Eledon Pharmaceuticals(ELDN) - 2019 Q4 - Annual Report

Part I Business Overview Novus Therapeutics, Inc. is a specialty pharmaceutical company focused on developing ear, nose, and throat disease products, with its lead program OP0201 targeting otitis media Company Overview - Novus Therapeutics, Inc. is a specialty pharmaceutical company focused on developing products for ear, nose, and throat diseases[17] - The company possesses two platform technologies: surfactant and foam[17] - The lead program, OP0201, is a surfactant nasal aerosol designed as a potential first-in-class treatment for otitis media (OM)[17] - Otitis media affects over 700 million adults and children globally annually, being one of the most common diseases in U.S. children and a leading cause of antibiotic prescriptions and surgeries[17] Surfactant Platform (OP0201) - OP0201 is a nasal aerosol composed of a surfactant (DPPC) and a spreading agent (CP), administered intranasally via a pressurized metered-dose inhaler (pMDI) to restore normal Eustachian tube (ET) physiological activity and reduce surface tension for middle ear ventilation[18][33] - Three Phase I clinical trials (C-001, C-002, C-004) in adults have been completed, evaluating the safety and tolerability of single and repeat doses of OP0201 nasal aerosol[19][40][41][42] - An exploratory Phase IIa clinical trial (C-006) is currently underway for infants and toddlers with acute otitis media (AOM)[19][44] - Successful development of the surfactant program would lead to product registration in North America and major European markets for treating and/or preventing otitis media in infants and toddlers[20][45] - Currently, no approved drug products exist for otitis media, antibiotics are ineffective against viral or non-infectious OM, and surgery is a common option but not effective for all patients[31] - Avanti Polar Lipids, Inc. is the sole supplier of the active pharmaceutical ingredients DPPC and CP for OP0201[34] Foam Platform (OP0101 and OP0102) - OP0101 and OP0102 are foam-based drug delivery products designed to deliver medication to the ear canal, nasal cavity, and sinus cavities[21] - OP0101 foam otic formulation completed four clinical trials, including a successful Phase IIb study demonstrating non-inferiority to standard therapy for acute otitis externa (AOE) with a superior once-daily dosing regimen[21][49] - OP0102 foam otic formulation is a second-generation formula aimed at rapid ear pain relief and infection eradication within one week[22][49] - The company suspended the foam otic platform development program in May 2017 to focus resources on the surfactant program[22][49] Intellectual Property - Novus protects its product candidates and technologies through patent applications, trademarks, trade secrets, and know-how in the U.S. and abroad[51] - The intellectual property portfolio for OP0201 includes one U.S. patent application, one international application, and seven foreign patent applications, with the latest expiring patent application due in December 2039 if granted[52] - The intellectual property portfolio for OP0101 and OP0102 includes two patent families, with the latest expiring U.S. patents due in September 2027 and December 2033, respectively[52] License Agreement with Otodyne, Inc. - In November 2015, Novus entered into a license agreement with Scientific Development and Research, Inc. and Otodyne, Inc., obtaining exclusive worldwide rights to develop and commercialize surfactant products[55] - The company is obligated to pay up to $42.1 million in development and regulatory milestone payments (if OP0201 is approved for multiple indications in the U.S., Europe, and Japan) and up to $36.0 million in sales milestone payments (for sales exceeding $1 billion)[56] - The company also owes tiered royalties ranging from low single-digit to mid-single-digit percentages for a maximum term of eight years[56] - In March 2019, the company paid a $300,000 milestone payment related to the enrollment of the first patient in a Phase II study[56] Government Regulation Pharmaceutical products are extensively regulated by U.S. and international government authorities across their lifecycle, from manufacturing and R&D to marketing and post-market surveillance - Pharmaceutical products are extensively regulated by U.S. and international government authorities across their lifecycle, from manufacturing, R&D, marketing, labeling, storage, distribution to post-market surveillance and reporting, as well as pricing[57] - Obtaining regulatory approval and complying with regulations requires significant time and financial resources[57] - Non-compliance may result in FDA refusal to approve applications, license revocation, product recalls, fines, civil penalties, or criminal prosecution[59] U.S. Government Regulation - The FDA regulates drug products under the Federal Food, Drug, and Cosmetic Act (FDCA) and its implementing regulations[59] - New drug products require extensive preclinical testing (GLP), IND application submission, IRB approval, human clinical trials (GCP), manufacturing scale-up and stability studies (GMP), BLA or NDA application submission, FDA advisory committee review, manufacturing facility inspection, and FDA approval before market entry[60] - Clinical trials are typically divided into three phases: Phase I (safety, tolerability, pharmacological effects), Phase II (dose tolerance, preliminary efficacy, side effects), and Phase III (clinical effectiveness, safety, risk-benefit profile)[64] - Post-market requirements include record-keeping, periodic reporting, product sampling and distribution, advertising and promotion, and