech and DARA. In particular, Midatech operates primarily outside of the United States and has greater exposure to markets and economies outside of the United States than DARA currently does. For a discussion of the business of Midatech and DARA and of certain factors to consider in connection with those businesses see “ Description of Midatech’s Business ” beginning on page 195 and “ Information Regarding DARA ” beginning page 236.

The fairness opinion obtained by DARA from its financial advisor will not reflect changes in circumstances subsequent to the date of the fairness opinion.

Aquilo Partners LP, referred to as Aquilo Partners, DARA’s financial advisor in connection with the proposed merger, orally delivered to the Board of Directors of DARA its opinion, which was subsequently confirmed in writing dated as of June 3, 2015. The opinion of Aquilo Partners stated that as of such date, and based upon and subject to the factors and assumptions set forth therein, the Per Share Merger Consideration to be received in the merger was fair to the DARA common stockholders from a financial point of view. The opinion does not reflect changes that may occur or may have occurred after the date of the opinion, including changes to the operations and prospects of Midatech or DARA, changes in general market and economic conditions or regulatory or other factors. Any such changes, or changes in other factors on which the opinion is based, may materially alter or affect the relative values of Midatech or DARA.

Issuance of Midatech ordinary shares prior to completion of the merger could decrease the value of the consideration to be delivered to DARA stockholders.

Under the terms of the merger agreement, Midatech is permitted to issue shares prior to the completion of the merger under certain circumstances and with restrictions as to the number of such shares issued. The issuance of Midatech ordinary shares without an offsetting share repurchase prior to the completion of the merger would have the effect of diluting DARA stockholders’ ownership of the combined company. In addition, such issuances could decrease the market price of Midatech ordinary shares, which could in turn decrease the value of the Per Share Merger Consideration to be delivered to DARA stockholders.

If the merger is not consummated by the Termination Date set forth in the merger agreement, either Midatech or DARA may, in certain circumstances, choose not to proceed with the merger.

Either Midatech or DARA may terminate the merger agreement if, in certain circumstances, the merger has not been completed by December 31, 2015 (which date was extended in accordance with certain conditions in the merger agreement from November 15, 2015), unless the failure of the merger to be completed has resulted from the failure of the party seeking to terminate the merger agreement to perform its obligations.

Some of the conditions to the merger may be waived by Midatech or DARA without resoliciting stockholder approval of the proposals approved by them.

Some of the conditions set forth in the merger agreement may be waived by Midatech or DARA, subject to certain limitations. If any conditions are waived, Midatech and DARA will evaluate whether amendment of this proxy statement/prospectus and resolicitation of proxies would be warranted. Subject to applicable law, if Midatech and DARA determine that resolicitation of DARA’s stockholders is not warranted, the parties will have the discretion to complete the merger without seeking further stockholder approval. No action by the Boards of Directors of Midatech or DARA may adversely affect the holders of any class or series of stock of DARA, affect

 

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the consideration to be received by DARA stockholders in the merger unless the DARA, common stockholders approve such action or alter or change any of the terms of the certificate of incorporation of the surviving corporation to be effected by the merger.

Risks Related to the Tax Consequences of the Merger and Merger Consideration

It is recommended that each DARA stockholder consult his or her own tax advisor as to the tax consequences of holding Midatech Depositary Shares.

If the mergers do not qualify as a reorganization under Section 368(a) of the Code, then DARA stockholders may be subject to U.S. federal, state, local or other income taxes based upon the full value of the merger consideration.

It is a condition to the completion of the mergers that Midatech and DARA each receive an opinion that, for U.S. federal income tax purposes, the merger and the secondary merger should qualify as a reorganization within the meaning of Section 368(a) of the Code. However, the tax opinions are not binding on the IRS or the courts, and neither Midatech nor DARA intends to request a ruling from the IRS with respect to the U.S. federal income tax consequences of the mergers. As a result, there can be no assurance that the IRS will not disagree with these tax opinions. If the IRS were to successfully assert that the mergers fail to qualify as a reorganization within the meaning of Section 368(a) of the Code, or if for any other reason the mergers were to fail to qualify as a reorganization within the meaning of Section 368(a) of the Code, a U.S. holder (as defined herein) of DARA common stock would recognize gain or loss in an amount equal to the difference, if any, between (i) the fair market value as of the closing date of the mergers of the Midatech Depositary Shares and the amount of cash and the fair market value of the CVRs received and (ii) such holder’s tax basis in the DARA common stock surrendered in the mergers.

The U.S. federal income tax treatment of the CVRs is unclear.

There is no legal authority directly addressing the U.S. federal income tax treatment of the CVRs or the treatment of payments that may be received pursuant to the CVRs. Accordingly, the amount, timing and character of any gain, income or loss with respect to the CVRs are uncertain. In addition, there is no legal authority directly addressing the U.S. federal income tax treatment of the expiration of any rights to receive a cash payment with respect to the CVRs.

Under the CVR Agreement, Midatech and DARA agree to work together in good faith to determine the value as of the closing date of the CVRs issued to DARA stockholders in connection with the mergers. There is a risk that the IRS will disagree with the reported value of the CVRs. Any change in the value of the CVRs will affect the amount of any gain or loss recognized with respect to the receipt of the CVRs. For further discussion, see “ Taxation—Material U.S. Federal Income Tax Consequences—Payments Received With Respect to the CVRs ” beginning on page 137.

Risks Related to Midatech Depositary Shares

The price of each Midatech ordinary share has been subject to movements on the AIM Market and may continue to do so.

Upon completion of the merger, holders of DARA common stock will become holders of Midatech Depositary Shares, each of which will represent two ordinary shares of Midatech. A public market has never been established for the Midatech Depositary Shares and such a market, once established, may not be sustained. Both the United States and United Kingdom stock markets have experienced significant volatility, including in pharmaceutical and biotechnology stocks. In particular, Midatech’s share price has fluctuated between £2.60 and £3.30 between December 8, 2014 and October 7, 2015. The volatility of pharmaceutical and biotechnology stocks does not often relate to the operating performance of the companies represented by the stock. Other price fluctuations are, or may be, directly attributable to financial performance.

 

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Factors that could cause volatility in the market price of each Midatech ordinary share and Midatech Depositary Shares include:

 

    the progress of preclinical development, laboratory testing and clinical trials of Midatech’s product candidates;

 

    the results from Midatech’s clinical programs and any future trials Midatech may conduct;

 

    developments in the clinical trials of potentially similar competitive products;

 

    European Medicines Agency, U.S. Food and Drug Administration or international regulatory actions;

 

    failure of any of Midatech’s product candidates, if approved, to achieve commercial success;

 

    announcements of the introduction of new products by Midatech or its competitors;

 

    market conditions in the pharmaceutical and biotechnology sectors;

 

    developments concerning intellectual property rights;

 

    litigation or public concern about the safety of Midatech’s products;

 

    market research and comments by securities analysts;

 

    actual and anticipated fluctuations in Midatech’s operating results;

 

    deviations in Midatech’s operating results from the estimates of securities analysts;

 

    rumors relating to Midatech or its competitors;

 

    additions or departures of key personnel;

 

    third party reimbursement policies;

 

    developments concerning current or future collaborations, strategic alliances, joint ventures or similar relationships; and

 

    reviews of long-term values of Midatech’s assets, which could lead to impairment charges that could reduce Midatech’s earnings.

These and other external factors may cause the market price and demand for Midatech Depositary Shares or Midatech ordinary shares to fluctuate substantially, which may limit or prevent investors from readily buying and selling the securities and may otherwise negatively affect the liquidity of, the Midatech Depositary Shares or the Midatech ordinary shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of Midatech’s stockholders brought a lawsuit against Midatech, it could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of Midatech’s management.

The value of Midatech Depositary Shares to be received in the merger will be subject to currency fluctuations.

Prior to the completion of the merger, any change in the exchange rate between the U.S. dollar and the British pound sterling will affect the U.S. dollar market value of the consideration that DARA stockholders will receive upon completion of the merger. Neither company is permitted to terminate the merger agreement, and the DARA Board of Directors is not permitted to change its recommendation to its stockholders to approve the merger, solely because of changes in currency exchange rates. Following completion of the merger, fluctuations in the exchange rate between the U.S. dollar and the British pound sterling will continue to affect the U.S. dollar equivalent of the British pound sterling price of Midatech ordinary shares quoted on AIM and the market price of Midatech Depositary Shares traded on NASDAQ. Before deciding whether to vote for adoption of the merger agreement, you should obtain information regarding the exchange rate between the U.S. dollar and the British pound sterling.

 

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Midatech Depositary Shares may not be as liquid as Midatech ordinary shares or DARA common stock.

Some companies that have issued ADRs on United States stock exchanges have experienced lower levels of liquidity in their ADRs than is the case for their ordinary shares listed on their domestic exchange. There is a possibility that Midatech Depositary Shares will be less liquid than Midatech ordinary shares listed on AIM, or less liquid than DARA common stock listed on the NASDAQ Capital Market. In addition, investors may incur higher transaction costs when buying and selling Midatech Depositary Shares than they would incur in buying and selling DARA common stock.

The rights of DARA’s stockholders who become holders of Midatech Depositary Shares in the merger will not be the same as the rights of holders of Midatech ordinary shares or DARA common stock.

DARA is a corporation organized under the laws of the State of Delaware. The rights of holders of DARA common stock are governed by the Delaware General Corporation Law, the certificate of incorporation and bylaws of DARA and the listing rules of NASDAQ. Midatech is a public limited company organized under the laws of England and Wales. Upon completion of the merger, the former holders of DARA common stock will receive Midatech Depositary Shares, which represent a beneficial ownership interest in Midatech ordinary shares. The rights of holders of Midatech Depositary Shares will be governed by English law, Midatech’s constitutional documents, the listing rules of the AIM Market of the London Stock Exchange, known as the AIM Rules, and the deposit agreement pursuant to which the Midatech Depositary Shares will be issued. There are differences between the rights presently enjoyed by holders of DARA common stock and the rights to which the holders of Midatech Depositary Shares will be entitled following the merger. In some cases, the holders of Midatech Depositary Shares to be issued in the merger may not be entitled to important rights to which they would have been entitled as holders of DARA common stock. The rights and terms of the Midatech Depositary Shares are designed to replicate, to the extent reasonably practicable, the rights attendant to Midatech ordinary shares, for which there is currently no active trading market in the United States. However, because of aspects of British law, Midatech’s constitutional documents and the terms of the deposit agreement, the rights of holders of Midatech Depositary Shares will not be identical to and, in some respects, may be less favorable than, the rights of holders of Midatech ordinary shares. For more information regarding the characteristics of, and differences between DARA common stock, Midatech ordinary shares and Midatech Depositary Shares, please refer to “ Description of Midatech’s Ordinary Shares ” beginning on page 245, “ Description of Midatech’s American Depositary Shares ” beginning on page 253 and “ Comparison of Stockholder Rights ” beginning on page 264.

After the completion of the merger, the market price of Midatech Depositary Shares may not be identical, in U.S. dollar terms, to the market price of each Midatech ordinary share.

While the market price of Midatech Depositary Shares is expected to fluctuate according to the market price of each Midatech ordinary share and according to changes in the U.S. dollar and British pound sterling exchange rate, there is no guarantee that this relationship will be observed at all times, or at any time. The market price of Midatech Depositary Shares may differ from the market price of each Midatech ordinary share in U.S. dollar terms for a number of reasons, including the relative liquidity of Midatech Depositary Shares and Midatech ordinary shares.

You may not receive distributions on Midatech ordinary shares represented by Midatech Depositary Shares or any value for them if it is illegal or impractical to make them available to holders of ADRs.

The depositary of Midatech Depositary Shares has agreed to pay to you distributions with respect to cash or other distributions it or the custodian receives on Midatech ordinary shares or other deposited securities after deducting its agreed fees and expenses. You will receive these distributions in proportion to the number of Midatech ordinary shares your Midatech Depositary Shares represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of Midatech Depositary Shares. Midatech has no obligation to take any other action to permit the distribution of its Midatech Depositary Shares, ordinary shares, rights or anything else to holders of its Midatech Depositary Shares. As a

 

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result, you may not receive the distributions made on Midatech ordinary shares or any value from them if it is illegal or impractical for Midatech to make them available to you. These restrictions may have a material adverse effect on the value of your Midatech Depositary Shares.

You may be subject to limitations on transfer of your Midatech Depositary Shares.

Your Midatech Depositary Shares are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your Midatech Depositary Shares generally when Midatech’s books or the books of the depositary are closed, or at any time if Midatech or the depositary deems it advisable to do so because of any requirement of law or government or governmental body, or under any provision of the deposit agreement, or for any other reason.

It may be difficult for you to bring any action or enforce any judgment obtained in the United States against us or members of Midatech’s Board of Directors, which may limit the remedies otherwise available to you.

Midatech is incorporated as a public limited company in England and Wales and the majority of Midatech’s assets are located outside the United States. In addition, all of the members of the Midatech Board of Directors are nationals and residents of countries, including the United Kingdom, outside of the United States. Most or all of the assets of these individuals are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States if you believe your rights have been infringed under the securities laws or otherwise. In addition, a United Kingdom court may prevent you from enforcing a judgment of a U.S. court against Midatech or these individuals based on the securities laws of the United States or any state thereof. A United Kingdom court may not allow you to bring an action against Midatech or its directors based on the securities laws of the United States or any state thereof.

Midatech has no present intention to pay dividends on its ordinary shares in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of Midatech Depositary Shares appreciates.

Midatech has no present intention to pay dividends on its ordinary shares in the foreseeable future. Any determination by Midatech’s Board of Directors to pay dividends will depend on many factors, including its financial condition, results of operations, legal requirements and other factors. Accordingly, if the price of Midatech Depositary Shares falls in the foreseeable future and you sell your Midatech Depositary Shares, you will lose money on your investment, without the likelihood that this loss will be offset in part or at all by cash dividends.

Risks Related to the CVRs

You may not receive any payment on the CVRs.

Your right to receive any future payment on the CVRs will be contingent upon the achievement by Midatech and its subsidiaries of certain sales milestones with respect to Gelclair and Oravig in each of 2016 and 2017, as specified in the CVR Agreement, and Midatech’s ability to pay the CVRs when, and if, due. If the sales milestones specified in the CVR Agreement are not achieved for any reason within the time periods specified in such agreement, no payment will be made under the CVRs and the CVRs will expire valueless. Accordingly, the value, if any, of the CVRs is speculative, and the CVRs may ultimately have no value. See “ Description of the CVRs ” beginning on page 167.

You will not be able to determine the amount of cash to be received under the CVRs until the achievement of certain agreed upon sales milestones, which makes it difficult to value the CVRs.

If any payment is made on the CVRs, it will not be made until the achievement of certain agreed upon sales milestones. As such, you will not know the value, if any, of your CVRs until certain sales milestones occur, or until the CVRs expire.

 

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Your payment on the CVRs, if any, may be decreased by certain indemnification obligations.

Pursuant to the merger agreement, DARA stockholders must indemnify Midatech, its officers, directors, and affiliates for any misrepresentation or breach of any of the representations or warranties of DARA under the merger agreement or any breach or non-fulfillment of any covenant, agreement or obligation to be performed by DARA prior to closing under the merger agreement. Any damages or other costs that are payable pursuant to these indemnification obligations will be satisfied solely from an offset against payments otherwise payable to CVR holders under the CVR Agreement. As a result, any payments that may be due to you under the CVR Agreement may be reduced in whole or in part due to the indemnification and expense claims of Midatech in accordance with the merger agreement.

The CVRs are nontransferable.

The CVRs are nontransferable, meaning that they may not be sold, assigned, transferred, pledged, encumbered or in any other manner transferred or disposed of either in whole or in part, other than in certain limited circumstances. The CVRs will not be registered as securities and they will not be listed or traded on any stock exchange in the United States or elsewhere. Therefore, the CVRs are not liquid and you will not be permitted to sell or transfer them, except for in certain limited circumstances. See “ Description of the CVRs ” beginning on page 167.

The combined company’s requirement to achieve the CVR sales milestones is based on “commercially reasonable efforts,” which allows for consideration of a variety of factors to determine the efforts Midatech is required to take; accordingly, under certain circumstances Midatech may not be required to take certain actions to achieve the CVR sales milestones, or may allocate resources to other projects, which would have an adverse effect on the value, if any, of the CVRs.

Midatech has agreed to use commercially reasonable efforts, until the CVR Agreement is terminated, to achieve each of the CVR sales milestones. However, under the CVR Agreement, while the definition of “commercially reasonable efforts” does enumerate certain required actions, it allows for the consideration of a variety of factors in determining the efforts Midatech is required to use to achieve the sales milestones, and it does not require Midatech to take all possible actions to achieve these goals. As a result, factors and events may come to pass that result in Midatech permissibly devoting less effort to achievement of the sales milestones than DARA would have devoted had DARA remained a stand-alone company.

The CVR Agreement states that Midatech’s undertakings as to commercially reasonable efforts will not limit its ability to operate in the same manner as it would had it not entered into the CVR Agreement, including but not limited to full discretion as to (i) the determination of pricing of products, (ii) the acceptance or rejection of any product sales or orders, (iii) the determination to discontinue the business or certain product lines (other than Gelclair and Oravig, the products on which the CVR sales milestones are based), or to incorporate the activities of such business or product line into Midatech or its affiliates, (iv) all decisions concerning production, marketing, sales, licensing, capital expenditures, expenses and related matters respecting the operations of the combined company and its business, or any part thereof, and (v) all decisions pertaining to personnel, staffing and other resources of the combined company.

Any payments in respect of the CVRs rank at parity with Midatech’s other indebtedness.

The CVRs will rank equal in right of payment to all existing and future unsecured unsubordinated indebtedness of Midatech, and senior in right of payment to all subordinated indebtedness of Midatech. The CVRs, however, will be effectively subordinated in right of payment to all of Midatech’s secured obligations to the extent of the collateral securing such obligations. Additionally, the CVRs will be effectively subordinated to all existing and future indebtedness, claims of holders of capital stock and other liabilities, including trade payables, of Midatech and its subsidiaries.

 

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Risks Related to the Combined Company

Midatech and DARA may experience difficulties integrating their businesses.

Currently, each company operates as an independent public company. Achieving the anticipated benefits of the merger will depend in significant part upon whether the two companies integrate their businesses in an efficient and effective manner. Due to legal restrictions, Midatech and DARA have been able to conduct only limited planning regarding the integration of the two companies following the merger and have not yet determined the exact nature of how the businesses and operations of the two companies will be combined after the merger. The actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. The companies may not be able to accomplish the integration process smoothly, successfully or on a timely basis. The necessity of coordinating geographically separated organizations, systems of controls, and facilities and addressing possible differences in business backgrounds, corporate cultures and management philosophies may increase the difficulties of integration. The companies operate numerous systems and controls, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits, payroll and regulatory compliance. The integration of operations following the merger will require the dedication of significant management and external resources, which may temporarily distract management’s attention from the day-to-day business of the combined company and be costly. Employee uncertainty and lack of focus during the integration process may also disrupt the business of the combined company. Any inability of management to successfully and timely integrate the operations of the two companies could have a material adverse effect on the business and results of operations of the combined company.

The combined company may not fully realize the anticipated synergies and related benefits of the merger or within the timing anticipated.

Midatech and DARA entered into the merger agreement because each company believes that the merger will be beneficial to each of Midatech, the Midatech stockholders, DARA and the DARA stockholders including, among other things, as a result of the anticipated synergies resulting from the combined company’s operations. The companies may not be able to achieve any anticipated operating and cost synergies or long-term strategic benefits of the merger within the timing anticipated or at all. For example, elimination of any duplicative costs may not be fully achieved or may take longer than anticipated. For at least the first year after the merger, and possibly longer, the benefits from the merger will be offset by the costs incurred in integrating the businesses and operations, or adverse conditions imposed by regulatory authorities on the combined business in connection with granting approval for the merger. An inability to realize the full extent of, or any of, the anticipated synergies or other benefits of the merger, as well as any delays that may be encountered in the integration process, which may delay the timing of such synergies or other benefits, could have an adverse effect on the business and results of operations of the combined company, and may affect the value of the Midatech ordinary shares and Midatech Depositary Shares after the completion of the merger.

The merger may not be accretive and may cause dilution to the combined company’s earnings per share, which may harm the market price of each Midatech ordinary share and Midatech Depositary Shares after the merger.

While Midatech believes the merger has the potential to be accretive to future earnings, there can be no assurance with respect to the timing and scope of the accretive effect or whether it will be accretive at all. The combined company could encounter additional transaction and integration-related costs or other factors such as the failure to realize all of the benefits anticipated in the merger or a downturn in its business. All of these factors could cause dilution to the combined company’s earnings per share or decrease the expected accretive effect of the merger and cause a decrease in the price of Midatech Depositary Shares and Midatech ordinary shares after the merger.

 

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Although Midatech and DARA expect that the merger will result in benefits to the combined company, the combined company may not realize those benefits because of various challenges and, as a result, the price of Midatech Depositary Shares and Midatech ordinary shares may be adversely affected.

Midatech and DARA believe that the merger will successfully combine DARA’s licensing portfolio with Midatech’s portfolio of products, resulting in a successful combined company with future growth opportunities. Realizing the benefits anticipated from the merger will depend, in part, on the following:

 

    retaining key DARA employees;

 

    maintaining and continually developing successful licensing collaborations, particularly with respect to Oravig and Gelclair; and

 

    successfully integrating DARA’s portfolio into the combined company’s various distribution channels.

The integration of a new company is a complex, costly and time-consuming process. This process may disrupt the business of either or both of the companies, and may not result in the full benefits expected by Midatech and DARA. There can be no assurance that the combination of Midatech with DARA will result in the realization of the anticipated benefits from the merger. If the anticipated benefits are not realized, the price of Midatech Depositary Shares and Midatech ordinary shares may be adversely affected.

The success of the combined company will depend in part on the combined company’s ability to successfully execute DARA’s business strategy in the future.

DARA’s primary business strategy is to in-license products for commercialization and enter into collaborative agreements with drug manufacturers. These measures are critical to the success of the combined company. However, the combined company may not be able to secure needed licensing or other partnering arrangements, and any such arrangements, even if completed successfully, may not be on terms favorable to the combined company, may not perform as expected, may result in unexpected liabilities and may never contribute significant revenues or cash flow. The combined company will depend to a significant extent on the expertise of and dedication of sufficient resources by its licensors, licensees and partners to develop and commercialize products. Each individual licensor, licensee or corporate partner will control the amount and timing of resources devoted by it to these activities. Moreover, the success of any such licenses or other alliances depends in part upon such partners’ own marketing and strategic considerations, including the relative advantages of alternative marketing partners and strategies. Corporate partners may pursue alternative technologies or develop products that are competitive with the combined company’s products. Disputes may arise between the combined company and one or more of its collaborative partners regarding the combined company’s collaborative arrangements. In such an event, the combined company may be required to initiate or defend expensive litigation or arbitration proceedings or to seek and attempt to reach agreement with another collaborative partner. The combined company may not be able to resolve successfully a dispute with a collaborative partner or to enter into a satisfactory arrangement with a replacement collaborative partner. If the combined company is not successful in executing its business strategy, it will not achieve the revenues it anticipates and its business may be materially harmed.

The combined company’s ability to generate revenues or profits from products originally licensed to DARA will be dependent upon successful operation of the dedicated sales force that will be contractually provided to the combined company by a third party. Any challenges that may arise in connection with the ongoing operations of the dedicated sales force, or any failure of the combined company’s marketing strategy to achieve the desired results, could have a material adverse effect on the combined company’s financial condition, operating results and stock price.

In October 2013, DARA entered into an agreement with Alamo Pharma Services, referred to as Alamo, for a 20 person national sales team in the U.S. oncology market. Pursuant to the agreement and a shared sales force agreement with Mission Pharmacal, referred to as Mission, Alamo’s parent company, since January 2014 the

 

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Alamo sales team has promoted DARA’s Soltamox (tamoxifen citrate) and Gelclair products, as well as Mission’s Ferralet 90 (for anemia) and Aquoral (for cancer related dry mouth). Mission’s products are concurrently being promoted by Mission in other non-oncology related therapeutic markets and all are under patent protection throughout the term of the agreement. In March of 2015, DARA also entered into a co-promotion agreement with Mission to co-promote Oravig in the primary care market.

