nvus-10q_20190930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           

Commission File Number: 001-36620

 

NOVUS THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

20-1000967

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

19900 MacArthur Blvd., Suite 550

Irvine, California

 

92612

(Address of principal executive offices)

 

(Zip Code)

 

 

(949) 238-8090

Registrant’s telephone number, including area code

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.001 par value

 

NVUS

 

Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes      No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No

As of November 11, 2019, there were 12,967,338 shares of the Registrant’s common stock outstanding.

 

 

 


Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. Any statements in this Quarterly Report on Form 10-Q about the Company’s future expectations, plans and prospects, including statements about its strategy, future operations, development of its product candidates, the review of strategic alternatives and the outcome of such review and other statements containing the words “believes,” “anticipates,” “plans,” “expects,” “estimates,” “intends,” “predicts,” “projects,” “targets,” “could,” “may,” and similar expressions, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, although not all forward-looking statements include such identifying words. Forward-looking statements include, but are not limited to statements regarding:

 

expectations regarding the timing for the commencement and completion of product development or
clinical trials;

 

the rate and degree of market acceptance and clinical utility of the company’s products;

 

the company’s commercialization, marketing and manufacturing capabilities and strategy;

 

the company’s intellectual property position and strategy;

 

the company’s ability to identify additional products or product candidates with significant commercial potential;

 

the company’s estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

 

developments relating to the company’s competitors and industry; and

 

the impact of government laws and regulations.

Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including: the ability to develop commercially viable product formulations; the sufficiency of the Company’s cash resources; the ability to obtain necessary regulatory and ethics approvals to commence additional clinical trials; whether data from early clinical trials will be indicative of the data that will be obtained from future clinical trials; whether the results of clinical trials will warrant submission for regulatory approval of any investigational product; whether any such submission will receive approval from the United States Food and Drug Administration or equivalent foreign regulatory agencies and, if we are able to obtain such approval for an investigational product, whether it will be successfully distributed and marketed. These risks and uncertainties, as well as other risks and uncertainties that could cause the Company’s actual results to differ significantly from the forward-looking statements contained herein, are described in greater detail in Item 1A. of Part II, Risk Factors. Any forward-looking statements contained in this Quarterly Report on Form 10-Q speak only as of the date hereof and not of any future date, and the Company expressly disclaims any intent to update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

 

 

 

2


NOVUS THERAPEUTICS, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2019

Table of Contents

 

 

 

 

Page

 

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

4

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018

 

4

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)

 

 

 

5

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)

 

6

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (Unaudited)

 

7

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

25

 

 

 

 

Item 4.

Controls and Procedures

 

26

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

27

 

 

 

 

Item 1A.

Risk Factors

 

27

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

51

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

51

 

 

 

 

Item 4.

Mine Safety Disclosures

 

51

 

 

 

 

Item 5.

Other Information

 

51

 

 

 

 

Item 6.

Exhibits

 

51

 

 

 

 

Exhibit Index

 

52

 

 

 

 

Signatures

 

53

 

3


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

NOVUS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

September 30,

2019

 

 

December 31,

2018

 

 

 

(Unaudited)

 

 

(Note 2)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

10,814

 

 

$

12,972

 

Prepaid expenses and other current assets

 

 

1,482

 

 

 

1,304

 

Total current assets

 

 

12,296

 

 

 

14,276

 

Property and equipment, net

 

 

7

 

 

 

14

 

Operating lease asset, net

 

 

360

 

 

 

 

Goodwill

 

 

1,867

 

 

 

1,867

 

Other assets

 

 

688

 

 

 

869

 

Total assets

 

$

15,218

 

 

$

17,026

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

256

 

 

$

689

 

Current operating lease liability

 

 

177

 

 

 

 

Accrued expenses and other liabilities

 

 

1,228

 

 

 

1,845

 

Total current liabilities

 

 

1,661

 

 

 

2,534

 

Non-current operating lease liability

 

 

191

 

 

 

 

Total liabilities

 

 

1,852

 

 

 

2,534

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized and none issued

   and outstanding at September 30, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, $0.001 par value, 200,000,000 shares authorized at September 30,

   2019 and December 31, 2018; 12,974,923 and 9,422,143 shares issued and

   outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

13

 

 

 

9

 

Additional paid-in capital

 

 

66,791

 

 

 

56,054

 

Accumulated deficit

 

 

(53,438

)

 

 

(41,571

)

Total stockholders’ equity

 

 

13,366

 

 

 

14,492

 

Total liabilities and stockholders’ equity

 

$

15,218

 

 

$

17,026

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


NOVUS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

1,509

 

 

$

1,651

 

 

$

6,795

 

 

$

4,077

 

General and administrative

 

 

1,411

 

 

 

1,848

 

 

 

5,089

 

 

 

5,406

 

Total operating expenses

 

 

2,920

 

 

 

3,499

 

 

 

11,884

 

 

 

9,483

 

Loss from operations

 

 

(2,920

)

 

 

(3,499

)

 

 

(11,884

)

 

 

(9,483

)

Other income (expense), net

 

 

27

 

 

 

3

 

 

 

17

 

 

 

(8

)

Net loss and comprehensive loss

 

$

(2,893

)

 

$

(3,496

)

 

$

(11,867

)

 

$

(9,491

)

Net loss per share, basic and diluted

 

$

(0.22

)

 

$

(0.37

)

 

$

(1.04

)

 

$

(1.07

)

Weighted-average common shares outstanding, basic and

   diluted

 

 

12,974,923

 

 

 

9,420,039

 

 

 

11,397,364

 

 

 

8,864,895

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


NOVUS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

 

 

 

 

Stockholders' Equity

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Deficit

 

 

Total

 

Balance as of December 31, 2018

 

 

9,422,143

 

 

$

9

 

 

$

56,054

 

 

$

(41,571

)

 

$

14,492

 

Issuance of common stock at-the-market, net of

   issuance costs

 

 

25,218

 

 

 

 

 

 

107

 

 

 

 

 

 

107

 

Issuance of common stock and warrants in

   registered direct offering, net of issuance costs

 

 

3,449,112

 

 

 

4

 

 

 

9,565

 

 

 

 

 

 

9,569

 

Issuance of common stock in connection with

   vesting of restricted stock units

 

 

78,450

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,065

 

 

 

 

 

 

1,065

 

Net loss and other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(11,867

)

 

 

(11,867

)

Balance as of September 30, 2019

 

 

12,974,923

 

 

$

13

 

 

$

66,791

 

 

$

(53,438

)

 

$

13,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2019

 

 

12,974,923

 

 

$

13

 

 

$

66,564

 

 

$

(50,545

)

 

$

16,032

 

Stock-based compensation

 

 

 

 

 

 

 

 

227

 

 

 

 

 

 

227

 

Net loss and other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(2,893

)

 

 

(2,893

)

Balance as of September 30, 2019

 

 

12,974,923

 

 

$

13

 

 

$

66,791

 

 

$

(53,438

)

 

$

13,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2017

 

 

7,110,414

 

 

$

7

 

 

$

46,951

 

 

$

(27,506

)

 

$

19,452

 

Issuance of common stock at-the-market, net of

   issuance costs

 

 

2,296,610

 

 

 

2

 

 

 

7,489

 

 

 

 

 

 

7,491

 

Issuance of common stock in connection with exercise of options

 

 

15,119

 

 

 

 

 

 

71

 

 

 

 

 

 

71

 

Stock-based compensation

 

 

 

 

 

 

 

 

802

 

 

 

 

 

 

802

 

Net loss and other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(9,491

)

 

 

(9,491

)

Balance as of September 30, 2018

 

 

9,422,143

 

 

$

9

 

 

$

55,313

 

 

$

(36,997

)

 

$

18,325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2018

 

 

9,407,024

 

 

$

9

 

 

$

55,005

 

 

$

(33,501

)

 

$

21,513

 

Issuance of common stock at-the-market, net of

   issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock in connection with exercise of options

 

 

15,119

 

 

 

 

 

 

71

 

 

 

 

 

 

71

 

Stock-based compensation

 

 

 

 

 

 

 

 

237

 

 

 

 

 

 

237

 

Net loss and other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(3,496

)

 

 

(3,496

)

Balance as of September 30, 2018

 

 

9,422,143

 

 

$

9

 

 

$

55,313

 

 

$

(36,997

)

 

$

18,325

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


NOVUS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Nine Months

Ended September 30,

 

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(11,867

)

 

$

(9,491

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7

 

 

 

8

 

Amortization of operating lease asset

 

