nvus-10q_20200630.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 June 30, 2020 

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 August 11, 2020, there were 19,384,562 shares of the Registrant’s common stock outstanding.

 

 

 


Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995, which statements 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 words such as “believes,” “anticipates,” “plans,” “expects,” “estimates,” “intends,” “predicts,” “projects,” “targets,” “could,” “may,” and similar expressions, constitute forward-looking statements, although not all forward-looking statements include such identifying words. Forward-looking statements include, but are not limited to statements regarding:

 

the impact of the COVID-19 pandemic on our operations, including our ability to access capital markets;

 

the anticipated expenses associated with a workforce reduction that we effected in June 2020;

 

our board of directors’ review of strategic alternatives;

 

the Company’s ability to regain compliance with the Nasdaq listing criteria in a timely manner;

 

expectations regarding the timing for the commencement and completion of product development or clinical trials for the Company’s product candidates;

 

the timing, costs, conduct and outcome of preclinical studies and clinical trials;

 

meeting future clinical and regulatory milestones, such as New Drug Application (“NDA”) submissions;

 

the risk that clinical trials of the Company’s product candidates may not be successful in establishing safety and tolerability or efficacy;

 

the Company’s plans and timing with respect to seeking regulatory approvals and uncertainties regarding the regulatory process;

 

the anticipated treatment of data by the U.S. Food and Drug Administration (“FDA”), the European Medicines Agency (“EMA”) or other regulatory authorities of the Company’s product candidates;

 

the rate and degree of market acceptance and clinical utility of the Company’s product candidates;

 

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 product candidates with significant commercial potential;

 

the availability of funds and resources to pursue the Company’s research and development projects, including preclinical studies and clinical trials of its product candidates, and manufacturing activities.

 

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

 

the Company’s ability to continue as a going concern;

 

developments relating to the Company’s competitors and industry;

 

the impact of government laws and regulations; and

 

the duration over which the Company’s cash balances will fund its operations.

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 on a timely basis, or at all; 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 FDA or equivalent foreign regulatory agencies and, if the Company is able to obtain such approval for an investigational product, whether it will be successfully distributed and marketed; and the severity, magnitude and duration of the COVID-19 pandemic, including economic and other impacts of the pandemic and of and actions taken in response to it by governments, businesses, and individuals. 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 Part II, Item 1A, Risk Factors in this Quarterly Report on Form 10-Q.

2


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.

 

 

 

3


NOVUS THERAPEUTICS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2020

Table of Contents

 

 

 

 

Page

 

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

5

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and December 31, 2019

 

5

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)

 

 

6

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)

 

7

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (Unaudited)

 

8

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

9

 

 

 

 

Item 2.

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

 

21

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

29

 

 

 

 

Item 4.

Controls and Procedures

 

29

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

31

 

 

 

 

Item 1A.

Risk Factors

 

31

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

59

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

59

 

 

 

 

Item 4.

Mine Safety Disclosures

 

59

 

 

 

 

Item 5.

Other Information

 

59

 

 

 

 

Item 6.

Exhibits

 

59

 

 

 

 

Exhibit Index

 

60

 

 

 

 

Signatures

 

61

 

4


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

NOVUS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

June 30,

2020

 

 

December 31,

2019

 

 

 

(Unaudited)

 

 

(Note 2)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

8,764

 

 

$

8,791

 

Prepaid expenses and other current assets

 

 

997

 

 

 

1,180

 

Total current assets

 

 

9,761

 

 

 

9,971

 

Property and equipment, net

 

 

1

 

 

 

5

 

Operating lease asset, net

 

 

228

 

 

 

316

 

Other assets

 

 

511

 

 

 

639

 

Total assets

 

$

10,501

 

 

$

10,931

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

150

 

 

$

329

 

Current operating lease liability

 

 

188

 

 

 

180

 

Accrued severance

 

 

490

 

 

 

 

Accrued expenses and other liabilities

 

 

269

 

 

 

813

 

Total current liabilities

 

 

1,097

 

 

 

1,322

 

Non-current operating lease liability

 