The combined company’s ability to successfully market its product portfolio, and to generate revenues or profits from its products, will depend upon successful operation of the shared sales force that Alamo is currently providing to DARA, and subsequently to the combined company, under contract. There can be no assurances that the sales representatives will achieve the desired results or that they will be successful in marketing the combined company’s products. Pursuant to the contractual arrangements governing the sales force, the combined company will be responsible for significant financial obligations whether or not the sales force achieves the desired results, including fixed monthly fees subject to an annual escalator, reimbursement for certain expenses, implementation fees, and recruiting fees in connection with new hires for the sales force. If the sales force does not effectively market the combined company’s products as desired, the combined company’s financial condition, results of operations and stock price could be materially adversely affected.

The success of any products the combined company may commercialize will depend on the degree of market acceptance by physicians, patients, healthcare payers and others in the medical community.

Any products that the combined company brings to the market may not gain market acceptance by physicians, patients, healthcare payers and others in the medical community. If these products do not achieve an adequate level of acceptance, the combined company will not generate material product revenues and will not become profitable. The degree of market acceptance of the combined company’s product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

    the prevalence and severity of any side effects;

 

    the efficacy and potential advantages of alternative treatments;

 

    the prices of the combined company’s product candidates;

 

    the willingness of physicians to prescribe the combined company’s products; and

 

    sufficient coverage or reimbursement by the Centers for Medicare and Medicaid Services and third party payers.

The combined company will incur significant transaction- and integration-related costs in connection with the merger.

Midatech and DARA expect to incur non-recurring costs associated with combining the operations of the two companies, including potential charges and payments to be made to some of their employees pursuant to “change in control” contractual obligations. Midatech expects that the amount of these costs will be determined as of the effective time of the merger and may be material to the financial position and results of operations of the combined company. The substantial majority of non-recurring expenses resulting from the merger will be comprised of transaction costs related to the merger, facilities and systems consolidation costs, and employee-related costs. Midatech and DARA will also incur fees and costs related to formulating integration plans and performing these activities. Additional unanticipated costs may be incurred in the integration of the two companies’ businesses. The elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may not offset incremental transaction- and other integration-related costs in the near term.

Midatech may have failed to discover undisclosed liabilities of DARA.

Midatech’s investigations and due diligence review of DARA may have failed to discover undisclosed liabilities of DARA. If DARA has undisclosed liabilities, Midatech as a successor owner may be responsible for

 

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such undisclosed liabilities. Midatech has tried to minimize its exposure to undisclosed liabilities by obtaining certain protections under the merger agreement, including representations and warranties from DARA regarding undisclosed liabilities. However, there can be no assurance that such provisions in the merger agreement will protect Midatech against any undisclosed liabilities being discovered or provide an adequate remedy for any undisclosed liabilities that are discovered. Such undisclosed liabilities could have an adverse effect on the business and results of operations of Midatech and its subsidiaries and may adversely affect the value of the Midatech ordinary shares and Midatech Depositary Shares after the consummation of the merger.

The combined company’s goodwill or other intangible assets may become impaired, which could result in material non-cash charges to its results of operations.

The combined company will have a substantial amount of goodwill and other intangible assets resulting from the merger. At least annually, or whenever events or changes in circumstances indicate a potential impairment in the carrying value as defined by IFRS, the combined company will evaluate this goodwill for impairment based on the fair value of each reporting unit. Estimated fair values could change if there are changes in the combined company’s capital structure, cost of debt, interest rates, capital expenditure levels, operating cash flows, or market capitalization. Impairments of goodwill or other intangible assets could require material non-cash charges to the combined company’s results of operations.

The acquisition of other product lines or businesses by Midatech following the completion of the merger could pose risks to its business and the market price of each Midatech ordinary share and Midatech Depositary Shares.

Following the completion of the merger, Midatech intends to continue to review acquisition prospects that it believes could complement its business. Any such future acquisitions could result in accounting charges, potentially dilutive issuances of stock, increased debt and contingent liabilities, any of which could have an adverse effect on the combined company’s business and the market price of Midatech ordinary shares and Midatech Depositary Shares. Acquisitions entail many financial, managerial and operational risks, including difficulties integrating the acquired operations, effective and immediate implementation of internal controls over financial reporting, diversion of management attention during the negotiation and integration phases, uncertainty entering markets in which the combined company has limited prior experience and the potential loss of key employees of acquired organizations. The combined company may be unable to integrate product lines or businesses that it acquires, which could have an adverse effect on its business and on the market price of each Midatech ordinary share and Midatech Depositary Shares.

The loss of any member of the senior management team of the combined company or a significant number of its managers could have a material adverse effect on Midatech’s results of operations and financial condition.

After the completion of the merger, the combined company’s operations will depend heavily on the skills and efforts of its senior management team. In addition, Midatech will rely substantially on the experience of the management of its businesses with regard to day-to-day operations. While Midatech will have employment agreements with certain of the members of its senior management team, the combined company may be unable to retain the services of any of those individuals. The loss of any member of the senior management team of Midatech or a significant number of managers could have a material adverse effect on the combined company’s results of operations and financial condition.

Future results of the combined company may differ materially from the unaudited pro forma financial information included in this proxy statement/prospectus.

The combined company’s future results may be materially different from those shown in the unaudited pro forma financial information presented in this proxy statement/prospectus that show only a combination of Midatech’s and DARA’s historical results. Midatech expects to incur significant costs associated with

 

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completing the merger and combining the operations of the two companies, and the exact magnitude of these costs is not yet known. Furthermore, these costs may decrease capital that could be used by Midatech for future income-earning investments.

The combined company’s operations will be subject to extensive governmental regulation in each of the jurisdictions in which it operates.

In each of the jurisdictions in which it will operate, including the United Kingdom, the United States and the states that make up the European Union, the combined company will be subject to a variety of laws and regulations relating to pharmaceutical manufacturing, testing, approval, sales and marketing, trade, competition, taxes, employees and employee benefits, worker health and safety, product safety, the environment and other matters. Midatech may be required to make significant expenditures and to devote substantial management time and attention in order to operate its business in compliance with such laws and regulations. In addition, changes in these laws or regulations or their interpretations or enforcement may require Midatech to make significant additional expenditures or to change its business practices. If Midatech fails to comply with applicable laws and regulations, it could incur criminal or civil fines, penalties, assessments or other damages, which could be substantial, and it could have material restrictions or limitations placed on its business operations. In certain cases, governmental compliance actions may also give rise to potential claims for damages by private parties.

After the merger, Midatech will be a “foreign private issuer” under the rules and regulations of the SEC and, as a result, will be exempt from a number of rules under the Exchange Act and will be permitted to file less information with the SEC than a company incorporated in the United States.

Following completion of the merger, Midatech will continue to be incorporated as a public limited company in England and Wales and will be deemed to be a “foreign private issuer” under the rules and regulations of the SEC. As a foreign private issuer, Midatech will be exempt from certain rules under the Exchange Act that would otherwise apply if Midatech were a company incorporated in the United States, including:

 

    the requirement to file periodic reports and financial statements with the SEC as frequently or as promptly as United States companies with securities registered under the Exchange Act;

 

    the requirement to file financial statements prepared in accordance with GAAP;

 

    the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations; and

 

    the requirement to comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information.

In addition, Midatech’s officers, directors and principal shareholders will be exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the related rules with respect to their purchases and sales of Midatech ordinary shares and Midatech Depositary Shares. Accordingly, after the completion of the merger, if you hold Midatech Depositary Shares, you may receive less information about the combined company than you currently receive about DARA and be afforded less protection under the United States federal securities laws than you are entitled to currently.

Additional reporting requirements may apply if Midatech loses its status as a foreign private issuer.

If Midatech loses its status as a foreign private issuer at some future time, then it will no longer be exempt from such rules and, among other things, will be required to file periodic reports and financial statements as if it were a company incorporated in the United States. The costs incurred in fulfilling these additional regulatory requirements could be substantial.

 

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As a foreign private issuer, Midatech will not be required to comply with many of the corporate governance standards of NASDAQ applicable to companies incorporated in the United States.

Following completion of the merger, the Midatech Board of Directors will be required to maintain an audit committee comprised solely of three or more directors satisfying the independence standards of NASDAQ applicable to audit committee members. As a foreign private issuer, however, Midatech will not be required to comply with most of the other corporate governance rules of NASDAQ, including the requirement to maintain a majority of independent directors, and nominating and compensation committees of its Board of Directors comprised solely of independent directors. Although the AIM Rules and the United Kingdom Corporate Governance Code have comparable requirements, holders of Midatech Depositary Shares may not be afforded the benefits of the corporate governance standards of NASDAQ to the same extent applicable to companies incorporated in the United States.

Although Midatech’s reporting obligations as a foreign private issuer are fewer than those of a public company incorporated in the U.S., Midatech’s costs of complying with its SEC reporting requirements will be significant and its management will be required to devote substantial time to complying with SEC regulations.

Midatech is not currently subject to SEC rules. However, following the completion of the merger, Midatech will be a foreign private issuer and subject to certain SEC reporting requirements. Midatech expects to incur significant legal, accounting and other expenses, including costs associated with its SEC reporting requirements under the Exchange Act and compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Midatech must follow the rules, regulations and requirements adopted by the SEC and the rules of NASDAQ. Although it cannot precisely predict the final amount, Midatech believes that such ongoing expenses could be in excess of approximately $300,000 per year, which includes, among other things, increased legal and accounting expenses.

Additionally, most of Midatech’s current directors do not have experience managing U.S. public companies, and therefore, Midatech’s directors and other personnel will also need to devote a substantial amount of time and financial resources to comply with these rules, regulations and requirements. Given their limited experiences with U.S. public reporting and other facets of managing a U.S. public company, Midatech’s management may initially require additional services from accounting, legal and other professional advisors. In addition, the U.S. securities statutes, rules and regulations may make it more difficult and more expensive for Midatech to obtain director and officer liability insurance and it may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for Midatech to attract and retain qualified individuals to serve on its board of directors or as executive officers as well as divert management’s attention from implementing its business strategy.

Since Midatech will not be subject to SEC rules until completion of the merger, significant expenditures and senior management time may be required following the merger with respect to Midatech’s internal controls to ensure compliance with the requirements of Section 404 of the Sarbanes Oxley Act of 2002.

Section 404 of the Sarbanes Oxley Act of 2002 and the rules and regulations of the SEC promulgated thereunder require senior executive and senior financial officers of Midatech to assess the effectiveness of its internal control over financial reporting on an annual basis. To the extent that Midatech is discovered to have deficient internal controls, the combined company may be required to allocate significant monetary and management resources to remedy the deficiencies that could otherwise be devoted to its business operations.

Following the completion of the merger, Midatech will continue to prepare its financial statements using the British pound sterling as its reporting currency.

Midatech will continue to use the British pound sterling as its financial statement reporting currency following completion of the merger. Midatech’s financial results reported in the British pound sterling may differ materially from its results if reported in U.S. dollars due to changes in the exchange rates of the British pound

 

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sterling, the U.S. dollar and the currencies of other countries in which Midatech does business. Future changes in currency exchange rates could have a material adverse effect on Midatech’s financial results.

Midatech is an “emerging growth company” and it cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make its securities less attractive to investors.

Midatech is an “emerging growth company,” as defined under the Jumpstart Our Business Startups Act. Midatech will remain an “emerging growth company” for up to five years; provided, however, that if Midatech’s annual gross revenues exceed $1.0 billion, or its non-convertible debt issued within a three-year period or revenues exceeds $1 billion, or the market value of its common shares that are held by non-affiliates exceeds $700 million on the last day of the second fiscal quarter of any given fiscal year, Midatech would cease to be an emerging growth company as of the following fiscal year. As an emerging growth company, Midatech is not required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act of 2002, it has reduced disclosure obligations, including with regard to its audited financial statements and executive compensation, and it is exempt from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

Midatech intends to operate so as to be treated exclusively as a resident of the United Kingdom for tax purposes, but the relevant tax authorities may treat it as also being a resident of another jurisdiction for tax purposes.

Midatech is a public limited company incorporated under the laws of England and Wales. Under current English law, the decisions of the English courts and the published practice of HM Revenue and Customs suggest that Midatech is likely to be regarded as being a United Kingdom resident and should remain so if, as Midatech intends that, (i) all major meetings of its Board of Directors and most routine meetings are held in the United Kingdom with a majority of directors present in the United Kingdom for those meetings; (ii) at those meetings there are full discussions of, and decisions are made regarding, the key strategic issues affecting Midatech and its subsidiaries; (iii) those meetings are properly minuted; (iv) at least some of the directors of Midatech, together with supporting staff, are based in the United Kingdom; and (v) Midatech has permanent staffed office premises in the United Kingdom sufficient to discharge its functions.

Even if Midatech is considered by HM Revenue and Customs as resident in the United Kingdom for United Kingdom tax purposes, as expected, it would nevertheless not be treated as resident in the United Kingdom if (a) it were concurrently resident in another jurisdiction (applying the tax residence rules of that jurisdiction) that has a double tax treaty with the United Kingdom and (b) there is a tiebreaker provision in that tax treaty which allocates exclusive residence to that other jurisdiction. Because this analysis is highly factual and may depend on future changes in Midatech’s management and organizational structure, there can be no assurance regarding the final determination of Midatech’s tax residence. Should Midatech be treated as resident for tax purposes in another jurisdiction other than the United Kingdom, it would be subject to taxation in such jurisdiction in accordance with such jurisdiction’s laws, which could result in additional costs and expenses.

The operations of the combined company will be subject to risks and uncertainties relating to international conflicts and terrorism and other activists.

The combined company will be subject to risks relating to international conflicts, wars, internal civil unrest, trade embargoes, acts of terrorism and animal rights activists. Midatech may be subject to a higher level of risks of this type than some other companies due to its international operations and pharmaceutical testing. These operations may include sales in developing countries, which may be more likely than developed countries to be affected by international conflicts and terrorism. Risks of this type may affect facilities owned or operated by Midatech or facilities of its suppliers or customers.

 

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Risks Related to Midatech’s Financial Operations and Capital Needs

Midatech (including its successor entity, Midatech Limited) has incurred significant losses since its inception and anticipates that it will continue to incur losses in the future.

Midatech is an early-stage biopharmaceutical company. Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that a product candidate will fail to gain regulatory approval or become commercially viable. Midatech has not generated any revenue from product sales to date, and it continues to incur significant development and other expenses related to its ongoing operations. As a result, Midatech is not profitable and has incurred substantial losses since its inception. For the year ended December 31, 2014 and for the six months ended June 30, 2015, Midatech had a net loss of £9.1 million and £4.9 million, respectively, and an accumulated deficit of £29.2 million and £34.0 million, respectively.

Midatech expects to continue to incur losses for the foreseeable future, and expects these losses to increase as it continues its development of, and seek regulatory approvals for, its product candidates, and begins to commercialize any approved products. Midatech may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect its business. The size of Midatech’s future net losses will depend, in part, on the rate of future growth of its expenses and its ability to generate revenues. If any of Midatech’s or its subsidiaries’ product candidates fail in clinical trials or do not gain regulatory approval, or if approved, fail to achieve market acceptance, Midatech may never become profitable. Even if Midatech achieves profitability in the future, it may not be able to sustain profitability in subsequent periods. Midatech’s prior losses and expected future losses have had and will continue to have an adverse effect on its stockholders’ equity and working capital.

Midatech is an early-stage biopharmaceutical company with no source of revenue and there is no assurance that Midatech will successfully develop and commercialize its product or ever become profitable.

Midatech is at a relatively early stage of its commercial development. To date, Midatech has not generated any revenue from its product candidates. Midatech’s ability to generate revenue and become and remain profitable depends, in part, on its ability to successfully commercialize products, including any of its product candidates, or other product candidates it may in-license or acquire. Even if Midatech were to successfully achieve regulatory approval of its product candidates, Midatech does not know when any of the product candidates will generate revenue, if at all. Midatech’s ability to generate revenue from its current or future product candidates also depends on a number of additional factors, including its ability to:

 

    successfully complete development activities, including preclinical development and clinical trials for its product candidates;

 

    complete and submit new drug applications to the European Medicines Agency, referred to as the EMA, the Medicines and Healthcare Products Regulatory Agency in the United Kingdom, referred to as the MHRA, the United States Food and Drug Administration, referred to as the FDA, and any other foreign regulatory authorities, and obtain regulatory approval for testing and for products for which there is a commercial market;

 

    set a commercially viable price for its products;

 

    obtain commercial qualities of its products at acceptable cost levels;

 

    develop a commercial organization capable of sales, marketing and distribution in its markets; and

 

    obtain adequate reimbursement from third-parties, including government, departments and healthcare payors.

In addition, because of the numerous risks and uncertainties associated with product development, including that Midatech’s product candidates may not advance through development or achieve the endpoints of applicable

 

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clinical trials, Midatech is unable to predict the timing or amount of increased expenses, or when or if it will be able to achieve or maintain profitability. Even if Midatech is able to complete the process described above, it anticipates incurring significant costs associated with commercializing these products.

Even if Midatech is able to generate revenues from the sale of its products, it may not become profitable and may need to obtain additional funding to continue operations. If Midatech fails to become profitable or is unable to sustain profitability on a continuing basis, then it may be unable to continue its operations at planned levels and may be forced to reduce its operations.

Potential investors should be aware of the risks associated with an investment in companies with limited trading histories. There can be no assurance that Midatech will operate profitably, produce a reasonable return, if any, on investment, or remain solvent. If Midatech’s strategy proves unsuccessful, stockholders could lose all or part of their investment.

If Midatech requires or seeks to raise additional capital to fund its operations and it fails to obtain necessary financing, Midatech may be unable to complete the development and commercialization of its product candidates.

Midatech expects to continue to spend substantial amounts of its cash resources going forward in order to advance the clinical development of its product candidates and launch and commercialize any product candidates for which it receives regulatory approval. Midatech believes that its existing cash and cash equivalents and interest thereon will be sufficient to fund its projected operating requirements for at least the next 12 months. However, Midatech may require, or may determine to seek, additional capital for the further development and commercialization of its product candidates from time to time.

Until such time as Midatech can generate a sufficient amount of revenue from its products, if ever, it expects that it may finance future cash needs through, among things, public or private equity or debt offerings. Such offerings may take place in the United Kingdom or, following completion of the merger and the listing of Midatech Depositary Shares on NASDAQ, in the United States. Additional capital may not be available on reasonable terms, if at all. If Midatech is unable to raise additional capital in sufficient amounts or on terms acceptable to it, Midatech may have to significantly delay, scale back or discontinue the development or commercialization of one or more of its product candidates. If Midatech raises additional funds through the issuance of additional debt or equity securities that could result in dilution to Midatech’s existing stockholders, and/or increased fixed payment obligations. Furthermore, these securities may have rights senior to those of Midatech’s ordinary shares and could contain covenants that would restrict its operations and potentially impair its competitiveness, such as limitations on Midatech’s ability to incur additional debt, limitations on Midatech’s ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact Midatech’s ability to conduct its business. Any of these events could significantly harm Midatech’s business, financial condition and prospects.

Midatech’s forecast of the period of time through which its financial resources will be adequate to support its operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. Midatech has based this estimate on assumptions that may prove to be wrong, and it could utilize its available capital resources sooner than it currently expects. Midatech’s future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

    the initiation, progress, timing, costs and results of clinical trials for its product candidates and future product candidates it may in-license or acquire;

 

    the attainment of milestones and the need to make any royalty payments on any of its product candidates or any other future product candidates;

 

    the number and characteristics of product candidates it in-license or acquires and develop;

 

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    the outcome, timing and cost of regulatory approvals by the EMA, the MHRA, the FDA and any other comparable foreign regulatory authorities, including the potential for such regulatory authorities to require that Midatech perform more studies than those it currently expects;

 

    the cost of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights;

 

    the effect of competing technological and market developments; and

 

    the cost of establishing sales, marketing and distribution capabilities for any product candidates for which it may receive regulatory approval.

If a lack of available capital means that Midatech is unable to expand its operations or otherwise capitalize on its business opportunities, its business, financial condition and results of operations could be materially adversely affected.

Risks Related to Midatech’s Business and Industry

Midatech’s future success is dependent on product development and regulatory approval and commercialization of its products candidates and any product candidates it may acquire in the proposed merger with DARA.

Midatech does not currently have any products that have gained regulatory approval. Midatech continues to conduct clinical trials and research and development for its products, and there can be no assurance that any of Midatech’s targeted developments will be successful. Midatech must develop functional products that address specific market needs. It must therefore engage in new conjugate identification and development activities, which may not produce innovative, commercially viable results in a timely manner or at all. In addition, Midatech may not be able to develop new technologies or identify specific market needs that are addressable by its technologies, or technologies available to it. Midatech may encounter delays and incur additional development and production costs and expenses, over and above those expected, in order to develop technologies and products suitable for licensing. If Midatech’s development program is curtailed due to any of the above issues, this may have an adverse material effect on Midatech’s business and financial conditions.

Midatech’s business is dependent on its ability to complete the development of, obtain regulatory approval for and commercialize its product candidates in a timely manner. Midatech cannot commercialize a product without first obtaining regulatory approval from the appropriate regulatory authorities in a country. Before obtaining regulatory approvals for the commercial sale of any product candidate for a target indication, Midatech must demonstrate with substantial evidence gathered in preclinical and well-controlled clinical studies that the product candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls are adequate. The process to develop, obtain regulatory approval for and commercialize product candidates is long, complex and costly. Even if a product candidate were to successfully obtain approval from the EMA, the MHRA, the FDA and comparable foreign regulatory authorities, any approval might contain significant limitations related to use restrictions for certain age groups, warnings, precautions or contraindications, or may be subject to burdensome post-approval study or risk management requirements. If Midatech is unable to obtain regulatory approval for its product candidates in one or more jurisdictions, or any approval contains significant limitations, it may not be able to obtain sufficient funding or generate sufficient revenue to continue the development of any other product candidate that it is currently developing or that it may in-license or acquire in the future. Furthermore, even if Midatech obtains approval for a product candidate from the regulatory authorities, it will still need to develop a commercial organization, establish commercially viable pricing and obtain approval for adequate reimbursement from third parties and government departments and healthcare payors. If Midatech is unable to successfully commercialize its current product candidates, or continue to commercialize any of DARA’s products following the merger, it may not be able to earn sufficient revenues to continue its business.

 

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Clinical drug development involves a risky, lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of Midatech’s product candidates may not be predictive of the results of later-stage clinical trials, even after seeing promising results in earlier clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Midatech’s future clinical trial results may not be successful.

Midatech has clinical trials ongoing for its transbuccal insulin program, which entered Phase IIa clinical trials in July 2015. Midatech may experience delays in its ongoing or future 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. Clinical trials may be delayed, suspended or prematurely terminated for a variety of reasons, such as:

 

    delay or failure in reaching agreement with the applicable regulatory authorities on a trial design that Midatech is able to execute;

 

    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;

 

    delay or failure in reaching agreement on acceptable terms with prospective contract research organizations, referred to as CROs, and clinical trial providers and sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial site;

 

    delay or failure in obtaining institutional review board approval, referred to as IRB, or the approval of other reviewing entities, including regulatory authorities, to conduct a clinical trial at each site;

 

    withdrawal of clinical trial sites from Midatech’s clinical trials as a result of changing standards of care or the ineligibility of a site to participate in Midatech’s clinical trials;

 

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

 

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

 

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

 

    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 indication;

 

    failure of Midatech’s third party clinical trial managers to satisfy their contractual duties or meet expected deadlines;

 

    the failure to receive the recommendation of the United Kingdom National Institute for Health and Care Excellence, referred to as NICE;

 

    delay or failure in adding new clinical trial sites;

 

    ambiguous or negative interim results, or results that are inconsistent with earlier results;

 

    feedback from the EMA, the MHRA, the FDA, the IRB, data safety monitoring boards, or other regulatory authority, or results from earlier stage or concurrent preclinical and clinical studies, that might require modification to the protocol;

 

    decisions by the EMA, the MHRA, the FDA, the IRB, other regulatory authorities, or Midatech, or recommendation by a data safety monitoring board or other regulatory authority, to suspend or terminate clinical trials at any time for safety issues or for any other reason;

 

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    unacceptable risk-benefit profile or unforeseen safety issues or adverse side effects;

 

    failure to demonstrate a benefit from using a drug;

 

    manufacturing, including manufacturing or obtaining from third parties sufficient quantities of a product candidate for use in clinical trials; or

 

    changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.