adverse event reporting, all subject to cGMP requirements[76][77][79] - Orphan drug designation provides financial incentives and 7 years of market exclusivity[81][82] - Pediatric exclusivity can add 6 months of marketing protection to existing regulatory exclusivity[85] - The Hatch-Waxman Amendments allow for patent term extensions of up to five years to compensate for patent term lost during product development and FDA review[86] - Generic drugs can be approved via an Abbreviated New Drug Application (ANDA) pathway, relying on preclinical and clinical data of a Reference Listed Drug (RLD)[87][88] - New chemical entities receive 5 years of non-patent exclusivity, while new clinical studies receive 3 years of exclusivity[91] European Union/Rest of World Government Regulation - Approval procedures in the EU and other international jurisdictions vary and may require additional product testing and administrative review periods[96] - EU drug authorization procedures include the centralized procedure (applicable across the European Economic Area) and national authorization procedures (including decentralized and mutual recognition procedures)[102] - New chemical entities and new fixed-dose combinations in the EU may receive 8 years of data exclusivity and 2 years of market exclusivity, extendable to a maximum of 11 years if a new therapeutic indication with significant clinical benefit is obtained[104] - For medicines of major public health interest, the EU may grant accelerated assessment, reducing the evaluation time to 150 days[106] Pharmaceutical Coverage, Pricing and Reimbursement - Commercial sales of any approved product depend partly on coverage and reimbursement from third-party payors, including government, managed care, and private health insurance companies[107] - Third-party payors increasingly challenge the price of medical products and scrutinize their medical necessity and cost-effectiveness[108] - U.S. government, state legislatures, and foreign governments have expressed strong interest in implementing cost control programs, including price controls and reimbursement limitations[110][111] - Failure of government and third-party payors to provide adequate coverage and reimbursement could impair the company's ability to commercialize products and reduce revenue[112] Other Healthcare Laws and Compliance Requirements - If products receive regulatory approval, the company will be subject to various federal and state healthcare fraud and abuse laws, including the Federal Anti-Kickback Statute, the Federal Civil and Criminal False Claims Act, HIPAA, and the Physician Payments Sunshine Act[113][115] - The company is also subject to the U.S. Foreign Corrupt Practices Act (FCPA), which prohibits improper payments to foreign governments and their officials[117] - Violations of any of these laws could result in fines, civil and criminal penalties, exclusion from government healthcare programs, imprisonment, damages, and restrictions or restructuring of business operations[118] Employees - As of March 22, 2020, Novus had 8 employees, 7 of whom were full-time[119] - None of the company's employees are unionized or subject to collective bargaining agreements, and the company maintains good employee relations[119] Corporate Information - Novus Therapeutics, Inc. was formed in 2017 through a reverse merger with Tokai Pharmaceuticals, Inc., following Otic Pharma, Ltd.'s establishment of U.S. operations in 2015 and relocation to Irvine, California[120][404] - The company's executive offices are located in Irvine, California[120] Risk Factors This section details risks that could materially and adversely affect Novus's business, financial condition, and operating results, including ongoing operating losses, funding needs, development uncertainties, competition, commercialization challenges, intellectual property, and regulatory compliance Risks Related to Our Operations - The company has incurred significant operating losses annually since inception, with a net loss of $16 million and an accumulated deficit of $57.6 million as of December 31, 2019[124] - The company currently has no approved commercial products and generates no revenue from product sales[124] - Significant expenses and increasing operating losses are anticipated in the coming years, requiring substantial additional funding[126][129] - The company is in early development with only one product candidate (OP0201) in clinical development, whose success depends on overcoming challenges in formulation, manufacturing, clinical trials, regulatory approval, and commercialization[130][131][134] - The clinical trial process is lengthy, expensive, and uncertain, potentially leading to delays, redesigns, or termination due to regulatory disagreements, patient recruitment difficulties, negative results, or safety concerns[139][141] - OP0201, as a drug-device combination product, faces stricter regulatory scrutiny and technical challenges to ensure reliable drug delivery[145] - Discovery of serious adverse events or unacceptable side effects during product development may necessitate abandoning or limiting product development[151] Risks Related to Our Financial Position and Need for Additional Capital - The company has concluded that its cash is insufficient to support operations for the next 12 months, raising substantial doubt about its ability to continue as a going concern[153][317][407][414] - The company requires substantial additional capital to advance clinical development, manufacturing, regulatory approval, and commercialization of products, as well as to fund other R&D activities[155][157][319] - Raising additional