 

48

 

 

 

144

 

Total liabilities

 

 

1,145

 

 

 

1,466

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized at June 30, 2020

   and December 31, 2019; 511 and 0 shares issued and outstanding at

   June 30, 2020 and December 31, 2019, respectively

 

 

 

 

 

 

Common stock, $0.001 par value, 200,000,000 shares authorized at June 30, 2020

   and December 31, 2019; 19,379,562 and 12,967,338 shares issued and

   outstanding at June 30, 2020 and December 31, 2019, respectively

 

 

19

 

 

 

13

 

Additional paid-in capital

 

 

77,682

 

 

 

67,034

 

Accumulated deficit

 

 

(68,345

)

 

 

(57,582

)

Total stockholders’ equity

 

 

9,356

 

 

 

9,465

 

Total liabilities and stockholders’ equity

 

$

10,501

 

 

$

10,931

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


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 June 30,

 

 

For the Six Months

Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

832

 

 

$

2,297

 

 

$

2,480

 

 

$

5,286

 

General and administrative

 

 

1,269

 

 

 

1,792

 

 

 

2,999

 

 

 

3,678

 

Restructuring expense

 

 

490

 

 

 

 

 

 

490

 

 

 

 

Total operating expenses

 

 

2,591

 

 

 

4,089

 

 

 

5,969

 

 

 

8,964

 

Loss from operations

 

 

(2,591

)

 

 

(4,089

)

 

 

(5,969

)

 

 

(8,964

)

Other income (expense), net

 

 

5

 

 

 

(4

)

 

 

35

 

 

 

(10

)

Warrant inducement expense

 

 

 

 

 

 

 

 

(4,829

)

 

 

 

Net loss and comprehensive loss

 

$

(2,586

)

 

$

(4,093

)

 

$

(10,763

)

 

$

(8,974

)

Net loss per share, basic and diluted

 

$

(0.15

)

 

$

(0.35

)

 

$

(0.63

)

 

$

(0.85

)

Weighted-average common shares outstanding, basic and diluted

 

 

16,981,540

 

 

 

11,751,110

 

 

 

17,124,331

 

 

 

10,595,511

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


NOVUS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

Balance as of December 31, 2019

 

 

 

 

$

 

 

 

12,967,338

 

 

$

13

 

 

$

67,034

 

 

$

(57,582

)

 

$

9,465

 

Issuance of common stock in connection with

   exercise of warrants, net of issuance costs

 

 

 

 

 

 

 

 

6,898,224

 

 

 

7

 

 

 

5,184

 

 

 

 

 

 

5,191

 

Issuance of common stock in connection with

  conversion of preferred stock

 

 

(3,285

)

 

 

 

 

 

3,285,000

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

Issuance of common stock in connection with

   vesting of restricted stock units

 

 

 

 

 

 

 

 

25,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancellation of common stock in connection

   with exchange for preferred stock

 

 

3,796

 

 

 

 

 

 

(3,796,000

)

 

 

(4

)

 

 

4

 

 

 

 

 

 

 

Warrant inducement expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,829

 

 

 

 

 

 

4,829

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

634

 

 

 

 

 

 

634

 

Net loss and other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,763

)

 

 

(10,763

)

Balance as of June 30, 2020

 

 

511

 

 

$

 

 

 

19,379,562

 

 

$

19

 

 

$

77,682

 

 

$

(68,345

)

 

$

9,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2020

 

 

3,796

 

 

$

 

 

 

16,069,562

 

 

$

16

 

 

$

77,488

 

 

$

(65,759

)

 

$

11,745

 

Issuance of common stock in connection with

  conversion of preferred stock

 

 

(3,285

)

 

 

 

 

 

3,285,000

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

Issuance of common stock in connection with

   vesting of restricted stock units

 

 

 

 

 

 

 

 

25,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

197

 

 

 

 

 

 

197

 

Net loss and other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,586

)

 

 

(2,586

)

Balance as of June 30, 2020

 

 

511

 

 

$

 

 

 

19,379,562

 

 

$

19

 

 