 

129

 

 

 

 

Stock-based compensation

 

 

1,065

 

 

 

803

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

3

 

 

 

(23

)

Accounts payable and accrued expenses

 

 

(1,050

)

 

 

163

 

Operating lease liability

 

 

(121

)

 

 

 

Net cash used in operating activities

 

 

(11,834

)

 

 

(8,540

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuances of common stock, net

 

 

9,676

 

 

 

7,490

 

Proceeds from exercise of stock options

 

 

 

 

 

71

 

Net cash provided by financing activities

 

 

9,676

 

 

 

7,561

 

Net change in cash

 

 

(2,158

)

 

 

(979

)

Cash at beginning of period

 

 

12,972

 

 

 

17,303

 

Cash at end of period

 

$

10,814

 

 

$

16,324

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

7


NOVUS THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Description of Business

Novus Therapeutics is a specialty pharmaceutical company focused on developing products for disorders of the ear, nose, and throat (“ENT”). Unless otherwise indicated, references to the terms “Novus,” “our,” ‘us,” “we”, or the “Company” refer to Novus Therapeutics, Inc.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and Article 10 of Regulation S-X requirements as set forth by the Securities and Exchange Commission (“SEC”) for interim financial information and reflect all adjustments and disclosures, which are, in the opinion of management, of a normal and recurring nature, and considered necessary for a fair presentation of the financial information contained herein. Pursuant to these rules and regulations, the unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of results of operations and comprehensive loss, financial position, and cash flows in conformity with GAAP.

The accompanying unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited financial statements and accompanying notes of Novus for the year ended December 31, 2018 included in the Annual Report on Form 10-K filed by the Company with the SEC on March 28, 2019, as amended. The results of operations and comprehensive loss for the three and nine months ended September 30, 2019 are not necessarily indicative of results expected for the full fiscal year or any other future period.

Principles of Consolidation

Novus, a Delaware corporation, owns 100% of the issued and outstanding common stock or other ownership interest in Otic Pharma, Ltd., a private limited company organized under the laws of the State of Israel (“Otic”). Otic owns 100% of the issued and outstanding common stock or other ownership interest in its U.S. subsidiary, Otic Pharma, Inc.

The functional currency of the Company’s foreign subsidiary is the U.S. Dollar; however, certain expenses, assets and liabilities are transacted at the local currency. These transactions are translated from the local currency into U.S. Dollars at exchange rates during or at the end of the reporting period. The impact of the currency translation is not significant.

All significant intercompany accounts and transactions among the entities have been eliminated from the condensed consolidated financial statements.

Liquidity and Financial Condition

The Company has experienced recurring net losses and negative cash flows from operating activities since its inception. The Company recorded a net loss of $2.9 million and $11.9 million for the three and nine months ended September 30, 2019, respectively. As of September 30, 2019, the Company had cash of $10.8 million, working capital of $10.6 million and an accumulated deficit of $53.4 million. Due to continuing research and development activities, the Company expects to continue to incur net losses into the foreseeable future. In order to continue these activities, the Company may need to raise additional funds through future public or private debt and equity financings or strategic collaboration and licensing arrangements. The Company’s ability to raise additional capital in the equity and debt markets is dependent on a number of factors, including, but not limited to, the market demand for the Company’s common stock, which itself is subject to a number of development and business risks and uncertainties, as well as the uncertainty that the Company would be able to raise such additional capital at a price or on terms that are favorable to the Company. If the Company issues equity or convertible debt securities to raise additional funding, its existing stockholders may experience dilution, it may incur significant financing costs, and the new equity or convertible debt securities may have rights, preferences and privileges senior to those of its existing stockholders. If the Company issues debt securities to raise additional funding, it would incur additional debt service obligations, it could become subject to additional restrictions limiting its ability to operate its business, and it may be required to further encumber its assets. On May 2, 2019, the Company raised gross proceeds of $10.7 million in a registered direct offering, see Note 7. Stockholders’ Equity.  

8


Adequate additional funding may not be available to us on acceptable terms on a timely basis, or at all. In the first nine months of 2019, the Company has implemented, and will continue to implement, certain cost cutting measures to reduce its cash flow requirements. Consistent with the actions the Company has taken in the past, it will execute the appropriate steps to enable the continued operation of the business and preservation of the value of its assets beyond the next twelve months, including but not limited to actions such as reduced personnel-related costs, delay or curtailment of the Company’s research and development activities, and other discretionary expenses that are within the Company’s control.  These initiatives, if required, may have an adverse impact on the Company’s ability to achieve certain of its planned objectives as it seeks strategic alternatives.

On August 8, 2019, the Company received written notice (the “Notification Letter”) from The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that it was not in compliance with the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on The Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires listed securities maintain a minimum closing bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum closing bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. Based on the closing bid price of the Company’s common stock for the 30 consecutive business days prior to the date of the Notification Letter, the Company did not meet the minimum closing bid price requirement.

The Notification Letter does not impact the Company’s listing on The Nasdaq Capital Market at this time. The Notification Letter states that the Company has 180 calendar days, or until February 4, 2020, to regain compliance with Nasdaq Listing Rule 5550(a)(2). To regain compliance, the closing bid price of the Company’s common stock must be at least $1.00 per share for a minimum of 10 consecutive business days at any time prior to February 4, 2020. In the event that the Company does not regain compliance by February 4, 2020, the Company may be eligible for additional time to reach compliance with the minimum bid price requirement.

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

At the time of issuance of the condensed consolidated financial statements for the period ended September 30, 2019, the Company concluded that there is substantial doubt regarding the Company’s ability to continue as a going concern for the twelve months from the date of issuance of the condensed consolidated financial statements. The financial information and the condensed consolidated financial statements included in this filing have been prepared on a basis that assumes that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. This financial information and these financial statements do not include any adjustments that may result from an unfavorable outcome of this uncertainty. Our ability to continue as a going concern is dependent upon our ability to successfully secure sources of financing and ultimately achieve profitable operations

Use of Estimates

The preparation of the Company’s financial statements in conformity with GAAP requires management to make informed estimates and assumptions that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in the Company’s unaudited condensed consolidated financial statements and accompanying notes. The most significant estimates in the Company’s financial statements relate to stock-based compensation, accruals for liabilities, operating lease liability, carrying value of goodwill, and other matters that affect the condensed consolidated financial statements and related disclosures. Actual results could differ materially from those estimates under different assumptions or conditions and the differences may be material to the condensed consolidated financial statements.

Cash and Cash Equivalents

Cash represents cash deposits held at financial institutions. The Company considers all liquid investments purchased with an original maturity of three months or less and that can be liquidated without prior notice or penalty to be cash equivalents. Cash equivalents are held for the purpose of meeting short-term liquidity requirements, rather than for investment purposes. The Company had no cash equivalents or restricted cash at September 30, 2019 and December 31, 2018.

Concentration of Credit Risk and Other Risks and Uncertainties

As of September 30, 2019 and December 31, 2018, all of the Company’s long-lived assets were located in the U.S.

9


Financial instruments that are subject to concentration of credit risk consist primarily of cash equivalents. The Company’s policy is to invest cash in institutional money market funds to limit the amount of credit exposure. At times, the Company maintains cash equivalents in short‑term money market funds and it has not experienced any losses on its cash equivalents.

The Company’s products will require approval from the U.S. Food and Drug Administration (“FDA”) and foreign regulatory agencies before commercial sales can commence. There can be no assurance that the Company’s products will receive any of these required approvals. The denial or delay of such approvals may impact the Company’s business in the future.

The Company is subject to risks common to companies in the pharmaceutical industry, including, but not limited to, new technological innovations, clinical development risk, establishment of appropriate commercial partnerships, protection of proprietary technology, compliance with government and environmental regulations, uncertainty of market acceptance of products, product liability, the volatility of its stock price and the need to obtain additional financing.

Reportable Segments

Operating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. The CODM is the Company’s Chief Executive Officer and the Company has determined that it operates in one business segment, which is developing products for disorders of the ear, nose, and throat.

Goodwill

Goodwill represents the difference between the consideration transferred and the fair value of the assets acquired and liabilities assumed under the acquisition method of accounting. Goodwill is not amortized but is evaluated for impairment annually as of October 1st or if indicators of impairment exist that would, more likely than not, reduce the fair value from its carrying amount. The Company determined that no impairment existed as of September 30, 2019 and December 31, 2018.

