Novus Therapeutics, Inc.
Annual Report 2018

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 Form 10-K (Mark One)☒☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2018OR☐☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number 001-36620 NOVUS THERAPEUTICS, INC.(Exact name of registrant as specified in its charter) Delaware20-1000967(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.) 19900 MacArthur Boulevard, Suite 550Irvine, California92612(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 Class Name of Exchange on Which RegisteredCommon Stock, $0.001 par value Nasdaq Capital MarketSecurities registered pursuant to Section 12(g) of the Act:None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒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 periodthat 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 during the preceding 12 months (or for suchshorter period that the registrant was required to submit such files). Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “largeaccelerated 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 providedpursuant 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 June 29, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates was $47,021,457,based on the last reported sale price of such stock on the Nasdaq Global Market as of such date.As of March 22, 2019, the registrant had 9,434,243 shares of Common Stock, $0.001 par value per share, outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement for its 2019 Annual Meeting of Stockholders, which the registrant intends to file pursuant to Regulation 14A with the Securities and ExchangeCommission not later than 120 days after the registrant’s fiscal year end December 31, 2018, are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K.  INDEX PageNumber PART I ITEM 1. Business4ITEM 1A. Risk Factors20ITEM 1B. Unresolved Staff Comments44ITEM 2. Properties44ITEM 3. Legal Proceedings44ITEM 4. Mine Safety Disclosures44 PART II ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities45ITEM 6. Selected Financial Data45ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations46ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk51ITEM 8. Financial Statements and Supplementary Data51ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure51ITEM 9A. Controls and Procedures51ITEM 9B. Other Information52 PART III ITEM 10. Directors, Executive Officers and Corporate Governance53ITEM 11. Executive Compensation53ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters53ITEM 13. Certain Relationships and Related Transactions, and Director Independence53ITEM 14. Principal Accountant Fees and Services53 PART IV ITEM 15. Exhibits and Financial Statement Schedules54ITEM 16. Form 10-K Summary56 Signatures57 Index to Financial StatementsF-1 2In this Annual Report on Form 10-K, Annual Report, unless the context requires otherwise, "Novus Therapeutics", “Novus”, the "Company", the“combined company”, "we", "our", and "us" means Otic Pharma, Ltd. prior to the consummation of the Reverse Merger, and Novus Therapeutics, Inc., uponthe consummation of the Reverse Merger described herein. The term “Tokai” refers to Tokai Pharmaceuticals, Inc., and its subsidiaries prior to the ReverseMerger.The market data and certain other statistical information used in this Annual Report are based on independent industry publications, governmentalpublications, reports by market research firms or other independent sources. Some data are also based on our good faith estimates. Information that is basedon estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances maydiffer materially from events and circumstances reflected in this information.Forward-Looking StatementsThis Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. Any statements in this AnnualReport on Form 10-K about the Company’s future expectations, plans and prospects, including statements about its strategy, future operations, developmentof its product candidates, the review of strategic alternatives and the outcome of such review and other statements containing the words “believes,”“anticipates,” “plans,” “expects,” “estimates,” “intends,” “predicts,” “projects,” “targets,” “could,” “may,” and similar expressions, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, although not all forward-looking statements include suchidentifying words. Forward-looking statements include, but are not limited to statements regarding: •expectations regarding the timing for the commencement and completion of product development or clinical trials; •the rate and degree of market acceptance and clinical utility of the Company’s products; •the Company’s commercialization, marketing and manufacturing capabilities and strategy; •the Company’s intellectual property position and strategy; •the Company’s ability to identify additional products or product candidates with significant commercial potential; •the Company’s estimates regarding expenses, future revenue, capital requirements and needs for additional financing; •developments relating to the Company’s competitors and industry; and •the impact of government laws and regulations.Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including: theability to develop commercially viable product formulations; the sufficiency of the Company’s cash resources; the ability to obtain necessary regulatory andethics approvals to commence additional clinical trials; whether data from early clinical trials will be indicative of the data that will be obtained from futureclinical trials; whether the results of clinical trials will warrant submission for regulatory approval of any investigational product; whether any suchsubmission will receive approval from the United States Food and Drug Administration or equivalent foreign regulatory agencies and, if we are able to obtainsuch approval for an investigational product, whether it will be successfully distributed and marketed. These risks and uncertainties, as well as other risks anduncertainties that could cause the Company’s actual results to differ significantly from the forward-looking statements contained herein, are described ingreater detail in Part I, Item 1A. Risk Factors in this Annual Report on Form 10-K. Any forward-looking statements contained in this Annual Report onForm 10-K speak only as of the date hereof and not of any future date, and the Company expressly disclaims any intent to update any forward-lookingstatements, whether as a result of new information, future events or otherwise.3PART IItem 1. Business.OverviewNovus Therapeutics, Inc. (Novus) is a specialty pharmaceutical company focused on developing products for patients with disorders of the ear, nose,and throat (ENT). The Company has two platform technologies, each with the potential to be developed for multiple indications. Novus’ lead program(OP0201) is a surfactant-based nasal aerosol drug-device combination product candidate being developed as a potential first-in-class treatment option forpatients at risk for, or with, otitis media (OM), which is middle ear inflammation and effusion with or without infection. Globally, OM affects more than 700million adults and children every year, with over half of the cases occurring in children under five years of age. OM is one of the most common disorders seenin pediatric practice, and in the U.S. is a leading cause of health care visits and the most frequent reason children are prescribed antibiotics or undergosurgery. Novus also has a foam-based drug delivery technology platform (OP01xx), which may be developed in the future to deliver drugs into the ear, nasal,and sinus cavities.Surfactant Platform (OP02xx)The first product in the surfactant platform program, OP0201, is being developed as a potential first-in-class treatment option for OM. OM is oftencaused by Eustachian tube dysfunction (ETD). OP0201 is a