Filing identity and reporting period
The supplied filing is Novus Therapeutics, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017, filed November 8, 2017. This does not match the request metadata naming Eledon Pharmaceuticals, Inc.; the filing itself identifies Novus as the registrant. Novus was a development-stage specialty pharmaceutical company focused on ear, nose and throat disorders, with no approved products or revenue.
Comparisons with 2016 require caution: Novus completed a reverse merger with Tokai Pharmaceuticals on May 9, 2017, and the combined company’s primary business became Otic’s. The merger was accounted for as a reverse acquisition, and 2017 results include merger-related costs and a substantially changed share count.
Financial performance and position
Amounts below are in millions of dollars, except per-share data. The company reported no revenue; accordingly, a revenue margin is not meaningful.
| Metric | Three months ended September 30, 2017 | Three months ended September 30, 2016 | Nine months ended September 30, 2017 | Nine months ended September 30, 2016 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| Research and development expense | $0.517 | $1.053 | $1.529 | $2.335 |
| General and administrative expense | $2.448 | $0.564 | $9.487 | $1.326 |
| Total operating expenses | $2.965 | $1.617 | $11.016 | $3.661 |
| Net loss | $2.970 | $2.035 | $11.006 | $4.140 |
| Basic and diluted loss per share | $0.43 | $4.35 | $2.25 | $9.09 |
Operating cash used in the first nine months was $12.330 million, compared with $3.641 million in 2016. Investing cash provided was $23.258 million, principally $23.250 million received in the merger; financing cash provided was $7.119 million, including $4.000 million from a private placement and $3.119 million from warrant exercises. Cash, cash equivalents and restricted cash ended the period at $19.164 million, including $19.094 million of unrestricted cash and $0.070 million of restricted cash.
At September 30, 2017, current assets were $21.035 million and current liabilities were $2.306 million, yielding reported working capital of approximately $18.7 million. Total liabilities were $2.400 million; the company reported no convertible debt at period end because the bridge financing had converted to common stock in connection with the merger. Accumulated deficit was $25.396 million. No operating or gross margin was reported because there was no revenue.
Changes versus the prior comparable period
- Third-quarter net loss increased to $2.970 million from $2.035 million; nine-month net loss increased to $11.006 million from $4.140 million.
- R&D expense declined, mainly due to reduced OP-01 spending, partly offset by wind-down costs for Tokai legacy programs. Management expected R&D expense to rise as OP-02 development advanced.
- G&A expense rose substantially, including $7.2 million of merger and public-company-related costs in the nine-month period, including Tokai employee severance, alongside public-company administrative and legal costs. The company expensed $7.9 million of combined transaction costs.
- Loss per share is not directly comparable: weighted-average shares were 3.845 million for the 2017 nine-month period versus 79,026 for 2016, reflecting the merger and reverse stock split. The statements give retroactive effect to the one-for-nine split.
Outlook, risks and unusual items
- Management estimated that cash resources would fund anticipated needs for at least 12 months from the financial statements’ issuance date. The company nevertheless expected continuing losses and said additional equity, debt, collaboration or licensing funding might be needed; financing may not be available on acceptable terms.
- OP-02, a proposed nasal-spray surfactant treatment for otitis media, was the primary development focus. No clinical-trial-suitable cGMP batch had been manufactured. Subject to successful formulation development and manufacturing, management expected to begin a Phase 1 program in healthy subjects in 2018.
- OP-01 development was paused after the merger. The company had completed four prior trials involving 353 subjects, including a Phase 2b study of an earlier antibiotic-only formulation; development of a second-generation formulation was on hold pending funding.
- On August 21, 2017, Novus entered an at-the-market equity distribution agreement allowing sales of up to $8.5 million of common stock. From October 2 through November 6, it sold 142,356 shares for gross proceeds of $653,000. Shares outstanding were 6,943,058 at September 30 and 7,085,414 at November 6.
- Potential dilution, clinical and formulation setbacks, regulatory approval, manufacturing dependence, intellectual-property protection and the ability to raise capital were prominent risks. Cash balances at financial institutions exceeded federally insured limits.
- Multiple securities actions involving Tokai were disclosed. The reverse-merger stockholder litigation was settled for $150,000 without admission of wrongdoing; other disclosed securities cases remained at preliminary or stayed stages, and the company said it could not estimate potential losses. No contingency liability requiring accrual was reported at September 30.
- The company had received approximately $537,000 in Israeli research grants repayable from royalties on products developed with the funding; no liability was recorded because related product revenues had not been earned and potential royalties could not be estimated. On October 5, 2017, the company gave notice terminating its UMB and Johns Hopkins license arrangements, with obligations ending December 4, 2017 and January 3, 2018, respectively.
- Management stated that disclosure controls and procedures were effective at quarter end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer and filing match the intended company: this document is for Novus Therapeutics, not Eledon Pharmaceuticals.
- Assess whether the $19.1 million unrestricted cash balance and management’s stated 12-month runway remain adequate in light of operating cash use and planned OP-02 development.
- Track OP-02 formulation, cGMP manufacturing and the timing and funding of the proposed Phase 1 program; confirm the status of the paused OP-01 program.
- Review subsequent ATM share sales, available authorization and potential dilution; distinguish reported share-count changes from the reverse merger and reverse split.
- Monitor the status and potential financial exposure of the disclosed securities litigation, grant repayment obligations and post-termination license arrangements.