$

77,682

 

 

$

(68,345

)

 

$

9,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 exercise of options

 

 

 

 

 

 

 

 

78,450

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

838

 

 

 

 

 

 

838

 

Net loss and other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,974

)

 

 

(8,974

)

Balance as of June 30, 2019

 

 

 

 

$

 

 

 

12,974,923

 

 

$

13

 

 

$

66,564

 

 

$

(50,545

)

 

$

16,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2019

 

 

 

 

$

 

 

 

9,447,361

 

 

$

9

 

 

$

56,372

 

 

$

(46,452

)

 

$

9,929

 

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 exercise of options

 

 

 

 

 

 

 

 

78,450

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

627

 

 

 

 

 

 

627

 

Net loss and other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,093

)

 

 

(4,093

)

Balance as of June 30, 2019

 

 

 

 

$

 

 

 

12,974,923

 

 

$

13

 

 

$

66,564

 

 

$

(50,545

)

 

$

16,032

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

7


NOVUS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Six Months

Ended June 30,

 

 

 

2020

 

 

2019

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(10,763

)

 

$

(8,974

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4

 

 

 

4

 

Amortization of operating lease asset

 

 

88

 

 

 

86

 

Warrant inducement expense

 

 

4,829

 

 

 

 

Stock-based compensation

 

 

634

 

 

 

838

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

311

 

 

 

(60

)

Accounts payable and accrued expenses

 

 

(233

)

 

 

(759

)

Operating lease liability

 

 

(88

)

 

 

(80

)

Net cash used in operating activities

 

 

(5,218

)

 

 

(8,945

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuances of common stock, net

 

 

 

 

 

9,676

 

Proceeds from exercise of warrants, net

 

 

5,191

 

 

 

 

Net cash provided by financing activities

 

 

5,191

 

 

 

9,676

 

Net change in cash

 

 

(27

)

 

 

731

 

Cash at beginning of period

 

 

8,791

 

 

 

12,972

 

Cash at end of period

 

$

8,764

 

 

$

13,703

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

8


NOVUS THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Description of Business

Novus Therapeutics, Inc. is a specialty pharmaceutical company focused on developing products for patients with 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 United States (“GAAP”) and Article 8 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, 2019 included in the Annual Report on Form 10-K filed by the Company with the SEC on March 16, 2020. The results of operations and comprehensive loss for the three and six months ended June 30, 2020 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 activities of the Company’s foreign subsidiary are not significant to the condensed consolidated financial statements.

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 $2.6 million and $10.8 million for the three and six months ended June 30, 2020, respectively. As of June 30, 2020, the Company had cash of $8.8 million, working capital of $8.7 million and an accumulated deficit of $68.3 million. Due to continuing operational 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.    

9


Adequate additional funding may not be available to us on acceptable terms on a timely basis, or at all. During fiscal year 2019 and in the first six months of 2020, the Company has implemented, and will continue to implement, certain cost cutting measures to reduce its cash flow requirements, including a reduction in force, which was announced in June 2020. 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, 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 stated that the Company had 180 calendar days, or until February 4, 2020, to regain compliance with Nasdaq Listing Rule 5550(a)(2).  

On February 6, 2020, the Company received written notice that Nasdaq determined that it is eligible for an additional 180-day extension (the “Extension Letter”), or until August 3, 2020, to regain compliance with the minimum bid price requirement. The Extension Letter does not impact the Company’s listing on the Nasdaq Capital Market at this time. 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 August 3, 2020.

On April 21, 2020, the Company received an additional notice from Nasdaq (the “Tolling Notice”), which stated that, due to current market conditions, Nasdaq has determined to toll the compliance period for the minimum bid price requirement through June 30, 2020. As a result, the new date by which the Company has to regain compliance with the minimum bid price requirement is October 19, 2020.

The Company intends to monitor the closing bid price of its common stock and consider its available options to resolve its noncompliance with the minimum bid price requirement.