If Midatech experiences delays in the completion of, or termination of, any ongoing or future clinical trial of Midatech’s product candidates, the commercial prospects of its product candidates will be harmed, and its ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing Midatech’s clinical trials may increase Midatech’s costs, slow down its product candidate development and approval process and jeopardize its ability to commence product sales and generate revenues. Any of these occurrences may harm Midatech’s business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of Midatech’s product candidates.

The regulatory approval processes in the United States and Europe are lengthy, time consuming and inherently unpredictable, and if Midatech is ultimately unable to obtain regulatory approval for its product candidates, its business may be substantially harmed.

The time required to obtain approval by the EMA, the MHRA, the FDA and other comparable foreign regulatory authorities is unpredictable but typically takes many years following the commencement of preclinical studies and clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. Midatech has not obtained regulatory approval for any product candidate and it is possible that none of its existing product candidates or any product candidates it may in-license or acquire and seek to develop in the future will ever obtain regulatory approval.

Midatech’s product candidates could fail to receive regulatory approval from the EMA, the MHRA, the FDA and other comparable foreign regulatory authorities for many reasons, including:

 

    disagreement with the design or implementation of Midatech’s clinical trials;

 

    failure to demonstrate that a product candidate is safe and effective for its proposed indication;

 

    failure of clinical trials to meet the level of statistical significance required for approval;

 

    failure to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

    disagreement with Midatech’s interpretation of data from preclinical studies or clinical trials;

 

    the insufficiency of data collected from clinical trials of Midatech’s product candidates to support the submission and filing of a new drug application or other submission or to obtain regulatory approval;

 

    disapproval of the manufacturing processes or facilities of third party manufacturers, if any, with whom Midatech contracts for clinical and commercial supplies; or

 

    changes in the approval policies or regulations that render Midatech’s preclinical and clinical data insufficient for approval.

In addition, the EMA, the MHRA, the FDA and other comparable foreign regulatory authorities may require more information, including additional preclinical or clinical data to support approval, which may delay or prevent approval and Midatech’s commercialization plans, or Midatech may decide to abandon the development program. If Midatech were to obtain approval, regulatory authorities may approve any of its product candidates

 

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for fewer or more limited indications than it requests, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. In addition, if Midatech’s product candidate produces undesirable side effects or safety issues, the regulatory authorities (the FDA, MHRA, EMA or a comparable foreign regulatory authority) may require the establishment of Risk Mitigation Strategy, that may, for instance, restrict distribution of Midatech’s products and impose burdensome implementation requirements on it. Any of the foregoing scenarios could materially harm the commercial prospects for Midatech’s product candidates.

Midatech’s product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following any marketing approval.

Undesirable side effects caused by any of Midatech’s product candidates could cause it or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the EMA, the MHRA, the FDA or other comparable foreign regulatory authority. Results of Midatech’s trials could reveal a high and unacceptable severity and prevalence of side effects. In such an event, Midatech’s trials could be suspended or terminated and the regulatory authorities could order it to cease further development of or deny approval of its product candidates for any or all targeted indications. The 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 Midatech’s business, financial condition and prospects significantly.

Additionally if one or more of Midatech’s product candidates receives marketing approval, and it or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:

 

    Midatech may suspend marketing of such product;

 

    regulatory authorities may withdraw approvals of such product or may require additional warnings on the label;

 

    Midatech may be required to develop a Risk Mitigation Strategy for each product or, if a strategy is already in place, to incorporate additional requirements;

 

    Midatech may be required to conduct post-market studies; and

 

    Midatech could be sued and held liable for harm caused to subjects or patients.

Consequently, Midatech’s reputation may suffer.

Any of these events could prevent Midatech from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm its business, results of operations and prospects.

Even if Midatech’s product candidates are approved by regulatory authorities, they may still face future development, manufacturing and regulatory difficulties.

Even if Midatech receives regulatory approval for a product candidate, it would be subject to the ongoing requirements of the EMA, the MHPA, the FDA and other regulatory agencies governing the manufacturer, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information. The safety profile of any product will continue to be closely monitored by the EMA, the MHRA, the FDA and other regulatory authorities after approval. If the EMA, the MHRA, the FDA or other regulatory authorities become aware of new safety information after approval of any of Midatech’s product candidates, regulatory authorities,

 

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may require labeling changes or establishment of a risk mitigation strategy or similar strategy, impose significant restrictions on a product’s indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance.

In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the EMA, the MHRA, the FDA and other governmental regulatory authorities for compliance with current good manufacturing practices, referred to as cGMP, regulations. If Midatech or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or Midatech, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. If Midatech, its product candidates or the manufacturing facilities for its product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

 

    issue warning letter or untitled letters;

 

    mandate modifications to, or the withdrawal of, marketing and promotional materials or require Midatech to provide corrective information to healthcare practitioners;

 

    require Midatech to enter into a consent decree, which can include the imposition of various fines against Midatech, reimbursements of inspection costs, required due dates for specific actions and penalties for noncompliance;

 

    seek an injunction or impose civil or criminal penalties or monetary fines;

 

    suspend or withdraw its regulatory approval;

 

    suspend any ongoing clinical studies;

 

    refuse to approve pending applications or supplements to applications filed;

 

    suspend or impose restrictions on operations, the products, manufacturing or Midatech itself;

 

    require Midatech to change its product labeling; or

 

    seize or detain products, refuse to permit the import or export of products or require Midatech to initiate a product recall.

The occurrence of any of these events may inhibit Midatech’s ability to commercialize its products and generate revenue.

Any advertising and promotion of any product candidate that obtain approval by regulatory authorities will be heavily scrutinized.

Advertising and promotion of any product candidate that obtains approval will be heavily scrutinized by various regulatory authorities in the jurisdictions in which the product is promoted. Violations, including promotion of Midatech’s products for unapproved (or off-label) uses, are subject to enforcement letters, inquiries and investigations, and civil and criminal sanctions by the FDA and other governmental agencies.

In the United States, engaging in impermissible promotion of Midatech’s products for off-label uses can subject Midatech to false claims litigation under federal and state statutes, which if successful could result in civil and criminal penalties and fines and agreements that materially restrict the manner in which a company promotes or distributes drug products. These false claims statutes include the federal False Claims Act, which allows any individual to bring a lawsuit against a pharmaceutical company on behalf of the federal government alleging submission of false or fraudulent claims, or causing to present such false or fraudulent claims, for payment by a federal program such as Medicare or Medicaid. If the government prevails in the lawsuit, the individual will share in any fines or settlement funds. Since 2004, these False Claims Act lawsuits against pharmaceutical companies have increased significantly in volume and breadth, leading to several substantial civil

 

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and criminal settlements based on certain sales practices promoting off-label drug uses. For instance, in 2009, Pfizer, Inc. paid $2.3 billion to settle civil and criminal allegations for illegally marketing four products and in 2012 GlaxoSmithKline paid $3 billion to resolve U.S. government investigations focused in large part on promotional practices, the largest False Claims Act settlement to date. This growth in litigation has increased the risk that a pharmaceutical company will have to defend a false claim action, pay settlement fines or restitution, agree to comply with burdensome reporting and compliance obligations, and be excluded from the Medicare, Medicaid, and other federal and state healthcare programs. If Midatech successfully launches an approved product in the United States, and if it does not lawfully promote its approved products, it may become subject to such litigation and, if it is not successful in defending against such actions, those actions may have a material adverse effect on its business, financial condition and results of operations.

Midatech is dependent on a limited number of customers, collaborators and partners.

A significant proportion of Midatech’s current income is, and is anticipated to continue to be in the near future, derived from a relatively small number of customers, collaborators and partners, including licensing income, royalty revenue, grants and joint ventures. The loss of any of these could have a negative impact on Midatech’s business, financial condition and results of operations.

Midatech’s future commercialization strategy includes possible royalty revenue, which may expose Midatech to risks.

Midatech’s commercialization strategy includes possible revenue generation from product royalty deals, including in respect of Midatech’s transbuccal insulin products. The right to receive possible product royalty revenues in the future may be challenged by the customer or licensee or there may be legal restrictions on the payment of royalties on product sales. Remittance of royalty revenues to Midatech may be restricted from certain territories or subject to withholding taxes that Midatech may not be able to recover or offset.

The commercial success of Midatech’s products is not guaranteed.

There can be no assurance that any of Midatech’s product candidates currently in development will be successfully developed into any commercially viable product or products and/or be manufactured in commercial quantities at an acceptable cost or be marketed successfully and profitably. If Midatech, or its partners, encounters delays at any stage of development, and fails successfully to address such delays, it may have a material adverse effect on Midatech’s business, financial condition and prospects. In addition, Midatech’s success will depend on the market’s acceptance of its products and there can be no guarantee that this acceptance will be forthcoming or that Midatech’s technologies will succeed as an alternative to competing products. The development of a market for Midatech’s products is affected by many factors, some of which are beyond Midatech’s control, including the emergence of newer, more effective technologies and products, and the cost of Midatech’s products themselves, including the availability of products for which healthcare reimbursement is available. Notwithstanding the technical merits of a product developed by Midatech, there can be no guarantee that the customer base of Midatech’s distributors for the products will purchase or continue to purchase the particular product. Demand for Midatech’s products may also decrease if governments amend their policies on limiting drug costs or reimbursement practice or other healthcare reform measures within public health provision or private insurance-based models. If a market fails to develop or develops more slowly than anticipated, Midatech may be unable to recover the costs it may have incurred in the development of particular products and may never achieve profitable revenues from that product. In addition, Midatech’s directors cannot guarantee that Midatech will continue to identify, develop, manufacture or market its products if market conditions do not support the continuation of such product.

 

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If Midatech is unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell its product candidates, it may be unable to generate any revenue.

Midatech does not currently have an organization for the sales, marketing and distribution of pharmaceutical products and the cost of establishing and maintaining such an organization may exceed the cost-effectiveness of doing so. In order to market any products that may be approved by the EMA, the MHRA, the FDA and other comparable foreign regulatory authorities, Midatech must build its sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. If Midatech is unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, it may not be able to generate product revenue and may not become profitable. Midatech will be competing with many companies that currently have extensive and well-funded sales and marketing operations. Without an internal commercial organization or the support of a third party to perform sales and marketing functions, Midatech may be unable to compete successfully against these more established companies.

The majority of Midatech’s revenues are derived from licensing or collaboration agreements with other organizations.

The majority of Midatech’s revenues are currently, and will likely in the near future be, derived from licensing or collaboration agreements with other biopharmaceutical companies, research institutes and universities. Midatech’s success is dependent on these commercial arrangements and on similar arrangements for future exploitation of product candidates in development that have not yet been partnered. Midatech’s collaborators have substantial responsibility for some of the development and commercialization of Midatech’s product candidates. Certain of Midatech’s collaborators also have significant discretion over the resources they devote to these efforts. Midatech’s success, therefore, will depend on the ability and efforts of those third parties. Midatech cannot guarantee that these collaborators will devote sufficient resources to collaborations with Midatech or that Midatech’s product candidates can be developed and commercialized without these collaborators. In addition, there can be no assurance that any company that enters into agreements with Midatech will not pursue alternative technologies, either on its own or in collaboration with others, including Midatech’s competitors, as a means of developing treatments for the conditions targeted by those products which Midatech has licensed. Some of Midatech’s collaboration agreements are contracted, and are likely to be contracted in the future, with partners who are in strong negotiating positions and who have greater financial resources than Midatech. While Midatech seeks to negotiate contracts on terms that it considers are the most beneficial to it, a number of existing contracts contain, and Midatech’s directors expect that future contracts may contain, what could be considered potentially onerous terms for Midatech, such as (in some cases) on-demand termination, uncapped indemnities, extensive warranties and broad confidentiality restrictions (in terms of scope and time).

If claims on liability and indemnity were to be successfully made under such contracts (i) Midatech could be liable for substantial damage awards that may significantly exceed its liability insurance coverage by unknown but significant amounts; (ii) result in early termination of contracts; and/or (iii) incur financial penalties, all of which could materially and adversely affect Midatech’s financial condition.

Further, if Midatech fails to meet its obligations under its licensing agreements or collaboration agreements, Midatech’s licensors or collaborators may have the right to terminate these agreements. Any uncured, material breach under the licenses or collaboration agreements could result in Midatech’s loss of its rights and may lead to a complete termination of its product development and any commercialization efforts for the applicable product candidate.

The pharmaceutical and biotechnology industries are highly competitive.

The development and commercialization of new drug products is highly competitive. Midatech’s business faces competition from a range of major and specialty pharmaceutical and biotechnology companies worldwide with respect to its product candidates, and will face competition in the future with respect to any product candidates that it may seek to develop or commercialize. There are a number of pharmaceutical and biotechnology companies that currently market and sell products or are pursuing development of products similar

 

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to Midatech’s technology and product candidates. From a technology perspective, Midatech believes other companies using gold nanoparticle technologies include AuraSense Therapeutics, CytImmune Sciences, Inc., and Nanospectra Biosciences, Inc. From a therapeutic perspective, Midatech believes other companies using non-injectable insulin include Mannkind Corporation, Oramed Pharmaceuticals, Inc., and Generex Biotechnology Corporation. Midatech is one of the few focused on buccal administration. In oncology, there are marketed nanodrugs on the market including a paclitaxel protein-bound particles for injectable suspension, known by its brand name Abraxane and marketed by Celgene Corporation, for breast and various other cancers, doxorubicin HCI liposome injection, known by its brand name Doxil and marketed by Janssen Products, for ovarian cancer, lyso-thermosensitive liposomal doxorubicin, known by its brand name ThermoDox and marketed by Celsion Corporation, for breast and liver cancer, as well as a number of drugs in development for various cancers at Phase I or II. Some of these competitive products and therapies are based on scientific approaches that are the same or similar to Midatech’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 collaborate arrangements for research, development, manufacturing and commercialization.

Midatech’s competitors in the biotechnology and pharmaceutical industries may have superior research and development capabilities, products, manufacturing capability or sales and marketing expertise. Many of Midatech’s competitors may have significantly greater financial and human resources and may have more experience in research and development.

As a result of these factors, Midatech’s competitors may obtain regulatory approval of their products more rapidly than Midatech is able to or may obtain patent protection of other intellectual property rights that limit Midatech’s ability to develop or commercialize its product candidates. Midatech’s competitors may also develop products that are more effective, more widely used and less costly than its own products, and may be more successful in manufacturing and marketing their products.

Midatech anticipates that it will face increased competition in the future as new companies enter Midatech’s markets and alternative products and technologies become available. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of Midatech’s 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 us in recruiting and retaining qualified scientific, management and commercial personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, its programs.

Even if Midatech is able to commercialize its product candidates, the products may become subject to unfavorable pricing regulation, third party reimbursement practices or healthcare reform initiatives, which could harm Midatech’s business.

The regulations that govern marketing approvals, pricing and reimbursement for new drug and biological products vary widely from country to country. Some countries require approval of the sale price of a product before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, Midatech may obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay its commercial launch of the product, possibly for lengthy time periods, which could negatively impact the revenues it is able to generate from the sale of the product in that particular country. Adverse pricing limitations may hinder Midatech’s ability to recoup its investment in one or more product candidates even if its product candidates obtain marketing approval.

Midatech’s ability to commercialize any products successfully will also depend in part on the extent to which coverage and reimbursement for these products and related treatments will be available from government

 

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health administration authorities, private health insurers and other organizations. Government authorities and third party payors, such as private health insurers and health maintenance organizations, determine which medications they will cover and establish reimbursement levels. A primary trend in the healthcare industry is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. Third party payors also may seek additional clinical evidence, beyond the data required to obtain marketing approval, demonstrating clinical benefits and value in specific patient populations, before covering Midatech’s products for those patients. Midatech cannot be sure that coverage and reimbursement will be available for any product that it commercializes and, if reimbursement is available, what the level of reimbursement will be. Coverage and reimbursement may impact the demand for, or the price of, any product candidate for which Midatech obtains marketing approval. If reimbursement is not available or is available only to limited levels, Midatech may not be able to successfully commercialize any product candidate for which it obtains marketing approval.

In the United States in the past, payors have implemented reimbursement metrics and periodically revised those metrics as well as the methodologies used as the basis for reimbursement rates, such as average sales price, referred to as ASP, average manufacturer price, referred to as AMP, and actual acquisition cost. For drugs furnished by hospital outpatient departments, separate payment is not made by Medicare for products that do not exceed a cost per day threshold. It is possible that Midatech’s products also would not be paid separately by Medicare in this setting. The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates. The Centers for Medicare and Medicaid Services, referred to as CMS, the federal agency that administers the Medicare and Medicaid programs, has made draft National Average Drug Acquisition Cost, referred to as NADAC, and draft National Average Retail Price, referred to as NARP, data publicly available on at least a monthly basis. In July 2013, CMS suspended the publication of draft NARP data, pending funding decisions. In November 2013, CMS moved to publishing final rather than draft NADAC data and has since made updated NADAC data publicly available on a weekly basis. As a result of this continuous evolution, it may be difficult to project the impact of these evolving reimbursement mechanics on the willingness of payors to cover Midatech’s products in the United States for which it receives regulatory approval. In most European Union countries, prescription drug pricing and/or reimbursement is subject to governmental control. In those countries, that impose price controls, 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 may require conducting a clinical trial that compares the cost effectiveness of Midatech’s products to over available therapies.

There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the EMA, the MHRA, the FDA or comparable foreign regulatory authorities. Moreover, eligibility for coverage and reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers Midatech’s costs, including research, development, manufacturing, selling and distribution costs. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover Midatech’s costs and may only be temporary. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and, in the United States, by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. In the United States, third party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Midatech’s inability to promptly obtain coverage and profitable reimbursement rates from both government-funded and private payors for any approved products that it develops could have a material adverse effect on its operating results and overall financial condition.

 

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Recently enacted and future legislation in the United Kingdom, United States and other foreign jurisdictions may increase the difficulty and cost for Midatech to obtain marketing approval of and commercialize its product candidates and affect the prices it may obtain.

In the United Kingdom, United States and other foreign jurisdictions, legislative and regulatory changes and proposed changes regarding the healthcare system could prevent or delay marketing approval of Midatech’s product candidates, restrict or regulate post-approval activities and affect its ability to profitably sell any product candidates for which it obtains marketing approval. Members of the European Union, or signatories thereto, are obliged to integrate directives into their national laws. European Union regulations, as in other European Union Member States, become immediately and directly enforceable in the member territories. These include without limitation:

 

    Directive 2001/83/EC of 6 November 2001 on the European Community code as regards medicinal products for human use;

 

    Commission Directive 2003/94/EC of October 8, 2003 enforcing principles and guidelines of good manufacturing practice as they related to medicinal products and investigational medicinal products for human use;

 

    Commission Directive 2005/28/EC of April 8, 2005 establishing the principles and guidelines for good clinical practice relating to investigational medicinal products for human use, and the authorization requirements for the manufacturing or import thereof; and

 

    Council Directive 89/105/EEC, of December 21, 1988, addressing the transparency of measures that regulate pricing of medicinal products for human use and their inclusion in national health insurance systems.

In the United Kingdom, the regulation of medicinal products derives from European Union legislation, particularly Directive 2001/83/EC on the European Community code relating to medicinal products for human use, and Regulation (EC) 726/2004 on the authorization and supervision of medicinal products and establishing the EMA. This legislation has been adopted in the United Kingdom by the Human Medicines Regulations 2012 (SI 2012/1916) and applied through the MHRA, which is the an executive agency of the Department of Health implementing pharmaceutical legislation in the United Kingdom.

In the European Union, marketing approvals can be submitted through the national, mutual recognition or decentralized procedures. For marketing authorizations submitted through the centralized procedure, the EMA is responsible. The EMA advises the European Commission in relation to decisions on marketing authorizations.

Reimbursement in the European Union is typically controlled by statutory stipulations and controls on pharmaceutical pricing. Healthcare is broadly divided into public and private health. Products that are not to be supplied through the countries’ public health services are typically less subject to price controls. All medicines validly prescribed on a public health prescription are in principle reimbursed from that country’s public funds.

In many European Union member states and signatories, a separate cost/benefit analysis may be required or requested (not a legal requirement) in order for prescribed products to be reimbursed. In the United Kingdom, most new medicines undergo an assessment by the National Institute for Health and Care Excellence, referred to as NICE, which will issue guidance on if and how to use the product in the National Health Service, referred to as the NHS, in England and Wales. This decision is largely based on the opinion of NICE regarding clinical effectiveness and cost effectiveness relative to alternative therapies. NICE appraisals follow a comprehensive and inclusive process including consultations with and contributions from stakeholders. Clinicians are expected to take NICE’s guidance into account when making prescribing decisions. Where NICE issues a positive recommendation, NHS bodies are required to make funding available to cover the cost of the product as a treatment option, consistent with NICE’s guidance. In contrast, products which are not recommended by NICE are generally not funded on a routine basis.

 

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In the United States, in recent years, Congress has considered reductions in Medicare reimbursement levels for drugs administered by physicians. CMS also has authority to revise reimbursement rates and to implement coverage restrictions for some drugs. Cost reduction initiatives and changes in coverage implemented through legislation or regulation could decrease utilization of and reimbursement for any approved products, which in turn would affect the price Midatech can receive for those products. While Medicare regulations apply only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from federal legislation or regulation may result in a similar reduction in payments from private payors.

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, referred to collectively as the Affordable Care Act. This law substantially changes the way healthcare is financed by both governmental and private insurers in the United States, and significantly impacts the pharmaceutical industry. The Affordable Care Act is intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers, and impose additional health policy reforms. The Affordable Care Act expanded manufacturers’ rebate liability under the Medicaid program from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well; increased the minimum Medicaid rebate due for most innovator drugs in general from 15.1% of average manufacturer price to 23.1% of average manufacturer price; and capped the total rebate amount for innovator drugs at 100% of average manufacturer price. The Affordable Care Act and subsequent legislation also changed the definition of AMP. The Affordable Care Act requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government. Each such manufacturer pays a prorated share of the branded prescription drug fee of $3.0 billion in 2015, based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law. Substantial new provisions affecting compliance have also been enacted, which may affect Midatech’s business practices with healthcare practitioners if its product candidates are approved and marketed in the United States. The Affordable Care Act also expanded the 340B program to include additional types of covered entities.

It appears likely that the Affordable Care Act will continue the pressure on pharmaceutical pricing, especially under the Medicare and Medicaid programs, and may also increase regulatory burdens and operating costs.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. Beginning April 1, 2013, Medicare payments for all items and services, including drugs and biologics, were reduced by 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012. The Bipartisan Budget Act of 2013 extended the 2% reduction to 2023, and the Protecting Access to Medicare Act of 2014 extended the 2% reduction, on average, to 2024. If Congress does not take action in the future to modify these sequestrations, Medicare Part D plans could seek to reduce their negotiated prices for drugs. Other legislative or regulatory cost containment provisions, as described below, could have a similar effect.

Midatech cannot be sure whether additional legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of Midatech’s product candidates, if any, may be.

Midatech is subject to environmental laws and regulations in the United Kingdom and the European Union, and the upon the closing of the merger, in the United States, that govern the use, storage, handling and disposal of hazardous materials and other waste products.

Midatech is, or may become following the merger, subject to English law, European Union’s laws and regulations, and European Union and United States environmental laws and regulations governing the use, storage, handling and disposal of hazardous materials and other waste products. Midatech has health and safety

 

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policies and procedures in place to assess the risks associated with use of hazardous materials, and the assessment includes information for employees on how the substances should be used to avoid contamination of the environment and inadvertent exposure to themselves and their colleagues. Despite its precautions for handling and disposing of these materials, Midatech cannot eliminate the risk of accidental contamination or injury. In the event of a hazardous waste spill or other accident, Midatech could be liable for damages, penalties or other forms of censure. If Midatech fails to comply with any laws or regulations, or if an accident occurs, Midatech may have to pay significant penalties and may be held liable for any damages that result. This liability could exceed Midatech’s financial resources and could harm its reputation. Midatech may also have to incur significant additional costs to comply with current or future environmental laws and regulations. Midatech’s failure to comply with any government regulation applicable to its laboratory and the materials used in its laboratory may adversely affect its ability to develop, produce, market or partner any products it may develop.

Midatech’s success depends in part on its ability to protect its rights in its intellectual property, which cannot be assured.