capital may result in dilution for existing shareholders or require the company to relinquish rights to technologies or product candidates[159][319] - Future stock sales by existing shareholders could lead to a decrease in the company's stock price[161] Risks Related to Regulatory Approval of Our Product Candidates and Other Legal Compliance Matters - The regulatory approval process for product candidates in the U.S. and internationally is expensive, time-consuming, and uncertain, potentially leading to delayed approval, narrow scope, or post-market restrictions[163][164][166] - Approved products will be subject to extensive post-market regulatory requirements, and non-compliance or discovery of unexpected issues could lead to product restrictions or withdrawal from the market[168][170] - The company's business operations will be subject to applicable anti-kickback, fraud and abuse, and other broadly applicable healthcare laws, including the Federal Anti-Kickback Statute, False Claims Act, HIPAA, and the Physician Payments Sunshine Act[183][185] - Rapidly evolving global data protection regulations, such as GDPR and CCPA, may increase compliance costs and potential liabilities[187][196] - Information technology systems may suffer security breaches, interruptions, or incidents, leading to data loss, disruption of development programs, and adverse effects on reputation, business, and financial condition[192][193] Risks Related to the Commercialization of Our Product Candidates - Even if product candidates receive marketing approval, they may not achieve sufficient market acceptance from physicians, patients, and third-party payors due to factors such as efficacy, safety, price, or convenience[198] - The company currently lacks a marketing and sales team, and establishing effective marketing and sales capabilities or partnering with third parties is expensive and time-consuming[202] - The company faces intense competition, and competitors may develop safer, more effective, less side-effect-prone, or cheaper products[203][205][206] - Insurance coverage and reimbursement status for newly approved products are uncertain, and failure to obtain or maintain adequate coverage and reimbursement could limit product commercialization and revenue generation[210][211][213] - Product liability lawsuits could result in substantial liabilities for the company and limit the commercialization of any developed products[215] - Natural disasters, public health epidemics (such as COVID-19), and other events beyond the company's control could adversely affect the business[216] Risks Related to Our Dependence on Third Parties - The company may rely on collaborations with pharmaceutical and biotechnology companies for future development or commercialization of product candidates, and failure to enter into or maintain these collaborations could adversely affect the business[217][219] - The company relies on third parties for manufacturing product candidates for preclinical and clinical trials, and for future commercial production, increasing the risk of not obtaining sufficient quantities of product candidates at acceptable costs and quality[223][226] - Certain active pharmaceutical ingredient (API) and product candidate manufacturers are single-source suppliers, and any supply disruption could adversely affect operations[223][225] - The company relies on contract research organizations (CROs) and other third parties for preclinical and clinical testing and other R&D activities, the outcomes of which are partly beyond the company's control[233][235] Risks Related to Our Intellectual Property - The company's success largely depends on its ability to obtain and maintain intellectual property protection for its technology and products, and to operate without infringing on the proprietary rights of others[236] - The patent application process is expensive, time-consuming, and uncertain, potentially failing to secure meaningful protection or being circumvented by competitors[238][243] - Failure to comply with various procedural, document submission, and fee payment requirements of government patent agencies could lead to reduced or lost patent protection[245] - Failure to comply with obligations in license agreements could result in the company losing license rights critical to its business[246][247] - The company may become involved in litigation to protect or enforce patents or other intellectual property, which can be costly, time-consuming, and unsuccessful[249][251][252] - If the company cannot protect the confidentiality of its trade secrets, its business and competitive position will be harmed[253] Risks Related to Our Employee Matters, Managing Growth and Macroeconomic Conditions - The company's future success depends on its ability to retain executives and key employees and to attract, retain, and motivate qualified personnel[255][256] - The company expects to expand its R&D functions and corporate operations, potentially encountering difficulties in managing growth, which could disrupt operations[257] - The company may face claims that its employees or directors improperly used or disclosed trade secrets of their former employers[258] - Adverse global economic conditions, such as the COVID-19 pandemic, could negatively impact the company's business, financial condition, or operating results[216][259] Risks Related to Our Common Stock - The company's stock price is expected to be volatile and may be influenced by various factors including regulatory approvals, clinical trial results, competition, key agreements, litigation, and macroeconomic conditions[262] - The company currently does not meet