nasal aerosol, drug-device combination product comprised of a novel formulation of a surfactant(dipalmitoylphosphatidylcholine [DPPC]) and a spreading agent (cholesteryl palmitate [CP]) suspended in propellant. The product is administeredintranasally via a pressurized metered-dose inhaler (pMDI). OP0201is intended to be used to restore the normal physiologic activity of the Eustachian tube(ET), which is a small tube that connects from the chamber of the middle ear to the back of the nasopharynx. Together, the active ingredients in OP0201effectively absorb to the air-liquid interface of the mucosa and reduce the interfacial surface tension of the ET, which reduces passive pressure required for theET to open. In other words, OP0201 promotes ‘de-sticking’ of the ET so that ventilation of the middle ear is restored.Novus is currently conducting four clinical trials to explore the safety, tolerability, and potential efficacy of OP0201. These trials include a phase 1safety and pharmacodynamic effects study (study C-001), a phase 1 safety and tolerability study (study C-002), a phase 1 safety and exploration of effectsstudy in adults with acute otitis media (study C-004), and an exploratory phase 2a study in children with acute otitis media (study C-006). Upon completionof these clinical studies, Novus intends to initiate phase 2 and phase 3 studies, with an initial focus on a development program that, if successful, will lead toregistration of OP0201 in North America and key European markets as a product to treat OM and prevent OM in children. Additional development activitiesto support registration of OP0201 in other countries, or for other indications, or other patient populations, may occur in the future.Foam Platform (OP01xx)OP0101 and OP0102 are foam-based products intended to be used as a delivery vehicle for drugs to be administered into the ear canals, as well as thenasal and sinus cavities. OP0101 was the initial product utilizing the foam platform. It was developed as an improved treatment option for acute otitis externa(AOE), a common infectious medical condition of the outer ear canal that affects tens of millions of adults and children each year (frequently called“swimmer’s ear”). Novus completed four clinical trials of OP0101 in 353 adult and pediatric subjects, including a successful phase 2b study with a steroid-free, antibiotic-only formulation of OP0101 that was non-inferior to standard of care, but with a more favorable dosing regimen (once a day dosing instead oftwice a day).In 2016, Novus began development of OP0102, a second-generation formulation designed to rapidly relieve ear pain (an unmet need in AOE) anderadicate infection with less than seven days of treatment. Novus subsequently suspended the OP0102 development program to focus resources on thesurfactant program.4OP0201 for Otitis Media (OM)OM is a generic term without reference to a specific etiology or pathogenesis and best regarded as a spectrum of diseases of the middle ear. OM is avery common condition and a leading cause of healthcare visits and antibiotic prescriptions. Common forms of OM are acute OM (AOM) and otitis mediawith effusion (OME). Both AOM and OME can occur episodically or persist for long periods of time. If reoccurrence is frequent (i.e., three episodes within sixmonths), the patient is diagnosed with recurrent AOM (RAOM). If middle ear effusion (MEE) persists in the middle ear for longer than three months, then thepatient is diagnosed with chronic OME (COME).AOM is very common and can affect both children and adults. AOM is usually a short-term inflammation of the middle ear, characterized by thesudden onset of one or more signs or symptoms of acute middle ear inflammation (e.g., ear pain, fever or irritability) in the presence of MEE. AOM is oftenpreceded by upper respiratory symptoms including cough and rhinorrhea. Micro-organisms (viral or bacterial) in the nasopharynx may reflux into the middleear, where they adhere and colonize resulting in an ear infection. AOM is extremely common in young children, many of whom will have multiple AOMepisodes (RAOM) over the course of months or even years.OME is also very common and can affect both children and adults. OME is characterized by a non-purulent (non-infected) MEE without sudden onsetof signs or symptoms of an acute ear infection. Symptoms usually involve conductive hearing loss or aural fullness caused by impaired transduction of soundwaves through the fluid-filled middle ear, but typically without pain or fever. OME often follows an AOM episode and can last for several months or up to ayear, which can result in speech and learning delays in children and other morbidities in both children and adults. There are several predisposing factors thathave been associated with OME including environmental (e.g., bottle feeding, day-care setting, allergies to common environmental entities, cigarette smoke),age (higher incidence in pre-school age children), and ETD. Like AOM, patients can experience multiple OME episodes over the course of months or years(recurrent OME; ROME). If MEE persists for longer than three months, then the patient is diagnosed with COME and is often considered as a surgicalcandidate to insert tympanostomy tubes to facilitate ventilating the middle ear.An important component of middle ear health is a normally functioning ET. The ET is a small cilia-lined passageway that connects the middle ear tothe back of the nasal cavity (nasopharynx). Its primary functions are to protect, drain, and ventilate the middle ear. Normally, it is collapsed, preventingmaterial from entering the middle ear. The ET opens periodically upon swallowing, chewing, yawning, or when a pressure differential exists between themiddle ear and the external environment. When the ET becomes blocked or does not open normally, ETD occurs.Pathophysiology of Otitis Media: 5The pathophysiology of OM and ETD are closely related. Both conditions can arise as a result of upper respiratory tract infections, allergies, and otherinflammatory mediators and one condition can perpetuate the other condition. There are more than 700 million cases of OM and ETD around the world everyyear, half of which occur in children under 5 years of age. In the U.S. alone, there were more than 15 million visits to physicians during 2014 related to OMand ETD. It is one of the most common diseases seen in Pediatric and Otolaryngology practices and is the most frequent reason children consume antibioticsor undergo surgery.To date, no drug product has been approved to treat OM. Antibiotics are commonly used to treat AOM patients who present with signs and symptomsof infection, but antibiotics have no effect on viral infections or OME which is a non-infectious condition. More importantly, antibiotics do not preventrecurrent AOM, recurrent OME or chronic OME. Topical steroids, antihistamines, and decongestants have not been shown to be effective as OM treatments orto prevent OM. In addition, the American Academy of Otolaryngology—Head and Neck Surgery recommends against use of these drugs in patients with OM.The only option today to treat and possibly prevent RAOM, ROME or COME, is to perform a surgery where the tympanic membrane is perforated to improvedrainage and ventilation of the middle ear (myringotomy or tympanostomy tube insertions). However, surgery is not always an effective solution for allpatients as many continue to suffer with OM or its complications, and sometimes require repeat surgeries. Managing recurrent and chronic OM drives billionsof dollars in healthcare costs and results in millions of surgical procedures in children and adults around the world. There is a clear unmet need for a safe, non-antibiotic, non-surgical option for patients.In 2016, the U.S. Food and Drug Administration (FDA) permitted marketing of a medical device that uses a small