Long-Lived Assets

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Additions, major renewals and improvements are capitalized, and repair and maintenance costs are charged to expense as incurred. Leasehold improvements are amortized over the remaining life of the initial lease term or the estimated useful lives of the assets, whichever is shorter.

The carrying value of long-lived assets, including operating lease right-of-use assets and intangible assets, is evaluated whenever events or changes in business circumstances or the Company’s planned use of long-lived assets indicate, based on undiscounted future operating cash flows, that their carrying amounts may not be fully recoverable or that their useful lives are no longer appropriate. When an indicator of impairment exists, undiscounted future operating cash flows of long-lived assets are compared to their respective carrying value. If the carrying value is greater than the undiscounted future operating cash flows of long-lived assets, the long-lived assets are written down to their respective fair values and an impairment loss is recorded. Fair value is determined primarily using the discounted cash flows expected to be generated from the use of assets. Significant management judgment is required in the forecast of future operating results that are used in the preparation of expected cash flows. No impairments of tangible assets have been identified during the periods presented.

Research and Development Expenses

Research and development expenses include personnel and facility-related expenses, outside contracted services including clinical trial costs, manufacturing and process development costs, research costs and other consulting services and non-cash stock-based compensation. Research and development costs are expensed as incurred. Amounts due under contracts with third parties may be either fixed fee or fee for service, and may include upfront payments, monthly payments and payments upon the completion of milestones or receipt of deliverables. Non-refundable advance payments under agreements are capitalized and expensed as the related goods are delivered or services are performed.

The Company contracts with third parties to perform various clinical trial activities in the on-going development of potential products. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows to its vendors. Payments under the contracts depend on factors such as the achievement of

10


certain events, successful enrollment of patients, and completion of portions of the clinical trial or similar conditions. The Company’s accrual for clinical trials is based on estimates of the services received and efforts expended pursuant to contracts with clinical trial centers and clinical research organizations. These contracts may be terminated by the Company upon written notice and the Company is generally only liable for actual effort expended by the organizations to the date of termination, although in certain instances the Company may be further responsible for termination fees and penalties, as well as reasonable shutdown costs. The Company estimates its research and development expenses and the related accrual as of each balance sheet date based on the facts and circumstances known to the Company at that time. There have been no material adjustments to the Company’s prior‑period accrued estimates for clinical trial activities through September 30, 2019.

Net Loss Per Share

Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share calculation, preferred stock, convertible notes and accrued interest, stock options, warrants and restricted stock units are considered to be potentially dilutive securities and are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive. Therefore, basic and diluted net loss per share was the same for the periods presented due to the Company’s net loss position.

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(In thousands, except share and per share data)

 

Net loss used in the calculation of basic and diluted

   loss per share

 

$

(2,893

)

 

$

(3,496

)

 

$

(11,867

)

 

$

(9,491

)

Net loss per share, basic and diluted

 

$

(0.22

)

 

$

(0.37

)

 

$

(1.04

)

 

$

(1.07

)

Weighted-average number of common shares, basic

   and diluted

 

 

12,974,923

 

 

 

9,420,039

 

 

 

11,397,364

 

 

 

8,864,895

 

 

The computation of diluted earnings per share excludes stock options, warrants, and restricted stock units that are anti-dilutive. As of September 30, 2019 and 2018, common share equivalents of 8,770,947 shares and 1,386,588 shares were anti-dilutive, respectively.   

Stock-based Compensation

For stock options granted to employees, the Company recognizes compensation expense for all stock-based awards based on the grant-date estimated fair value.

The fair value of stock options is determined using the Black-Scholes option pricing model, using assumptions that are subjective and require significant judgment and estimation by management. The risk-free rate assumption was based on observed yields from governmental zero-coupon bonds with an equivalent term. The expected volatility assumption was based on historical volatilities of a group of comparable industry companies whose share prices are publicly available. The peer group was developed based on companies in the pharmaceutical industry. The expected term of stock options represents the weighted-average period that the stock options are expected to be outstanding. Because the Company does not have historical exercise behavior, it determined the expected life assumption using the simplified method, which is an average of the options ordinary vesting period and the contractual term. The expected dividend assumption was based on the Company’s history and expectation of dividend payouts. The Company has not paid and does not expect to pay dividends at any time in the foreseeable future. The Company recognizes forfeitures on an actual basis and as such did not estimate forfeitures to calculate stock-based compensation.

Restricted Stock Units (“RSU”) and Performance-Based Restricted Stock Units (“PRSU”) are measured and recognized based on the quoted market price of our common stock on the date of grant.

Effective as of August 1, 2018, the Board of Directors amended the Company’s 2014 Stock Incentive Plan (the “2014 Plan”) and the Company’s 2014 Employee Stock Purchase Plan (the “ESPP” and, together with the 2014 Plan, the “Plans”) to reduce the share reserves under the Plans. These reductions were made to equitably adjust the share reserves in accordance with the terms of the Plans. As a result of these equitable adjustments: (1) the number of shares of common stock authorized

11


for issuance under the 2014 Plan (excluding shares underlying outstanding awards as of August 1, 2018) was reduced to 766,500 shares and the maximum number of shares that can be added to the 2014 Plan under the evergreen provision set forth in Section 4(a)(1)(C) of the 2014 Plan was reduced to 550,000 shares annually; and (2) the number of shares of common stock authorized for future issuance under the ESPP was reduced to 209,500 shares (excluding shares previously issued under the ESPP prior to August 1, 2018) and the maximum number of shares that can be added to the ESPP under the evergreen provision set forth in the ESPP was reduced to 135,000 shares annually. The 2014 Plan and ESPP were amended and restated as of August 1, 2018 to reflect these equitable adjustments. The number of shares reserved for issuance under the 2014 Plan and ESPP were 337,955 and 303,721 shares, respectively, as of September 30, 2019.

Stock-based compensation expense related to stock options granted to nonemployees is recognized based on the estimated fair value of the stock options on their grant date, determined using the Black-Scholes option pricing model. The awards generally vest over the period the Company expects to receive services from the nonemployees. Similar to stock options granted to employees, the fair value of stock options granted nonemployees, determined using the Black-Scholes option pricing model, involves assumptions that are subjective and require significant judgment and estimation by management.  The risk-free rate assumption was based on observed yields from governmental zero-coupon bonds with an equivalent term. The expected volatility assumption was based on historical volatilities of a group of comparable industry companies whose share prices are publicly available. The peer group was developed based on companies in the pharmaceutical industry. The expected term of stock options represents the weighted-average period that the stock options are expected to be outstanding. Because the Company does not have historical exercise behavior on stock options granted to nonemployees, the Company determined the contractual term is the appropriate periods for expected life on stock options granted to nonemployees. The expected dividend assumption was based on the Company’s history and expectation of dividend payouts. The Company has not paid and does not expect to pay dividends at any time in the foreseeable future. The Company recognizes forfeitures on an actual basis and as such did not estimate forfeitures to calculate stock-based compensation.

Income Taxes

The Company’s policy related to accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. As of December 31, 2018, there were no unrecognized tax benefits included in the balance sheet that would, if recognized, affect the Company’s effective tax rate, and the Company has noted no material changes through September 30, 2019. The Company has not recognized interest and penalties in the balance sheets or statements of operations and comprehensive loss. The Company is subject to tax in the U.S., Israel and California.

Recently Issued Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles – Goodwill and Other (Topic 350), which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The standard has tiered effective dates, starting in 2020 for calendar-year public business entities that meet the definition of an SEC filer. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently assessing the impact and timing of adopting this guidance on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement”, an amendment to the accounting guidance on fair value measurements. The guidance modifies the disclosure requirements on fair value measurements, including the removal of disclosures of the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The guidance also adds certain disclosure requirements related to Level 3 fair value measurements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not expect the adoption of this guidance will have a material impact on its condensed consolidated financial statements.

12


In August 2018, the FASB also issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, an amendment to the accounting guidance on cloud computing service arrangements that changes the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance also requires an entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact the guidance will have on its condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

On January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842) (“Topic 842”) along with related clarifications and improvements. This pronouncement requires lessees to recognize a liability for lease obligations with lease terms greater than twelve months, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use asset on the balance sheet. The guidance also changes the definition of a lease and expands required disclosures of key information about leasing arrangements that is intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. The Company elected the optional transition method to apply the standard as of the effective date and therefore, did not restate prior periods to apply the standard to the comparative periods presented on our condensed consolidated financial statements.

The Company elected practical expedients as follows as of January 1, 2019:  

 

Practical expedient package

 

The Company has not reassessed whether any expired or existing contracts are, or contain, leases.