Nasdaq's continued listing requirements, and if its stock price remains below $1.00 or other requirements are not met, common stock may be delisted, affecting market price and liquidity, and reducing the ability to raise additional capital[265][266][268] - If securities analysts do not publish research or reports about the company's business, or publish negative evaluations, the common stock price may decline[270] - The company's executive officers, directors, and principal shareholders (if they choose to act in concert) will be able to control all matters submitted to shareholders for approval, potentially delaying or preventing a change of control[271] - As a public company, the company will incur costs and administrative demands due to compliance with laws and regulations[272] - If the company fails to establish and maintain appropriate and effective internal controls over financial reporting, its operating results and ability to conduct business operations may be harmed[273][275] - Provisions in the company's charter documents and Delaware law may make it more difficult to acquire the company and could prevent attempts by shareholders to replace or remove current management[277][278] - The company does not expect to pay any cash dividends in the foreseeable future, and capital appreciation of common stock will be the sole source of gain for shareholders[279] Unresolved Staff Comments This item is not applicable - Not applicable[281] Properties Novus leases approximately 5,197 square feet of office space in Irvine, California, for its executive offices, with the lease agreement expiring in September 2021 - The company's executive offices are located in Irvine, California, leasing approximately 5,197 square feet[282] - The operating lease agreement for this office space expires in September 2021[282] Legal Proceedings Information regarding legal proceedings is incorporated by reference to Note 5, "Commitments and Contingencies," in the consolidated financial statements - Legal proceedings information is available in Note 5, "Commitments and Contingencies," of the consolidated financial statements[283] Mine Safety Disclosures This item has no relevant disclosures - No relevant disclosures[284] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Novus's common stock trades on the Nasdaq Capital Market under the symbol "NVUS," with approximately 11 registered shareholders as of March 9, 2020, and no cash dividends declared or paid, nor any intention to do so in the foreseeable future - The company's common stock trades on the Nasdaq Capital Market under the symbol "NVUS"[2][288] - As of March 9, 2020, the company had approximately 11 registered shareholders[289] - The company has never declared or paid cash dividends and does not intend to do so in the foreseeable future[290] Selected Financial Data As a smaller reporting company, Novus is not required to provide the disclosures mandated by this item - As a smaller reporting company, the company is not required to provide this disclosure[291] Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses Novus Therapeutics' business overview, product platforms, recent financial developments, key accounting policies, and financial performance and cash flows for 2019 and 2018, highlighting ongoing losses, the need for additional funding, and uncertainty regarding its ability to continue as a going concern ABOUT NOVUS THERAPEUTICS - Novus Therapeutics, Inc. is a specialty pharmaceutical company focused on developing products for ear, nose, and throat diseases, possessing both surfactant and foam platform technologies[294] - The lead program, OP0201, is a surfactant nasal aerosol designed as a potential first-in-class treatment for otitis media (OM), currently undergoing an exploratory Phase IIa clinical trial[294][295] - Foam platform products OP0101 and OP0102 were previously used for acute otitis externa (AOE) treatment, but development of this platform was suspended in May 2017 to concentrate resources on the surfactant program[298] RECENT DEVELOPMENTS 2018 Equity Distribution Agreement Sales (as of December 31, 2019) | Metric | Amount/Quantity | | :--- | :--- | | Total shares available for sale | $9.8 million | | Number of shares sold | 25,218 shares | | Total proceeds from shares sold | Approximately $0.11 million | | Remaining shares available for sale | $8.7 million | [299][321] - On April 30, 2019, the company sold 3,449,112 shares of common stock through a registered direct offering, generating approximately $10.7 million in gross proceeds, and simultaneously issued Series A and Series B warrants to investors, as well as warrants to the placement agent[300][322] CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES - The company's financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP), requiring management to make estimates and judgments regarding reported amounts of assets, liabilities, and expenses, as well as disclosures of contingent assets and liabilities[301] - Key estimates and judgments include goodwill impairment, research and development expenses (particularly clinical trial costs), and stock-based compensation[301] - Goodwill is assessed for impairment annually, or earlier if impairment indicators exist, using methods such as comparing the estimated fair value of a reporting unit to its carrying value or performing a qualitative assessment[302][304] - R&D expenses are recognized as incurred, and accrued expenses for clinical trials are based on estimates of services received and work performed[305][306] - Stock-based compensation is recognized based on the estimated fair value at the grant date, with