On May 12, 2020, the Company’s stockholders approved and adopted an amendment to the Company’s Restated Certificate of Incorporation to effect a reverse stock split of the Company’s common stock at a ratio ranging from 1 share-for-10 shares up to a ratio of 1 share-for-30 shares, which ratio will be selected by the Company’s Board of Directors and set forth in a public announcement. Management may effect the reverse stock split at any time prior to December 31, 2020. If the Company’s stock price does not meet or exceed $1.00 per share prior to the compliance deadline, management expects to effect the reverse stock split in order to regain compliance.

There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or that the Company will otherwise be in compliance with other Nasdaq listing criteria. If the Company fails to regain compliance with the minimum bid requirement or to meet the other applicable continued listing requirements for the Nasdaq Capital Market in the future and Nasdaq determines to delist its common stock, the delisting could adversely affect the market price and liquidity of the Company’s common stock and reduce its ability to raise additional capital.

If the Company’s common stock is delisted by Nasdaq, the 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 the Company 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 June 30, 2020, 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 filing of this quarterly report on Form 10-Q. 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

10


course of business. This financial information and these condensed consolidated 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 consolidated 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 condensed consolidated financial statements relate to stock-based transactions, accruals for liabilities, operating lease liability, 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 at June 30, 2020 and December 31, 2019.

Concentration of Credit Risk and Other Risks and Uncertainties

As of June 30, 2020 and December 31, 2019, all of the Company’s long-lived assets were located in the United States.

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. In addition, after approval by the FDA, there is still an ongoing risk of adverse events that did not appear during the product approval process.

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.

Our facilities and equipment, including those of our suppliers and vendors, may be affected by natural or man-made disasters. Our administrative office is based in Irvine, California and we manage all our research and development activities through third parties that are located throughout the world. We have taken precautions to safeguard our facilities, equipment and systems, including insurance, health and safety protocols, and off-site storage of computer data. However, our facilities and systems, as well as those of our third-party suppliers and vendors, may be vulnerable to earthquakes, fire, storm, health emergencies, including the ongoing COVID-19 pandemic, power loss, telecommunications failures, physical and software break-ins, software viruses and similar events which could cause substantial delays in our operations, damage or destroy our equipment or inventory, and cause us to incur additional expenses and delay research and development activities. In addition, the insurance coverage we maintain may not be adequate to cover our losses in any circumstance and may not continue to be available to use on acceptable terms, or at all.

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 the development of products for disorders of the ear, nose, and throat.

11


         

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 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 June 30, 2020.

12


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 June 30,

 

 

For the Six Months

Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In thousands, except share and per share data)

 

Net loss and comprehensive loss used in the calculation of basic

   and diluted loss per share

 

$

(2,586

)

 

$

(4,093

)

 

$

(10,763

)

 

$

(8,974

)

Net loss per share, basic and diluted

 

$

(0.15

)

 

$

(0.35

)

 

$

(0.63

)

 

$

(0.85

)

Weighted-average number of common shares outstanding, basic

   and diluted

 

 

16,981,540

 

 

 

11,751,110

 

 

 

17,124,331

 

 

 

10,595,511

 

 

The computation of diluted earnings per share excludes stock options, warrants, and restricted stock units that are anti-dilutive. As of June 30, 2020 and 2019, common share equivalents of 9,481,958 shares and 8,233,947 shares were anti-dilutive, respectively.   

Stock-based Compensation

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 for options granted to employees, which is an average of the options ordinary vesting period and the contractual term for 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.

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.

The Company’s 2014 Stock Incentive Plan (the “2014 Plan”) and 2014 Employee Stock Purchase Plan (the “ESPP” and, together with the 2014 Plan, the “Plans”) each provide for an annual increase in shares available for grant, beginning with the fiscal year ending December 31, 2019 and continuing for each fiscal year until, and including, the fiscal year ending December 31, 2024.       

In March 2020, the board of directors approved an increase of 518,693 shares issuable under the 2014 Plan and 129,673 shares issuable under the ESPP. The number of shares reserved for issuance under the 2014 Plan and ESPP were 401,648 and 433,394 shares, respectively, as of June 30, 2020.