Midatech’s success and ability to compete effectively are in large part dependent upon exploitation of proprietary technologies and products that Midatech has developed internally or through joint ventures or has in-licensed. To date, Midatech has relied on copyright, trademark and trade secret laws, as well as confidentiality procedures, non-compete and/or work for hire invention assignment agreements and licensing arrangements with its employees, consultants, contractors, customers and vendors, to establish and protect its rights to its technology and, to the best extent possible, control the access to and distribution of its technology, software, documentation and other proprietary information, all of which offer only limited protection. Where Midatech has the right to do so under its agreements, it seeks to protect its proprietary position by filing patent applications in the United States, the United Kingdom and worldwide related to its novel technologies and products that are important to its business. The patent positions of biotechnology and pharmaceutical companies generally are highly uncertain, involve complex legal and factual questions and have in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of Midatech’s patents, including those patent rights licensed to Midatech by third parties, are highly uncertain. There can be no assurance that:

 

    the scope of Midatech’s patents provides and will provide Midatech with exclusivity with respect to any or all of its products and technologies, as well as any other technologies and/or products that address the same problems as Midatech’s technologies and products by a different means, whether in the same manner as Midatech or not;

 

    pending or future patent applications will be issued as patents;

 

    Midatech’s patents, and/or those patents to which Midatech is licensed, are and will remain valid and enforceable and will not be subject to invalidity or revocation proceedings and that such proceedings will not result in a complete or partial loss of rights;

 

    Midatech’s entitlement to exploit patents from time to time (including patents registered solely in Midatech or its affiliates’ name or in the joint names of Midatech or an affiliate and a third party or patents which are licensed to Midatech) is and will be sufficient to protect Midatech’s core intellectual property rights against third parties, its commercial activities from competition or to support comprehensively its ability to develop and market its proposed products either now or in the future;

 

    the lack of any particular patents or rights to exploit any particular patents, and the scope of Midatech’s patents, will not have a material adverse effect on Midatech’s ability to develop and market its proposed products, either now or in the future;

 

    Midatech has or will have the resources to pursue any infringer of: (i) patents registered in its name (whether solely or jointly with a third party) from time to time; or (ii) patents licensed to Midatech where Midatech or an affiliate has the financial responsibility to bring such infringement actions pursuant to the relevant license agreement;

 

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    Midatech will develop technologies or products which are patentable, either alone or in conjunction with third parties;

 

    the ownership, scope or validity of any patents registered in Midatech’s name (either solely or jointly) from time to time will not be challenged by third parties, including parties with whom Midatech, or any affiliate, has entered into collaboration projects or co-ownership arrangements and that any such challenge will not be successful;

 

    any patent or patent application owned solely or jointly by Midatech will not be challenged on grounds that Midatech failed to identify the correct inventors or that Midatech failed to comply with its duty of disclosure to the United States Patent and Trademark Office or any equivalent office in a foreign jurisdiction having a disclosure requirement;

 

    any issued patent in Midatech’s sole or joint name from time to time will not be challenged in one or more post-grant proceeding, including but not limited to inter partes review, derivation proceedings, interferences, and that like; and that any such challenge will not result in a complete or partial loss of rights to such issued patent or patents;

 

    any patent applications in Midatech’s sole or joint name from time to time will not be opposed by any third party, including parties to collaboration, co-existence and any other contractual relationship with Midatech or any of its members;

 

    the license agreements between Midatech and third parties are and will be valid and subsisting in the future or until their expiry dates, and that Midatech has complied with its contractual obligations under the license agreements;

 

    all intellectual property capable of being commercialized that is or has been generated pursuant to collaboration agreements between Midatech and third parties will be or has been identified;

 

    all intellectual property generated pursuant to collaboration agreements and to which Midatech has a contractual entitlement or generated by employees has been lawfully assigned into Midatech’s sole name (or to one of its subsidiaries);

 

    in respect of all intellectual property generated pursuant to a collaboration agreement between Midatech and a third party to which Midatech and that third party have a joint contractual entitlement, that such intellectual property has been lawfully assigned into joint names and the rights between Midatech and that third party are properly regulated by a co-ownership agreement; and

 

    beyond contractual warranties, the licensors of intellectual property to Midatech or affiliate own the relevant patents and that those patents have not and will not be the subject of, or subject to, infringement, invalidity or revocation actions.

The steps Midatech has taken to protect its proprietary rights may not be adequate to preclude misappropriation of its proprietary information or infringement of its intellectual property rights, both inside and outside of the United Kingdom and United States. The rights already granted under any of Midatech’s currently issued patents and those that may be granted under future issued patents may not provide Midatech with the proprietary protection or competitive advantages it is seeking. If Midatech is unable to obtain and maintain patent protection for its technology and products, or if the scope of the patent protection obtained is not sufficient, Midatech’s competitors could develop and commercialize technology and products similar or superior to Midatech, and Midatech’s ability to successfully commercialize Midatech’s technology and products may be adversely affected.

With respect to patent rights, Midatech does not know whether any of the pending patent applications for any of its licensed compounds will result in the issuance of patents that protect its technology or products, or which will effectively prevent others from commercializing competitive technologies and products. Although Midatech has a number of issued patents covering its technology, its pending applications cannot be enforced against third parties practicing the technology claimed in such applications unless and until a patent issues from such applications. Further, the examination process may require Midatech to narrow the claims, which may limit

 

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the scope of patent protection that may be obtained. Because the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, issued patents that Midatech owns or have licensed from third parties may be challenged in the courts or patent offices in the European Unions, United Kingdom, the United States and other foreign jurisdictions. Overall, such challenges may result in the loss of patent protection, the narrowing of claims in such patents, or the invalidity or unenforceability of such patents, which could limit Midatech’s ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection for its technology and products. Protecting against the unauthorized use of Midatech’s patented technology, trademarks and other intellectual property rights is expensive, difficult and, may in some cases not be possible. In some cases, it may be difficult or impossible to detect third party infringement or misappropriation of Midatech’s intellectual property rights, even in relation to issued patent claims, and proving any such infringement may be even more difficult.

The patent prosecution process is expensive and time-consuming, and Midatech may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that Midatech will fail to identify patentable aspects of inventions made in the course of its development and commercialization activities before it is too late to obtain patent protection on them. Further, 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. Midatech expects to seek extensions of patent terms where they are available in any countries where it is prosecuting patents. However, the applicable authorities, including the FDA in the United States, and any equivalent regulatory authority in other countries, may not agree with Midatech’s assessment of whether such extensions are available, and may refuse to grant extensions to its patents, or may grant more limited extensions than it requests. If this occurs, Midatech’s competitors may be able to take advantage of its investment in development and clinical trials by referencing its clinical and preclinical data and launch their product earlier than might otherwise be the case. Changes in either the patent laws or interpretation of the patent laws in the United Kingdom, the United States and other countries may diminish the value of Midatech’s patents or narrow the scope of its patent protection. The laws of foreign countries may not protect Midatech’s rights to the same extent as the laws of the United Kingdom or the United States, and these foreign laws may also be subject to change. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications typically are not published until 18 months after filing or, in some cases, not at all. Therefore, Midatech cannot be certain that 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.

Previously, in the United States, assuming the other requirements for patentability are met, the first to make the claimed invention was entitled to the patent. Outside the United States, the first to file a patent application is entitled to the patent. In March 2013, the United States transitioned to a “first to file” system in which the first inventor to file a patent application will be entitled to the patent. Under either the previous or current system, third parties will be allowed to submit prior art prior to the issuance of a patent by the United States Patent and Trademark Office, and may become involved in opposition, derivation, reexamination, inter-partes review or interference proceedings challenging Midatech’s 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, Midatech’s patent rights, which could adversely affect its competitive position with respect to third parties.

Midatech’s commercial success depends, in part, upon Midatech not infringing intellectual property rights owned by others.

Although Midatech believes that it has a proprietary platform for its technologies and products, Midatech cannot determine with certainty whether any existing third party patents or the issuance of any third party patents in the future would require it to alter its technology, obtain licenses or cease certain activities. Midatech may become subject to claims by third parties that its technology infringes their intellectual property rights, in which case it will have no option other than to defend the allegation, which it may be possible to resolve through negotiation or which might result in court proceedings. An adverse outcome in any of these circumstances is that Midatech might be subject to significant liabilities, be required to cease using a technology or to pay license fees

 

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(both prospectively and retrospectively); and may be subject to the payment of significant damages. Midatech could incur substantial costs in any litigation or other proceedings relating to patent rights, even if it is resolved in Midatech’s favor. If the proceedings occur in the United States, it is likely that Midatech will be responsible for its own legal costs, no matter the outcome of the litigation. In contrast, in the United Kingdom, the losing party typically is ordered to pay the winning party’s costs, although it is rare to have a complete recovery of all costs from the losing side. Some of Midatech’s competitors may be able to sustain the costs of complex litigation more effectively or for a longer time than Midatech can because of their substantially greater resources. In addition, uncertainties or threatened or actual disputes relating to any patent, patent application or other intellectual property right (including confidential information) could have a material adverse effect on Midatech’s ability to market a product, enter into collaborations in respect of the affected products, or raise additional funds.

The policing of unauthorized use of Midatech’s patented technologies and products is difficult and expensive. There can be no assurance that the steps Midatech takes will prevent misappropriation of, or prevent an unauthorized third party from obtaining or using, the technologies, know-how and products Midatech relies on. In addition, effective protection may be unavailable or limited in some jurisdictions. Any misappropriation of Midatech’s proprietary technology, products and intellectual property could have a negative impact on Midatech’s business and its operating results. Litigation may be necessary in the future to enforce or protect Midatech’s rights or to determine the validity or scope of the proprietary rights of others. Litigation could cause Midatech to incur substantial costs and divert resources and management attention away from its daily business and there can be no guarantees as to the outcome of any such litigation. In addition, a defendant in any such litigation may counterclaim against Midatech, resulting in additional time and expense to defend against such a counterclaim, which defense may not be successful.

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

Competitors may infringe Midatech’s patents or misappropriate or otherwise violate its intellectual property rights. To counter infringement or unauthorized use, litigation may be necessary in the future to enforce or defend Midatech’s intellectual property rights, to protect its trade secrets or to determine the validity and scope of its own intellectual property rights or the proprietary rights of others. This can be expensive and time consuming. Many of Midatech’s current and potential competitors have the ability to dedicate substantially greater resources to defend their intellectual property rights than it can. Accordingly, despite Midatech’s efforts, it may not be able to prevent third parties from infringing upon or misappropriating its intellectual property. Litigation could result in substantial costs and diversion of management resources, which could harm Midatech’s business and financial results. In addition, in an infringement proceeding, a court may decide that a patent owned by or licensed to Midatech is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that Midatech’s patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of Midatech’s patents at risk of being invalidated, held unenforceable or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of Midatech’s confidential information could be compromised by disclosure during this type of litigation.

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

Midatech’s commercial success depends upon Midatech’s ability and the ability of its collaborators to develop, manufacture, market and sell its product candidates, and to use its proprietary technologies without infringing the proprietary rights of third parties. Midatech may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to its products and technology. Third parties may assert infringement claims against Midatech based on existing patents or patents that may be granted in the future. If Midatech is found to infringe a third party’s intellectual property rights, it

 

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could be required to obtain a license from such third party to continue developing and commercializing its products and technology. However, Midatech may not be able to obtain any required license on commercially reasonable terms or at all. Even if Midatech is able to obtain a license, it may be non-exclusive, thereby giving its competitors access to the same technologies licensed to it. Midatech could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, in any such proceeding or litigation, Midatech could be found liable for monetary damages. A finding of infringement could prevent Midatech from commercializing its product candidates or force it to cease some of its business operations, which could materially harm its business. Any claims by third parties that Midatech has misappropriated their confidential information or trade secrets could have a similar negative impact on its business.

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

Many of Midatech’s employees, including its senior management, were previously employed at other biotechnology or pharmaceutical companies. Some of these employees, including members of Midatech’s senior management, executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although Midatech tries to ensure that its employees do not use the proprietary information or know-how of others in their work for Midatech, Midatech may be subject to claims that it or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. Midatech is not aware of any threatened or pending claims related to these matters or concerning the agreements with its senior management, but in the future litigation may be necessary to defend against such claims. If Midatech fails in defending any such claims, in addition to paying monetary damages, it may lose valuable intellectual property rights or personnel. Even if Midatech is successful in defending against such claims, litigation could result in substantial costs and be a potential distraction to management.

Intellectual property disputes could cause Midatech to spend substantial resources and distract its personnel from their normal responsibilities.

Even if ultimately successful in litigation or other legal proceedings relating to intellectual property claims may cause Midatech to incur significant expenses, and could distract Midatech’s technical personnel, management personnel, or both from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the market price of each of Midatech’s ordinary shares and Midatech Depositary Shares. Such litigation or proceedings could substantially increase Midatech’s operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. Midatech may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of Midatech’s competitors may be able to sustain the costs of such litigation or proceedings more effectively than it can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on Midatech’s ability to compete in the marketplace.

If Midatech were unable to protect the confidentiality of its trade secrets, its business and competitive position could be harmed.

In addition to seeking patents for some of Midatech’s technology and products, Midatech also relies on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain its competitive position. Midatech 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. Midatech also enters into confidentiality and invention or patent assignment agreements with its employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose Midatech’s proprietary information, including Midatech’s trade secrets, and Midatech may not be able to obtain adequate

 

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remedies for such breaches. In addition, a court may determine that Midatech failed to take adequate steps to protect its trade secrets, in which case it may not be possible to enforce its trade secret rights. 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 may be less willing or unwilling to protect trade secrets. If any of Midatech’s trade secrets were to be lawfully obtained or independently developed by a competitor, Midatech would have no right to prevent such competitor from using that technology or information to compete with it, which could harm Midatech’s competitive position.

Midatech may face product liability claims stemming from its products.

In carrying out its activities, Midatech may potentially face contractual and statutory claims, or other types of claim from customers, suppliers and/or investors. In addition, Midatech is exposed to potential product liability risks that are inherent in the research, development, production and supply of its products. Subjects enrolled in Midatech’s clinical trials, consumers, healthcare providers or other persons administering or selling products based on Midatech’s and its collaborators’ technology may be able to bring claims against Midatech based on the use of such products. If Midatech cannot successfully defend itself against claims that its product candidates or products caused injuries, Midatech could incur substantial costs and liabilities. Irrespective of their merits or actual outcome, liability claims may result in:

 

    decreased demand for any product candidates or product that Midatech may develop;

 

    termination of clinical trial sites or entire trial programs;

 

    significant negative media attention and injury to Midatech’s reputation;

 

    withdrawal of clinical trial participants;

 

    significant costs to defend the related litigation;

 

    substantial monetary awards to trial subjects or patients;

 

    loss of revenue;

 

    diversion of management and scientific resources from Midatech’s business operations; and

 

    the inability to commercialize any products that Midatech may develop.

Midatech currently does not hold product liability insurance coverage. Midatech expects to obtain such insurance coverage when it begins to commercialize its product candidates. Insurance coverage is increasingly expensive. Midatech may not be able to maintain any future insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise. Midatech expects any insurance coverage for products to include the sale of commercial products if it obtains marketing approval for its product candidates in development, but it may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against Midatech, particularly if judgments exceed any insurance coverage Midatech may obtain, could consume significant amounts of its cash and adversely affect its business.

Midatech’s products may be faced with recalls.

Midatech may be faced with the necessity of recalling one or more products or batches of products from the market. This necessity may also occur if no de facto product property exists that makes a recall obligatory, in particular a side effect or defect, but rather if such a property is merely suspected of being present. A recall may result in loss of revenue, damage to reputation and consequential fall in cash flow, among other things. Affected products could not be sold any longer, moreover trust among, in particular, doctors and patients could be affected, which again could lead to reductions in sales or profits. Further, options for refinancing on the capital market could be negatively affected or even excluded.

 

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Midatech relies on third parties to conduct its preclinical and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, Midatech may not be able to obtain regulatory approval for or commercialize its product candidates and its business could be substantially harmed.

Midatech is, and may continue to be, reliant on other parties for the successful development and commercialization of many of its products. Midatech relies upon CROs for the conduct of its clinical studies. Midatech relies on these parties for execution of its preclinical and clinical trials, and controls only certain aspects of their activities. Nevertheless, Midatech is responsible for ensuring that each of its studies is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and Midatech’s reliance on the CROs or collaboration partners does not relieve it of its regulatory responsibilities. Midatech also relies on third parties to assist in conducting its preclinical studies in accordance with Good Laboratory Practices, referred to as GLP, and requirements with respect to animal welfare. Midatech and its CROs or collaboration partners are required to comply with Good Clinical Practices, referred to as GCP, which are regulations and guidelines enforced by the MHRA, the FDA, the EMA and comparable foreign regulatory authorities for all of its products in clinical development. Regulatory authorities enforce these GCP through periodic inspections of trial sponsors, principal investigators and trial sites. If Midatech or any of its CROs or partners fail to comply with applicable GCP, the clinical data generated in Midatech’s clinical trials may be deemed unreliable and the EMA, the MHPA, the FDA or comparable foreign regulatory authorities may require Midatech to perform additional clinical trials before approving its marketing applications. Midatech cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of its clinical trials comply with GCP requirements. In addition, Midatech’s clinical trials must be conducted with product produced under cGMP requirements. Failure to comply with these regulations may require Midatech to repeat preclinical and clinical trials, which would delay the regulatory approval process.

Midatech’s CROs are not its employees, and except for remedies available to it under such agreements with such CROs, Midatech cannot control whether or not they devote sufficient time and resources to its on-going clinical, nonclinical and preclinical programs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to Midatech’s clinical protocols, regulatory requirements or for other reasons, then Midatech’s clinical trials may be extended, delayed or terminated and it may not be able to obtain regulatory approval for or successfully commercialize its product candidates. As a result, Midatech’s results of operations and the commercial prospects for its product candidates would be harmed, its costs could increase and its ability to generate revenues could be delayed.

Because Midatech has relied on third parties, its internal capacity to perform these functions is limited. Outsourcing these functions involves risk that third parties may not perform to Midatech’s standards, may not produce results in a timely manner or may fail to perform at all. In addition, the use of third party service providers requires Midatech to disclose its proprietary information to these parties, which could increase the risk that this information will be misappropriated. Midatech currently has a small number of employees, which limits the internal resources it has available to identify and monitor its third party providers. To the extent it is unable to identify and successfully manage the performance of third party service providers in the future, Midatech’s business may be adversely affected. Though Midatech carefully manages its relationships with its CROs, there can be no assurance that it will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on Midatech’s business, financial condition and prospects.

Midatech is dependent on third party suppliers, and if it experiences problems with any of these third parties, the manufacturing of its product candidates or products could be delayed, which could harm its results of operations.

Midatech is also dependent upon certain qualified suppliers, of which there are a limited number, for the supply of raw materials, components and manufacturing equipment. Thus, the success of Midatech’s business may be adversely affected by the underperformance of third parties, exploitation by third parties of Midatech’s

 

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commercial dependence and by unforeseen interruptions to third parties’ businesses. Although the existence of several alternative suppliers for each function mitigates the risks associated with this dependence, as does the availability of commercial insurance in respect of the impact of accidental events, the failure of a third party properly to carry out their contractual duties or regulatory obligations would be disruptive to Midatech’s business. Further, any action taken by a third party that is detrimental to Midatech’s reputation could have a negative impact on Midatech’s ability to register its trademarks and/or market and sell its products.

In the future, Midatech intends to license certain of its products to other companies for later stages of development and subsequent marketing, and consequently Midatech will be increasingly reliant on securing and retaining such partners once its products advance through the development process. There can be no assurance that Midatech will be able to secure such partners or that, once secured, Midatech’s partners will continue to make the necessary and timely investments in its products to complete their development in the expected time and achieve commercial success.

Midatech is exposed to risks related to its partnerships in joint ventures.

Midatech participates in and may expand through joint ventures, most notably its joint venture with MonoSol Rx LLC to commercialize a transbuccal insulin delivery system. There are certain risks associated with joint venture partners, including the risk that joint venture partners may:

 

    have economic or business interests or goals that are inconsistent with those of Midatech and be in a position to take or influence actions contrary to Midatech’s interests and plans, which may create impasses on decisions and affect Midatech’s ability to implement its strategies;

 

    veto proposals in respect of joint venture operations;

 

    be unable or unwilling to fulfill their obligations under the joint venture or other agreements; or

 

    experience financial or other difficulties.

In addition, Midatech is currently entitled to 50% of the economic interest in the MonoSol Rx LLC joint venture. According to the terms of the agreement, in the event of certain specified circumstances in relation to the development of products, either party may subsequently become entitled to either 66% or 75% of the economic interest of the joint venture. Any joint venture arrangements may expose Midatech to the risk that disputes develop between Midatech and joint venture partners, with any litigation or arbitration resulting from any such disputes increasing the Midatech’s expenses and distracting management resources. In addition, there can be no assurance that Midatech will always have a controlling interest in any joint venture in which it currently participates or into which it may enter in the future. As such, joint ventures may disproportionately divert financial and management resources, which may have a material adverse effect on Midatech’s business, financial condition, operating results or prospects.

Midatech’s counterparties may become insolvent.

There is a risk that parties with whom Midatech trades or has other business relationships with (including partners, joint venturers, customers, suppliers, subcontractors and other parties) may become insolvent. This may be due to general economic conditions or factors specific to that company. In the event that a party with whom Midatech trades becomes insolvent, this could have an adverse impact on the revenues and profitability of Midatech.

Midatech may not be granted the required sterile production license and may encounter unexpected difficulties in the scale-up of production to viable clinical trial or commercialization levels.

Midatech completed a major upgrade of its infrastructure in September 2014 by integrating a separated sterile production unit within the manufacturing containment area. Through integrating the separated sterile production unit within the manufacturing facility, Midatech expects to be in the position to produce clinical

 

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candidate compounds under sterile conditions, allowing Midatech to clinically test and evaluate candidate gold nanoparticles-based cancer vaccines and gold nanoparticles-chemotherapeutics, which are administered by intravenous injection. The Spanish regulatory authority is due to inspect the manufacturing facility to fully validate the facility and enable the grant of the required sterile production licenses and updated cGMP license for European compliance, which is anticipated to occur in late 2015. Were the Spanish regulatory authority to not validate the facility and not grant the requisite licenses, Midatech may need to outsource its requirements of the sterile production and cGMP manufacturing, which will increase Midatech’s reliance on third parties to manufacture the candidate compounds to the required standards, and will be therefore be at risk of underperformance and unforeseen interruptions, which could adversely affect Midatech’s business and financial performance.

Because of the complex nature of Midatech’s product candidates, it may not be able to manufacture the product candidates in a timely manner at cost or in quantities necessary to successfully commercialize Midatech’s products. Certain of Midatech’s products under development have historically only been manufactured in small quantities. Later stage development and commercial supply of such products will require Midatech to scale up the manufacture of its products. There can be no assurance that this can be successfully completed or that, if completed, it will result in commercially acceptable manufacturing costs.

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

Healthcare providers, physicians and third party payors play a primary role in the recommendation and prescription of any product candidates for which Midatech obtains marketing approval. Midatech’s future arrangements with third party payors and customers may expose it to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which it markets, sells and distributes its products for which it obtains marketing approval. For example, in the United States, restrictions under applicable federal and state healthcare laws and regulations include the following:

 

    the federal healthcare anti-kickback statute prohibits any person from, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchasing, leasing, ordering or arranging for or recommending of any good or service for which payment may be made, in whole or in part, under federal and state healthcare programs such as Medicare and Medicaid. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand, and prescribers, purchasers, and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly and practices that involve remuneration to those who prescribe, purchase, or recommend pharmaceutical and biological products, including certain discounts, including certain discounts, or engaging consultants for as speakers or consultants, may be subject to scrutiny if they do not fit squarely within the exemption or safe harbor. Midatech’s practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability. Moreover, there are no safe harbors for many common practices, such as educational and research grants or patient assistance programs;

 

   

the federal civil False Claims Act imposes civil penalties, and provides for whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment of government funds that are false or fraudulent, or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government, or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. In recent years, several pharmaceutical and other healthcare companies have faced enforcement actions under the federal False Claims Act for, among other things, allegedly submitting false or misleading pricing information to

 

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government health care programs and providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have faced enforcement actions for causing false claims to be submitted because of the company’s marketing the product for unapproved, and thus non-reimbursable, uses. In addition, violation of the federal anti-kickback statute may be actionable under the federal civil False Claims Act. Criminal prosecution is possible for making or presenting a false or fictitious or fraudulent claim to the federal government;

 

    the federal Health Insurance Portability and Accountability Act of 1996, referred to as HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, among other things, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information. HIPAA also prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation, or making or using any false writing or document knowing the same to contain any materially false fictitious or fraudulent statement or entry in connection with the delivery of or payment for healthcare benefits, items or services;

 

    the federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requires certain manufacturers of drugs, devices, biologics and medical supplies to engage in extensive tracking of payments and other transfers of value to physicians and teaching hospitals, including physician ownership and investment interests, and to publicly report such data. Pharmaceutical and biological manufacturers with products for which payment is available under Medicare, Medicaid or the State Children’s Health Insurance Program started tracking such payments in August 2013, and must submit a report on or before the 90th day of each calendar year disclosing reportable payments made in the previous calendar year; and

 

    analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers. Several states also require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products in those states and to report gifts and payments to individual health care providers in those states. Some of these states also prohibit certain marketing-related activities, including the provision of gifts, meals, or other items to certain health care providers. In addition, several states require pharmaceutical companies to implement compliance programs or marketing codes.