intranasal balloon inserted into theET to treat persistent ETD in adults. However, like OM, no drug product has been approved for the prevention of ETD.OP0201 is a novel nasal aerosol combination drug product, comprised of the two active ingredients, DPPC and CP, and formulated with a propellantfor easy administration. OP0201 is delivered as a local treatment through each nostril using a pMDI device. The pMDI device holds the canister and spraysthe drug product into the nasal cavity. Together DPPC and CP are designed to effectively absorb to the air-liquid interface of the mucosa and reduce theinterfacial surface tension of the ET, which reduces the passive pressure required for the ET to open. In other words, OP0201 is intended to promote ‘de-sticking’ of the ET so that ventilation of the middle ear may occur.Avanti Polar Lipids, Inc. (Alabaster, Alabama, U.S.) is our sole supplier of DPPC and CP, the active pharmaceutical ingredients used in OP0201. Othermanufacturers of DPPC and CP exist, but we have not yet qualified a secondary supplier. The drug product is currently manufactured using GoodManufacturing Practices by Sciarra Aeromed, Inc. (Hicksville, New York, U.S.). We have not yet qualified a secondary manufacturer.Surfactants are ubiquitous and well-understood endogenous compounds present in human nasal passages, the ET, and lung tissues, as well as inhuman milk and amniotic fluid. Surfactants have been evaluated under the hypothesis that exogenous administration of surfactant to a mucosal lined lumensuch as the alveoli would result in de-sticking of the tissue and allowance of oxygen exchange in the lungs. In the case of the ET, it is known that thequantity of surfactants along the ET of children with OM is significantly reduced when compared to otologically healthy children. Also, the ET surfacetension in patients with OM is higher than reported for patients with healthy ETs, causing the luminal surfaces to stick together. Indeed, reduction in ETluminal surface tension and passive opening pressure (POP), as well as improved ET function was demonstrated in a study of six cynomolgus monkeys whoreceived injections of the calf lung surfactant extract INFASURF® (whose main component is the surfactant DPPC) directly into the ET lumen.The positive effects of OP0201 on ET function have been observed in preclinical animal studies using an early formulation of a DPPC and CPcombination surfactant product. Meaningful reductions in POP of healthy ET, as well as meaningful reduction in severity and duration of OM episodes inthree animal species after treatment were observed. In two separate animal-model experiments, the investigators studied the effects of intranasaladministration of the early formulation on ET POP of the left ear as compared to propellant in healthy Mongolian gerbils and albino mice. In both animalspecies, administration of the product resulted in significant (p<0.001) reductions in mean ET POP measurements at both the 5 and 10-minute assessmenttimes compared to baseline and immediately following propellant alone administration (Figures 1, 2 and 3). Among the gerbils, the mean (standard error [SE])ET POP values (in millimeters of mercury [mmHg]) were 42.8 (2.29) at baseline, 42.43 (2.36) after propellant, 31.76 (1.74) at 5 minutes after surfactant, and29.3 (1.51) at 10 minutes after surfactant. Similar findings were noted in the mice: mean (SE) ET POP values were 42.02 (1.22) at baseline, 42.02 (1.22) afterpropellant, 29.77 (1.69) at 5 minutes after surfactant, and 32.79 (1.77) at 10 minutes after surfactant.6Figure 1: Mean Passive Opening Pressures in Gerbil and Mice at Baseline, Immediately after Propellant, and at 5 and 10 Minutes after SurfactantAdministration (Experiment 1) *p<0.05 for surfactant treatment (each timepoint and animal group) compared to baseline and following propellant administration.In a study of experimentally induced AOM in chinchillas, the use of the early formulation was associated with a marked reduction in the severity andduration of AOM. Furthermore, quantitative cultures of middle ear fluid showed dramatic decreases in bacterial colonization with intranasal treatment alone(i.e., no antibiotics were administered in this study). Based on these findings, Novus believes that resolution of MEE may occur significantly earlier withtreatment. The data suggest that restoration of ET function and ventilation of the middle ear is beneficial in resolving bacterial AOM.Prior to licensing rights to the surfactant program, the inventors treated nine humans who had various OM and ETD conditions. This human experience wascaptured as case studies and reported to the FDA. Based on these case studies, in conjunction with the preclinical animal data, Novus believes that a productof this type may have utility in the treatment and prevention of OM and ETD in children and adults. Novus is currently conducting four clinical trials toexplore the safety, tolerability, and potential efficacy of OP0201. •Study OP0201-C-001 (“C-001”) is a phase 1 clinical trial designed to evaluate safety, tolerability, and ET function following a single intranasaldose of OP0201 in 16 healthy adults. The randomized, double-blind, placebo-controlled, cross-over trial will explore the effect of a 20 mg dose ofOP0201 on ET function. Assessment of ET function will be captured using continuous tympanic impedance while subjects are exposed to changesin atmospheric pressure produced in a hyperbaric/hypobaric chamber. The single center study will be conducted in Germany. Additionalinformation about the study can be found at clinicaltrials.gov using the identifier NCT03828149. •Study OP0201-C-002 (“C-002”) is a phase 1 clinical trial designed to evaluate safety and tolerability of daily intranasal administration of OP0201over 14 consecutive days in 30 healthy adults. The randomized, double-blind, placebo-controlled, parallel-group, dose-escalation trial includes a30 mg per day dose (Cohort A) and 60 mg per day dose (Cohort B) of OP0201. The study is being conducted at a single phase 1 unit in the U.S.Additional information about the study can be found at clinicaltrials.gov using the identifier NCT03748758. •Study OP0201-C-004 (“C-004”) is a phase 1 clinical trial designed to evaluate safety, tolerability, and relief of ear pain over a 60-minuteobservation period following a single intranasal dose of OP0201 in 24 adults with acute otitis media. The randomized, double-blind, placebo-controlled, parallel-group trial will explore the effects of a 20 mg intranasal dose of OP0201. Assessment of pain relief will be captured utilizing aVisual Analog Scale (VAS), Numeric Rating Scale (NRS-11), Patient Global Impression of Change (PGIC), and Clinical Global Impressions Scale:Global Improvement (CGI-I). The multicenter study was conducted in the U.S. Additional information about the study can be found atclinicaltrials.gov using the identifier NCT03766373.7 •Study OP0201-C-006 (“C-006”) is an exploratory phase 2a clinical trial designed to evaluate safety, tolerability, and efficacy of daily intranasaladministration of OP0201 over 10 consecutive days in 50 pediatric patients, 6 to 24 months of age, with acute otitis media. The randomized,double-blind, placebo-controlled, parallel-group trial will explore the effects of a 20 mg per day dose of OP0201 as an adjunct to oral antibiotics.Patients will receive 10 days of treatment and will be followed for up to 30 days, during which multiple endpoints will be explored. The singlecenter study will be conducted in the U.S. Additional information about the study can be found at clinicaltrials.gov using the identifierNCT03818815.Upon completion of these clinical studies, Novus intends to initiate phase 2 and phase 3 studies, with an initial focus on a development program that,if successful, will lead to registration of OP0201 in North