13


Recently Adopted Accounting Pronouncements  

No 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 current assets consisted of the following (in thousands):

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Prepaid insurance

 

$

471

 

 

$

734

 

Prepaid clinical

 

 

217

 

 

 

102

 

Prepaid other

 

 

64

 

 

 

45

 

Insurance receivable

 

 

162

 

 

 

245

 

Other current assets

 

 

83

 

 

 

54

 

Total prepaid expenses and other current assets

 

$

997

 

 

$

1,180

 

 

Note 4. Accrued Expenses and Other Liabilities

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Accrued compensation and related expenses

 

$

8

 

 

$

40

 

Accrued clinical

 

 

32

 

 

 

437

 

Accrued professional services

 

 

105

 

 

 

130

 

Accrued vacation

 

 

115

 

 

 

199

 

Accrued other

 

 

9

 

 

 

7

 

Total accrued expenses and other liabilities

 

$

269

 

 

$

813

 

 

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 for the three months ended June 30, 2020 and 2019, and $93,000 and $95,000 for the six months ended June 30, 2020 and 2019, respectively.  

The Company has an operating lease for 5,197 of office space in Irvine, California, that expires on September 30, 2021, as amended.    

The Company determines if a contract contains a lease at inception. Our office lease has a remaining term of 1.25 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 lease contains 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

14


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.

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

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.

 

The components of lease expense were as follows:

 

 

 

Six Months Ended June 30, 2020

 

Operating lease cost(a)

 

$

98

 

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

 

 

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

 

 

 

Six Months Ended June 30, 2020

 

Supplemental Cash Flows Information

 

 

 

 

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

 

 

 

 

Operating cash flows from operating lease

 

$

93

 

Remaining lease term

 

 

 

 

Operating lease

 

1.25 years

 

Discount rate

 

 

 

 

Operating lease

 

 

3.25

%

 

Future payments under noncancelable 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

 

2020 (remainder of)

 

$

95

 

2021

 

 

146

 

Total minimum lease payments

 

 

241

 

Less imputed interest

 

 

(5

)

Present value of lease liabilities

 

 

236

 

Less current portion

 

 

(188

)

 

 

$

48

 

 

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 its 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

15


if no sales are generated. The Company has not yet generated sales as of June 30, 2020; 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 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 United States, 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 milestones achieved during the six months ended June 30, 2020.

16


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, the legal predecessor of the Company, completed the initial public offering of its common stock (the “IPO”). 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. The lawsuit was 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 lawsuit alleges that Tokai made false and misleading statements and omissions about its clinical trials for galeterone, in violation of the Securities Act of 1933 and the Securities Exchange Act of 1934. The lawsuit seeks, among other things, unspecified compensatory damages, interest, costs, and attorneys’ fees.

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. On February 18, 2020, the court held a hearing on defendants’ motion to dismiss. The court also ordered the parties to confer and notify it by March 10, 2020, if they reached an agreement to settle the case. On March 10, 2020, pursuant to the court’s order, the parties advised the court they did not agree on a settlement. On July 15, 2020, Plaintiff filed a Notice of Supplemental Authority, and on July 21, 2020, defendants filed a response.

The Company intends to vigorously defend against these claims. Given the uncertainty of litigation, the preliminary stage of this case, 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 this action, and therefore it cannot estimate the reasonably possible loss or range of loss that may result from this action.

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 such expenditures can be reasonably estimated. There have been no contingent liabilities requiring accrual at June 30, 2020.

17


Note 6. 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 December 31, 2019 and June 30, 2020, 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 (the “Series A Warrants”) 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”). The Series B Warrants become exercisable only upon the exercise of the Series A Warrants. In addition, the Company 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 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 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.

Warrant Exercise Transaction

On January 10, 2020 and January 15, 2020, the Company entered into warrant exercise agreements (the “Exercise Agreements”) with the holders (the “Holders”) of its Series A Warrants and Series B Warrants (collectively, the “Warrants”), issued in the 2019 Equity Offering, pursuant to which the Holders agreed to exercise in cash their Warrants to purchase an aggregate of 6,898,224 shares of the Company’s common stock at a reduced exercise price of $0.715 per share, plus an additional $0.125 per share for the issuance of the private placement warrants for gross proceeds (before placement agent fees and expenses) to the Company of approximately $5.8 million (the “Exercise Transaction”).