stock options valued using the Black-Scholes option pricing model, and restricted stock units (RSUs) and performance restricted stock units (PRSUs) based on the market price of common stock at the grant date[307][308][310] RESULTS OF OPERATIONS Comparison of Operating Results for 2019 and 2018 (in USD thousands) | Metric | 2019 | 2018 | Difference | Percentage Difference | | :--- | :--- | :--- | :--- | :--- | | Research and Development Expenses | 8,128 | 6,817 | 1,311 | 19% | | General and Administrative Expenses | 6,056 | 7,243 | (1,187) | -16% | | Goodwill Impairment | 1,867 | - | 1,867 | 100% | | Total Operating Expenses | 16,051 | 14,060 | 1,991 | 14% | | Operating Loss | (16,051) | (14,060) | (1,991) | 14% | | Other Income (Expense), Net | 40 | (5) | 45 | -900% | | Net Loss and Comprehensive Loss | (16,011) | (14,065) | (1,946) | 14% | [311] - R&D expenses increased by $1.3 million in 2019, primarily due to a $1.8 million increase in clinical development costs and a $0.131 million increase in consulting costs from advancing the OP0201 program, and a $0.094 million increase in stock-based compensation, partially offset by a $0.474 million decrease in formulation and device development costs[312] - General and administrative expenses decreased by $1.2 million in 2019, mainly due to a $0.59 million reduction in administrative costs related to operating as a public company, and decreases of $0.163 million and $0.33 million in personnel costs and stock-based compensation, respectively[313] - A goodwill impairment of $1.9 million was recognized in 2019, with no impairment recorded in 2018[315][460] LIQUIDITY AND CAPITAL RESOURCES Liquidity Metrics (in USD thousands) | Metric | December 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and Cash Equivalents | 8,791 | 12,972 | | Accumulated Deficit | (57,582) | (41,571) | [317][392] - The company's cash and cash equivalents are insufficient to support operations for the next 12 months, raising substantial doubt about its ability to continue as a going concern[317][329][414] - The company will continue to require additional financing to advance the clinical development, manufacturing, regulatory approval, and commercialization of its surfactant drug products, as well as to fund future operations[319] - The company received a Nasdaq notification of non-compliance with the minimum bid price requirement ($1.00 per share) and was granted an extension until August 3, 2020, to regain compliance; failure to do so may result in delisting risk[324][325][326][410][411][412] Summary of Cash Flow Activities for 2019 and 2018 (in USD thousands) | Metric | Year Ended December 31, 2019 | Year Ended December 31, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | (13,857) | (11,893) | | Net cash provided by financing activities | 9,676 | 7,562 | | Net decrease in cash and cash equivalents | (4,181) | (4,331) | | Cash and cash equivalents at end of year | 8,791 | 12,972 | [330][400] - Net cash used in operating activities in 2019 primarily included a $16 million net loss, partially offset by non-cash items (depreciation and amortization, goodwill impairment, stock-based compensation) and a net decrease in cash from changes in operating assets and liabilities[331][400] - Net cash provided by financing activities in 2019 primarily resulted from the 2019 equity offering ($9.6 million) and common stock sales under the 2018 prospectus ($0.107 million)[333][400] Contractual Obligations - The company's contractual obligations primarily stem from property leases for office space[335] Contractual Obligations as of December 31, 2019 (in USD thousands) | Period | Amount | | :--- | :--- | | 2020 | 188 | | 2021 | 146 | | Total minimum lease payments | 334 | | Less: Estimated interest | (10) | | Present value of lease liabilities | 324 | | Less: Current portion | (180) | | Non-current operating lease liabilities | 144 | [337][467] - Potential payments for contract research organization (CRO) services are not included in the contractual obligations table because their timing and actual amounts may vary based on service receipt or changes in agreement terms, and these agreements are cancellable by the company with written notice[335] Off-Balance Sheet Arrangements - The company has no off-balance sheet arrangements as defined by SEC rules and regulations[338] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Novus is not required to provide the disclosures mandated by this item - As a smaller reporting company, the company is not required to provide this disclosure[339] Financial Statements and Supplementary Data The reports of independent registered public accounting firms, along with the company's consolidated financial statements and notes, are incorporated into this annual report, commencing on page F-1 - The reports of independent registered public accounting firms, along with the company's consolidated financial statements and notes, are incorporated into this annual report, commencing on page F-1[340] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable - Not applicable[341] Controls and Procedures As of December 31, 2019, the company's management, including the CEO and CFO, assessed the effectiveness of disclosure controls and procedures and concluded they were effective, also evaluating and concluding on the effectiveness of internal controls over financial reporting based on the COSO framework, with no significant changes occurring in the fourth quarter of 2019 - As of December 31, 2019, the company's management assessed and determined that disclosure controls and procedures were effective[341] - Management evaluated the effectiveness of