America and key European markets as a product to treat OM and prevent OM in children.Additional development activities to support registration of OP0201 in other countries, or for other indications, or for other patient populations, may occur inthe future.OP0101 and OP0102 for Acute Otitis Externa (AOE)AOE (or “swimmer’s ear”) is a generalized inflammation of the epithelium of the external ear canal that may also involve the pinna and/or thetympanic membrane (eardrum). The vast majority of AOE cases are due to bacterial infections, with Pseudomonas aeruginosa and Staphylococcus aureusbeing the most common pathogens. The condition is commonly associated with pain and characterized by redness of the ear canal (erythema), swelling of thetissue (edema), increased secretion of fluid, and shedding or peeling of the skin (desquamation of the epithelium). AOE occurs in all age groups and is morefrequently observed in the summer months as well as in hot and humid environments. The most common treatment for AOE is antibiotics, with or withoutsteroids, analgesics and avoiding ears being immersed underwater (e.g., swimming). Ear treatments are generally supplied in the form of liquids with severaldrops administered into each infected ear multiple times per day for a week or longer. In the U.S. alone, more than 5 million prescriptions for ear anti-infectiveproducts are prescribed every year, mostly for the treatment of AOE.The current market leader in the ear anti-infective market is CIPRODEX®, marketed by Alcon, which according to IMS Health generated over$400 million in sales in the U.S. in 2015. It is a liquid suspension containing the antibiotic ciprofloxacin and the steroid dexamethasone. It is administered asfour drops per infected ear, twice-daily over seven days for a total of 14 doses (56 drops placed into the ear canal over the course of a week). There arenumerous other branded and generic ear anti-infectives, but none of these are clinically differentiated from CIPRODEX. Although effective whenadministered properly, liquid drops like these anti-infectives can be a challenge to administer into the ear, particularly in children. Proper administrationrequires the patient to lie down with the infected ear pointed upward, careful placement of multiple drops into the infected ear, manipulation of the ear lobeto move the liquid down into the ear canal, and the patient should remain still with the infected ear pointed upwards after applying the product for a period oftime to prevent the medication from draining out of the ear. In addition, rapid resolution of otalgia (ear pain) is not achieved with any of the currentlyapproved anti-infective products, even those that also contain an anti-inflammatory (e.g., steroid) in the formulation, like CIPRODEX.Foam formulations such as OP0101 and OP0102 are becoming a prominent delivery system for topical drugs due to the intrinsic advantages of theplatform: easy and fast administration, visibility of product during and after the administration, and complete coverage of large and variable surface areas asthe product expands and molds to the shape of the cavity. In addition, foam formulations can remain in place for longer periods of time, increasing residencetime of drugs at target sites. Finally, foam-based ear products can be administered while the patient is standing or sitting and do not require holding the headin any special orientation for a period of time.8Novus conducted four clinical trials of its first generation, antibiotic only formulation (OP0101), which it believes supported the utility of the foamplatform in AOE. Data from the most recent clinical trial was announced in January 2015. The study was a 220 patient, phase 2, randomized, multicenter,parallel, active comparator trial in 220 AOE patients ages six months and older. During this trial, OP0101, which contains 0.3% ciprofloxacin, wasadministered once-daily for 7 days (7 doses) while the active comparator (CIPRODEX), which contains 0.3% ciprofloxacin and 0.1% dexamethasone, wasadministered twice-daily for 7 days (14 doses). The primary endpoint of the study was clinical cure, defined as score = 0 for erythema, edema, tenderness, eardischarge (otorrhea), and no further antibiotic required. Safety and efficacy of OP0101 was found to be non-inferior to CIPRODEX, even though OP0101contained no steroid and utilized 50% fewer doses over the week-long course of therapy. Although OP0101 proved to be effective in treating AOE infection,the product is not sufficiently differentiated from other products in the market. Novus believes that none of the currently marketed products adequatelyaddress the greatest unmet need, which is rapid pain relief. Therefore, in 2016, Novus began development of OP0102, a second-generation formulationdesigned to rapidly relieve ear pain and eradicate infection with less than seven days of treatment. Novus subsequently paused OP0102 development to focusresources on the surfactant program.The competitive conditions faced by the Company are described in greater detail in Part I, Item 1A. Risk Factors in this Annual Report on Form 10-Kunder the caption “We face substantial competition, which may result in others discovering, developing or commercializing competing products before ormore successfully than we do.”Intellectual PropertyNovus’s success depends in part on its ability to obtain and maintain proprietary protection for its product candidates, novel discoveries, producttechnologies and other know-how, to operate without infringing on the proprietary rights of others and to prevent others from infringing Novus’s proprietaryrights. Novus seeks to protect its product candidates by, among other methods, filing U.S. and foreign patent applications related to its proprietarytechnology, inventions and improvements that are important to the development and implementation of its business. Novus also relies on trademarks, tradesecrets, know-how, continuing technological innovation and potential in-licensing opportunities to develop and maintain Novus’s proprietary protection forNovus’s product candidates.Novus’s intellectual property portfolio includes issued patents and patent applications directed towards products derived from Novus’s foam platform(OP01xx) and surfactant platform (OP02xx) with claims to pharmaceutical preparations as well as to methods of treatment. For OP0101 and OP0102, Novusowns or has exclusive rights to two families of patents, one with three U.S. and seven foreign patents (Canada, France, Germany, Israel, Italy, Spain, and theUnited Kingdom), and a second with two U.S. and five foreign patents (France, Germany, Italy, Spain and the United Kingdom). In the first family the last toexpire issued patent in the U.S. will expire in September 2027, including patent term adjustment. In the second family the last to expire issued patent in theU.S. will expire in December 2033. For OP0201, Novus has exclusive rights to seven U.S. and three foreign patents (Canada, Mexico, and Europe). The last toexpire patent in the U.S. will expire in November 2019. In addition, Novus owns or has exclusive rights to two U.S. patent applications and seven foreignpatent applications. If allowed. the last to expire patent application will expire in December 2039, absent any adjustments or extensions.Patents extend for varying periods according to the date of patent filing or grant and the legal term of patents in various countries where patentprotection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends on the type of patent, the scope of itscoverage and the availability of legal remedies in the country.Novus also protects its proprietary information by requiring its employees, consultants, contractors and other advisors to execute nondisclosure andassignment of invention agreements upon commencement of their respective employment or