Under the Exercise Agreements, the Company also agreed to issue to the Holders new warrants to purchase up to 6,898,224 shares of the Company’s common stock at an exercise price of $0.72 per share, with an exercise period of five and a half years (the “Private Placement Warrants”). The Private Placement Warrants transaction subsequently closed and the Private Placement Warrants were issued on January 14, 2020 with respect to the Warrants exercised on January 10, 2020 and on or about January 17, 2020, with respect to the Warrants exercised on January 15, 2020. In addition, the Company agreed to issue to the placement agent warrants to purchase up to 344,911 shares of common stock, representing 5.0% of the aggregate number of shares of common stock issued in the Exercise Transaction. The placement agent warrants have substantially the same terms as the Private Placement Warrants issued to the Holders, except that the placement agent warrants have an exercise price equal to $1.05. A warrant inducement expense of $4.8 million was recorded which was determined using the Black-Scholes option pricing model and was calculated as the difference between the fair value of the Warrants prior to, and immediately after, the reduction in the exercise price on the date of repricing in addition to the fair value of the Private Placement Warrants issued.

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As of June 30, 2020, a total of 7,415,591 warrants were available for exercise. The shares of common stock underlying the registered direct placement agent warrants are registered for offer and sale under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the Company’s effective registration statement on Form S-1 (File No. 333-232011). The shares of common stock underlying the Private Placement Warrants and related placement agent warrants are registered for offer and sale under the Securities Act pursuant to the Company’s effective registration statement on Form S-1 (File No. 333-237379).

The following table shows the warrant activity:

 

 

 

Rollforward of Warrant Activity

 

 

 

Registered direct

warrants, Series A

 

 

Registered direct

warrants, Series B

 

 

Registered direct

warrants, placement agent

 

 

Private placement warrants

 

 

Private placement warrants, placement agent

 

 

Total

 

Balance as of December 31, 2019

 

 

3,449,112

 

 

 

3,449,112

 

 

 

172,456

 

 

 

 

 

 

 

 

 

7,070,680

 

Issued

 

 

 

 

 

 

 

 

 

 

 

6,898,224

 

 

 

344,911

 

 

 

7,243,135

 

Exercised

 

 

(3,449,112

)

 

 

(3,449,112

)

 

 

 

 

 

 

 

 

 

 

 

(6,898,224

)

Cancelled/Expired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2020

 

 

 

 

 

 

 

 

172,456

 

 

 

6,898,224

 

 

 

344,911

 

 

 

7,415,591

 

 

Common Stock Exchange Agreement

On February 13, 2020, the Company entered into an exchange agreement (the “Exchange Agreement”) with Biotechnology Value Fund, L.P., Biotechnology Value Fund II, L.P. and Biotechnology Value Trading Fund OS, L.P. (the “Exchanging Stockholders”), pursuant to which the Exchanging Stockholders exchanged (the “Exchange”) 3,796,000 shares of the Company’s common stock for 3,796 shares of newly designated Series X Convertible Preferred Stock (the “Series X Preferred Stock”). The Company agreed to reimburse the Exchanging Stockholders for their expenses in connection with the Exchange up to a total of $25,000, which was recorded as operating expense in the Company’s condensed consolidated statements of operations and comprehensive loss. The Exchange was completed on February 19, 2020.