In the United Kingdom and other European Union member states, comparable regulations and laws exist in order to maintain a fair healthcare market. The United Kingdom Bribery Act 2010 may also have jurisdiction in relation to unlawful payments or kickbacks in the United Kingdom and elsewhere.

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

 

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If Midatech is unable to retain and recruit qualified scientists or if any of its key executives, key employees or key consultants discontinues his or her employment or consulting relationship with us, this may delay its development efforts or otherwise harm its business.

Midatech’s future development and prospects depends to a large degree on the experience, performance and continued service of its senior management team, including members of its Board of Directors. Midatech has invested in its management team at all levels. Midatech has entered into contractual arrangements with its directors and senior management team with the aim of securing the services of each of them. However, retention of these services or the identification of suitable replacements cannot be guaranteed. There can be no guarantee that the services of the current directors and senior management team will be retained, or that suitably skilled and qualified individuals can identified and employed, which may adversely impact Midatech’s ability to develop its technologies and/or provide its services at the time requested by its customers or its ability to market its services and technologies, and otherwise to grow its business, could be impaired. The loss of the services of any of the directors or other members of the senior management team and the costs of recruiting replacements may have a material adverse effect on Midatech and its commercial and financial performance.

The ability to continue to attract and retain employees with the appropriate expertise and skills also cannot be guaranteed. Finding and hiring any additional personnel and replacements could be costly and might require Midatech to grant significant equity awards or other incentive compensation, which could adversely impact its financial results, and there can be no assurance that Midatech will have sufficient financial resources to do so. Effective product development and innovation, upon which Midatech’s success is dependent, is in turn dependent upon attracting and retaining talented technical and scientific personnel, who represent a significant asset and serve as the source of Midatech’s technological and product innovations. If Midatech is unable to hire, train and retain such personnel in a timely manner, the development and introduction of Midatech’s products could be delayed and its ability to sell its products and otherwise to grow its business will be impaired and the delay and inability may have a detrimental effect upon the performance of Midatech.

Midatech’s employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on its business.

Midatech is exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with applicable regulations, provide accurate information to regulatory authorities, comply with manufacturing standards, comply with healthcare fraud and abuse laws and regulations, report financial information or data accurately, or disclose unauthorized activities to Midatech. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to Midatech’s reputation. Midatech has adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter employee misconduct, and the precautions Midatech has taken to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against Midatech and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on its business and results of operations, including the imposition of significant fines or other sanctions.

Unexpected facility shutdowns may occur and Midatech’s disaster recovery plans may not be sufficient.

Midatech depends on the performance, reliability and availability of its properties, plant, machinery, laboratory equipment and information technology systems. Midatech may not be able to access its facilities as

 

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a result of events beyond its control, such as extreme weather conditions, flood, fire, theft, terrorism and acts of God. Any damage to or failure of its equipment and/or systems could also result in disruptions to Midatech’s operations. A complete or partial failure of Midatech’s information technology systems or corruption of data could result in Midatech being unable to access information that it needs in order to meet its obligations to its customers or a breach of confidentiality with respect to Midatech’s or its customers’ proprietary information. Midatech’s disaster recovery plans may not adequately address every potential event and its insurance policies may not cover any loss in full or in part (including losses resulting from business interruptions) or damage that it suffers fully or at all. The occurrence of one or more of these events could have a material adverse effect on Midatech’s business, financial position, reputation or prospects, and might lead to a claim for damages.

Midatech’s business may be adversely affected by economic conditions and current economic weakness.

Any economic downturn either globally, regionally or locally in any country in which Midatech operates may have an adverse effect on the demand for Midatech’s future products. A more prolonged economic downturn may lead to an overall decline in Midatech’s sales, limiting Midatech’s ability to generate a profit and positive cash flow. The markets in which Midatech offers its products are directly affected by many national and international factors that are beyond Midatech’s control, such as political, economic, currency, social and other factors.

Midatech is exposed to the risks of doing business internationally.

Midatech currently operates in a number of countries in Europe. Following the closing of the merger, Midatech will also operate in the United States. Midatech’s international operations are subject to a number of risks inherent in operating in different countries. These include, but are not limited to, risks regarding:

 

    currency exchange rate fluctuations;

 

    restrictions on repatriation of earnings;

 

    efforts to develop an international sales, marketing and distribution organization may increase Midatech’s expenses, divert management’s attention from the acquisition or development of product candidates or cause it to forgo profitable licensing opportunities in these geographies;

 

    unexpected changes in foreign laws and regulatory requirements, including pharmaceutical regulations;

 

    difficulty of effective enforcement of contractual provisions in local jurisdictions;

 

    inadequate intellectual property (including confidentiality) protection in foreign countries

 

    trade-protection measures, import or export licensing requirements and fines, penalties or suspension or revocation of export privileges; and

 

    changes in a specific country’s or a region’s political or economic conditions, particularly in emerging markets.

The occurrence of any of these events or conditions could adversely affect Midatech’s ability to increase or maintain its operations in various countries.

Failure to integrate acquisitions could adversely affect Midatech’s value.

While currently Midatech has no specific plans to acquire any other businesses other than DARA, Midatech will, from time to time, evaluate acquisition opportunities, if any, and may, in the future, strategically make further acquisitions of, and investments in, businesses and technologies when it believes the opportunity is advantageous to its prospects. There can be no assurance that in the future Midatech will be able to find appropriate acquisitions or investments. In connection with these acquisitions or investments, Midatech may:

 

    issue stock that would dilute its stockholders’ percentage of ownership;

 

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    incur debt and assume liabilities; and

 

    incur amortization expenses related to intangible assets or incur large and immediate write-offs.

Midatech also may be unable to find suitable acquisition candidates and may not be able to complete acquisitions on favorable terms, if at all. If Midatech does complete an acquisition, this may not ultimately strengthen its competitive position or that it will not be viewed negatively by customers, financial markets or investors. Further, future acquisitions could also pose numerous additional risks to Midatech’s operations, including:

 

    problems integrating the purchased business, products or technologies, including the failure to achieve the expected benefits and synergies;

 

    increases to Midatech’s expenses;

 

    the failure to have discovered undisclosed liabilities of the acquired asset or company;

 

    diversion of management’s attention from their day-to-day responsibilities;

 

    harm to Midatech’s operating results or financial condition;

 

    entrance into markets in which Midatech has limited or no prior experience; and

 

    potential loss of key employees, particularly those of the acquired entity.

Midatech may not be able to complete one or more acquisitions or effectively integrate the operations, products or personnel gained through any such acquisition without a material adverse effect on its business, financial condition and results of operations.

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

Despite the implementation of security measures, Midatech’s internal computer systems, and those of its CROs and other third parties on which it relies, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, fire, war and telecommunication and electrical failures. If such an event were to occur and cause interruptions in Midatech’s operations, it could result in a material disruption of its drug development programs. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in Midatech’s regulatory approval efforts and significantly increase Midatech’s costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of or damage to Midatech’s data or applications, or inappropriate disclosure of confidential or proprietary information, Midatech could incur liabilities and the further development of its product candidates could be delayed.

Risks Related to DARA’s Business and Industry

DARA has limited cash on hand and may not be able to continue to operate as a going concern.

The accompanying consolidated financial statements have been prepared under the assumption that DARA will continue as a going concern. Without taking into account funding that DARA may receive from Midatech if the merger closes in a timely manner, DARA estimates that it will have sufficient working capital to continue DARA’s operations into the first quarter of 2016. If DARA incurs unanticipated expenses, its capital resources may be expended more rapidly than DARA currently expects. DARA’s continued losses and lack of capital raise substantial doubt about DARA’s ability to continue independently as a going concern. Should the merger not occur, DARA will review alternatives to source adequate financing to continue its business. If adequate financing is not available on acceptable terms, if at all, DARA may be forced to seek bankruptcy protection.

Additionally, in the event that the merger is not completed in a timely manner, DARA’s independent registered public accounting firm may include in its report regarding DARA’s consolidated financial statements for the year ending December 31, 2015 a statement to the effect that DARA’s significant losses from operations and its immediate need for financing raise substantial doubt about DARA’s ability to continue as a going concern.

 

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DARA will have an immediate need to raise significant capital if the merger does not occur in a timely manner.

If the merger does not occur, DARA anticipates that significant additional financing will be required in the future to maintain and expand DARA’s business, and such financing may not be available on favorable terms, if at all.

If DARA needs funds and cannot raise them on acceptable terms, DARA may not be able to:

 

    continue marketing and sales efforts with respect to DARA’s existing products, or begin commercialization of any other products;

 

    successfully build a portfolio of additional products for commercialization;

 

    successfully out-license, otherwise monetize or commercialize any of DARA’s programs; or

 

    continue operations.

If the merger is not completed, DARA intends to finance its business, in part, through the private placement and public offering of equity and debt securities as needed. DARA has historically financed its operations primarily from proceeds of registered direct offerings and private placements of equity securities and the sale of securities DARA acquired through investments made in other companies. If DARA raises additional equity capital, investors’ interests in DARA will be diluted and investors may suffer dilution in their net book value per share depending on the price at which such securities are sold. If DARA issues any such additional equity securities, such issuances also will cause a reduction in the proportionate ownership and voting power of all other stockholders. Further, any such issuance may result in a change in control.

DARA has a history of losses and does not expect to become profitable in the near future.

DARA has incurred losses since inception and expects to continue to incur losses for the foreseeable future. DARA incurred a net loss of $9.2 million for the year ended December 31, 2014, and $3.2 million for the quarter ended March 31, 2015. As of June 30, 2015, DARA’s accumulated deficit was $71.8 million. DARA has not achieved operating profitability on a quarterly or annual basis.

Historically, there have been limited sales of DARA’s products. DARA’s revenues were $0.4 million for the year ended December 31, 2013, $1.9 million for the year ended December 31, 2014, and $1.0 million for the quarter ended June 30, 2015. DARA will need to significantly grow its revenues to become profitable.

DARA’s limited experience selling and marketing pharmaceutical products may make it difficult to evaluate DARA’s business to date and future viability.

DARA is in the early stage of its commercial operations and has only a limited operating history on which to base an evaluation of DARA’s current business and prospects. For example, DARA is in the early stages of building its sales and marketing strategy and organization and has only recently established a national sales team. DARA has not yet launched Oravig into the marketplace and cannot accurately predict the effectiveness of DARA’s sales and marketing of Oravig. DARA’s operations and development are subject to all of the risks inherent in the growth of an early stage company. DARA will be subject to the risks inherent in the ownership and operation of a company with a limited operating history such as regulatory setbacks and delays, fluctuations in expenses, competition, the general strength of regional and national economies and governmental regulation. Any failure to successfully address these risks and uncertainties could seriously harm DARA’s business and prospects. DARA may not succeed given the technological, marketing, strategic and competitive challenges DARA faces. The likelihood of DARA’s success must be considered in light of the expenses, difficulties, complications, problems and delays frequently encountered in connection with the growth of a new business, the continuing development of new technologies and alternative therapies in the pharmaceutical industry, and the competitive and regulatory environment in which DARA operates or may choose to operate in the future.

 

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DARA’s business will be harmed if DARA does not successfully execute its business strategy.

DARA’s business strategy is to in-license products for commercialization, enter into collaborative agreements with drug manufacturers and develop with a partner, out-license or sell KRN 5500, DARA’s remaining clinical development asset. DARA’s management believes these measures are critical to successfully building DARA’s portfolio of oncological products for commercialization. DARA may not be able to secure needed licensing or other partnering arrangements, and any such arrangements, even if completed successfully, may not be on terms favorable to DARA, may not perform as expected, may result in unexpected liabilities and may never contribute significant revenues or cash flow. DARA depends to a significant extent on the expertise of and dedication of sufficient resources by DARA’s licensors, licensees and partners to develop and commercialize products. Each individual licensor, licensee or corporate partner will control the amount and timing of resources devoted by it to these activities. Moreover, the success of any such licenses or other alliances depends in part upon such partners’ own marketing and strategic considerations, including the relative advantages of alternative marketing partners and strategies. Corporate partners may pursue alternative technologies or develop products that are competitive with DARA’s products. Disputes may arise between DARA and one or more of its collaborative partners regarding DARA’s collaborative arrangements. In such an event, DARA may be required to initiate or defend expensive litigation or arbitration proceedings or to seek and attempt to reach agreement with another collaborative partner. DARA may not be able to resolve successfully a dispute with a collaborative partner or to enter into a satisfactory arrangement with a replacement collaborative partner. If DARA is not successful in executing its business strategy, DARA will not achieve the revenues DARA anticipates and DARA’s business will be materially harmed.

DARA’s ability to generate revenues or profits from its products will be dependent upon the successful operation of the dedicated sales force that a third party provides to DARA under a contractual arrangement. Any challenges that may arise in connection with the ongoing operations of the dedicated sales force, or any failure of DARA’s marketing strategy to achieve the desired results, could have a material adverse effect on DARA’s financial condition, operating results and stock price.

In October 2013, DARA entered into an agreement with Alamo Pharma Services, referred to as Alamo, for a 20 person national sales team in the U.S. oncology market. Pursuant to the agreement and a shared sales force agreement with Mission Pharmacal, referred to as Mission, (Alamo’s parent company), since January 2014 the Alamo sales team has promoted DARA’s Soltamox ® (tamoxifen citrate) and Gelclair ®  products, as well as Mission’s Ferralet ® 90 (for anemia) and Aquoral ® (for cancer related dry mouth). Mission’s products are concurrently being promoted by Mission in other non-oncology related therapeutic markets and all are under patent protection throughout the term of DARA’s agreement with Mission. The agreements with Alamo and Mission expand DARA’s presence in oncology supportive care to address ongoing areas of unmet medical need.

DARA’s ability to successfully market its product portfolio, and to generate revenues or profits from its products, will depend upon successful operation of the shared sales force that Alamo is providing to DARA under contract. There can be no assurances that the sales representatives will achieve the desired results or that they will be successful in marketing DARA’s products. Pursuant to the contractual arrangements governing the sales force, DARA will be responsible for significant financial obligations whether or not the sales force achieves the desired results, including fixed monthly fees subject to an annual escalator, reimbursement for certain expenses, implementation fees, and recruiting fees in connection with new hires for the sales force. If the sales force does not effectively market DARA’s products as desired, DARA’s financial condition, results of operations and stock price could be materially adversely affected.

The success of DARA’s current products and any future products DARA may commercialize will depend on the degree of market acceptance by physicians, patients, healthcare payers and others in the medical community.

Any products that DARA brings to the market may not gain market acceptance by physicians, patients, healthcare payers and others in the medical community. If these products do not achieve an adequate level of

 

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acceptance, DARA will not generate material product revenues and DARA will not become profitable. The degree of market acceptance of DARA’s product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

    the prevalence and severity of any side effects;

 

    the efficacy and potential advantages of alternative treatments;

 

    the cost of DARA’s product candidates;

 

    the willingness of physicians to prescribe DARA’s products; and

 

    sufficient coverage or reimbursement by government and commercial payers

Commercialization of a new product or a new method of use for an existing product involves risks of failure inherent in the development of products based on innovative technologies and the risks associated with drug development generally.

Commercialization of a new or newly launched product, including Gelclair, Oravig and Soltamox, or a new method of use for an existing product involves risks of failure inherent in the development of products based on innovative technologies and the risks associated with drug development generally. These risks include the following:

 

    the products, even if safe and effective, may be difficult to manufacture on a large scale or uneconomical to market;

 

    proprietary rights of third parties may prevent DARA from exploiting technologies or marketing products; and

 

    third parties, who may have larger sales and marketing capacities, may offer equivalent or superior products.

DARA’s ability to commercialize its products will depend on, among other things, DARA’s ability to:

 

    complete any necessary clinical trials and studies with respect to any partnered clinical assets;

 

    obtain and maintain necessary intellectual property rights to DARA’s products;

 

    obtain and maintain necessary regulatory approvals related to the efficacy and safety of DARA’s products;

 

    enter into arrangements with manufacturers to provide manufacturing resources;

 

    establish marketing and sales channels; and

 

    obtain favorable reimbursement coverage and formulary placement for DARA’s products.

If DARA does not successfully execute some or all of these initiatives, DARA’s commercialization efforts may not succeed and its business will be materially harmed.

DARA cannot guarantee that it will be able to effectively market its existing products and product candidates.

A significant part of DARA’s success depends on the various marketing strategies that DARA plans to implement. DARA’s business model was historically focused solely on product development, and until DARA’s launch of Soltamox in late 2012, DARA had never attempted to commercialize any product. DARA is in the early stages of building its sales and marketing strategy and organization, and only established a national sales team in January 2014 through its contractual relationships with Mission and Alamo. There can be no assurance as to the success of any such marketing strategy or that DARA will be able to build a successful sales and marketing organization. If DARA cannot effectively market those products DARA seeks to commercialize directly, such products’ prospects will be harmed.

 

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DARA is substantially dependent on a relatively small group of products.

Sales of a limited number of products collectively represent substantially all of DARA’s revenues and DARA’s management expects this concentration will continue in the foreseeable future. If the volume or pricing of DARA’s largest selling products does not increase, or if it declines, in the future or DARA is unable to satisfy market demand for these products, DARA’s business, financial position and results of operations could be materially adversely affected.

If DARA is unable to continue to commercialize additional products in a timely and cost-effective manner, DARA may not achieve its expected revenue growth or profitability or such revenue growth and profitability, if any, could be delayed.

DARA’s future success will depend to a substantial degree on its ability to continue to commercialize new products in a timely and cost-effective manner. The acquisition, development and commercialization of new products is complex, time-consuming and costly and involves a high degree of business risk. DARA may, however, encounter unexpected delays in the launch of any such products, or these products, if fully commercialized by DARA, may not perform as DARA expects.

The success of DARA’s new product offerings will depend upon several factors, including DARA’s ability to properly anticipate customer needs, obtain timely regulatory approvals and locate and establish collaborations for product development and finished product manufacturing in a cost-effective manner. In addition, the acquisition, development and commercialization of new products require significant up-front costs, including costs associated with product development, obtaining regulatory approval, building inventory and sales and marketing. Furthermore, the development and commercialization of new products is subject to inherent risks, including the possibility that any new product may:

 

    fail to receive or encounter unexpected delays in obtaining necessary regulatory approvals;

 

    be difficult or impossible to manufacture on a larger scale;

 

    be uneconomical to market;

 

    fail to be developed prior to the successful marketing of similar or superior products by third parties; and

 

    infringe on the proprietary rights of third parties.

DARA may not achieve its expected revenue growth or profitability or such revenue growth and profitability, if any, could be delayed if DARA is not successful in continuing to develop and commercialize new products.

A loss of DARA’s license rights to use certain critical intellectual property or distribution rights for any reason could have a material adverse effect on DARA’s business.

DARA has entered into exclusive license agreements with third parties to obtain the right to distribute certain products. These third parties own the products DARA licenses. If DARA breaches or fails to perform the material conditions of its license agreements, including the minimum sales requirement, DARA may lose all or some of its rights to intellectual property or other contractual rights that are necessary for DARA to sell its products. Further, there can be no guarantee that these third parties will continue to license their products to DARA once the term of the license agreements expire. Such loss could have a material adverse effect on DARA’s business.

DARA relies on third parties for the manufacture of its products, and if such parties fail to supply DARA with finished products in the quantities DARA requires on a timely basis, sales of DARA’s products could be delayed or prevented, DARA’s revenues could decline and DARA may not achieve profitability.

DARA does not, nor does DARA intend to, manufacture any products itself. Instead, DARA relies on third parties to manufacture the products DARA seeks to commercialize. If the third parties DARA contracts with do

 

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not provide these services to DARA in a satisfactory manner, DARA may not be able to obtain these services from others in a timely manner or on commercially acceptable terms. Likewise, if DARA encounters delays or difficulties with its manufacturing partners in producing its products, the distribution, marketing and subsequent sales of these products could be adversely affected. If, for any reason, DARA’s third party manufacturers are unable to obtain or deliver sufficient quantities of finished products on a timely basis or DARA develops any significant disagreements with such parties, the manufacture or supply of DARA’s products could be disrupted, which may decrease DARA’s sales revenue, increase DARA’s operating expenses or otherwise negatively impact DARA’s operations. In addition, if DARA is unable to engage and retain third parties for the supply of finished products on commercially acceptable terms, DARA may not be able to sell its products as planned.

DARA works with its third party manufacturing parties to maintain the supply of its products and has engaged them in discussions to develop backup supply plans. However, the manufacture of pharmaceutical products is highly exacting and complex and DARA’s manufacturing partners may experience problems during the manufacture of finished products for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, manufacturing quality concerns, problems with raw materials, natural disaster related events or other environmental factors. If problems arise during the production, storage or distribution of a batch of product, that batch of product may have to be discarded. If DARA is unable to find alternative sources of finished products, this could, among other things, lead to increased costs, lost sales and damage to customer relations. If problems are not discovered before the product is released to market, voluntary recalls, corrective actions or product liability related costs may also be incurred. Problems with respect to the manufacture, storage or distribution of DARA’s products could materially disrupt DARA’s business and reduce DARA’s revenues and prevent or delay DARA from achieving profitability.

DARA’s clinical development asset, KRN 5500, is in an early stage of development, and DARA may not be able to successfully partner it.

The drug development process is highly uncertain and requires a substantial investment of capital. KRN5500 is in the early stages of development and has not been approved for commercial sale. DARA does not presently have the resources to fully develop KRN 5500 into a commercial product. DARA is attempting to partner the drug with other organizations who may have the interest and resources to undertake and support the cost of a Phase IIb program to test for safety and efficacy. DARA may also determine not to develop KRN 5500 and seek other alternatives for the drug, including, but not limited to, a sale to another party. Further, if the merger is completed, there is no guarantee that Midatech will develop KRN 5500. Before a drug product is approved by the FDA for commercial marketing, it must be tested for safety and effectiveness in clinical trials that are expensive to conduct and can take many years to complete. Promising results in preclinical development or early clinical trials may not be predictive of results obtained in later clinical trials. Pharmaceutical companies may experience significant setbacks in advanced clinical trials, even after obtaining promising results in earlier preclinical and clinical trials. At any time, new safety information may lead the FDA to place a clinical trial on clinical hold, or permanently stop the trial. DARA or its collaborators may experience numerous unforeseen events during, or as a result of, the clinical development process that could delay or prevent DARA’s drug candidate from being successfully commercialized, including:

 

    failure to achieve clinical trial results that indicate a product candidate is effective in treating a specified condition or illness in humans;

 

    safety issues, including the presence of harmful side effects;

 

    determination by the FDA that the submitted data do not satisfy the criteria for approval;

 

    new information that suggests lack of commercial viability of the drug;

 

    failure to acquire, on reasonable terms, intellectual property rights necessary for commercialization; and

 

    development of competing therapeutics that are more effective.

 

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DARA’s success depends on its ability to retain its managerial personnel and to attract additional personnel (including a sales force).

DARA’s success depends largely on its ability to attract and retain managerial personnel, and to have a fully staffed sales force pursuant to its contractual arrangements with Alamo. DARA operates with a small staff and a 20-person contracted sales force. Competition for desirable personnel is intense, and there can be no assurance that DARA will be able to attract and retain the necessary staff. The loss of one or more members of DARA’s managerial or commercial staff, or any administrative difficulties associated with the implementation of DARA’s sales force through Alamo or difficulties in keeping the sales force fully staffed, could have a material adverse effect on DARA’s future operations and on the successful development of products for DARA’s target markets. The failure to maintain management, particularly DARA’s Chief Executive Officer, Chief Medical Officer and Senior Vice President, Commercial Operations and Business Development, and to attract additional key sales and other personnel could materially adversely affect DARA’s business, financial condition and results of operations.