engagement. In addition, Novus also requires confidentiality orservice agreements from third parties that receive confidential information or materials.License Agreement with Otodyne, Inc.In November 2015, Novus entered into a license agreement with Scientific Development and Research, Inc. and Otodyne, Inc. granting Novusexclusive worldwide rights to develop and commercialize surfactant-based products. Under the terms of the agreement, Novus is obligated to usecommercially 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). Novus is responsible for prosecuting, maintaining, and enforcing all intellectual property and will be thesole owner of improvements.9In January 2016, Otodyne completed transfer of all technology, including the active investigational new drug application (IND), to Novus. Novus isobligated to pay up to $42.1 million in development and regulatory milestones if OP0201 is approved for three indications in the U.S., two in Europe, andtwo in Japan. Novus 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.Novus 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 low-single to mid-singlepercent of net sales.Government RegulationGovernment authorities in the U.S., including federal, state, and local authorities, and in other countries, extensively regulate, among other things, themanufacturing, research and clinical development, marketing, labeling and packaging, storage, distribution, post-approval monitoring and reporting,advertising and promotion, and export and import of pharmaceutical and biological products, such as those we are developing. Pricing of such products isalso subject to regulation in many countries. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state,local, and foreign statutes and regulations require the expenditure of substantial time and financial resources.U.S. Government RegulationThe FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act (FDCA) and its implementing regulations, and biologics under the FDCAand the Public Health Service Act (PHSA) and its implementing regulations. FDA approval is required before any new unapproved drug or biologic or dosageform, including a new use of a previously approved drug, can be marketed in the U.S. Drugs and biologics are also subject to other federal, state, and localstatutes and regulations. If we fail to comply with applicable FDA or other requirements at any time during the product development process, clinical testing,approval process or after approval, we may become subject to administrative or judicial sanctions. These sanctions could include the FDA’s refusal toapprove pending applications, license suspension or revocation, withdrawal of an approval, untitled or warning letters, product recalls, product seizures, totalor partial suspension of production or distribution, injunctions, fines, civil penalties or criminal prosecution. Any FDA enforcement action could have amaterial adverse effect on us.The process required by the FDA before product candidates may be marketed in the U.S. generally involves the following: •completion of extensive preclinical laboratory tests and preclinical animal studies, all performed in accordance with the Good LaboratoryPractices (GLP) regulations; •submission to the FDA of an investigational new drug application (IND) which must become effective before human clinical trials may beginand must be updated annually; •approval by an independent institutional review board (IRB) or ethics committee representing each clinical site before each clinical trial may beinitiated; •performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate for each proposedindication; •preparation of and submission to the FDA of a biologics license application (BLA) or a new drug application, or NDA, after completion of allpivotal clinical trials; •potential review of the product application by a FDA advisory committee, where appropriate and if applicable; •a determination by the FDA within 60 days of its receipt of a BLA or NDA to file the application for review; •satisfactory completion of a FDA pre-approval inspection of the manufacturing facilities where the proposed product is produced to assesscompliance with current Good Manufacturing Practices (cGMP) regulations; •potential FDA audit of the clinical trial sites that generated the data in support of the BLA or NDA; and •FDA review and approval of a BLA or NDA prior to any commercial marketing or sale of the product.The preclinical and clinical testing and approval process requires substantial time, effort, and financial resources, and we cannot be certain that anyapprovals for our product candidates will be granted on a timely basis, if at all.10An IND is a request for authorization from the FDA to administer an investigational new drug product to humans in clinical trials. The central focus ofan IND submission is on the general investigational plan and the protocol(s) for human trials. The IND also includes results of animal and in vitro studiesassessing the toxicology, pharmacokinetics, pharmacology, and pharmacodynamic characteristics of the product; chemistry, manufacturing, and controlsinformation; and any available human data or literature to support the use of the investigational new drug. An IND must become effective before humanclinical trials may begin. An IND will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns orquestions related to the proposed clinical trials. In such a case, the IND may be placed on clinical hold and the IND sponsor and the FDA must resolve anyoutstanding concerns or questions before clinical trials can begin. Accordingly, submission of an IND may or may not result in the FDA allowing clinicaltrials to commence. The FDA may impose a clinical hold at any time during clinical trials and may impose a partial clinical hold that would limit trials, forexample, to certain doses or for a certain length of time.Clinical TrialsClinical trials involve the administration of the investigational new drug to human subjects under the supervision of qualified investigators inaccordance with Good Clinical Practices (GCPs) which include the requirement that all research subjects provide their informed consent for theirparticipation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the study, the parameters to beused in monitoring safety, and the efficacy criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must besubmitted to the FDA as part of the IND. Additionally, approval must also be obtained from each clinical trial site’s IRB before the trials may be initiated, andthe IRB must monitor the trial until completed. There are also requirements governing the reporting of ongoing clinical trials and clinical trial results topublic registries.The clinical investigation of a drug is generally divided into three phases. Although the phases are usually conducted sequentially, they may overlapor be combined. •Phase 1. The drug is initially introduced into healthy human subjects or patients with the target disease or condition. These studies are designedto evaluate the safety, dosage tolerance, metabolism and pharmacologic actions of the investigational new drug in humans, the side effectsassociated with increasing doses, and if possible, to gain early evidence on effectiveness. •Phase 2. The drug is administered to a limited patient population to evaluate dosage tolerance and optimal dosage, identify possible adverseside effects and safety risks, and preliminarily evaluate efficacy. •Phase 3. The drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites to generateenough data to evaluate dosage, clinical effectiveness and safety, to establish the overall benefit-risk relationship of the investigational newdrug product, and to provide an adequate basis for physician labeling.In some cases, the FDA may condition approval of a BLA or NDA for a product candidate on the sponsor’s