 

On February 13, 2020, in connection with the Exchange, the Company filed a Certificate of Designation setting forth the preferences, rights and limitations of the Series X Preferred Stock with the Secretary of State of the State of Delaware. The number of shares so designated shall be 10,000 and Series X Preferred Stock shall have a par value of $0.001 per share. Each share of Series X Preferred Stock will be convertible into 1,000 shares of common stock at the option of the holder at any time; subject to certain limitations, including, that the holder will be prohibited from converting Series X Preferred Stock into common stock if, as a result of such conversion, the holder, together with its affiliates, would beneficially own a number of shares of common stock above a conversion blocker, which is initially set at 9.99% of the total common stock then issued and outstanding immediately following the conversion of such shares of Series X Preferred Stock. In the event of the Company’s liquidation, dissolution or winding up, holders of Series X Preferred Stock will participate pari passu with any distribution of proceeds to holders of common stock. Holders of Series X Preferred Stock are entitled to receive dividends on shares of Series X Preferred Stock equal (on an as-if-converted-to-common stock basis) to and in the same form as dividends actually paid on the common stock or other junior securities of the Company. Shares of Series X Preferred Stock will generally have no voting rights, except as required by law and except that the consent of a majority of the holders of the outstanding Series X Preferred Stock will be required to amend the terms of the Series X Preferred Stock.

SEC Accounting Series Release No. 268, Presentation in Financial Statements of “Redeemable Preferred Stocks” (“ASR 268”) requires equity instruments with redemption features that are not solely within the control of the issuer to be classified outside of permanent equity, often referred to as classification in “temporary equity”).The Company evaluated Series X Preferred Stock redemption features and concluded that there are no redemption features with the Series X Preferred Stock that are not solely within the control of the Company and permanent equity classification was appropriate.        

Series X Preferred Stock has two (2) separate and distinct embedded features. They are: (1) optional conversion by holder and (2) redemption put feature upon fundamental transaction.

Each share of Series X Preferred Stock shall be convertible into 1,000 shares of common stock, at the option of the holder, at any time after the date of issuance.  The Company evaluated the embedded optional conversion feature in accordance with the guidance under ASC 815, Derivatives and Hedging, and determined it is exempt from derivative accounting as the embedded feature is deemed to be indexed to the Company’s own stock and classified in stockholder’s equity if freestanding. Further, because the conversion ratio is fixed and equal to the ratio of the original exchange of 1,000

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common stock to each share of Series X Preferred Stock, the Company concluded that there is no intrinsic value to the beneficial conversion feature.  

Each share of Series X Preferred Stock contains redemption put features that allow the holders of the Series X Preferred Stock the right to receive, in lieu of the right to receive conversion shares, for each conversion share that would have been issuable upon such conversion immediately prior to the occurrence of an effective change in control (“Fundamental Transaction”), the same kind and amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of one share of common stock.  The Company evaluated the redemption put feature contained in each Series X Preferred Stock under the guidance of ASC 815, Derivatives and Hedging, and concluded that the embedded redemption put feature do not meet the definition of a derivative, if freestanding, under ASC 815 as net settlement could not be achieved.  Accordingly, the redemption put features contained in the Series X Preferred Stock were not bi-furcated and accounted for as freestanding derivative instruments.

On June 1, 2020 and June 10, 2020, the Exchanging Stockholders converted a total of 3,285 shares of Series X Preferred Stock into 3,285,000 shares of common stock. As of June 30, 2020, 511 shares of Series X Preferred Stock remain outstanding.

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 June 30,

 

 

For the Six Months

Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Research and development

 

$

49

 

 

$

186

 

 

$

203

 

 

$

222

 

General and administrative

 

 

148

 

 

 

441

 

 

 

431

 

 

 

616

 

Total stock-based compensation

 

$

197

 

 

$

627

 

 

$

634

 

 

$

838

 

 

During the six months ended June 30, 2020, PRSUs awarded to employees totaling 55,000 shares vested and resulted in the recognition of $204,765 in stock-based compensation expense.

Note 7. Restructuring Expense

On June 11, 2020, following the announcement regarding the topline results from the phase 2a clinical trial of OP0201, in June 2020, Novus announced that its board of directors approved a plan to reduce the size of its workforce. The workforce reduction, which was completed in June 2020, was designed to reduce the Company’s operating expenses while it is conducting a review of development and strategic alternatives. For the three months ended June 30, 2020, Novus incurred $0.5 million in expenses related to the workforce reduction and expects to pay these amounts in the next nine months.

Total liability for restructuring expenses