The success of DARA’s business depends, in part, on its ability to develop and protect its intellectual property rights, which could be expensive.

DARA’s success will depend in part on its ability to obtain and maintain protection in the United States and other countries for the intellectual property covering or incorporated into DARA’s technology and products. The patent situation in the field of pharmaceuticals is highly uncertain and involves complex legal and scientific questions. DARA may not be able to obtain additional issued patents relating to its technology or products. Even if issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit DARA’s ability to stop competitors from marketing similar products or limit the length or term of patent protection DARA may have for its products. Changes in either patent laws or in the interpretations of patent laws in the United States or other countries may diminish the value of DARA’s intellectual property or narrow the scope of DARA’s patent protection, and any defense of DARA’s patent rights would be costly and time-consuming and may adversely affect DARA’s overall financial condition and liquidity.

If DARA’s competitors or others challenge DARA’s patent rights or misappropriate or otherwise violate its intellectual property, DARA may be required to rely on third parties to defend its interests. DARA has licensed its commercial products from various licensors, each of whom has the primary right to institute any action to defend its patent estate relating to the licensed products. In addition, DARA’s license agreement with respect to Oravig specifies that if the licensor does not initiate an action to defend any patents covering the product, DARA may choose to defend such patents at its sole cost. In the event that any action instituted to defend DARA’s intellectual property is unsuccessful, or if DARA and its licensors fail to defend DARA’s intellectual property, DARA’s business may be materially harmed. If DARA pursues litigation to defend its intellectual property rights, the litigation may be expensive, time-consuming and ultimately unsuccessful.

DARA’s patents also may not afford DARA protection against numerous competitors with similar technology. Patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing and in some cases not at all. Therefore, because publications of discoveries in the scientific literature often lag behind actual discoveries, neither DARA nor its licensors can be certain that DARA or they were the first to develop the inventions claimed in issued patents or pending patent applications, or that DARA or they were the first to file for protection of the inventions set forth in these patent applications. Even in the event that DARA’s patents are upheld as valid and enforceable, they may not foreclose potential competitors from developing new technologies or “workarounds” that circumvent DARA’s patent rights. This means that DARA’s patent portfolio may not prevent the entry of a competitive product into the market. In addition, patents generally expire, regardless of their date of issue, 20 years from the earliest claimed non-provisional filing date. As a result, the time required to obtain regulatory approval for a product candidate may consume part or all of the patent term. DARA is not able to accurately predict the remaining length of the applicable patent term following regulatory approval of any of its product candidates.

 

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If DARA is unable to protect the confidentiality of its proprietary information and know-how, the value of DARA’s technology and products could be adversely affected.

In addition to patented technology, DARA relies on trademarks, copyrights, trade secrets and know-how to develop, maintain and strengthen DARA’s competitive positions. DARA seeks to protect this information in part through confidentiality agreements with its employees, consultants and third parties. If any of these agreements are breached, DARA may not have adequate remedies for any such breach. Moreover, there can be no assurance that third parties will not know, discover or develop independently equivalent proprietary information or techniques, that they will not gain access to DARA’s trade secrets or disclose such trade secrets to the public. Therefore, DARA cannot guarantee that DARA can maintain and protect unpatented proprietary information and trade secrets. Misappropriation of DARA’s intellectual property would have an adverse effect on DARA’s competitive position and may cause DARA to incur substantial litigation costs.

DARA may be subject to claims that DARA infringes the intellectual property rights of others, and unfavorable outcomes could harm DARA’s business.

DARA’s operations may be subject to claims, and potential litigation, arising from DARA’s alleged infringement of patents, trade secrets or copyrights owned by third parties. DARA intends to fully comply with the law in avoiding such infringements. However, within the drug development industry, established companies have actively pursued such infringements, and have initiated such claims and litigation, which has made the entry of competitive products more difficult. DARA may experience such claims or litigation initiated by existing, better-funded competitors. DARA could also become involved in disputes regarding the ownership of intellectual property rights that relate to DARA’s technologies. These disputes could arise out of collaboration relationships, strategic partnerships or other relationships. Any such litigation could be expensive, take significant time, and could divert management’s attention from other business concerns. DARA’s failure to prevail in any such legal proceedings, or even the mere occurrence of such legal proceedings, could substantially affect DARA’s ability to meet its expenses and continue operations.

In November 2012, a suit was filed in the United States District Court District of Columbia naming DARA as a defendant. Plaintiff in the suit is GlycoBioSciences, Inc. Also named as a defendant is Innocutis Holdings, LLC. DARA and Innocutis were parties to a now-terminated Exclusive Marketing Agreement that granted DARA rights to promote Bionect in the U.S. oncology and radiation oncology marketplace. Plaintiff alleges that defendants’ distribution and sale of Bionect infringes on certain of plaintiff’s patents and plaintiff seeks to enjoin defendants’ alleged patent infringement and seeks unspecified damages and costs. Pursuant to the Exclusive Marketing Agreement, Innocutis is required to indemnify DARA in connection with this lawsuit, an obligation which survives the expiration or termination of the Exclusive Marketing Agreement. As a result, Innocutis has assumed DARA’s defense. The defendants filed a motion to dismiss the complaint on February 1, 2013. On June 26, 2014, counsel for the defendants notified the Court that the United States Patent and Trademark Office had completed a reexamination of two patents which underlie the suit and also filed a Motion to Dismiss. On August 25, 2014, plaintiff filed an amended complaint asserting that defendants infringed on certain patents relating to the sale of Bionect. On September 25, 2014, defendants filed an answer and asserted various affirmative defenses and counterclaims. On April 16, 2015, plaintiff filed a Motion to Dismiss defendant’s Amended Complaint. The Motion to Dismiss was denied by Court on June 10, 2015. The Court has ordered that fact discovery commence not earlier than January 1, 2016, and that it be completed not later than April 22, 2016. Additional discovery and expert reports are to be submitted at intervals throughout 2016 culminating in dispositive motions being filed on or before August 26, 2016. No assurance can be given regarding the outcome of this litigation or its effect on DARA’s financial position or results of operations.

DARA’s inability to manage its planned growth could harm DARA’s business.

As DARA works toward building a portfolio of oncology treatment and supportive care pharmaceutical products and a sales organization that will market such products for sale, DARA expects to require additional personnel. As a result, DARA’s operating expenses and capital requirements may increase significantly. DARA’s

 

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ability to manage its growth effectively requires DARA to forecast accurately its sales and growth and manufacturing needs and to expend funds to improve DARA’s operational, financial and management controls, reporting systems and procedures. If DARA is unable to manage its anticipated growth effectively, DARA’s business could be harmed.

The pharmaceutical and biotechnology industries are intensely competitive and DARA may be unable to successfully compete against competitors with substantially more resources than DARA has.

In general, the pharmaceutical and biotechnology industries are intensely competitive. The technological areas in which DARA works continue to evolve at a rapid pace. Competition from pharmaceutical, chemical and biotechnology companies, universities and research institutions is intense and DARA expects it to increase. Many of these competitors are substantially larger than DARA is and have substantially greater capital resources, research and development capabilities and experience, manufacturing, marketing, financial and managerial resources than DARA does. Acquisitions of competing companies by large pharmaceutical companies or other companies could enhance the financial, marketing and other resources available to these competitors.

An important factor in DARA’s ability to compete will be the timing of market introduction of competitive products. Accordingly, the relative speed with which DARA and competing companies can in-license and develop products, complete the clinical testing and approval processes, and supply commercial quantities of the products to the market will be an important element of market success. Other significant competitive factors include:

 

    product safety and efficacy;

 

    timing and scope of regulatory approval;

 

    product availability;

 

    marketing and sales capabilities;

 

    reimbursement coverage from insurance companies and others;

 

    the extent of clinical benefits and side effects of DARA’s products relative to their cost;

 

    price;

 

    patent protection; and

 

    capabilities of partners with whom DARA may collaborate.

There can be no assurance that DARA can develop products that are more effective or achieve greater market acceptance than competitive products, or that DARA’s competitors will not succeed in developing products and technologies that are more effective than DARA’s or that render DARA’s products and technologies less competitive or obsolete.

If the healthcare system or reimbursement policies change, the prices of DARA’s potential products may be lower than expected and DARA’s potential sales may decline.

The levels of revenues and profitability of bio-pharmaceutical companies like DARA may be affected by the continuing efforts of government and third party payers to contain or reduce the costs of healthcare through various means. For example, in the U.S. there have been, and DARA expects that there will continue to be, a number of federal and state proposals to implement similar governmental control. While DARA cannot predict whether any legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on DARA’s business, financial condition and profitability. In addition, in the U.S. and elsewhere, sales of therapeutic and other pharmaceutical products depend in part on the availability of reimbursement to the consumer from third party payers, such as government and private insurance plans. Third

 

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party payers are increasingly challenging the prices charged for medical products and services. Moreover, in certain foreign markets, pricing or profitability of therapeutic and other pharmaceutical products is subject to governmental control. DARA cannot assure you that any of its potential products will be considered cost effective or that reimbursement to the consumer will be available or will be sufficient to allow DARA to sell its potential products on a competitive and profitable basis.

Government regulation of DARA’s business is extensive and drug approvals are uncertain, expensive and time-consuming.

The research, development, pre-clinical and clinical trials of any intended products, including ones DARA may seek to partner with licensees or collaborators, are subject to an extensive regulatory approval process by the FDA and other regulatory agencies in the U.S. and abroad, such as in the European Union and Japan. The process of obtaining FDA and other required regulatory approvals for drug and biological products, including required pre-clinical and clinical testing, is lengthy, expensive and uncertain. Even if regulatory clearance is obtained, a marketed product is subject to continual review, and later discovery of previously unknown adverse events or failure to comply with the applicable manufacturing, packaging, distribution and marketing requirements may result in restrictions on a product’s marketing or withdrawal of the product from the market as well as possible criminal and civil sanctions.

Currently DARA has only one clinical development candidate, KRN 5500. DARA is looking to find a partner with the interest and resources to undertake and support the cost for the Phase IIb program. The merger agreement provides that DARA may, for a period of time following the completion of the merger, continue to seek a partner for KRN 5500. A delay or setback in the partnering efforts with respect to KRN5500 would have a material adverse effect on DARA’s ability to realize any benefits from the drug candidate.

DARA’s business, as well as that of DARA’s manufacturers, is strictly regulated by the federal and other governments, and there can be no assurance that either DARA or its manufacturers will be able to maintain full compliance with all applicable regulations.

The clinical testing, manufacture and sale of pharmaceutical products and medical devices, including ones DARA currently or may in the future sell independently or through partnerships with licensees or collaborators, are subject to extensive regulation by numerous governmental authorities in the U.S., principally the FDA, and corresponding foreign regulatory agencies. Changes in existing regulations or adoption of new regulations or policies could prevent DARA from obtaining, or affect the timing of, future regulatory approvals or clearances. DARA cannot assure you that DARA or its development partners will be able to obtain necessary regulatory clearances or approvals on a timely basis, or at all, or that DARA will not be required to incur significant costs in obtaining or maintaining such regulatory approvals. Delays in receipt of, or failure to receive, such approvals or clearances, the loss of previously obtained approvals or clearances or the failure to comply with existing or future regulatory requirements could have a material adverse effect on DARA’s business, financial condition and results of operations.

Any enforcement action by regulatory authorities with respect to past or future regulatory noncompliance could have a material adverse effect on DARA’s business, financial condition and results of operations. Noncompliance with applicable requirements can result in fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to authorize the marketing of new products and criminal prosecution.

DARA’s products that are approved for market are still subject to continuing regulation. Any proposed products that may in the future be approved for market will also be subject to continued regulation. DARA and its collaborative partners, including DARA’s manufacturers, will continuously be subject to routine inspection by the FDA and will have to comply with the host of regulatory requirements that usually apply to pharmaceutical products marketed in the U.S., including labeling regulations, the FDA’s Good Manufacturing

 

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Practice requirements, Good Clinical Practices and Good Laboratory Practices, review and response to adverse drug experience reports and regulation governing marketing and promotion of approved drug products. DARA’s failure to comply with applicable regulatory requirements could result in enforcement action or sanctions by the FDA and other governmental agencies, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of DARA’s products, delay, suspension or withdrawal of approvals, license revocation, product seizures or recalls, operational restrictions or criminal prosecutions, any of which could have a material adverse effect on DARA’s business, financial condition and results of operations.

DARA’s business exposes DARA to potential liability for personal injury and product liability claims that could affect DARA’s financial condition.

DARA’s business involves the testing of new drugs on human volunteers and the use of DARA’s marketed products by patients. This exposes DARA to the risk of liability for personal injury or death to patients resulting from, among other things, possible unforeseen adverse side effects or improper administration of a drug. Many study volunteers and participants are already seriously ill and are at risk of further illness or death. If DARA is required to pay damages or incur defense costs in connection with any personal injury claim that is outside the scope of indemnification agreements that DARA has with clients and collaborative partners, if any indemnification agreement is not performed in accordance with its terms or if DARA’s liability exceeds the amount of any applicable indemnification limits or available insurance coverage, DARA could be materially and adversely affected both financially and reputationally. Any such claims may also prevent DARA from being able to obtain adequate insurance for these risks at reasonable rates in the future.

If DARA or its contract sales force market DARA’s products in a manner that violates healthcare fraud and abuse laws, or if DARA violates false claims laws or fails to comply with DARA’s reporting and payment obligations under the Medicaid rebate program or other governmental pricing programs, DARA may be subject to civil or criminal penalties or additional reimbursement requirements and sanctions, which could have a material adverse effect on DARA’s business, financial condition, results of operations and growth prospects.

In addition to FDA restrictions on the marketing of pharmaceutical products, several other types of state and federal healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. These laws include anti-kickback statutes and false claims statutes. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of DARA’s business activities could be subject to challenge under one or more of these laws.

The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federally financed healthcare program. Although there are several statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly and practices that involve remuneration intended to induce prescribing, purchasing or recommending such healthcare items or services may be subject to scrutiny if they do not qualify for an exemption or safe harbor.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement in order to have a claim paid. Pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of alleged promotional and marketing activities, such as providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers, reporting inflated average wholesale prices to pricing services that were then used by federal programs to set reimbursement rates and engaging in off-label promotion that caused claims to be submitted to Medicaid for non-covered, off-

 

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label uses. Such activities have been alleged to cause the resulting claims for reimbursement to be “false” claims. Most states also have statutes or regulations similar to the federal anti-kickback and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payer.

DARA has initiated participation in the federal Medicaid Rebate Program established by the Omnibus Budget Reconciliation Act of 1990, as well as several state supplemental rebate programs, in connection with the sale of Soltamox and would anticipate participating in these programs with respect to future pharmaceutical products, including Oravig. Though to date invoices for rebates have not been material, under the Medicaid rebate program, DARA anticipates paying a rebate to each state Medicaid program for its products that are reimbursed by those programs. Federal law requires that any company that participates in the Medicaid rebate program extend comparable discounts to qualified purchasers under the Public Health Service Act pharmaceutical pricing program, which requires DARA to sell its products to certain customers at prices lower than DARA otherwise might be able to charge. If products are made available to authorized users of the Federal Supply Schedule, additional pricing laws and requirements apply. Pharmaceutical companies have been prosecuted under federal and state false claims laws in connection with allegedly inaccurate information submitted to the Medicaid Rebate Program or for knowingly submitting or using allegedly inaccurate pricing information in connection with federal pricing and discount programs.

Pricing and rebate calculations vary among products and programs. The calculations are complex and may be subject to interpretation by DARA or its contractors, governmental or regulatory agencies and the courts. DARA’s methodologies for calculating these prices could be challenged under false claims laws or other laws. DARA or its contractors could make a mistake in calculating reported prices and required discounts, revisions to those prices and discounts, or determining whether a revision is necessary, which could result in retroactive rebates (and interest, if any). Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. If this were to occur, DARA could face, in addition to prosecution under federal and state false claims laws, substantial liability and civil monetary penalties, exclusion of DARA’s products from reimbursement under government programs, criminal fines or imprisonment or the entry into a Corporate Integrity Agreement, Deferred Prosecution Agreement, or similar arrangement.

In addition, federal legislation now imposes additional requirements. For example, as part of the Patient Protection and Affordable Care Act, a federal physician payment disclosure provision based on the Physician Payments Sunshine Act was enacted, which requires pharmaceutical manufacturers to report certain gifts and payments to physicians beginning in 2013. These reports will then be placed on a public database. Failure to so report could subject companies to significant financial penalties.

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

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus contains certain forward-looking information about Midatech, DARA, and the combined company that is intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. These statements may be made directly in this proxy statement/prospectus or may be incorporated into this proxy statement/prospectus by reference to other documents and may include statements for the period following the completion of the merger. Representatives of Midatech may also make forward-looking statements. Forward-looking statements are statements that are not historical facts. Words such as “expect,” “believe,” “will,” “may,” “anticipate,” “plan,” “estimate,” “intend,” “should,” “can,” “likely,” “could” and similar expressions are intended to identify forward-looking statements. These statements include, but are not limited to, statements regarding the expected completion of the merger and timing thereof, Midatech’s or the combined company’s expected revenues, the market and growth opportunities, the amount of anticipated cost synergies and other benefits associated with the proposed merger and other statements that are not historical facts.

These forward-looking statements are based on currently available competitive, financial and economic data together with management’s views and assumptions regarding future events and business performance as of the time the statements are made and are subject to risks and uncertainties. The parties wish to caution you that there are some known and unknown factors that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements, including but not limited to, how many stockholders will vote in favor of the proposals for consideration at the special meeting, the possibility that competing offers will be made, the possibility that various closing conditions for the merger may not be satisfied or waived, legal or other proceedings that may affect the timing or ability to complete the transaction as contemplated, operational challenges in achieving strategic objectives and executing each party’s plan, and the potential impact of general economic conditions and developments beyond a party’s control, and competition in the industry.

You are referred to the section titled “ Risk Factors ” in this proxy statement/prospectus, which contain and identify other important factors that could cause actual results to differ materially from those contained in any projections or forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement/prospectus. All subsequent written and oral forward-looking statements by or concerning Midatech or DARA are expressly qualified in their entirety by the cautionary statements above. Except as may be required by law, neither Midatech nor DARA undertake any obligation to publicly update or revise any forward-looking statements because of new information, future events or otherwise.

 

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DARA PROPOSALS

Proposal 1: Adoption of the Merger Agreement

DARA stockholders are being asked to adopt the merger agreement pursuant to which DARA would become a wholly owned subsidiary of Midatech, a copy of which is attached hereto as Annex A .

For a detailed discussion of the terms and conditions of the merger agreement, see “ The Merger Agreement .” As discussed under “ The Merger—DARA’s Reasons for the Merger and Recommendation of DARA’s Board of Directors ,” after careful consideration, the DARA Board of Directors unanimously approved the merger agreement and declared the merger agreement the transactions contemplated thereby, including the merger, advisable, fair to and in the best interests of DARA and its stockholders.

The approval of the merger proposal requires the affirmative vote of holders of a majority of shares of DARA common stock issued and outstanding and entitled to vote at the special meeting. Failures to vote, abstentions and broker non-votes, if any, will have the effect of a vote “ AGAINST ” this proposal.

THE DARA BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THIS PROPOSAL.

Proposal 2: Advisory Vote on Potential Payments Under Compensation Arrangements

The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, requires that DARA provide its stockholders with the opportunity to vote to approve, on an advisory, non-binding basis, the “golden parachute” compensation arrangements for DARA’s named executive officers, as disclosed in the section of this proxy statement/prospectus entitled “ The Merger—Golden Parachute Arrangements for DARA Named Executive Officers ” beginning on page 123. DARA is asking its stockholders to vote on the adoption of the following resolution:

“RESOLVED, that the compensation that may be paid or become payable to DARA’s named executive officers in connection with the merger, as disclosed in the table entitled “ The Merger—Golden Parachute Arrangements for DARA Named Executive Officers ” on page 123 of this proxy statement/prospectus, including the associated narrative discussion, and the agreements or understandings pursuant to which such compensation may be paid or become payable, are hereby APPROVED.”

The vote on Potential Payments Under Compensation Arrangements proposal is a vote separate and apart from the vote to adopt the merger agreement. Accordingly, you may vote to approve the Potential Payments Under Compensation Arrangements proposal and vote not to adopt the merger agreement and vice versa. In addition, because the vote on Potential Payments Under Compensation Arrangements is advisory in nature only, it will not be binding on DARA. Accordingly, because DARA is contractually obligated to pay the compensation, such compensation will be payable, subject only to the conditions applicable thereto, if the merger is completed and regardless of the outcome of the advisory vote.

The affirmative vote of the majority of the votes cast by holders of DARA’s common stock will be required to approve the advisory resolution on the Potential Payments Under Compensation Arrangements. Abstentions and broker non-votes (if a properly executed proxy card is returned) will be counted towards a quorum. However, if you are a stockholder of record, and you fail to vote by proxy or by ballot at the special meeting, your shares will not be counted for purposes of determining a quorum.

Failure to submit a proxy card or vote in person, abstentions and broker non-votes will not affect whether this matter has been approved.

THE DARA BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THIS PROPOSAL.

 

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Proposal 3: Adjournment of the Special Meeting

If the number of shares of common stock present in person or represented by proxy at the special meeting voting in favor of the proposal to adopt the merger agreement and approve the Potential Payments Under Compensation Arrangements proposal set forth herein, referred to collectively as the Proposals, is insufficient to approve such Proposals at the time of the special meeting, then, subject to the terms of the merger agreement, DARA intends to move to adjourn or postpone the special meeting in order to enable DARA’s Board of Directors to solicit additional proxies in respect of such Proposals. In that event, DARA will ask its stockholders to vote only upon the adjournment proposal, and not any other Proposal.

In this proposal, DARA is asking you to authorize the holder of any proxy solicited by DARA’s Board of Directors to vote in favor of granting discretionary authority to the proxy holder to adjourn the special meeting for the purpose of soliciting additional proxies. If DARA’s stockholders approve the adjournment proposal, DARA could adjourn the special meeting and any adjourned session of the special meeting and use the additional time to solicit additional proxies, including the solicitation of proxies from stockholders that have previously returned properly executed proxies or authorized a proxy by using the Internet or a toll-free telephone number. Among other things, approval of the adjournment proposal could mean that, even if DARA had received proxies representing a sufficient number of votes against the adoption or approval of the one or more of the Proposals such that such Proposal(s) would be defeated, DARA could adjourn the special meeting without a vote on the approval of the such Proposal(s) and seek to obtain sufficient votes in favor of such Proposal(s). Additionally, DARA may seek to adjourn the special meeting if a quorum is not present at the special meeting.

Approval of the proposal to adjourn the special meeting requires the affirmative vote of the holders of a majority of the shares of DARA common stock present in person or by proxy and entitled to vote at the special meeting, assuming a quorum is present. For the proposal to adjourn the special meeting, you may vote “ FOR ,” “ AGAINST ” or “ ABSTAIN .” Abstentions will be counted as present for the purpose of determining whether a quorum is present at the special meeting, but will have the same effect as a vote against the proposal to adjourn the special meeting. Broker non-votes, if any, will be counted as present for the purpose of determining whether a quorum is present at the special meeting, but the failure to instruct your bank, broker or other nominee how to vote your shares will have the same effect as a vote “ AGAINST ” the adjournment proposal. No proxy will be voted in favor of the adjournment proposal unless it is specifically marked “ FOR ” the proposal to adjourn the special meeting.

THE DARA BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THIS PROPOSAL.

 

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THE MERGER

The following discussion contains important information relating to the merger. You are urged to read this discussion together with the merger agreement and the related documents attached as Annexes to this proxy statement/prospectus before voting.

Structure of the Merger

Subject to the terms and conditions of the merger agreement and in accordance with Delaware law, Merger Sub, a wholly owned subsidiary of Midatech, will be merged with and into DARA, with DARA continuing as the surviving corporation, referred to as the merger. Immediately after the Effective Time, DARA, as the surviving corporation in the merger, will be merged with and into Secondary Merger Sub, a wholly owned subsidiary of Midatech, with Secondary Merger Sub surviving and continuing as a wholly owned subsidiary of Midatech, referred to as the secondary merger. It is intended that the secondary merger will be effected immediately after the Effective Time without further approval, authorization or direction from or by any of the parties to the merger agreement.