internal controls over financial reporting based on the COSO framework and concluded that its internal controls over financial reporting were effective as of December 31, 2019[344][345] - No significant changes in internal controls over financial reporting occurred during the quarter ended December 31, 2019[346] Other Information This item has no other information to disclose - No other information to disclose[347] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2020 Annual Meeting of Stockholders Proxy Statement, and the company has adopted a written code of business conduct and ethics applicable to all directors, officers, and employees - Relevant information is incorporated by reference from the company's 2020 Annual Meeting of Stockholders Proxy Statement[350] - The company has adopted a written code of business conduct and ethics, applicable to directors, executive officers, and employees, and available on the company's website[351] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2020 Annual Meeting of Stockholders Proxy Statement - Relevant information is incorporated by reference from the company's 2020 Annual Meeting of Stockholders Proxy Statement[352] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management and related stockholder matters is incorporated by reference from the company's 2020 Annual Meeting of Stockholders Proxy Statement - Relevant information is incorporated by reference from the company's 2020 Annual Meeting of Stockholders Proxy Statement[353] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2020 Annual Meeting of Stockholders Proxy Statement - Relevant information is incorporated by reference from the company's 2020 Annual Meeting of Stockholders Proxy Statement[354] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2020 Annual Meeting of Stockholders Proxy Statement - Relevant information is incorporated by reference from the company's 2020 Annual Meeting of Stockholders Proxy Statement[355] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules (omitted as not applicable or presented elsewhere), and a detailed exhibit index filed as part of the annual report on Form 10-K - This annual report includes the reports of independent registered public accounting firms, consolidated financial statements, and notes thereto[358] - Financial statement schedules are omitted because they are not applicable or the required information is presented in the financial statements and notes[358] - The exhibit index provides a detailed list of various agreements, certificates, and certifications[358][359][360][361][362][363][364] Form 10-K Summary This item has no summary - No summary[364] Signatures This report was signed on March 16, 2020, by the Chief Executive Officer, Senior Vice President of Finance and Administration, and members of the Board of Directors - This report was signed by Gregory J. Flesher (Chief Executive Officer and Director), Jon S. Kuwahara (Senior Vice President, Finance and Administration), and members of the Board of Directors including Keith A. Katkin (Chairman of the Board)[368][370] - The signing date was March 16, 2020[367][369] Index to Consolidated Financial Statements This index lists the components of the consolidated financial statements, including the reports of independent registered public accounting firms, consolidated balance sheets, consolidated statements of operations and comprehensive loss, consolidated statements of stockholders' equity, consolidated statements of cash flows, and notes to consolidated financial statements - The index lists the components of the consolidated financial statements, including the reports of independent registered public accounting firms, consolidated balance sheets, consolidated statements of operations and comprehensive loss, consolidated statements of stockholders' equity, consolidated statements of cash flows, and notes to consolidated financial statements[373] Reports of Independent Registered Public Accounting Firms KMJ Corbin & Company LLP audited the company's consolidated financial statements as of December 31, 2019, issuing a fair presentation opinion in accordance with GAAP, but noting substantial doubt about the company's ability to continue as a going concern; Ernst & Young LLP audited the consolidated financial statements as of December 31, 2018, with a similar opinion and going concern emphasis - KMJ Corbin & Company LLP audited the company's consolidated financial statements as of December 31, 2019, deeming them fairly presented in all material respects in accordance with U.S. GAAP[376] - The auditors noted that the company has incurred recurring losses and negative cash flows from operations since inception, with an accumulated deficit of approximately $57.6 million as of December 31, 2019, raising substantial doubt about the company's ability to continue as a going concern[377] - Ernst & Young LLP audited the company's consolidated financial statements as of December 31, 2018, issuing a similar opinion and also highlighting substantial doubt about the company's ability to continue as a going concern[384][385] Consolidated Balance Sheets The consolidated balance sheets show a decrease in the company's total assets and total stockholders' equity, while the accumulated deficit increased as of December 31, 2019 Summary of Consolidated Balance Sheets (in USD thousands) | Metric | December 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | 10,931 | 17,026 | | Total Liabilities | 1,466 | 2,534 | | Total Stockholders' Equity | 9,465 | 14,492 | | Accumulated Deficit | (57,582) | (41,571) | | Cash and Cash Equivalents | 8,791 | 12,972 | [392] Consolidated