Note 3. Reverse Merger

The Company completed the Reverse Merger with Tokai as discussed in Note 1. Based on the terms of the Reverse Merger, the Company concluded that the transaction is a business combination pursuant to ASC Topic 805 Business Combinations, Otic was deemed the acquiring company for accounting purposes, and the transaction has been accounted for as a reverse acquisition under the acquisition method of accounting for business combinations in accordance with GAAP. Under the acquisition method of accounting, the total purchase price is allocated to the acquired tangible and intangible assets and assumed liabilities of Tokai based on their estimated fair values as of the Reverse Merger closing date. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was allocated to goodwill.

On May 9, 2017, Tokai issued 4,027,693 shares of its common stock to the stockholders of Otic and the holders of warrants and options of Otic upon the exercise of such options and warrants in exchange for 840,115 Otic Shares. All warrants were exercised as of the merger date and after consummation of the Reverse Merger, Otic stockholders owned a majority of the fully diluted common stock of Novus Therapeutics, Inc.

Purchase Consideration

The purchase price for Tokai on May 9, 2017, the closing date of the Reverse Merger, was as follows (in thousands):

Fair value of Tokai common stock outstanding (1)	$	14,486
Premium paid (2)		8,889
Purchase price	$	23,375

(1)	Comprised of 2,515,739 shares of common stock outstanding at the date of the Reverse Merger based on the closing price of $5.76 per share on May 9, 2017, as adjusted for the one-for-nine reverse stock-split on May 11, 2017.

(2)	Premium paid over fair value of common stock based on net tangible asset multiple of 1.08x book value of Tokai equity of $21.5 million as of May 9, 2017.

Allocation of Purchase Consideration

The allocation of the estimated purchase price to the acquired assets and liabilities assumed of Tokai, based on their estimated fair values as of May 9, 2017, the close of the transaction, is as follows (in thousands):

Cash, cash equivalents, and restricted cash	$	23,250
Prepaids and other current assets		1,132
Property and equipment		73
Goodwill		1,867
Accounts payable, accrued expenses and other liabilities		(2,947	)
Net assets acquired	$	23,375

The Company engaged a third-party valuation firm to assist management in its analysis of the fair value of Tokai. All estimates, key assumptions, and forecasts were either provided by or reviewed by management. While the Company chose to utilize a third-party valuation firm, the fair value analysis and related valuations represent the conclusions of management and not the conclusions or statements of any third party. The excess of the total purchase price over the fair value of assets acquired and liabilities assumed was allocated to goodwill.

The Company believes that the historical values of Tokai’s current assets and current liabilities approximate fair value based on the short-term nature of such items.

Goodwill, which relates principally to intangible assets that do not qualify for separate recognition under GAAP, was calculated as the difference between the fair value of the consideration expected to be transferred and the values assigned to the identifiable tangible and intangible assets acquired and liabilities assumed. Goodwill is not expected to be deductible for tax purposes.

Pro Forma Results in Connection with Reverse Merger

The operating activity for Tokai, the acquiree for accounting purposes, was immediately integrated with Otic post‑merger, therefore it is not practical to segregate results of operations related specifically to Tokai since the date of acquisition.

The unaudited financial information in the following table summarizes the combined results of operations of the Company and Tokai, on a pro forma basis, as if the Reverse Merger had occurred at the beginning of the periods presented
(in thousands):

	Three Months Ended September 30, 2017			Nine Months Ended September 30, 2017
Operating expenses
Research and development	$	517		$	1,988
General and administrative		2,270			7,744
Total operating expenses		2,787			9,732
Loss from operations		(2,787	)		(9,732	)
Other income, net		(5	)		50
Net loss and other comprehensive loss	$	(2,792	)	$	(9,682	)
Net loss per share, basic and diluted	$	(0.40	)	$	(1.39	)
Weighted-average shares outstanding, basic and diluted		6,943,058			6,943,058

The above unaudited pro forma information was determined based on historical GAAP results of Otic and Tokai. The unaudited pro forma combined results are not necessarily indicative of what the Company’s combined results of operations would have been if the acquisition was completed at the beginning of the periods presented. The unaudited pro forma combined net loss includes pro forma adjustments primarily relating to the following non-recurring items directly attributable to the business combination:

•

Elimination of transaction costs of $178,000 and $7.2 million incurred during the three and nine months ended September 30, 2017, respectively. These amounts have been eliminated on a pro forma basis as they are not expected to have a continuing effect on the operating results of the combined company.

•

An increase in the weighted-average shares outstanding for the period after giving effect to the issuance of Tokai common stock in connection with the Reverse Merger and Private Placement.