Immediately following the secondary merger, the name of the surviving entity will be changed to “DARA BioSciences, Inc.”

Merger Consideration

Common Stock. Other than excluded shares, as a result of the transaction, DARA common stockholders will have the right, with respect to each of their shares of DARA common stock to receive, without interest, (i) 0.272 ordinary shares of Midatech, subject to adjustment in accordance with the terms of the merger agreement, referred to as the Per Share Stock Consideration, plus (ii) one contingent value right, referred to as CVRs, which represents the right to receive contingent payments if specified milestones are achieved within agreed time periods, subject to and in accordance with the terms and conditions of the Contingent Value Rights Agreement, in substantially the form included as Annex C to this proxy statement/prospectus, to be entered into prior to the Effective Time by Midatech, DARA, the Shareholder Representative and a rights agent selected by Midatech with DARA’s approval, plus (iii) cash in lieu of functional Midatech Depositary Shares. The CVR Agreement was approved by DARA’s Board of Directors in connection with the approval of the merger agreement. All Midatech ordinary shares issued in connection with the merger will be delivered to the holders of DARA common stock in the form of American Depositary Receipts, each representing the right to receive two Midatech ordinary shares. The Per Share Stock Consideration and one CVR, together with any cash to be paid in lieu of fractional shares of Midatech Depositary Shares to be issued, are referred to collectively as the Per Share Merger Consideration.

The merger agreement includes a collar provision under which the initial exchange ratio of 0.272 is subject to adjustment in the event the Exchange Ratio Market Value (as defined herein) determined one business day prior to closing of the merger, referred to as the Closing, is less than $1.08 or greater than $1.32, this ratio, as adjusted if necessary, is referred to as the Exchange Ratio. In such event, the Exchange Ratio shall be determined as follows: (i) if the Exchange Ratio Market Value is an amount less than $1.08, then the Exchange Ratio shall be equal to the quotient obtained by dividing $1.08 by the Exchange Ratio Market Value (subject to a maximum Exchange Ratio of 0.306) and (ii) if the Exchange Ratio Market Value is an amount greater than $1.32, then the Exchange Ratio shall be equal to the quotient obtained by dividing $1.32 by the Exchange Ratio Market Value (subject to a minimum Exchange Ratio of 0.249).

As used herein, Exchange Ratio Market Value means 0.272, the initial Exchange Ratio, multiplied by a figure that represents the average of the weighted average mid-market trading price of Midatech ordinary shares on AIM (as calculated by Bloomberg Screen AQR) for each of the 15 trading days ending on the day which is the business day immediately prior to the Effective Time, and then translated into U.S. dollars using the Bank of England’s daily spot exchange rate for the day which is the business day immediately prior to the Effective Time.

 

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As of [●], 2015, the last practicable trading day before the date of this proxy statement/prospectus, the implied value of the per share stock consideration was $[●] for each share of DARA common stock. The implied value of the per share stock consideration as of June 3, 2015, the last trading day before the day on which Midatech and DARA announced the execution of the merger agreement, was $1.22 per share of DARA common stock.

As used herein, excluded shares mean all shares held by DARA as treasury stock or any shares held by Midatech, Merger Sub, Secondary Merger Sub or any wholly owned subsidiary of Midatech or DARA, which will be cancelled, and any shares authorized but unissued, and shares owned by DARA stockholders who have perfected and not withdrawn a demand for, or lost their right to, appraisal with respect to such shares.

Fractions of Shares . Midatech will not issue fractional shares in the merger. In lieu of receiving any fractional share of Midatech Depositary Shares, holders of common stock will receive from Midatech an amount of cash, without interest, less the amount of any withholding taxes, equal to the product of (x) such fraction, multiplied by (y) the U.S. dollar equivalent of the closing price of each Midatech ordinary share underlying the Midatech Depositary Shares on AIM on the last trading day preceding the day the merger is consummated, referred to as the Closing Date.

Preferred Stock. At the Effective Time, each share (other than excluded shares) of DARA’s issued and outstanding Series A Convertible Preferred Stock, Series B-2 Convertible Preferred Stock and Series C-1 Convertible Preferred Stock will be converted into the right to receive, without interest, $1,000 in cash, plus any declared but unpaid dividends.

Conversion . The conversion of DARA’s common stock and preferred stock into the merger consideration will occur automatically upon completion of the merger. Under the merger agreement, after the Effective Time, Midatech will cause its exchange agent to pay the purchase price to each DARA stockholder who surrenders the appropriate documents to the exchange agent. As used herein, the term “purchase price” refers to, (i) for holders of DARA common stock, (x) Midatech Depositary Shares and (y) any cash to be paid in lieu of fractional Midatech Depositary Shares, payable to each holder of DARA common stock, and (ii) for holders of DARA preferred stock, cash to be paid to each holder of DARA preferred stock.

Adjustments . If, between the date of the merger agreement and the Effective Time, the outstanding shares of DARA common stock or Midatech ordinary shares are changed into a different number of shares or a different class (including, but not limited to, by reason of any forward or reverse stock split, stock dividend, stock sale, reorganization, reclassification, combination, exchange of shares or other like shares), the Exchange Ratio will be correspondingly adjusted to reflect such change and to provide the holders of DARA common stock the same economic effect as contemplated by the merger agreement prior to such action.

Treatment of Stock Options and Warrants

Stock Options . Subject to certain exceptions, each outstanding and unexercised DARA Stock Option will become fully vested and exercisable immediately prior to the Effective Time. Stock Options that remain outstanding and unexercised at the Effective Time will be assumed by Midatech and will vest in accordance with their vesting schedule pursuant to the same material terms and conditions as set forth in the applicable agreement under which such Stock Option was granted immediately prior to the Effective Time, provided that at the Effective Time, (i) each Stock Option will be exercisable for that number of whole Midatech ordinary shares equal to the product of (A) the number of shares of DARA common stock that were issuable upon exercise of such Stock Option immediately prior to the Effective Time, multiplied by (B) the Exchange Ratio, rounded down to the nearest whole number of Midatech ordinary shares, and (ii) the per share exercise price for each Midatech ordinary share issuable upon exercise of each Stock Option so converted will be equal to the quotient determined by dividing the exercise price per share of DARA common stock at which such Stock Option was exercisable

 

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immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. All Midatech ordinary shares delivered to the holders of Stock Options will be delivered in the appropriate amount of Midatech Depositary Shares.

Warrants . Each outstanding and unexercised Warrant to purchase shares of DARA common stock as of immediately prior to the Effective Time will be assumed or substituted by Midatech in accordance with the terms of such Warrant and, as of the Effective Time, (i) will be exercisable for (A) the number of whole Midatech ordinary shares equal to the product of the number of shares of DARA common stock that were issuable upon exercise of such Warrant immediately prior to the Effective Time, multiplied by the Exchange Ratio, rounded down to the nearest whole number of shares of Midatech ordinary shares and (B) one CVR multiplied by the total number of shares of DARA common stock that were issuable upon exercise of such Warrants immediately prior to the Effective Time, and (ii) the per share exercise price for each Midatech ordinary share issuable upon exercise of Warrants so converted will be equal to the quotient determined by dividing the exercise price per share of DARA common stock at which such Warrant was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. All Midatech ordinary shares delivered to the holders of Warrants will be delivered in the appropriate amount of Midatech Depositary Shares.

Oncogenerix Contingent Consideration Shares

Pursuant to the terms of that certain Agreement and Plan of Merger, dated as of January 17, 2012, referred to as the Oncogenerix Merger Agreement, by and among Oncogenerix, Inc., referred to as Oncogenerix, certain stockholders of Oncogenerix, Christopher Clement, in his capacity as stockholder representative, DARA and Oncogenerix Acquisition Corporation, on January 17, 2012, DARA acquired Oncogenerix, referred to as the Oncogenerix Merger. In addition to the merger consideration payable by DARA upon the closing of the Oncogenerix Merger, the former stockholders of Oncogenerix are entitled to receive up to 1,114,560 shares of DARA common stock, each share referred to as an Oncogenerix Contingent Consideration Share, based upon, among other things, DARA’s achievement of certain revenue milestones, ranging from $5 million to $20 million of customer revenue, or market capitalization milestones, ranging from a market capitalization of $75 million to at least $200 million, during the 60 months following the closing of the Oncogenerix Merger. In addition, if a change of control of DARA were to occur during the 60 months following the closing of the Oncogenerix Merger, and DARA were to have a marketed product (as such term is defined the Oncogenerix Merger Agreement) at such time, which it currently has, then all of the Oncogenerix Contingent Consideration Shares would become payable. The occurrence of the Effective Time will constitute a change in control under the Oncogonerix Merger Agreement.

At the Effective Time, pursuant to the terms of the merger agreement, each right to receive an Oncogenerix Contingent Consideration Share reserved for issuance pursuant to the terms of the Oncogenerix Merger Agreement, will become payable to the holder of such right, and each such Oncogenerix Contingent Consideration Share will be converted into the right to receive the Per Share Merger Consideration. Each of Mr. Clement and Mr. Benharris, each an executive officer of DARA, will be entitled to 34,507 Oncogenerix Contingent Consideration Shares. See “ —Interests of DARA’s Executive Officers and Directors in the Merger ” beginning on page 119.

Purpose and Effects of the Merger

The purpose of the merger is to enable Midatech to acquire the assets and business of DARA and its subsidiaries. Upon completion of the merger, except as discussed below, the issued and outstanding shares of DARA capital stock will be automatically converted into the merger consideration. See “ —Merger Consideration ” on page 94.

Ownership of Combined Company After Merger

As of October 2, 2015, 27,820,760 Midatech ordinary shares were in issue and approximately 1,270,000 Midatech ordinary shares were reserved for the exercise of outstanding Midatech options. In accordance with terms of the merger, at the Effective Time, Midatech (1) will issue up to approximately 6.0 million of its ordinary

 

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shares (in the form of Midatech Depositary Shares) to DARA stockholders pursuant to the merger (assuming the maximum Exchange Ratio of 0.306) and (2) will reserve for issuance approximately 4.5 million Midatech ordinary shares in connection with the exercise or settlement of DARA Warrants and Stock Options (assuming the maximum Exchange Ratio of 0.306). Midatech and DARA expect that the Midatech ordinary shares issued in connection with the merger in respect of DARA common stock will represent approximately 16% of the outstanding ordinary shares of the combined company immediately after the merger on a diluted basis. Midatech ordinary shares held by Midatech stockholders immediately prior to the merger will represent approximately 84% of the outstanding ordinary shares of the combined company immediately after the merger on a diluted basis.

Background of the Merger

In May 2014, DARA engaged Destum Partners, Inc., referred to as Destum Partners, in order to find a partner for its KRN5500 asset. Destum Partners examined and approached approximately 70 companies to discuss the KRN5500 opportunity, one of which was Midatech. On November 19, 2014, Midatech and DARA entered into a non-disclosure agreement. While Midatech ultimately was not interested in the KRN5500 asset, in January 2015 Midatech indicated interest in discussing the possibility of a broader strategic transaction.

In January 2015, DARA’s Executive Chairman and Chief Medical Officer, Chief Executive Officer, and Senior Vice President, Commercial Operations and Business Development met with Midatech’s Chief Executive Officer at the J.P. Morgan 33rd Annual Healthcare Conference in San Francisco, California. At the meeting, Midatech’s representatives expressed Midatech’s interest in pursuing a possible business combination transaction with DARA.

Following this meeting, in late January 2015, DARA preliminarily concluded that a transaction with Midatech presented a potentially attractive opportunity in relation to which the Board of Directors of DARA should further explore. Representatives of DARA informed Midatech that DARA was prepared to enter into more formal discussions with Midatech regarding a possible transaction involving the two companies.

In February 2015, DARA engaged Aquilo Partners to assist it in the discussions with Midatech as well as to assist in evaluating DARA’s alternatives. Aquilo Partners was familiar with DARA’s business and operations due to their understanding of the pharmaceutical industry, its relationship with potential merger partners and experience with similar transactions. Midatech retained Torreya Partners (Europe) LLP, referred to as Torreya, as its financial advisor for the proposed transaction on February 2, 2015.

On February 4 and 5, 2015 at DARA’s corporate offices in Raleigh, North Carolina, DARA senior management met with members of Midatech’s senior management and discussed in detail DARA’s business and the prospects for a potential business combination.

At a meeting of DARA’s Board of Directors held on February 25, 2015, the DARA Board of Directors reviewed DARA’s commercial plan and product forecasts for 2015, which included projections for future growth, key assumptions and additional forecasts for 2016 and 2017. At this meeting DARA’s Chief Executive Officer advised the Board of Directors of the status of the discussions with Midatech and representatives of Aquilo Partners provided the Board of Directors with preliminary information regarding potential valuation ranges for DARA as well as information regarding Midatech. The Board of Directors also reviewed with DARA senior management and Aquilo Partners other companies that would be approached to determine their interest in engaging in discussions about a strategic transaction.

In February 2015, DARA and Midatech, together with their outside legal advisors, K&L Gates LLP and Brown Rudnick LLP, respectively, and financial advisors, Aquilo Partners and Torreya, respectively, initiated diligence investigations of each other.

 

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Based on the discussion with Midatech in January and February 2015, DARA’s Board of Directors determined that senior management should contact other potential parties that could be interested in acquiring DARA. DARA’s Board of Directors determined that contacts with potential strategic partners should be made on a confidential basis as the Board of Directors was not committed to undertaking a sale of DARA, believed there were a relatively small number of potential acquirors for a small specialty pharma company like DARA, all of whom could be contacted on a confidential basis, and did not want a public strategic process to harm DARA’s commercial activities.

DARA’s senior management and Board of Directors and Aquilo Partners had several discussions about the types of parties that could be interested in a transaction. During these discussions, the parties considered numerous types of potential buyers and a master list of target companies was prepared encompassing both companies whom DARA’s management had already contacted and companies that Aquilo Partners had identified as therapeutically and strategically aligned. After considerable discussion and review, a judgment was made to focus on 19 strategic parties that had complementary business models or therapeutic focus. After consulting with Aquilo Partners, DARA’s Board of Directors and senior management believed that companies who were already engaged in the specialty pharmaceutical business would be most likely to have the experience and skills necessary to identify the value in DARA’s relatively small business and build value into that business. Aquilo Partners advised, and DARA’s Board of Directors and senior management agreed, that investment groups without existing specialty pharmaceutical businesses generally sought larger, more established and profitable platforms than DARA could then offer.

During March and April 2015, DARA’s senior management and Aquilo Partners had discussions with these potential parties as to their interest in exploring a strategic transaction with DARA. In addition to Midatech, five other potential parties executed confidentiality agreements with respect to discussions pertaining to strategic combinations involving DARA. Several of these parties engaged in preliminary discussions and initial diligence, but no party other than Midatech conducted in depth diligence.

Of the five parties who executed confidentiality agreements with DARA, only Company A expressed an interest in discussing strategic opportunities. However, Company A’s interest was limited to acquiring rights to certain of DARA’s products via an outlicense agreement. The outlicense arrangement proposed by Company A was structured in a manner to pay little or no upfront amounts and Company A did not indicate willingness to pay any significant upfront cash. As such a judgment was made that any such discussions would be unlikely to yield favorable financial terms to DARA. DARA’s Board of Directors and senior management believed that the proposed outlicense agreement would reduce the synergies in DARA’s product portfolio, limiting DARA’s ability to compete and position itself in the area of oncology supportive care.

Company B, who also signed a confidentiality agreement with DARA, indicated interest in a limited co-promotion agreement but was not interested in a broader transaction in the near future. There was further uncertainty with respect to Company B’s ability to execute on a co-promotion arrangement in a timely fashion as Company B had only recently acquired rights to the product Company B wished DARA to jointly promote and Company B had not yet determined a launch date for such product. DARA’s senior management and its Board of Directors discussed the potential for a transaction with Company A or Company B, but the opportunities did not promise to present a significant benefit to DARA’s stockholders.

In addition, none of these parties other than Midatech submitted a formal proposal or indicated informally to DARA or Aquilo Partners a price at which it would be interested in exploring a transaction. Although each party had differing reasons for not pursuing a transaction with DARA, a number of parties expressed a view that DARA was too small and lacked critical mass for a transaction to be compelling for those parties.

In general, these parties were given non-confidential information on the business of DARA until signing a confidentiality agreement. Those companies that did sign confidentiality agreements were provided some confidential information but none of the parties pursued diligence investigations in depth.

 

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On March 5, 2015, members of DARA and Midatech senior management met in New York, New York, together with representatives from Brown Rudnick LLP, K&L Gates LLP, Aquilo Partners and Torreya, and discussed potential transaction structure issues, including Midatech’s proposal that the merger consideration include a contingent value rights component. In addition, Midatech senior management made a presentation detailing its business.

On March 9, 2015 DARA entered into a Commercialization Agreement with Onxeo S.A. granting DARA the U.S. rights to Oravig, the first and only orally-dissolving buccal tablet approved for oral thrush.

On March 13, 2015, Midatech’s Board of Directors met to discuss the potential transaction with DARA. At the meeting, representatives of Torreya presented their views on the proposed transaction and the valuation metrics, including, but not limited to, a review of 52-week high and low share prices and analyst price targets. Brown Rudnick LLP also advised the Midatech Board of Directors on certain legal aspects of the transaction, including timetables and matters related to conducting a transaction in the United States. The Midatech Board of Directors discussed the benefits of the proposed transaction, and the belief that the addition of contingent value right may be more beneficial than an initial up-front payment of cash or stock. Following these discussions, the Midatech Board of Directors recommended that senior management submit a proposal to DARA to acquire all of DARA’s outstanding shares of common stock, subject to certain financial parameters.

Following the meeting of the Midatech Board of Directors, it was determined by senior management, upon discussion with Torreya and Brown Rudnick LLP, that the initial consideration payable to DARA stockholders should consist of ordinary shares of Midatech.

On March 19, 2015, Midatech senior management, operating within the financial parameters set by the Midatech Board of Directors, delivered to DARA a proposal to acquire all of DARA’s outstanding shares of common stock for a combination of shares of Midatech and contingent value rights that would entitle DARA’s stockholders to additional consideration if the gross sales of Gelclair and Oravig in 2016 and 2017 exceeded certain thresholds. Midatech’s draft non-binding letter of intent proposed, among other things, that each share of DARA common stock be exchanged for $1.10 of Midatech stock, plus a contingent value right to potentially receive a pro rata portion of a $5 million fund dependent on the achievement of certain revenue targets. The non-binding letter of intent sought to prohibit DARA from soliciting an alternative to the proposed merger for a period of 60 days, in consideration of Midatech’s time, effort and expense in pursuing the proposed merger.

DARA’s Board of Directors met by telephonic conference call on March 23, 2015 to discuss Midatech’s proposal and the status of Aquilo Partners’ efforts to identify other potential strategic opportunities. At this meeting DARA’s Board of Directors directed management to continue the discussions with Midatech in order to seek better pricing and other terms for a potential transaction. DARA’s Board of Directors reiterated its request for Aquilo Partners to continue to identify alternative strategic transactions.

Between March 19 and March 27, 2015, Midatech’s Chief Executive Officer had a number of further discussions with DARA’s Chief Executive Officer regarding transaction terms, including DARA’s request for better pricing, which resulted in the delivery to DARA on March 27, 2015 of a revised proposal from Midatech. This proposal was substantially similar to the proposal dated March 19, 2015, except that the purchase price per share of DARA common stock was increased to $1.15 of Midatech stock, plus the initially proposed contingent value right to receive a pro rata portion of a $5 million fund. The payout of the contingent value right, however, was revised to allow for an initial pro rata payout of $2.5 million from the fund upon the achievement of certain lower revenue targets than would be necessary for the payment of the full $5 million from the fund.

On April 1, 2015, DARA’s Board of Directors met by telephonic conference call with representatives from Aquilo Partners present. At this meeting, representatives of Aquilo Partners presented their views regarding the results to date of strategic outreach efforts, valuation metrics and comparables, background regarding Midatech and its value proposition, the proposed transaction terms presented by Midatech. In addition, DARA’s Board of

 

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Directors and Aquilo Partners conducted discussions on DARA’s prospects operating on a standalone basis which included a case study and DARA’s financing requirements. The case study examined a small, publicly traded specialty pharmaceutical company that executed a buy-and-build strategy over a three year period to increase its stock price significantly. DARA’s Board of Directors discussed this alternative, considering the risks and required financings for DARA to execute a similar strategy to add new product offerings and build DARA’s business. However, DARA’s Board of Directors indicated that the opportunity presented by Midatech’s proposals to date could provide a competitive premium much sooner and with less risk than that associated with a buy-and-build strategy. During this meeting DARA’s Board of Directors also discussed in detail the proposed transaction terms and the standalone scenario, which would require additional financing in the near future. Aquilo Partners discussed potential pricing for a financing, as well as the risk that new financing may not be available when needed. DARA’s Board of Directors and senior management expected that, given the amount of money that DARA would need to raise to fund future growth, the current price of DARA’s common stock and investors’ likely requirements for a discount to the common stock price, any financing, if available at all, would only be available on terms that would be significantly dilutive to current holders of DARA’s common stock. Following this discussion, DARA’s Board of Directors directed management to continue discussions with Midatech. Aquilo Partners reported that no other potential partners had come forward expressing a strategic interest in DARA.

On April 2, 2015, DARA’s Board of Directors met by telephonic conference call. During this meeting Midatech’s Chief Executive Officer made a detailed presentation concerning Midatech’s business model and strategies as well as the vision of a proposed business combination.

Between April 2 and April 19, 2015, Midatech’s Chief Executive Officer had a number of further discussions with DARA’s Chief Executive Officer regarding transaction terms during which time DARA asked for better pricing terms, among other things. Midatech senior management, following discussion with DARA senior management, determined that an increase to the contingent value rights fund would be acceptable, as they viewed such increase as economically neutral due to the fact that it would only be triggered (and subsequently funded by) an increase in sales.

Members of Midatech’s senior management met with and made presentations to the Board of Directors of DARA on April 13, 2015 in New York, New York. The following day, on April 14, 2015, Midatech, operating within the transaction parameters previously approved by its Board of Directors, provided a revised transaction proposal contained in a revised non-binding letter of intent. The letter proposed, among other things, an increase in the total proposed purchase price, such that each share of DARA common stock be exchanged for $1.20 of Midatech stock, plus a contingent value right to potentially receive a pro rata portion of a $7.5 million fund, dependent on the achievement of certain revenue targets higher than those necessary to trigger payments on the previously proposed $5 million fund. The letter also sought a 60 day period in which DARA would negotiate exclusively with Midatech on a proposed business combination.

DARA reviewed the new proposed terms with its outside legal and financial advisors. After such discussions, DARA’s Chief Executive Officer further negotiated the terms of the proposed merger with Midatech’s Chief Executive Officer. DARA sought, among other changes, additional up-front share consideration, a collar provision, a shorter exclusivity period and deal protections that were more favorable to DARA and it stockholders.

Following such negotiations, Midatech provided a revised transaction proposal on April 19, 2015, which retained substantially the same economic terms and exclusivity period as Midatech’s previous offer, but included a collar provision and compromised on certain deal protections, including reducing the maximum termination fee from 4% of the offer value to 3.5%.

DARA’s Board of Directors met by telephonic conference call on April 19, 2015 with representatives from Aquilo Partners present. During this meeting the Board of Directors discussed the status of strategic outreach

 

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efforts and the terms of the proposed non-binding letter of intent. DARA’s Board of Directors considered the exclusivity period in the letter of intent to be acceptable because, among other things, DARA had already dedicated significant time and resources to identifying and contacting other potential acquirors and it was anticipated that DARA and Midatech would need a substantial period of time to negotiate the terms of the proposed merger transaction. DARA’s Board of Directors and senior management discussed whether to push for further improvements to the terms of the letter of intent, but concluded that, given that Midatech had stated that the changes to the letter of intent already provided represented the best and final offer, any additional requests by DARA would likely be unsuccessful and would raise the risk of Midatech terminating the negotiations. Following this discussion the Board of Directors approved the letter of intent, which was executed by the parties on April 20, 2015.

Brown Rudnick LLP delivered a draft merger agreement and a draft contingent value rights agreement to DARA and K&L Gates LLP on April 27, 2015 and April 30, 2015, respectively.