agreement to conduct additional clinicaltrials after approval. In other cases, a sponsor may voluntarily conduct additional clinical trials after approval to gain more information about the drug. Suchpost-approval studies are typically referred to as Phase 4 clinical trials.Sponsors must also report to the FDA, within certain timeframes, serious and unexpected adverse reactions, any clinically important increase in therate of a serious suspected adverse reaction over that listed in the protocol or investigator’s brochure, or any findings from other studies or animal or in vitrotesting that suggest a significant risk in humans exposed to the product candidate. The FDA, the IRB, or the clinical trial sponsor may suspend or terminate aclinical trial at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. Additionally,some clinical trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoringboard or committee. This group provides authorization for whether or not a trial may move forward at designated check points based on access to certain datafrom the trial. We may also suspend or terminate a clinical trial based on evolving business objectives or competitive climate.The clinical trial process can take three to ten years or more to complete, and there can be no assurance that the data collected will support FDAapproval or licensure of the product. Results from one trial are not necessarily predictive of results from later trials.11A drug being studied in clinical trials may be made available to individual patients in certain circumstances. Pursuant to the 21st Century Cures Act(Cures Act) which was signed into law in December 2016, the manufacturer of an investigational drug for a serious disease or condition is required to makeavailable, such as by posting on its website, its policy on evaluating and responding to requests for individual patient access to such investigational drug(compassionate use). This requirement applies on the later of 60 calendar days after the date of enactment of the Cures Act or the first initiation of a Phase 2 orPhase 3 trial of the investigational drug. At this time, Novus does not have a program for the compassionate use of an investigational product outside of aclinical trial as it is not applicable to our investigational products and our current stage of development.Submission of a BLA or NDA to the FDAAssuming successful completion of all required testing (e.g. completion of pivotal clinical trials) in accordance with all applicable regulatoryrequirements, detailed investigational new drug product information is submitted to the FDA in the form of a BLA or NDA requesting approval to market theproduct for one or more indications. Under federal law, the submission of most BLAs and NDAs is subject to an application user fee and these fees aretypically increased on an annual basis. Applications for orphan drug products are exempted from the BLA and NDA user fees and may be exempted fromproduct and establishment user fees, unless the application includes an indication for other than a rare disease or condition. No application user fees areanticipated for OP0201 in calendar 2019.A BLA or NDA for a new molecular entity must include all relevant data available from pertinent preclinical studies and clinical trials, includingnegative or ambiguous results as well as positive findings, together with detailed information relating to the product’s chemistry, manufacturing, controls,and proposed labeling, among other things. Data can come from company-sponsored clinical trials intended to test the safety and effectiveness of a use of aproduct, or from several alternative sources, including investigator-initiated trials that are not sponsored by Novus. To support marketing approval, the datasubmitted must be sufficient in quality and quantity to establish the safety and effectiveness of the investigational new drug product to the satisfaction of theFDA.Once a BLA or NDA for a new molecular entity has been submitted, the FDA’s goal is to review the application within ten months after it accepts theapplication for filing, or, if the application relates to an unmet medical need in a serious or life-threatening indication, six months after the FDA accepts theapplication for filing. The review process is often significantly extended by the FDA’s requests for additional information or clarification.Before approving a BLA or NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approvean application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assureconsistent production of the product within required specifications. Additionally, before approving a BLA or NDA, the FDA will typically inspect one ormore clinical sites to assure compliance with GCP.The FDA is required to refer an application for a novel drug to an advisory committee or explain why such referral was not made. Typically, anadvisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides arecommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisorycommittee, but it considers such recommendations carefully when making decisions.The FDA’s Decision on a BLA or NDAThe FDA evaluates a BLA to determine whether the data demonstrate that the biologic is safe, pure, and potent, or effective, and an NDA to determinewhether the drug is safe and effective. After the FDA evaluates the BLA or NDA and conducts inspections of manufacturing facilities where the product willbe produced, it may issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing of the drug with specificprescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the application is complete, and theapplication is not ready for approval. A Complete Response Letter may require additional clinical data or an additional pivotal Phase 3 clinical trial(s), orother significant, expensive and time-consuming requirements related to clinical trials, preclinical studies or manufacturing. Even if such additionalinformation is submitted, the FDA may ultimately decide that the BLA or NDA does not satisfy the criteria for approval and issue a denial. The FDA couldalso approve the BLA or NDA with a Risk Evaluation and Mitigation Strategy (REMS) plan to mitigate risks, which could include medication guides,physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools.The FDA also may condition approval on, among other things, changes to12proposed labeling, development of adequate controls and specifications, or a commitment to conduct one or more post-market studies or clinical trials. Suchpost-market testing may include Phase 4 clinical trials and surveillance to further assess and monitor the product’s safety and effectiveness aftercommercialization. Also, new government requirements, including those resulting from new legislation, may be established, or the FDA’s policies maychange, which could delay or prevent regulatory approval of our products under development.Post-Approval RequirementsDrugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among otherthings, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverseexperiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject toprior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which suchproducts are manufactured, as well as new application fees for supplemental applications with clinical data.Drug manufacturers are subject to periodic unannounced inspections by the FDA and state agencies for compliance with cGMP requirements.Changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require prior FDA approval before beingimplemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirementsupon us and any third-party manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the areaof production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.We rely, and expect to continue to rely, on third parties for the production of clinical quantities of our product candidates