NVUS 2018 Annual Report

NOVUS THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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) 8QOHVV RWKHUZLVH LQGLFDWHG UHIHUHQFHV WR WKH WHUPV WKH ³FRPELQHG FRPSDQ\´ ³1RYXV´ WKH ³&RPSDQ\´ UHIHU WR 2WLF 3KDUPD /WG SULRU WR WKH FRQVXPPDWLRQ RI WKH 5HYHUVH 0HUJHU DQG 1RYXV 7KHUDSHXWLFV ,QF upon WKH FRQVXPPDWLRQ RI WKH 5HYHUVH 0HUJHU GHVFULEHG KHUHLQ 7KH WHUP ³7RNDL´ UHIHUV WR 7RNDL 3KDUPDFHXWLFDOV ,QF DQG its subsidiaries prior to the Reverse Merger. Reverse Merger On December 21, 2016, Tokai, a Delaware corporation, Otic, and the stockholders of Otic Pharma, Ltd., a private OLPLWHG FRPSDQ\ RUJDQL]HG XQGHU WKH ODZV RI WKH 6WDWH RI ,VUDHO ³2WLF´ HDFK D ³6HOOHU´ DQG FROOHFWLYHO\ WKH ³6HOOHUV´ HQWHUHG LQWR D 6KDUH 3XUFKDVH $JUHHPHQW WKH ³6KDUH 3XUFKDVH $JUHHPHQW´ SXUVXDQW WR ZKLFK DP ong other things, each Seller agreed to sell to Tokai, and Tokai agreed to purchase from each Seller, all of the common and preferred shares of Otic ³2WLF 6KDUHV´ RZQHG E\ VXFK 6HOOHU LQ H[FKDQJH IRU WKH LVVXDQFH RI D FHUWDLQ QXPEHU RI VKDUHV RI FRPPRQ V tock of Tokai, DV GHWHUPLQHG SXUVXDQW WR WKH WHUPV RI WKH 6KDUH 3XUFKDVH $JUHHPHQW WKH ³5HYHUVH 0HUJHU´ 7KH SDUWLHV DPHQGHG DQG restated the Share Purchase Agreement on March 2, 2017. On May 9, 2017, Tokai, Otic, and the Sellers closed the transaction contemplated by the Share Purchase Agreement, and subsequently effected a reverse stock-split of common stock at a ratio of one-for-nine (see Reverse Stock-Split below). On a post-split basis, Tokai issued to the Sellers an aggregate of 4,027,693 shares of 7RNDL¶V FRPPRQ VWRFN LQ H[FKDQJH IRU 840,115 Otic Shares. Following the completion of the Reverse Merger, the business being conducted by Tokai became primarily the business conducted by Otic. In connection with the Reverse Merger, the name of the surviving corporation was FKDQJHG WR ³1RYXV 7KHUDSHXWLFV ,QF ´ 1RYXV HQWHUHG LQWR D VWRFN SXUFKDVH DJUHHPHQW WKH ³6WRFN 3XUFKDVH $JUHHPHQW´ ZLWK FHUWDLQ SXUFKDVHUV QDPHG WKHUHLQ WKH ³3XUFKDVHUV´ SXUVXDQW WR ZKLFK WKH Purchasers agreed to purchase approximately $4.0 PLOOLRQ RI WKH &RPSDQ\¶V FRPPRQ VWRFN WKURXJK WKH SXUFKDVH RI VKDUHV RI WKH &RPSDQ\¶V FRPPRQ VWRFN DW D SULFH RI SHU VKDUH WKH ³3ULYDWH 3ODFHPHQW´ 7KH 3ULYDWH 3ODFHPHQW FORVHG RQ 0D\ 10, 2017. After giving effect to the issuance of the shares in the Private Placement, the stockholders RI 2WLF RZQHG DSSUR[LPDWHO\ RI WKH &RPSDQ\¶V common stock. Note 2. Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. ³*$$3´ 1RYXV D 'HODZDUH FRUSRUDWLRQ RZQV RI WKH LVVXHG DQG RXWVWDQGLQJ FRPPRQ VWRFN RU RWKHU RZQHUVKLS interest in 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 WKH &RPSDQ\¶V 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. 7KH DFWLYLWLHV RI WKH &RPSDQ\¶V foreign subsidiary are not significant to the consolidated financial statements. All significant intercompany accounts and transactions among the entities have been eliminated in consolidation. 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 $14.1 million and used $11.9 million of cash in operating activities for the year ended December 31, 2018. As of December 31, 2018, the Company had cash of $13.0 million, working capital of $11.7 million and an accumulated deficit of $41.6 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 Private Placement On January

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