 

The Company has not reassessed the lease classification for any expired or existing leases.



 

The Company has not reassessed initial direct costs for any expired or existing leases.

Hindsight practical expedient

 

The Company has not elected the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets.

 

As a result of adopting Topic 842 as of January 1, 2019, the Company recorded an operating lease right-of-use asset of $489,000 and related operating lease liability of $491,000, respectively, related to the Company’s office lease, based on the present value of the future lease payments on the date of adoption.

No other new accounting pronouncement issued or effective during the fiscal period had or is expected to have a material impact on the Company’s condensed consolidated financial statements or disclosures.

Note 3. Prepaid Expenses and Other Current Assets

Prepaid expenses and other assets consisted of the following (in thousands):

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Prepaid insurance

 

$

308

 

 

$

413

 

Prepaid other

 

 

203

 

 

 

261

 

Insurance receivable

 

 

956

 

 

 

583

 

Other current assets

 

 

15

 

 

 

47

 

Total prepaid expenses and other current assets

 

$

1,482

 

 

$

1,304

 

 

13


Note 4. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Accrued compensation and related expenses

 

$

415

 

 

$

742

 

Accrued clinical

 

 

387

 

 

 

735

 

Accrued professional services

 

 

209

 

 

 

194

 

Accrued vacation

 

 

188

 

 

 

160

 

Accrued other

 

 

29

 

 

 

14

 

Total accrued expenses and other liabilities

 

$

1,228

 

 

$

1,845

 

 

Note 5. Commitments and Contingencies

Operating Leases

The Company leases office space under a single operating lease. Total rental expense for the operating lease in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss was $47,000 and $42,000 for the three months ended September 30, 2019 and 2018, respectively, and $142,000 and $126,000 for the nine months ended September 30, 2019 and 2018, respectively.

In September 2015, the Company entered into a three-year operating lease for 5,197 square feet of office space in Irvine, California. The lease had an expiration date of August 31, 2018; however, the Company extended the term of the lease through September 30, 2021 by amending the office lease effective October 31, 2018.

The Company determines if a contract contains a lease at inception. Our material operating lease consists of a single office space. Our office lease has a remaining term of 2.0 years and does not include options to extend the lease for additional periods.

Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities as adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. As we have no outstanding debt nor committed credit facilities, secured or otherwise, we estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management’s judgment.

Our leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term. Our lease agreement does not contain any material residual value guarantees or material restrictive covenants. The Company has no lease agreements with lease and non-lease components.

Related to the adoption of Topic 842, our policy elections were as follows:



 

 

Separation of lease and non-lease components

 

While we do not currently have any lease agreement with lease and non-lease components, we elected this expedient to account for lease and non-lease components as separate components.

Short-term policy

 

We have elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet.

14


 

The components of lease expense were as follows:

 

 

 

Nine Months Ended September 30, 2019

 

Operating lease cost(a)

 

$

147

 

(a) Includes variable operating lease expenses, which is immaterial

 

 

Other information related to leases was as follows (in thousands, except lease term and discount rate):

 

 

 

Nine Months Ended September 30, 2019

 

Supplemental Cash Flows Information

 

 

 

 

Cash paid for amounts included in the measurement of lease liability:

 

 

 

 

Operating cash flows from operating lease

 

$

134

 

Operating lease asset obtained in exchange for lease obligation:

 

 

 

 

Operating lease

 

 

489

 

Remaining lease term

 

 

 

 

Operating lease

 

2.0 years

 

Discount rate

 

 

 

 

Operating lease

 

 

3.25

%

 

Future payments under noncancelable extended operating leases having initial or remaining terms of one year or more are as follows for the remaining fiscal year and thereafter (in thousands):

 

Years ending

 

2019 (remainder of)

 

$

47

 

2020

 

 

188

 

2021

 

 

146

 

Total minimum lease payments

 

 

381

 

Less imputed interest

 

 

(13

)

Present value of lease liabilities

 

$

368

 

 

Grants and Licenses

Israeli Innovation Authority Grant

From 2012 through 2015, the Company received grants in the amount of approximately $537,000 from the Israeli Innovation Authority (previously the Office of Chief Scientist) of the Israeli Ministry of Economy and Industry designated for investments in research and development. The grants are linked to the U.S. Dollar and bear annual interest of LIBOR. The grants are to be repaid out of royalties from sales of the products developed by the Company from it’s investments in research and development. Because the Company has not yet earned revenues related to these investments and cannot estimate potential royalties, no liabilities related to these grants have been recorded as of each period presented. Repayment of the grant is contingent upon the successful completion of the Company’s research and development programs and generating sales. The Company has no obligation to repay these grants, if the research and development program fails, is unsuccessful or aborted or if no sales are generated. The Company has not yet generated sales as of September 30, 2019; therefore, no liability was recorded for the repayment in the accompanying condensed consolidated financial statements.

Otodyne License Agreement

In November 2015, the Company entered into an exclusive license agreement with Scientific Development and Research, Inc. and Otodyne, Inc. (collectively, the “Licensors”) granting the Company exclusive worldwide rights to develop and commercialize OP0201, a potential first-in-class treatment option for patients at risk for or with otitis media (middle ear inflammation with or without infection), which is often caused by Eustachian tube dysfunction (“ETD”). Under the terms of the agreement, the Company is obligated to use commercially reasonable efforts to seek approval for and commercialize at

15


least one product for otitis media in the U.S. and key European markets (France, Germany, Italy, Spain, and the United Kingdom). The Company is responsible for prosecuting, maintaining, and enforcing all related intellectual property and will be the sole owner of improvements. Under the agreement with the Licensors, the Company paid license fees totaling $750,000 and issued 9,780 common shares to the Licensors, which was expensed to research and development during the year ended December 31, 2015.

In December 2015, the Licensors completed transfer of all technology, including the active Investigational New Drug application for OP0201 to the Company. The Company is obligated to pay up to $42.1 million in development and regulatory milestones if OP0201 is approved for three indications in the U.S., two in Europe, and two in Japan. The Company is also obligated to pay up to $36.0 million in sales-based milestones, beginning with sales exceeding $1.0 billion in a calendar year. The Company is also obligated to pay a tiered royalty for a period up to eight years, on a country-by-country basis. The royalty ranges from a low-single to mid-single percentage of net sales. The Company made a $300,000 milestone payment in March 2019 related to the first patient enrolled in a phase 2 study. There were no other milestones achieved during the nine months ended September 30, 2019 or the year ended December 31, 2018.

Legal Matters

The Company is involved in various lawsuits and claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, and contractual matters. In connection with these matters, the Company assesses, on a regular basis, the probability and range of possible loss based on the developments in these matters. A liability is recorded in the financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable results could occur, assessing contingencies is highly subjective and requires judgments about future events. The Company regularly reviews outstanding legal matters to determine the adequacy of the liabilities accrued and related disclosures. The amount of ultimate loss may differ from these estimates. Each matter presents its own unique circumstances, and prior litigation does not necessarily provide a reliable basis on which to predict the outcome, or range of outcomes, in any individual proceeding. Because of the uncertainties related to the occurrence, amount, and range of loss on any pending litigation or claim, the Company does not consider a liability probable and is currently unable to predict their ultimate outcome, and, with respect to any pending litigation or claim where no liability has been accrued, to make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome. In the event that opposing litigants in outstanding litigation proceedings or claims ultimately succeed at trial and any subsequent appeals on their claims, any potential loss or charges in excess of any established accruals, individually or in the aggregate, could have a material adverse effect on the Company’s business, financial condition, results of operations, and/or cash flows in the period in which the unfavorable outcome occurs or becomes probable, and potentially in future periods.

Legal Proceedings

On September 22, 2014, Tokai Pharmaceuticals, Inc. (“Tokai”), the legal predecessor of the Company, completed the initial public offering of its common stock (the “IPO”). Subsequent to the IPO, several lawsuits were filed against Tokai, Jodie P. Morrison, Lee H. Kalowski, Seth L. Harrison, Timothy J. Barberich, David A. Kessler, Joseph A. Yanchik, III, and the underwriters of the IPO. The lawsuits allege that, in violation of the Securities Act of 1933 (the “Securities Act”), Tokai’s registration statement for the IPO made false and misleading statements and omissions about Tokai’s clinical trials for galeterone. Each lawsuit sought, among other things, unspecified compensatory damages, interest, costs, and attorneys’ fees. Further details on each lawsuit are set forth below. The Company intends to vigorously defend against these claims. Given the uncertainty of litigation, the preliminary stage of these cases, and the legal standards that must be met for, among other things, success on the merits, the Company is unable to predict the ultimate outcome of these actions, and therefore it cannot estimate the reasonably possible loss or range of loss that may result from these actions.