and expect to rely in thefuture on third parties for the production of commercial quantities. Future FDA and state inspections may identify compliance issues at our facilities or at thefacilities of our contract manufacturers that may disrupt production, distribution, or require substantial resources to correct. In addition, discovery ofpreviously unknown problems with a product or the failure to comply with applicable requirements may result in restrictions on a product, manufacturer orholder of an approved BLA or NDA, including withdrawal or recall of the product from the market or other voluntary, FDA-initiated or judicial action thatcould delay or prohibit further marketing. Also, new government requirements, including those resulting from new legislation, may be established, or theFDA’s policies may change, which could delay or prevent regulatory approval of our products under development.The FDA may withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the productreaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or withmanufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information;imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMSprogram. Other potential consequences include, among other things: •restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls; •fines, untitled or warning letters or holds on post-approval clinical trials; •refusal of the FDA to approve pending BLAs or NDAs or supplements to approved BLAs or NDAs, or suspension or revocation of licenses orwithdrawal of approvals; •product seizure or detention, or refusal to permit the import or export of products; or •injunctions or the imposition of civil or criminal penalties.The FDA strictly regulates marketing, labeling, advertising, and promotion of products that are placed on the market. Drugs may be promoted only forthe approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulationsprohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.Orphan Designation and ExclusivityThe FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition that affects fewer than 200,000 individuals in theU.S., or if it affects more than 200,000 individuals in the U.S., there is no reasonable13expectation that the cost of developing and making the drug for this type of disease or condition will be recovered from sales in the U.S.Orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages,and user-fee waivers. In addition, if a product is the first to receive FDA approval for the indication for which it has orphan designation, the product is entitledto orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period ofseven years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity.Pediatric Trials and ExclusivityUnder the Pediatric Research Equity Act of 2003 (PREA) as amended, BLAs and NDAs must contain data to assess the safety and effectiveness of aninvestigational new drug product for the claimed indications in all relevant pediatric populations and to support dosing and administration for each pediatricsubpopulation for which the drug is safe and effective. A sponsor who is planning to submit a marketing application for a drug product that includes a newactive ingredient, new indication, new dosage form, new dosing regimen or new route of administration must submit an initial Pediatric Study Plan (PSP)within sixty days of an end-of-phase 2 meeting or as may be agreed between the sponsor and the FDA. The initial PSP must include an outline of the pediatricstudy or studies that the sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach, or ajustification for not including such detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement toprovide data from pediatric studies along with supporting information. The FDA may, on its own initiative or at the request of the applicant, grant deferralsfor submission of some or all pediatric data until after approval of the product for use in adults or full or partial waivers if certain criteria are met. The FDAand the sponsor must reach agreement on the PSP. A sponsor can submit amendments to an agreed-upon initial PSP at any time if changes to the pediatricplan need to be considered based on data collected from preclinical studies, early phase clinical trials, and/or other clinical development programs. Therequirements for pediatric data do not apply to any drug for an indication for which orphan designation has been granted.Pediatric exclusivity is another type of non-patent exclusivity in the U.S. and, if granted, provides for the attachment of an additional six months ofmarketing protection to the term of any existing regulatory exclusivity, including the five-year and three-year non-patent and orphan exclusivity. This six-month exclusivity may be granted if a BLA or NDA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. Thedata do not need to show the product to be effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’srequest, the additional protection is granted. If reports of FDA-requested pediatric trials are submitted to and accepted by the FDA within the statutory timelimits, whatever statutory or regulatory periods of exclusivity or patent protection covering the product are extended by six months. This is not a patent termextension, but it effectively extends the regulatory period during which the FDA cannot accept or approve another application relying on the BLA or NDAsponsor’s data.Patent Term RestorationDepending upon the timing, duration, and specifics of the FDA approval of the use of our product candidates, some of our U.S. patents may beeligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost duringproduct development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND and thesubmission date of a BLA or NDA, plus the time between the submission date and the approval of that application, except that the review period is reducedby any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved product is eligible for the extension andthe application for the extension must be submitted prior to the expiration of the patent and within 60 days of the product’s approval. The U.S. Patent andTrademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we mayapply for restoration of the patent term for one of our currently owned or licensed patents to add patent life beyond its current expiration date, depending onthe expected length of the clinical trials and other factors involved in the filing of the relevant BLA or NDA.14Abbreviated New Drug Applications for Generic DrugsIn 1984, with passage of the Hatch-Waxman Amendments, Congress authorized the FDA to approve generic drugs that are the same as drugspreviously approved by the FDA under the NDA provisions of the statute. To obtain approval of a generic drug, an applicant must submit an abbreviated newdrug application (ANDA) to the agency. In support of such applications, a generic manufacturer may rely on the preclinical and clinical testing previouslyconducted for a drug product previously approved under an NDA, known as the reference listed drug (RLD).Specifically, in order for an ANDA to be approved, the FDA must find that the generic version is identical to the RLD with respect to the activeingredients, the route of administration, the dosage form, and the strength of the drug. At the same time, the FDA must also determine that the generic drug is“bioequivalent” to the innovator drug. Under the statute, a generic drug is bioequivalent to an RLD if “the rate and extent of absorption of the generic drugdo not show a significant difference from the rate and extent of absorption of the listed drug...”Upon approval of an ANDA, the FDA indicates that the generic product is “therapeutically equivalent” to the RLD and it assigns a therapeuticequivalence rating to the approved generic drug in its publication “Approved Drug Products with Therapeutic Equivalence