Statements of Operations and Comprehensive Loss The consolidated statements of operations and comprehensive loss indicate an increased net loss for the year ended December 31, 2019, primarily due to higher research and development expenses and goodwill impairment Summary of Consolidated Statements of Operations and Comprehensive Loss (in USD thousands, except per share data) | Metric | Year Ended December 31, 2019 | Year Ended December 31, 2018 | | :--- | :--- | :--- | | Research and Development Expenses | 8,128 | 6,817 | | General and Administrative Expenses | 6,056 | 7,243 | | Goodwill Impairment | 1,867 | — | | Total Operating Expenses | 16,051 | 14,060 | | Operating Loss | (16,051) | (14,060) | | Other Income (Expense), Net | 40 | (5) | | Net Loss and Comprehensive Loss | (16,011) | (14,065) | | Net Loss Per Share, Basic and Diluted | (1.36) | (1.56) | | Weighted-Average Common Shares Outstanding, Basic and Diluted | 11,799,468 | 9,005,352 | [394] Consolidated Statements of Stockholders' Equity The consolidated statements of stockholders' equity reflect changes in equity for 2019 and 2018, primarily showing increases in common stock and additional paid-in capital from equity issuances, offset by net losses, leading to an expanded accumulated deficit Summary of Consolidated Statements of Stockholders' Equity (in USD thousands, except share data) | Metric | December 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Common Shares Outstanding | 12,967,338 | 9,422,143 | | Common Stock Amount | 13 | 9 | | Additional Paid-in Capital | 67,034 | 56,054 | | Accumulated Deficit | (57,582) | (41,571) | | Total Stockholders' Equity | 9,465 | 14,492 | [397] - Major changes in stockholders' equity in 2019 included common stock issuances through at-the-market offerings and registered direct offerings, as well as stock-based compensation, but these were offset by net losses[397] Consolidated Statements of Cash Flows The consolidated statements of cash flows illustrate cash flow activities for 2019 and 2018, characterized by significant cash usage in operating activities partially offset by financing activities Summary of Consolidated Statements of Cash Flows (in USD thousands) | Metric | Year Ended December 31, 2019 | Year Ended December 31, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | (13,857) | (11,893) | | Net cash provided by financing activities | 9,676 | 7,562 | | Net decrease in cash and cash equivalents | (4,181) | (4,331) | | Cash and cash equivalents at end of year | 8,791 | 12,972 | [400] - Net cash used in operating activities in 2019 primarily stemmed from a $16 million net loss, partially offset by non-cash items such as depreciation and amortization, goodwill impairment, and stock-based compensation, as well as a net decrease in cash from changes in operating assets and liabilities[331][400] - Net cash provided by financing activities in 2019 primarily resulted from the 2019 equity offering ($9.6 million) and common stock sales under the 2018 prospectus ($0.107 million)[333][400] Notes to Consolidated Financial Statements These notes provide detailed explanations of the company's business, significant accounting policies, financial condition, and recent events, including going concern uncertainties, key accounting estimates, commitments, contingencies, and subsequent events like warrant exercises and preferred stock issuance Note 1. Description of Business - Novus Therapeutics, Inc. is a specialty pharmaceutical company focused on developing products for ear, nose, and throat diseases[403] - The company was formed in 2017 through a reverse merger with Tokai Pharmaceuticals, Inc[404] Note 2. Summary of Significant Accounting Policies - The consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP)[405] - The company has incurred recurring losses and negative cash flows from operations since inception, with cash and cash equivalents of $8.8 million and an accumulated deficit of $57.6 million as of December 31, 2019, raising substantial doubt about its ability to continue as a going concern[407][414] - The company does not meet Nasdaq's minimum bid price requirement and has been granted an extension until August 3, 2020, to regain compliance[410][411] - Key accounting estimates include stock-based compensation, accrued liabilities, operating lease liabilities, and goodwill carrying value[415] - A goodwill impairment of $1.9 million was recognized in 2019[430] - Due to the company's net loss position, basic and diluted net loss per share are the same, with 8,770,947 common stock equivalents having an anti-dilutive effect in 2019[437][438] - The company maintains a full valuation allowance against its deferred tax assets due to the unlikelihood of realizing future tax benefits[447] - On January 1, 2019, the company adopted ASU 2016-02, "Leases (Topic 842)," recognizing $0.489 million in operating lease right-of-use assets and $0.491 million in corresponding operating lease liabilities[454][455] Note 3. Prepaid Expenses, Other Assets, Accrued Expenses and Other Liabilities Prepaid Expenses and Other Current Assets (in USD thousands) | Metric | December 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Prepaid insurance | 734 | 413 | | Prepaid clinical expenses | 102 | 208 | | Other prepaid expenses | 45 | 53 | | Insurance receivable | 245 | 594 | | Other current assets | 54 | 36 | | Total | 1,180 | 1,304 | [457] Accrued Expenses and Other Liabilities (in USD thousands) | Metric | December 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Accrued compensation and related expenses | 40 | 742 | | Accrued clinical expenses | 437 | 735 | | Accrued professional