 

Jackie888 Action. On August 19, 2016, a purported stockholder of Tokai filed a putative class action lawsuit in the Superior Court of the State of California, County of San Francisco, entitled Jackie888, Inc. v. Tokai Pharmaceuticals, Inc., et al., No. CGC-16-553796. The plaintiff sought to represent a class of purchasers of Tokai common stock in or traceable to Tokai’s IPO. On October 19, 2016, the defendants moved to dismiss or stay the action on grounds of forum non conveniens, and certain individual defendants moved to quash the plaintiff’s summons for lack of personal jurisdiction. On February 27, 2017, the Superior Court entered an order granting defendants’ motion to stay the lawsuit. On May 24, 2018, the plaintiff dismissed its complaint in the Superior Court of the State of California and refiled its complaint in the Business Litigation Session of the Superior Court Department of the Suffolk County Trial Court, Massachusetts (“Massachusetts State Court”). On June 28, 2018, plaintiff Wu moved to consolidate the Jackie888 Action with the Wu Action (discussed below). On June 29, 2018, plaintiffs Jackie888 and Wu filed a consolidated complaint. On July 6, 2018, the Jackie888

16


 

Action was consolidated with the Wu Action. Events that occurred while the actions were consolidated are described below. The Jackie888 Action and Wu Action were later de-consolidated on May 16, 2019 when the Wu Action was dismissed with prejudice. In the remaining Jackie888 action, the plaintiff filed a motion for class certification on August 22, 2019. Defendants opposed the plaintiff’s motion, and the Court held a hearing on the motion for class certification on October 23, 2019.

 

Wu Action. On December 5, 2016, a putative securities class action was filed in the Massachusetts State Court, entitled Wu v. Tokai Pharmaceuticals, Inc., et al., 16-3725 BLS (“Wu Action”). The plaintiff seeks to represent a class of purchasers of Tokai common stock in or traceable to Tokai’s IPO. On December 19, 2016, defendants removed the Wu Action to the U.S. District Court for the District of Massachusetts, where it was captioned Wu v. Tokai Pharmaceuticals, Inc., et al., 16-cv-12550. On January 6, 2017, plaintiff filed a motion to remand the Wu Action to Massachusetts State Court. On September 28, 2017, the court stayed the case pending a decision by the United States Supreme Court in Cyan, Inc. v. Beaver County Employees Retirement Fund, S. Ct. Case No. 15-1439. On March 20, 2018, the United States Supreme Court ruled in Cyan that state courts have subject matter jurisdiction over covered class actions alleging only Securities Act claims and that such actions are not removable to federal court. On March 22, 2018, plaintiff moved for leave to submit the Cyan decision in support of plaintiff’s remand motion. On March 27, 2018 the Wu Action was remanded to the Massachusetts State Court. On May 3, 2018, plaintiff filed an amended class action complaint. Following the refiling of the Jackie888 Action in Massachusetts State Court (discussed above), on June 28, 2018, plaintiff Wu moved to consolidate the Jackie888 Action with the Wu Action. On June 29, 2018, plaintiffs Jackie888 and Wu filed a consolidated complaint. On July 6, 2018, the Jackie888 Action was consolidated with the Wu Action. Defendants moved to dismiss the consolidated complaint on August 15, 2018, plaintiffs filed their opposition thereto on September 28, 2018, and defendants filed their reply in support of their motion on October 19, 2018. In addition, Defendants moved to strike the class allegations in the consolidated complaint on August 15, 2018, plaintiffs filed their opposition thereto on September 11, 2018, and defendants filed their reply in support of their motion on September 21, 2018. The court held a hearing on November 15, 2018 on defendants’ motion to strike. On December 20, 2018, the court denied defendants’ motion to strike.  The court held a hearing on December 20, 2018 on defendants’ motion to dismiss.  On January 8, 2019, the court denied defendants’ motion to dismiss.  On February 6, 2019, the court entered a scheduling order, pursuant to which discovery on merits issues was stayed pending the court’s resolution of class certification. On April 18, 2019, the court held a hearing as to plaintiff Wu’s failure to respond to defendant’s discovery requests.  The court issued an order requiring plaintiff Wu to serve written responses to the pending discovery requests by May 10, 2019.  Plaintiff Wu failed to serve written responses by the deadline and her claims were subsequently dismissed with prejudice by the court on May 16, 2019. In the same order, the court also de-consolidated the Wu Action from the Jackie888 Action.

 

Angelos Action. On July 25, 2017, a purported stockholder of Tokai filed a lawsuit in the U.S. District Court for the District of Massachusetts, entitled Peter B. Angelos v. Tokai Pharmaceuticals, Inc., et al., No. 1:17-cv-11365-MLW. On September 7, 2018, plaintiff filed an amended complaint. Defendants moved to dismiss the amended complaint on October 15, 2018. Plaintiff opposed defendants’ motion on November 19, 2018, defendants filed a reply in support of their motion on December 17, 2018, and plaintiff filed a sur-reply in support of his opposition on January 8, 2019. The court set a hearing for February 25, 2019 on defendants’ motion to dismiss but later cancelled the hearing.  On July 9, 2019, the court scheduled the hearing for defendants’ motion to dismiss on September 18, 2019. On September 10, 2019, the court continued the hearing for defendants’ motion to dismiss until an unspecified later time.

Indemnification

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnification. The Company’s exposure under these agreements is unknown because it involves future claims that may be made against the Company but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future because of these indemnification obligations. No amounts associated with such indemnifications have been recorded to date.

Contingencies

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and

17


such expenditures can be reasonably estimated. There have been no contingent liabilities requiring accrual at September 30, 2019.

Note 6. Income Taxes

The Company is subject to income taxes under Israeli and U.S. tax laws. The Company was subject to an Israeli corporate tax rate of 23% in the year 2018 and is expected to be subject to an Israeli corporate tax rate of 23% in the year 2019 and thereafter. The Company was subject to a blended U.S. tax rate (federal as well as state corporate tax) of 21% in 2018 and is expected to be subject to a blended U.S. tax rate of 21% in 2019.

 

Note 7. Stockholders’ Equity

Equity Distribution Agreement

On July 23, 2018, the Company filed a prospectus and prospectus supplement (the “2018 Prospectus”) under which the Company may offer and sell, from time to time, pursuant to an equity distribution agreement with Piper Jaffray & Co., up to $9.8 million in shares of its common stock. As of September 30, 2019, 25,218 shares have been sold under the 2018 Prospectus for gross proceeds of approximately $110,000.

2019 Equity Offering

On April 30, 2019, the Company entered into a securities purchase agreement with certain investors pursuant to which the Company agreed to sell, in a registered direct offering, an aggregate 3,449,112 shares of its common stock for gross proceeds of approximately $10.7 million under its effective shelf registration statement on Form S-3 (File No. 333-226286), which became effective on July 31, 2018.  In a concurrent private placement, the Company also agreed pursuant to the securities purchase agreement to issue to such investors Series A warrants to purchase up to 3,449,112 shares of its common stock at an exercise price of $4.00 with a term of eighteen months and Series B warrants to purchase up 3,449,112 shares of its common stock at an exercise price of $4.00 with a term of five years. The Series B warrants become exercisable only upon the exercise of the Series A warrants. In addition, we have agreed to issue to the placement agent warrants to purchase up to 172,456 shares of common stock representing 5.0% of the aggregate number of shares of common stock sold in this offering. The placement agent warrants will have substantially the same terms as the Series A Warrants issued to the investors in the concurrent private placement, except that the placement agent warrants will have an exercise price equal to $3.87 or 125% of the offering price per share and will expire on April 30, 2024. The registered direct offering and the concurrent private placement are referred to collectively herein as the “2019 Equity Offering.”

All the warrants issued in connection with the 2019 Equity Offering contained put options that allow the holders of the warrants the right to receive, for each warrant share that would have been issuable upon an exercise immediately prior to the occurrence of an effective change in control event defined as a fundamental transaction, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration receivable as a result of such fundamental transaction by a holder of the number of shares of common stock for which this warrant is exercisable immediately prior to such fundamental transaction.  The Company evaluated the embedded put option contained in the warrants under the guidance of Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging, and concluded that the requirements for contingent exercise provisions as well as the settlement provision for scope exception in ASC 815-10-15-74 has been met.  Accordingly, the put options contained in the warrants were not bi-furcated and accounted for as freestanding derivative instruments.