On May 1, 2015, Midatech’s and DARA’s senior management and their respective advisors met in New York, New York, with certain advisors joining by teleconference, to discuss the draft agreements and other terms for the proposed transactions. During the meeting the parties discussed the structure for the collar provision and deal protections, opportunities to make the transaction tax efficient for DARA stockholders and additions to the CVR Agreement to protect the interests of DARA common stockholders.

From May 1, 2015 until the announcement of the transaction on June 4, 2015, negotiations continued between Midatech and DARA and their respective advisors regarding the terms of the merger agreement and related transaction agreements, including the contingent value rights agreement. Also during this period, members of DARA’s Board of Directors from time to time conferred among themselves and with DARA’s legal and financial advisors to discuss the terms of the proposed transaction and to provide guidance to DARA’s legal and financial advisors regarding the matters being negotiated relating to the merger.

DARA’s Board of Directors met by telephonic conference call on May 20, 2015 to discuss the status of the negotiations with Midatech concerning the proposed transaction. DARA’s Board of Directors provided DARA’s management guidance on negotiating positions and strategy in connection with the ongoing discussions with Midatech.

During April and May 2015, DARA and Midatech together with their outside legal and financial advisors continued their diligence investigations of each other.

Discussions continued in May 2015 regarding the structure and payout amounts for the CVRs. On May 19, 2015, DARA provided Midatech updated projections which estimated DARA’s 2015 through 2019 financial results after considering DARA’s introduction of its Oravig product. DARA’s and Midatech’s senior management and their respective advisors discussed these projections. In connection with these discussions, Midatech requested certain changes to the terms and payment structure for the CVRs in particular, by reducing the amounts that could be paid out under the CVRs. DARA’s Board of Directors consulted with Aquilo Partners and DARA’s management as to how to maximize stockholders’ expected return from the CVRs. DARA’s Board of Directors resisted reductions in the potential CVR payouts, sought to decrease the incremental Gelclair and Oravig gross sales DARA would need to achieve to receive additional payments under the CVRs and increase the number of payment thresholds in each of 2016 and 2017, the years in which the CVR payments would be earned. Midatech’s Board of Directors maintained that the CVRs would need to be structured in such a way that Gelclair and Oravig would remain profitable for Midatech in 2016 and 2017, including after making CVR payouts. After a series of negotiations in person, via teleconference and over email, in consultation with DARA’s and Midatech’s respective outside legal and financial advisors and based on the direction of their respective Boards of Directors, the parties settled on a slight reduction in the target CVR payouts and smaller increments between the payment thresholds, but retained three payment thresholds for each of 2016 and 2017.

 

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During May 2015 the parties and their respective legal and financial advisors held numerous discussions regarding the proposed collar provision in the merger agreement. These negotiations primarily involved the range to be used to determine when the provision was triggered, the specific calculations that would be used in the provision, whether the collar would be reciprocal, whether there would be a cap on the size of any potential adjustment and, if so, the level of such cap.

As part of the ongoing meetings between the parties, DARA’s and Midatech’s senior management discussed at a high level the proposed organization and structure for the combined company. However, there were no discussions or agreements regarding any additional compensation or changes to existing employment agreements for DARA’s executives.

On May 26, 2015, Midatech’s Board of Directors and senior management met with DARA’s senior management in London, England, to discuss terms of the proposed business combination, continuing ongoing negotiations with respect to the structure of the collar and the CVR payments.

On May 27, 2015, Midatech’s and DARA’s senior management and their respective legal and financial advisors met in London, England, with certain advisors joining by teleconference, to discuss the terms of the proposed transaction. Negotiations focused on deal protections, including when the termination fee and expense reimbursement would be triggered, the circumstances under which DARA’s stockholders would indemnify Midatech for breaches and the extent of that liability. In connection with the CVR Agreement, the parties discussed the addition of covenants related to Midatech’s continued ownership and development of Gelclair and Oravig. During the discussions, Midatech’s senior management indicated they could accept some compromises on the deal protections, particularly in connection with potential material adverse effects that could occur between signing and closing and the DARA Board of Directors’ exercise of its fiduciary duties in approving and completing the proposed transactions. The parties discussed limiting post-closing DARA stockholder liability to amounts receivable under the CVR Agreement, as well as appointing a third party agent to represent DARA’s common stockholders in connection with the CVR Agreement and potential indemnification claims under the merger agreement. In connection with the CVR Agreement, Midatech’s senior management indicated Midatech could accept an obligation to pay the CVRs in full if Midatech sold the rights to Gelclair or Oravig prior to the end of 2017, as well as covenants to make commercially reasonable efforts to maximize gross sales of Gelclair and Oravig during 2016 and 2017. In addition, the parties discussed Midatech creating a bonus pool for DARA employees, which would reward DARA employees post-closing on terms substantially similar to the CVR payments.

Midatech’s and DARA’s senior management and their respective advisors met by telephonic conference calls on May 31, 2015 and June 1, 2015 to negotiate terms of the merger agreement and the CVR Agreement. These negotiations were focused on resolving the issues discussed at the May 27, 2015 meeting as described above, as well as discussing the press release that would announce the proposed transaction.

On June 2, 2015, Midatech’s Board of Directors and its advisors met to consider the proposed transaction. At the meeting, Midatech’s senior management, and representatives of Brown Rudnick LLP and Torreya made presentations to the Board of Directors concerning the proposed merger and the terms and conditions of the merger agreement, as well as the terms of the CVR Agreement. After discussion, the Midatech Board of Directors unanimously approved the merger agreement and the other transaction agreements, including the CVR Agreement.

On June 3, 2015, DARA’s Board of Directors met to consider the proposed transaction. At the meeting, DARA’s management, and representatives of K&L Gates LLP and Aquilo Partners made presentations to the Board of Directors concerning the proposed merger and the terms and conditions of the merger agreement, as well as the terms of the CVR Agreement. A representative of K&L Gates LLP also advised the DARA Board of Directors of its fiduciary duties and, along with members of DARA’s management, reviewed the terms of the draft merger agreement and CVR Agreement with the DARA Board of Directors and answered questions from the board members about the transaction. Aquilo Partners delivered an oral opinion to the DARA Board of

 

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Directors, which was subsequently confirmed in writing and copy of which is attached hereto as Annex D , to the effect that, as of that date, the consideration pursuant to the proposed merger agreement was fair from a financial point of view to the holders of DARA common stock. The DARA Board of Directors discussed the matters presented by management and by DARA’s legal and financial advisors, including the factors discussed under “ —DARA’s Reasons for the Merger and Recommendation of DARA’s Board of Directors .” After discussion, the DARA Board of Directors unanimously approved the merger agreement and other transaction agreements, including the CVR Agreement, authorized the execution of the merger agreement with Midatech and directed that the merger agreement be submitted to the stockholders of DARA along with the DARA Board of Directors’ unanimous recommendation that the DARA stockholders vote to approve the merger agreement.

Following the approval of the Boards of Directors of Midatech and DARA, the parties executed the merger agreement and certain related agreements on June 3, 2015 and each of DARA and Midatech issued a press release announcing the transaction on the morning of June 4, 2015.

DARA’s Reasons for the Merger and Recommendation of DARA’s Board of Directors

At a meeting held on June 3, 2015, the DARA Board of Directors, by a unanimous vote, (1) determined that the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of DARA and its stockholders, (2) approved the execution, delivery and performance by DARA of the merger agreement and the consummation of the transactions contemplated thereby, (3) resolved that the merger agreement and the transactions contemplated thereby be submitted to DARA’s stockholders for adoption at a duly held special meeting of such stockholders and (4) recommended that DARA’s stockholders vote to adopt the merger agreement. In making its recommendation, the DARA Board of Directors consulted with outside legal and financial advisors and DARA’s senior management team at various times, and considered a number of factors, including the following principal factors that the DARA Board of Directors believes support such determinations, approvals, resolutions and recommendations:

 

    the fact that the Per Share Merger Consideration represents approximately $1.20 per share of DARA common stock, a premium of 50.8% over the closing share price of $0.796 per share on June 3, 2015 and a premium of 59.8% over the volume weighted average closing price of $0.751 per share based on the 15 days ended June 3, 2015;

 

    the belief that a combination with Midatech was more favorable to DARA’s stockholders than the alternative of remaining a standalone independent company;

 

    the fact that DARA believed its existing cash and cash equivalents would not be sufficient to fund DARA’s cash requirements beyond the first quarter of 2016, and that an alternative source of financing could be significantly dilutive to DARA’s stockholders or may not be available at all;

 

    the assessment by the DARA Board of Directors of DARA’s prospects for substantially increasing stockholder value as a standalone company by building out its commercial infrastructure, including growing its sales force, and launching and marketing Oravig, and considering the execution risks associated with implementing its long-term strategic plan;

 

    the fact that the majority of the Per Share Merger Consideration will be paid to DARA’s common stockholders in tradable securities upon closing of the merger, providing immediate liquidity to the common stockholders;

 

    the fact that DARA common stockholders would receive the merger consideration in the form of Midatech Depositary Shares, which would allow the common stockholders to share in value-creation opportunities of the combined company, including the realization of synergies;

 

    the fact that the holder of each share of DARA’s preferred stock will be entitled upon the effectiveness of the merger to receive $1,000 in cash;

 

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    the significant value to DARA stockholders represented by the potential earnings improvement of the combined company;

 

    views of DARA’s management as to the expected realization of synergies arising from the combined company;

 

    the belief of the DARA Board of Directors that, after closing, the combined company will have a stronger financial profile, relative to that of DARA and Midatech separately;

 

    the fact that Midatech will assume DARA’s obligations under its outstanding warrants, which such warrants were an obstacle to negotiating a sale transaction with other potential acquirors;

 

    the belief of DARA’s Board of Directors that potential payments pursuant to the CVR Agreement are reasonably achievable, thereby potentially providing DARA’s common stockholders with an opportunity under the terms of the CVR Agreement to realize value in addition to the portion of the Per Share Merger Consideration payable upon closing through cash payment;

 

    the belief of the DARA Board of Directors that the merger is superior to the other strategic alternatives reasonably available currently to DARA (including remaining as a standalone entity);

 

    the oral opinion of Aquilo Partners rendered to the DARA Board of Directors (subsequently confirmed by delivery to the DARA Board of Directors of a written opinion, dated June 3, 2015), as to, as of June 3, 2015, the fairness, from a financial point of view, to the holders of DARA common stock of the merger consideration to be received in the merger by such holders, as more fully described below in the section entitled “— Opinion of DARA’s Financial Advisor ” beginning on page 106;

 

    the fact that DARA’s Board of Directors met annually to engage in a strategic review dedicated to evaluating DARA’s long term value and strategy and considering the potential for a strategic transaction;

 

    the fact that DARA, with the assistance of financial and legal advisors, conducted an extensive and thorough process over more than a year to identify viable partners, to obtain the best value for DARA’s stockholders, which included contacting approximately 70 parties regarding partnership opportunities for DARA’s KRN5500 asset and approximately 20 parties regarding a possible strategic transaction;

 

    the fact that, of the approximately 20 parties contacted regarding a potential acquisition of DARA, only Midatech submitted a proposal;

 

    the belief of DARA’s Board of Directors, based upon arm’s length negotiations with Midatech, that the price to be paid by Midatech was at or very close to the highest price per share that Midatech was willing to pay for DARA;

 

    the risk that further prolonging the negotiation process with Midatech could have resulted in the loss of the opportunity to enter into an agreement with Midatech;

 

    the reputation of Midatech and its management team for successfully building pharmaceutical organizations with an eye towards achieving significant returns for its stockholders;

 

    the fact that Midatech’s obligations under the merger agreement are not subject to any financing conditions and other factors regarding the likelihood that the merger will be completed, including the absence of any material antitrust risk; and

 

    the terms and conditions of the merger agreement and related documents, as reviewed by the DARA Board of Directors with legal counsel, including that:

 

    the representations, warranties and covenants of the parties, the conditions to the parties’ obligations to complete the merger and their right to terminate the merger agreement under certain circumstances were the result of significant arms’ length negotiations;

 

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    the merger agreement provides that the DARA Board of Directors may withdraw or modify its recommendation that DARA’s stockholders vote in favor of adoption of the merger agreement in certain circumstances, including in connection with a superior proposal, and that DARA may terminate the merger agreement in order to accept a superior proposal and enter into a definitive agreement with respect to such superior proposal, in both cases subject to payment of a termination fee;

 

    the merger agreement includes a collar provision that provides certain price protection to DARA’s stockholders if the market price of Midatech ordinary shares falls prior to the closing of the merger;

 

    the termination fee provisions, pursuant to which DARA may be required to pay a termination fee of $1.05 million or certain expenses of Midatech in an amount of up to $525,000, and the circumstances under which the same would be payable, are customary for transactions of this size and type;

 

    the post-closing indemnification obligations of DARA’s stockholders under the merger agreement are limited to Midatech’s right to offset losses against potential future payments under the CVR Agreement, if any;

 

    the voting agreement entered into by the committed DARA stockholders automatically terminates if the merger agreement is validly terminated by DARA in accordance with its terms;

 

    DARA stockholders who do not vote in favor of adoption of the merger agreement and who otherwise comply with all required procedures under the DGCL are entitled to seek statutory appraisal rights;

 

    DARA is entitled to seek specific performance to prevent breaches of the merger agreement and to enforce specifically the terms of the merger agreement; and

 

    the fact that the merger agreement will be subject to adoption by DARA’s stockholders.

The Board of Directors also considered the following potentially negative factors and risks in its deliberations concerning the merger agreement:

 

    the fact that the approximate $1.20 value per share of the Per Share Merger Consideration was, as of June 3, 2015 (the last trading day before the merger was announced), approximately 26.8% below the 52-week high sales price of DARA common stock of $1.64;

 

    the fact that the price adjustment provisions of the merger agreement would limit the ability of DARA common stockholders to take full advantage of trading price increases in the value of a Midatech ordinary share prior to closing;

 

    the fact that the milestones under CVR Agreement may never be achieved and, as a result, the CVR payments may never be made;

 

    the risks and costs to DARA if the merger does not close, including the potential diversion of management and employee attention, employee attrition and the effect on existing business relationships, and the expenditure of financial resources in pursuit of the merger;

 

    the possibility that the share price of Midatech could decline beyond the point where the merger agreement’s collar provision protects DARA common stockholders, reducing the value of the consideration payable at closing to DARA common stockholders;

 

    the possibility that the share price of Midatech could also decline after the merger, reducing the overall value proposition of the transaction to DARA common stockholders;

 

    the termination fee payable by DARA upon the occurrence of certain events, including the potential effect of such termination fee to deter other potential acquirers from making a competing offer for DARA that might be more advantageous to the stockholders;

 

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    the restrictions on the conduct of DARA’s business prior to the closing of the merger, which could delay or prevent DARA from undertaking certain actions it would otherwise take with respect to its operations pending closing; and

 

    the possibility that the consummation of the merger may be delayed or not occur at all, and the adverse impact such event would have on DARA and its business.

The foregoing discussion of the information and factors considered by DARA’s Board of Directors in reaching their conclusions and recommendations is not intended to be exhaustive, but includes the material factors considered by DARA’s Board of Directors. In view of the wide variety of factors considered in connection with its evaluation of the merger and the complexity of these matters, the board of directors did not find it practicable, and did not attempt, to quantify, rank or assign any relative or specific weights to the various factors considered in reaching its determination and making its recommendation. In addition, individual directors might have given different weights to different factors. DARA’s Board of Directors considered all of the foregoing factors as a whole and based its recommendation on the totality of the information presented.

DARA’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” APPROVAL OF THE PROPOSAL TO ADOPT THE MERGER AGREEMENT.

Opinion of DARA’s Financial Advisor

Aquilo Partners has acted as financial advisor to DARA’s Board of Directors with respect to the merger. In connection with Aquilo Partners’ engagement as financial advisor, DARA’s Board of Directors requested that Aquilo Partners evaluate the fairness, from a financial point of view, of the Per Share Merger Consideration to be received by the holders of DARA’s common stock. On June 3, 2015, Aquilo Partners delivered its oral opinion, subsequently confirmed in writing, to DARA’s Board of Directors to the effect that, as of the date of its opinion and based upon and subject to the qualifications, limitations and assumptions set forth therein, the Per Share Merger Consideration to be received by the holders of DARA common stock was fair, from a financial point of view, to the holders of DARA common stock.

The summary of the written opinion of Aquilo Partners in this proxy statement/prospectus is qualified in its entirety by reference to the full text of the written opinion of Aquilo Partners, dated June 3, 2015, attached to this proxy statement as Annex D . You are urged to, and should, read the written opinion of Aquilo Partners carefully and in its entirety.

The opinion of Aquilo Partners addresses only the fairness, from a financial point of view, to the holders of DARA common stock of the Per Share Merger Consideration and does not address any other aspect or implication of the transaction or any other agreement, arrangement or understanding entered into in connection with the transaction or otherwise and Aquilo Partners expresses no opinion as to the fairness of any consideration paid in connection with the transaction to the holders of any other class of securities, creditors or other constituencies of DARA. Aquilo Partners’ opinion was not intended to be and does not constitute a recommendation to any DARA stockholder as to how such stockholder should vote in connection with the merger. Aquilo Partners has not been requested to opine as to, and its opinion does not in any manner address, DARA’s underlying business decision to proceed with or effect the merger. Aquilo Partners expresses no opinion on, and its opinion does not in any manner address, the likelihood or probability of the achievement or satisfaction of the milestones necessary to receive one or more contingent payments in accordance with the CVR Agreement. In addition, Aquilo Partners’ expresses no opinion on, and its opinion does not in any manner address, fairness of the amount or the nature of any compensation to any officers, directors or employees of any parties to the merger, or any class of such persons, relative to consideration to be received by the holders of DARA common stock in the merger.

 

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Having considered Aquilo Partners’ opinion as to the fairness of the merger consideration, as well as the factors described above under the heading “— DARA’s Reasons for the Merger and Recommendation of DARA’s Board of Directors ,” DARA’s Board of Directors unanimously recommended that holders of DARA’s common stock approve the proposal to adopt the merger agreement.

In arriving at its opinion, Aquilo Partners reviewed and analyzed, among other things:

 

    the merger agreement and the CVR Agreement and the terms of the transaction;

 

    certain publicly available business and financial information relating to DARA and Midatech that Aquilo Partners believed to be relevant to its analysis;

 

    certain other financial information relating to DARA, including financial forecasts relating to DARA which were provided by DARA’s management;

 

    publicly available financial terms of certain transactions involving companies Aquilo Partners deemed relevant and the consideration paid for such companies and comparisons of these terms with the proposed financial terms of the transaction; and

 

    the market prices of DARA’s common stock and Midatech’s ordinary shares and certain publicly traded securities of such other companies that Aquilo Partners deemed relevant.

In addition, Aquilo Partners had discussions with the managements of DARA and Midatech concerning their businesses, operations, financial conditions, and prospects and undertook such other studies, analysis and investigations as it deemed relevant.

In connection with its review, Aquilo Partners has not assumed any responsibility for independent verification of any of the forgoing information and relied on such information being complete and accurate in all material respects. With respect to the financial forecasts for DARA, Aquilo Partners was advised by DARA’s management, and Aquilo Partners has assumed, that such forecasts have been reasonably prepared on bases reflecting the best currently available estimates and judgments of DARA’s management as to DARA’s future financial performance. In this regard, DARA’s management has further advised Aquilo Partners that, absent the merger, DARA may need additional financing that DARA may not be able to obtain on favorable terms to DARA or its stockholders, if at all. In addition, Aquilo Partners has not been requested to make, and have not made, an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of DARA, nor has Aquilo Partners been furnished with any such evaluations or appraisals. The opinion of Aquilo Partners is necessarily based upon information made available to it as of the date hereof and financial, economic, market and other conditions as they exist and can be evaluated on the date hereof.

In preparing its opinion, Aquilo Partners performed a number of financial and comparative analyses. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Aquilo Partners believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all analyses and factors, could create a misleading view of the processes underlying its opinion. No company or transaction used in the analyses performed by Aquilo Partners as a comparison is identical to DARA or the contemplated merger. In addition, Aquilo Partners may have given some analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable than other assumptions, so that the range of valuation resulting from any particular analysis described below should not be taken to be Aquilo Partners’ view of the actual value of DARA. The analyses performed by Aquilo Partners are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. In addition, analyses relating to the value of businesses or assets do not purport to be appraisals or to necessarily reflect the prices at which businesses or assets may actually be sold. The analyses performed were prepared solely as part of Aquilo Partners’ analysis of the fairness, from a financial point of view, of the merger consideration to be received by the holders of DARA common stock and were provided to DARA in connection with the delivery of Aquilo Partners’ opinion.

 

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At a meeting of the DARA Board of Directors held on June 3, 2015, Aquilo Partners presented certain financial analyses accompanied by delivery of its written materials in connection with the delivery of its oral opinion at that meeting and its subsequent written opinion. The following is a summary of the material financial analyses performed by Aquilo Partners in arriving at its opinion. Certain of the following summaries of financial analyses include information presented in tabular format. In order to understand fully the material financial analyses that were performed by Aquilo Partners, the tables should be read together with the text of each summary. The tables alone do not constitute a complete description of the material financial analyses.

Calculation of Implied Value of Merger Consideration.  Based on the initial Exchange Ratio of 0.272 ordinary shares of Midatech for each share of DARA common stock, Midatech’s price per share of £2.91 as of June 3, 2015, the last trading day prior to the announcement of the merger, and an exchange rate of 1.5194 as of June 1, 2015, Aquilo Partners noted that the implied value per share of DARA stock was $1.21 as of June 3, 2015. Aquilo Partners also noted that the initial Exchange Ratio was calculated based on using a value of $1.20 per share of DARA common stock divided by a volume weighted average of the Midatech ordinary shares prior to the announcement of the transaction. Aquilo Partners also noted that the Exchange Ratio is subject to an implied acquisition price range of $1.08 to $1.32 per DARA share and will be adjusted for movements outside this range, subject to a maximum exchange ratio of 0.306 and a minimum exchange ratio of 0.249.

Aquilo Partners also calculated an implied probability-adjusted present value per CVR. The following table sets forth, for the periods indicated, estimates made by DARA management of the probabilities of achievement of Gross Sales thresholds for Oravig and Gelclair.

 

Gross Sales

(in thousands)

  

CVR Value Based on
Achievement

(in thousands)

     Probability of
Achievement
 

2016

 

< $15,000

   $ 0         50.0

$15,000-$16,500

   $ 1,425         45.0

$16,500-$18,000

   $ 1,900         4.0

$18,000 <

   $ 2,375         1.0

 

 

2017

 

< $26,000

   $ 0         50.0

$26,000-$28,600

   $ 2,375         45.0

$28,600-$31,200

   $ 2,850         4.0

$31,200 <

   $ 3,325         1.0

The estimates set forth above were prepared by DARA management for internal use. The estimates were not prepared with a view towards public disclosure, nor were these estimates shared with Midatech or any of its representatives. The estimates set forth above are forward-looking statements. Accordingly, there can be no assurance that the estimates would be realized and the actual results may vary materially from those shown. The inclusion of such estimates in this proxy statement/prospectus should not be regarded as an indication that DARA, Midatech or any of their respective affiliates, advisors or representatives considered or consider such estimates to be predictive of actual future events, and the estimates should not be relied upon as such. Neither DARA, Midatech, nor any of their respective advisors, officers, directors or representatives can give any assurance that actual results will not differ from the estimates set forth above. For more information on factors affecting DARA’s financial results and the value of the CVRs, see the sections entitled “ Risk Factors ” beginning on page 35 and “ Cautionary Note Regarding Forward-Looking Statements ” beginning on page 91.

Based on these estimates as to the probability of the Gross Sales of Oravig and Gelclair in 2016 and 2017 being within the applicable range set forth in the CVR Agreement (including a 50% probability of not receiving any payment in a year) and discounting the resulting probability weighted CVR value using a 10% discount rate, Aquilo Partners calculated the implied probability-adjusted present value per CVR to be $0.08, or an aggregate of $1.6 million. Aquilo Partners used a 10% discount rate based on the risk and time value associated with the

 

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CVR based on the fact that the CVR amounts had been probability adjusted. Aquilo Partners added the implied probability-adjusted present value per CVR of $0.08 to $1.20 per share to derive an implied total value of the consideration of $1.28 per share.

Aquilo Partners calculated the total implied equity