services | 130 | 194 | | Accrued vacation pay | 199 | 160 | | Other accrued expenses | 7 | 14 | | Total | 813 | 1,845 | [459] Note 4. Goodwill - As of December 31, 2018, goodwill had a carrying value of $1.9 million, but due to fair value falling below carrying value, the company recognized a $1.9 million goodwill impairment as of December 31, 2019, reducing the net carrying value to zero[460] Note 5. Commitments and Contingencies - The company leases office space in Irvine, California, with the lease term extending through September 30, 2021[462][463] Operating Lease Obligations as of December 31, 2019 (in USD thousands) | Period | Amount | | :--- | :--- | | 2020 | 188 | | 2021 | 146 | | Total minimum lease payments | 334 | | Less: Estimated interest | (10) | | Present value of lease liabilities | 324 | [467] - The company received approximately $0.537 million in R&D grants from the Israel Innovation Authority between 2012 and 2015, repayable through royalties on product sales, but no related liability has been recorded due to the absence of sales[469] - Under the license agreement with Otodyne, Inc., the company is obligated to pay up to $42.1 million in development and regulatory milestone payments, up to $36.0 million in sales milestone payments, and tiered royalties[471] - The company is involved in multiple legal proceedings, including post-IPO securities litigation, and is actively defending itself, but cannot predict the ultimate outcome or estimate potential losses[475][477] Note 6. Stock-Based Compensation - The company has a 2014 Equity Incentive Plan and a 2007 Equity Incentive Plan, with the 2014 plan being the primary one[480][482] - As of December 31, 2019, a total of 337,955 stock awards were available for grant under the 2014 plan[484] Summary of Stock Option and PRSU Activity as of December 31, 2019 | Metric | Number of Shares Issuable for Stock Options and PRSUs | Weighted-Average Exercise Price | | :--- | :--- | :--- | | Unexercised as of December 31, 2019 | 1,700,267 | $7.64 | | Vested and expected to vest as of December 31, 2019 | 1,645,267 | $7.64 | | Exercisable options as of December 31, 2019 | 882,576 | $12.49 | [485] - As of December 31, 2019, total unrecognized stock-based compensation expense related to unvested equity awards was $1.3 million, expected to be recognized over a weighted-average period of approximately 2.2 years[487] Stock-Based Compensation Expense for 2019 and 2018 (in USD thousands) | Category | 2019 | 2018 | | :--- | :--- | :--- | | Research and Development Expenses | 343 | 249 | | General and Administrative Expenses | 965 | 1,294 | | Total | 1,308 | 1,543 | [489] Note 7. Income Taxes Loss Before Income Taxes for 2019 and 2018 (in USD thousands) | Region | 2019 | 2018 | | :--- | :--- | :--- | | United States | (16,174) | (14,177) | | Non-U.S. | 163 | 112 | | Total | (16,011) | (14,065) | [491] - The company's income tax expense (benefit) was zero for both 2019 and 2018[494] - The company maintains a full valuation allowance against its deferred tax assets due to the unlikelihood of realizing future tax benefits, with a net increase in the valuation allowance of $3 million in 2019[497][500] Major Components of Deferred Tax Assets as of December 31, 2019 (in USD thousands) | Metric | Amount | | :--- | :--- | | Net operating loss carryforwards | 9,947 | | Research and development tax credits | 506 | | Accruals and reserves | 43 | | Stock-based compensation | 391 | | Depreciation and amortization | 116 | | Lease liabilities | 68 | | Total deferred tax assets | 11,071 | [500] - As of December 31, 2019, the company had federal net operating loss carryforwards of approximately $38.6 million and federal R&D tax credit carryforwards of approximately $0.764 million[503][504] Note 8. Stockholders' Equity - As of December 31, 2019, the company sold 25,218 shares of common stock under the 2018 equity distribution agreement, generating approximately $0.11 million in gross proceeds, with $8.7 million remaining available for sale[509] - On April 30, 2019, the company sold 3,449,112 shares of common stock through a registered direct offering, generating approximately $10.7 million in gross proceeds, and issued Series A, Series B, and placement agent warrants[510] - As of December 31, 2019, a total of 7,070,680 warrants were exercisable[514][515] - The embedded put options within the warrants were evaluated under ASC 815 guidance and met the scope exception requirements, thus not accounted for as separate derivative instruments[513] Note 9. Subsequent Events - In January 2020, the company entered into agreements with warrant holders to cash exercise 6,898,224 Series A and Series B warrants at an exercise price of $0.715 per share, plus an additional $0.125 per share for the issuance of private placement warrants, generating approximately $5.8 million in gross proceeds[516] - The net proceeds from the exercise will be used to fund the ongoing Phase IIa clinical trial for acute otitis media, working capital, and other general corporate purposes[517] - In February 2020, the company entered into agreements with exchange shareholders to exchange 3,796,000 shares of common stock for 3,796 shares of newly designated Series X Convertible Preferred Stock[521] - Series X Preferred Stock is convertible into common stock at the holder's option, with each share of preferred stock convertible into 1,000 shares of common stock, subject to a 9.99% conversion limitation[522] - Following the exchange, the company had 16,069,562 shares of common stock and 3,796 shares of Series X Preferred Stock (convertible into 3,796,000 shares of common stock) outstanding[523]