Stock-Based Compensation

Total stock-based compensation expense was recognized in our Condensed Consolidated Statements of Operations and Comprehensive Loss as follows (in thousands):

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Research and development

 

$

57

 

 

$

50

 

 

$

278

 

 

$

125

 

General and administrative

 

 

170

 

 

 

187

 

 

 

787

 

 

 

678

 

Total stock-based compensation

 

$

227

 

 

$

237

 

 

$

1,065

 

 

$

803

 

 

18


During the nine months ended September 30, 2019, PRSUs awarded to employees totaling 78,450 shares vested and resulted in the recognition of $379,000 in stock-based compensation expense.

 

  

   

19


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The unaudited interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our audited financial statements and accompanying notes for the year ended December 31, 2018 included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (the “SEC”) on March 28, 2019, as amended. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please see Part II, Item 1A. Risk Factors for a discussion of certain risk factors applicable to our business, financial condition, and results of operations. Operating results are not necessarily indicative of results that may occur for the full fiscal year or any other future period. Unless otherwise indicated, references to the terms “Novus”, the “Company”, “we”, “our”, and “us” refer to Novus Therapeutics, Inc. References to the term “Tokai” refer to Tokai Pharmaceuticals, Inc., the legal predecessor of the Company.

ABOUT NOVUS THERAPEUTICS

Overview

Novus Therapeutics, Inc. is a specialty pharmaceutical company focused on developing products for patients with disorders of the ear, nose, and throat (“ENT”). The Company has two platform technologies, each with the potential to be developed for multiple indications. Novus’ lead program (OP0201) is a surfactant-based nasal aerosol drug-device combination product candidate being developed as a potential first-in-class treatment option for patients at risk for, or with, otitis media (“OM”), which is middle ear inflammation and effusion with or without infection. Globally, OM affects more than 700 million adults and children every year, with over half of the cases occurring in children under five years of age. OM is one of the most common disorders seen in pediatric practice, and in the U.S. is a leading cause of health care visits and the most frequent reason children are prescribed antibiotics or undergo surgery. Novus also has a foam-based drug delivery technology platform (OP01xx), which may be developed in the future to deliver drugs into the ear, nasal, and sinus cavities.

Surfactant Platform (OP02xx)

The first product in the surfactant platform program, OP0201, is being developed as a potential first-in-class treatment option for OM. OM is often caused by Eustachian tube dysfunction (“ETD”). OP0201 is a nasal aerosol, drug-device combination product comprised of a novel formulation of a surfactant (dipalmitoylphosphatidylcholine [“DPPC”]) and a spreading agent (cholesteryl palmitate [“CP”]) suspended in propellant. The product is administered intranasally via a pressurized metered-dose inhaler (“pMDI”). OP0201 is intended to be used to restore the normal physiologic activity of the Eustachian tube (“ET”), which is a small tube that connects from the chamber of the middle ear to the back of the nasopharynx. Together, the active ingredients in OP0201 effectively absorb to the air-liquid interface of the mucosa and reduce the interfacial surface tension of the ET, which reduces passive pressure required for the ET to open. In other words, OP0201 promotes ‘de-sticking’ of the ET so that ventilation of the middle ear is restored.

Novus has completed three phase 1 placebo-controlled clinical trials in adults that were designed to evaluate safety and tolerability of single and repeated intranasal doses of OP0201. Results of a single-dose phase 1 trial in healthy adults (study C-001), a single-dose phase 1 trial in adults with acute otitis media (study C-004), and a 14-day phase 1 trial in healthy adults (study C-002) demonstrated the safety and tolerability of OP0201 nasal aerosol. Novus is currently conducting an exploratory phase 2a clinical trial of OP0201 nasal aerosol in infants and children with acute otitis media (study C-006). Upon completion of the phase 2a study, Novus intends to initiate phase 2 and phase 3 studies with an initial focus on a development program that, if successful, will lead to registration of OP0201 nasal aerosol in North America and key European markets as a product to treat OM and prevent OM in infants and children. Additional development activities to support registration of OP0201 nasal aerosol in other countries, or for other indications, or other patient populations, may occur in the future.

Foam Platform (OP01xx)

OP0101 and OP0102 are foam-based products intended to be used as a delivery vehicle for drugs to be administered into the ear canals, as well as the nasal and sinus cavities. OP0101 was the initial product utilizing the foam platform. It was developed as an improved treatment option for acute otitis externa (“AOE”), a common infectious medical condition of the outer ear canal that affects tens of millions of adults and children each year (frequently called “swimmer’s ear”). Novus completed four clinical trials of OP0101 in 353 adult and pediatric subjects, including a successful phase 2b study with a steroid-free, antibiotic-only formulation of OP0101 that was non-inferior to standard of care, but with a more favorable dosing regimen (one dose daily instead of two doses daily for seven days).

20


In 2016, Novus began development of OP0102, a second-generation formulation designed to rapidly relieve ear pain (an unmet need in AOE) and eradicate infection with less than seven days of treatment. Novus subsequently suspended the OP0102 development program to focus resources on the surfactant program.

RECENT DEVELOPMENTS

Equity Distribution Agreement

On August 21, 2017, the Company entered into an equity distribution agreement (the “Equity Distribution Agreement”) with Piper Jaffray & Co. (“Piper Jaffray”), as sales agent, pursuant to which the Company may offer and sell, from time to time, through Piper Jaffray. In connection with the Equity Distribution Agreement on July 23, 2018, the Company filed a prospectus supplement (the “2018 Prospectus”) under which the Company may offer and sell, from time to time, through Piper Jaffray, up to $9.8 million in shares of its common stock. Piper Jaffray sold 25,218 shares of the Company’s common stock under the 2018 Prospectus through September 30, 2019.

2019 Equity Offering

On April 30, 2019, the Company entered into a securities purchase agreement with certain investors pursuant to which the Company agreed to sell, in a registered direct offering, an aggregate 3,449,112 shares of its common stock for gross proceeds of approximately $10.7 million under its effective shelf registration statement on Form S-3 (File No. 333-226286), which became effective on July 31, 2018.  In a concurrent private placement, the Company also agreed pursuant to the securities purchase agreement to issue to such investors Series A warrants to purchase up to 3,449,112 shares of its common stock at an exercise price of $4.00 with a term of eighteen months and Series B warrants to purchase up 3,449,112 shares of its common stock at an exercise price of $4.00 with a term of five years. The Series B warrants become exercisable only upon the exercise of the Series A warrants. In addition, we have agreed to issue to the placement agent warrants to purchase up to 172,456 shares of common stock representing 5.0% of the aggregate number of shares of common stock sold in this offering. The placement agent warrants will have substantially the same terms as the Series A Warrants issued to the investors in the concurrent private placement, except that the placement agent warrants will have an exercise price equal to $3.86875 or 125% of the offering price per share and will have a term equal to five years from the effective date of this offering. We refer to the registered direct offering and the concurrent private placement collectively as the “2019 Equity Offering.”

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities as of the date of the financial statements. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. There have been no significant and material changes in our critical accounting policies and significant judgments and estimates during the nine months ended September 30, 2019, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018 filed by the Company with the SEC on March 28, 2019, as amended.

21


RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2019 and 2018

The following table provides comparative unaudited results of operations for the three months ended September 30, 2019 and 2018 (in thousands):

 

 

 

For the Three Months

Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

$ Variance

 

 

% Variance

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

1,509

 

 

$

1,651

 

 

 

(142

)

 

 

(9

)%

General and administrative

 

 

1,411

 

 

 

1,848

 

 

 

(437

)

 

 

(24

)%

Total operating expenses

 

 

2,920

 

 

 

3,499

 

 

 

(579

)

 

 

(17

)%

Loss from operations

 

 

(2,920

)

 

 

(3,499

)

 

 

579

 

 

 

(17

)%

Other income, net

 

 

27

 

 

 

3

 

 

 

24

 

 

 

800

%

Net loss

 

$

(2,893

)

 

$

(3,496

)

 

 

603

 

 

 

(17

)%

 

Research and Development Expenses

The decrease in research and development expenses of $142,000 for the three month period was primarily due to decreases in clinical and formulation development costs for OP0201 of $176,000 and $77,000 respectively, as well as a decrease in travel and meetings expense of $26,000. The decreases were offset by an increase in consulting services of $95,000, personnel costs of $35,000, and stock-based compensation costs of $7,000.

General and Administrative Expenses

The decrease in general and administrative expenses of $437,000 for the three month period was primarily due to a decrease in litigation costs of $217,000, costs associated with operating a publicly traded company of $247,000, stock-based compensation costs of $17,000, and general operating costs of $77,000. The decreases were offset by increases in personnel costs of $119,000 and travel and meetings expense of $2,000.

Other Income, Net

The change in other income, net was due to an increase in interest income of $34,000, offset by an increase in realized losses on foreign currency translation of $4,000, and an increase in VAT tax of $6,000 for the three months ended September 30, 2019.

Comparison of the Nine Months Ended September 30, 2019 and 2018

The following table provides comparative unaudited results of operations for the nine months ended September 30, 2019 and 2018 (in thousands):

 

 

 

For the Nine Months

Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

$ Variance

 

 

% Variance

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

6,795

 

 

$

4,077

 

 

 

2,718

 

 

 

67

%

General and administrative

 

 

5,089

 

 

 

5,406

 

 

 

(317

)

 

 

(6

)%

Total operating expenses

 

 

11,884

 

 

 

9,483

 

 

 

2,401

 

 

 

25

%

Loss from operations

 

 

(11,884

)

 

 

(9,483

)

 

 

(2,401

)

 

 

25

%

Other income (expense), net

 

 

17

 

 

 

(8

)

 

 

25

 

 

 

(313

)%

Net loss

 

$

(11,867

)

 

$

(9,491

)

 

 

(2,376

)

 

 

25

%

 

22


Research and Development Expenses

The increase in research and development expenses of $2.7 million for the nine month period was primarily due to an increase in clinical related costs for OP0201 of $2.4 million, an increase in personnel costs of $268,000, an increase in stock-based compensation of $153,000, and an increase in general operating costs of $5,000. The increases were offset by decreases in formulation development costs of $42,000, consulting costs of $32,000, and travel and meetings expense of $81,000.

General and Administrative Expenses

The decrease in general and administrative expenses of $317,000 for the nine month period was primarily due to a decrease in costs associated with operating a publicly traded company of $452,000, a decrease in litigation costs of $262,000, and decreases in general operating costs and travel and meetings expense of $99,000 and $17,000 respectively. The decreases were offset by increases of $404,000 in personnel costs and $109,000 in stock-based compensation costs.

Other Income (Expense), Net

The change in other income (expense), net was due to an increase in interest income of $34,000 and a decrease in VAT tax of $1,000, offset by an increase in realized losses on foreign currency translation of $10,000 for the nine months ended September 30, 2019. 

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2019, we had cash of $10.8 million, consisting of readily available cash in bank accounts. While we believe our cash is not subject to excessive risk, we maintain significant amounts of cash at one or more financial institutions that are in excess of federally insured limits. To date, our operations have been financed primarily by net proceeds from the sale of preferred and common stock, the issuance of convertible promissory notes, and cash received in a 2017 reverse merger with Tokai. We have concluded and disclosed in the footnotes to our unaudited condensed consolidated financial statements, included elsewhere within this Quarterly Report on Form 10-Q, that we do not have sufficient cash to fund our operations through 12 months from the date of issuance of the most recent financial statements.

We do not have any approved products for commercial sale and have never generated revenue from product sales, and have incurred significant net losses since our inception and expect to continue to incur net operating losses for the foreseeable future. We do not expect to receive any revenue from any product candidates that we develop unless and until we obtain regulatory approval and commercialize our product candidates or enter into collaborative arrangements with third parties. Our primary use of cash is to fund operating expenses, which consist of research and development expenses and general and administrative expenses. Cash used to fund operating expenses is impacted by the timing of when we pay or prepay these expenses. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution.

We will continue to require additional financing in order to advance OP0201 through clinical development, to manufacture, obtain regulatory approval for and to commercialize our product candidates, to develop, acquire or in-license other potential product candidates, and to fund operations for the foreseeable future. Therefore, we will seek to raise additional capital through equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements. Adequate additional funding may not be available to us on acceptable terms on a timely basis, or at all. Any such failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies, and may cause us to delay the scope of or suspend one or more of our clinical trials, research and development programs or commercialization efforts, out-license intellectual property rights to our product candidates or sell unsecured assets, or a combination of the above. Any of these actions could materially harm our business. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. Debt financing, if available, would result in fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business. If we raise funds through collaborations, licenses and other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. Please see Part II, Item 1A. Risk Factors for additional risks associated with our substantial capital requirements and the challenges we may face in raising capital.

23


We plan to continue to fund losses from operations and capital funding needs through cash on hand and future equity or debt financings, as well as potential additional collaborations or strategic partnerships with other companies. During the third quarter of 2017, we entered into the Equity Distribution Agreement pursuant to which we may sell shares of common stock from time to time in “at-the-market” offerings and filed a related prospectus supplement (the “2017 Prospectus”). On July 23, 2018, the Company filed the 2018 Prospectus. Under the 2017 Prospectus, we sold shares of common stock from October 2, 2017 through March 9, 2018 for gross proceeds of approximately $8.5 million.  Under the 2018 Prospectus, we may offer and sell up to an additional $9.8 million in shares of common stock. 25,218 shares have been sold under the 2018 Prospectus for gross proceeds of approximately $110,000 as of September 30, 2019. The sale of additional equity or convertible debt could result in additional dilution to our stockholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financing covenants that would restrict our operations.

On April 30, 2019, the Company entered into a securities purchase agreement with certain investors pursuant to which the Company agreed to sell, in a registered direct offering, an aggregate 3,449,112 shares of its common stock for gross proceeds of approximately $10.7 million under its effective shelf registration statement on Form S-3 (File No. 333-226286), which became effective on July 31, 2018.  In a concurrent private placement, the Company also agreed pursuant to the securities purchase agreement to issue to such investors Series A warrants to purchase up to 3,449,112 shares of its common stock at an exercise price of $4.00 with a term of eighteen months and Series B warrants to purchase up 3,449,112 shares of its common stock at an exercise price of $4.00 with a term of five years. The Series B warrants become exercisable only upon the exercise of the Series A warrants. In addition, we have agreed to issue to the placement agent warrants to purchase up to 172,456 shares of common stock representing 5.0% of the aggregate number of shares of common stock sold in this offering. The placement agent warrants will have substantially the same terms as the Series A Warrants issued to the investors in the concurrent private placement, except that the placement agent warrants will have an exercise price equal to $3.86875 or 125% of the offering price per share and will have a term equal to five years from the effective date of this offering.

Our primary uses of capital are, and we expect will continue to be, funding research efforts and the development of our product candidates, compensation and related expenses, hiring additional staff (including clinical, scientific, operational, financial, and management personnel) and costs associated with operating as a public company. We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our product candidates.

On August 8, 2019, the Company received written notice (the “Notification Letter”) from The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that it was not in compliance with the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on The Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires listed securities maintain a minimum closing bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum closing bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. Based on the closing bid price of the Company’s common stock for the 30 consecutive business days prior to the date of the Notification Letter, the Company did not meet the minimum closing bid price requirement.

The Notification Letter does not impact the Company’s listing on The Nasdaq Capital Market at this time. The Notification Letter states that the Company has 180 calendar days, or until February 4, 2020, to regain compliance with Nasdaq Listing Rule 5550(a)(2). To regain compliance, the closing bid price of the Company’s common stock must be at least $1.00 per share for a minimum of 10 consecutive business days at any time prior to February 4, 2020. In the event that the Company does not regain compliance by February 4, 2020, the Company may be eligible for additional time to reach compliance with the minimum bid price requirement.

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

As a result of these conditions, we have concluded that substantial doubt about our ability to continue as a going concern exists as conditions and events, considered in the aggregate, indicate that it is probable that we will be unable to meet our obligations as they become due within one year after the date that our condensed consolidated financial statements were issued without raising additional capital. The financial information and condensed consolidated financial statements included in this filing have been prepared on a basis that assumes that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. This financial information and these financial statements do not include any adjustments that may result from an unfavorable outcome of this uncertainty. Our ability to continue as a going concern is dependent upon our ability to successfully secure sources of financing and ultimately achieve profitable operations.

24


Cash Flows

The following table provides a summary of our net cash flow activity (in thousands):

 

 

 

For the Nine Months

Ended September 30,

 

 

 

2019

 

 

2018

 

Net cash used in operating activities

 

$

(11,834

)

 

$

(8,540

)

Net cash used in investing activities

 

 

 

 

 

 

Net cash provided by financing activities

 

 

9,676

 

 

 

7,561

 

Net increase in cash and restricted cash

 

$

(2,158

)

 

$

(979

)

 

Comparison of the Nine Months Ended September 30, 2019 and 2018

Net cash used in operating activities for the nine months ended September 30, 2019 consisted primarily of our net loss of $11.9 million, partially offset by non-cash items consisting primarily of stock-based compensation and depreciation and amortization totaling $1.2 million. Additionally, cash used in operating activities for the nine months ended September 30, 2019 reflected a net decrease in cash from changes in operating assets and liabilities of $1.2 million, due to an increase in our prepaid expenses and other current assets of $178,000, a decrease in our accounts payable and other accrued expenses of $1.1 million and a decrease in our operating lease liability of $121,000, offset by a decrease in our other assets of $181,000.

Net cash used in operating activities for the nine months ended September 30, 2018 consisted primarily of our net loss of $9.5 million, partially offset by non-cash items consisting primarily of stock-based compensation and depreciation totaling $811,000. Additionally, cash used in operating expenses for the nine months ended September 30, 2018 reflected a net increase in cash from changes in operating assets and liabilities of $140,000, primarily due to a decrease in our prepaid expenses and other current assets of $911,000 and an increase in accounts payable and other accrued expenses of $741,000, offset by an increase in our other assets of $934,000 and a decrease in accrued severance expense of $578,000.

There was no cash provided by or used in the Company’s investing activities for the nine months ended September 30, 2019 and 2018.

Net cash provided by financing activities for the nine months ended September 30, 2019 was comprised of $9.6 million in net proceeds from the 2019 Equity Offering for the sale of approximately 3.4 million shares of common stock and $107,000 in net proceeds from the 2018 Prospectus for the sale of approximately 25,000 shares of common stock.

Net cash provided by financing activities for the nine months ended September 30, 2018 was comprised of $7.5 million in net proceeds from the Equity Distribution Agreement for the sale of approximately 2.3 million shares of common stock and $71,000 from the exercise of employee stock options.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Contractual Obligations

No material changes to contractual obligations and commitments occurred during the nine months ended September 30, 2019.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Per §229.305 of Regulation S-K, the Company, designated a Smaller Reporting Company as defined in §229.10(f)(1) of Regulation S-K, is not required to provide the disclosure required by this Item.

25


Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of September 30, 2019, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of September 30, 2019 in alerting them in a timely manner to material information required to be disclosed in our periodic reports filed with the SEC.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

26


PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

Information pertaining to legal proceedings is provided under the heading “Legal Proceedings” in Note 5, Commitments and Contingencies, to the condensed consolidated financial statements and is incorporated by reference herein.

Item 1A. Risk Factors.

Investing in our common stock involves a high degree of risk. You should consider carefully the risks described below, together with the other information included or incorporated by reference in our Annual Report on Form 10-K, as amended, and subsequent reports filed with the Securities and Exchange Commission. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. In these circumstances, the market price of our common stock could decline.

Unless otherwise indicated, references to the terms “Novus”, the “Company”, “we”, “our”, and “us” refer to Novus Therapeutics, Inc.

Risks Related to Our Operations

We have incurred significant operating losses since our inception and expect that we will continue to incur losses over the next several years and may never achieve or maintain profitability.

The Company has experienced recurring net losses and negative cash flows from operating activities since its inception. The Company recorded a net loss of $2.9 million and $11.9 million for the three and nine months ended September 30, 2019, respectively. As of September 30, 2019, the Company had cash of $10.8 million, working capital of $10.6 million and an accumulated deficit of $53.4 million.  We have not generated any revenues from product sales, have not completed the development of any product candidate and may never have a product candidate approved for commercialization. We expect it will be several years, if ever, before we have a product candidate ready for commercialization. We have financed our operations to date primarily through sales of equity. We have devoted substantially all of our financial resources and efforts to research and development, including pre-clinical studies and our clinical trials. Our net losses may fluctuate significantly from quarter to quarter and year to year and will depend, in part, on the rate at which we incur expenses and our ability to generate revenue. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

We are currently focused on developing OP0201 nasal aerosol as a potential first-in-class treatment option for patients at risk for or with otitis media (“OM”) (middle ear inflammation with or without infection). We have successfully manufactured several current Good Manufacturing Procedures (“cGMP”) batches of OP0201 nasal aerosol drug product suitable for clinical trials. These batches were all of a smaller scale, and we may have difficultly scaling up manufacturing in a timely and cost-effective manner. We have completed three phase 1 placebo-controlled clinical trials in adults that were designed to evaluate safety and tolerability of single and repeated intranasal doses of OP0201. We are currently conducting one exploratory phase 2a clinical trial of OP0201 nasal aerosol in infants and children with acute OM. Upon completion of the phase 2a clinical study, we intend to initiate phase 2 and phase 3 studies, with an initial focus on a development program that, if successful, will lead to registration of OP0201 nasal aerosol in North America and key European markets as a product to treat OM and prevent OM in infants and children. We expect that it will be several years, if ever, before we have a product candidate ready for commercialization. If we are unable to successfully generate clinical data for the OP0201 nasal aerosol program, we may have greater difficulty raising additional capital on favorable terms, or at all.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses that we incur may fluctuate significantly from quarter to quarter. We anticipate that our expenses will increase substantially if and as we:

 

continue formulation development of our product candidates;

 

continue device development for our drug-device product candidates;

 

continue nonclinical and clinical development of our product candidates;

 

seek to identify and acquire additional product candidates;

 

acquire or in-license other products and technologies;

27


 

enter into collaboration arrangements with regards to product discovery or development;

 

develop manufacturing processes;

 

seek marketing approvals for any of our product candidates that successfully complete clinical trials;

 

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

 

maintain, expand and protect our intellectual property portfolio;

 

hire additional personnel;

 

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

 

operate as a public company.

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

We are early in our development efforts and are developing only one of our two drug candidates, OP0201 nasal aerosol. If we are unable to successfully develop and commercialize this candidate or any other drug candidate, or if we experience significant delays in doing so, our business will be materially harmed.

We currently do not have any products that have gained regulatory approval. We have invested substantially all of our efforts and financial resources in product development, including funding our formulation and device development, manufacturing, nonclinical studies, and clinical studies. Our ability to generate product revenues, which we do not expect will occur for several years, if ever, will depend heavily on the successful development and eventual commercialization of one or more drug candidates. As a result, our business is substantially dependent on our ability to successfully complete the development of and obtain regulatory approval for our or additional product candidates.

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

 

execute formulation, manufacturing, clinical, and nonclinical development activities;

 

manufacture drug product at commercial scale;

 

establish and confirm commercially acceptable stability (shelf-life) of our drug products;

 

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

 

obtain required regulatory approvals for the development and commercialization of OP0201 nasal aerosol or other product candidates;

 

maintain, leverage and expand our intellectual property portfolio;

 

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

 

gain market acceptance for OP0201 nasal aerosol and/or other product candidates;

 

obtain and maintain adequate product pricing and reimbursement;

28


 

develop and maintain any strategic relationships we elect to enter into; and

 

manage our spending as costs and expenses increase due to product manufacturing, nonclinical development, clinical trials, regulatory approvals, post-marketing commitments, and commercialization.

If we are unsuccessful in accomplishing these objectives, we may not be able to successfully develop and commercialize our or other product candidates, and our business will suffer.

Our short operating history may make it difficult to evaluate the success of our business to date and to assess our future viability.

We are an early development stage pharmaceutical company. Our ongoing operations to date have been limited to organizing and staffing the Company, business planning, raising capital, acquiring and developing technology, identifying potential product candidates, and, until May 2017, early stage clinical studies of our most advanced product candidate, OP0101 otic foam. In May 2017, we paused the OP0101 otic foam development program and began focusing substantially all of our resources on the advancement of our surfactant program (OP0201 nasal aerosol) for OM. Since then, operations related to OP0201 nasal aerosol have included arranging for third party vendors to formulate and manufacture cGMP clinical material as well as preparing and conducting three phase 1 clinical studies and one phase 2a clinical study. Additional phase 2 clinical trial preparation activities are also ongoing. We have not yet demonstrated our ability to successfully complete large-scale, pivotal clinical trials, obtain marketing approvals, manufacture a commercial scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. It can take many years to develop a new medicine from the time it is discovered to when it is available for treating patients. Consequently, any predictions made about our future success or viability based on our short operating history to date may not be as accurate as they could be if we had a longer operating history.

In addition, as an early stage business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. To successfully market any of our product candidates, we will need to transition