Evaluations,” also referred to asthe “Orange Book.” Physicians and pharmacists consider an “AB” therapeutic equivalence rating to mean that a generic drug is fully substitutable for theRLD. In addition, by operation of certain state laws and numerous health insurance programs, the FDA’s designation of an “AB” rating often results insubstitution of the generic drug without the knowledge or consent of either the prescribing physician or patient.The FDCA provides a period of five years of non-patent exclusivity for a new drug containing a new chemical entity. In cases where such exclusivityhas been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the submission is accompanied by a Paragraph IVcertification, in which case the applicant may submit its application four years following the original product approval. The FDCA also provides for a periodof three years of exclusivity if the NDA includes reports of one or more new clinical investigations, other than bioavailability or bioequivalence studies, thatwere conducted by or for the applicant and are essential to the approval of the application. This three-year exclusivity period often protects changes to apreviously approved drug product, such as a new dosage form, route of administration, combination or indication.Hatch-Waxman Patent Certification and the 30-Month StayUpon approval of an NDA or a supplement thereto, NDA sponsors are required to list with the FDA each patent with claims that cover the applicant’sproduct or a method of using the product. Each of the patents listed by the NDA sponsor is published in the Orange Book. When an ANDA applicant files itsapplication with the FDA, the applicant is required to certify to the FDA concerning any patents listed for the reference product in the Orange Book, exceptfor patents covering methods of use for which the ANDA applicant is not seeking approval.Specifically, the applicant must certify with respect to each patent that: •the required patent information has not been filed; •the listed patent has expired; •the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or •the listed patent is invalid, unenforceable or will not be infringed by the new product.A certification that the new product will not infringe the already approved product’s listed patents or that such patents are invalid or unenforceable iscalled a Paragraph IV certification. If the applicant does not challenge the listed patents or indicates that it is not seeking approval of a patented method ofuse, the ANDA application will not be approved until all the listed patents claiming the referenced product have expired.If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification tothe NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringementlawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days after the receipt of a ParagraphIV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months after the receipt of the Paragraph IV notice,expiration of the patent, or a decision in the infringement case that is favorable to the ANDA applicant.15European Union/Rest of World Government RegulationIn addition to regulations in the U.S., we will be subject to a variety of regulations in other jurisdictions governing, among other things, clinical trialsand any commercial sales and distribution of our products. The cost of establishing a regulatory compliance system for numerous varying jurisdictions can bevery significant. Although many of the issues discussed above with respect to the U.S. apply similarly in the context of the European Union (EU) and in otherjurisdictions, the approval process varies between countries and jurisdictions and can involve additional product testing and additional administrativereview periods. The time required to obtain approval in other countries and jurisdictions might differ from and be longer than that required to obtain FDAapproval. Regulatory approval in one country or jurisdiction does not ensure regulatory approval in another, but a failure or delay in obtaining regulatoryapproval in one country or jurisdiction may negatively impact the regulatory process in others.Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior tothe commencement of clinical trials or marketing of the product in those countries. Certain countries outside of the U.S. have a similar process that requiresthe submission of a clinical trial application much like the IND prior to the commencement of human clinical trials. In the EU, for example, a clinical trialauthorization application (CTA) must be submitted for each clinical protocol to each country’s national health authority and an independent ethicscommittee, much like the FDA and IRB, respectively. Once the CTA is accepted in accordance with a country’s requirements, the clinical trial may proceed.The requirements and process governing the conduct of clinical trials vary from country to country. In all cases, the clinical trials are conducted inaccordance with good clinical practices (GCP) the applicable regulatory requirements, and the ethical principles that have their origin in the Declaration ofHelsinki.To obtain regulatory approval of an investigational medicinal product under EU regulatory systems, we must submit a marketing authorizationapplication. The content of the BLA or NDA filed in the U.S. is like that required in the EU, except, among other things, country-specific documentrequirementsFor other countries outside of the EU, such as countries in Eastern Europe, Latin America or Asia, the requirements governing product licensing,pricing, and reimbursement vary from country to country.Countries that are part of the EU, as well as countries outside of the European Union, have their own governing bodies, requirements, and processeswith respect to the approval of pharmaceutical and biologic products. If we fail to comply with applicable foreign regulatory requirements, we may be subjectto, among other things, fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminalprosecution.Authorization Procedures in the EUMedicines can be authorized in the EU by using either the centralized authorization procedure or national authorization procedures. •Centralized procedure. The European Medicines Agency (EMA) implemented the centralized procedure for the approval of human medicines tofacilitate marketing authorizations that are valid throughout the European Economic Area (EEA). This procedure results in a single marketingauthorization issued by the EMA that is valid across the EEA. The centralized procedure is compulsory for human medicines that are: derivedfrom biotechnology processes, such as genetic engineering, contain a new active substance indicated for the treatment of certain diseases, suchas HIV/AIDS, cancer, diabetes, neurodegenerative disorders or autoimmune diseases and other immune dysfunctions, and officially designatedorphan medicines. •For medicines that do not fall within these categories, an applicant has the option of submitting an application for a centralized marketingauthorization to the European Commission following a favorable opinion by the EMA, as long as the medicine concerned is a significanttherapeutic, scientific or technical innovation, or if its authorization would be in the interest of public health. •National authorization procedures. There are also two other possible routes to authorize medicinal products in several EU countries, which areavailable for investigational medicinal products that fall outside the scope of the centralized procedure:16 •Decentralized procedure. Using the decentralized procedure, an applicant may apply for simultaneous authorization in more than one EUcountry of medicinal products that have not yet been authorized in any EU country and that do not fall within the mandatory scope of thecentralized procedure. •Mutual recognition procedure. In the mutual recognition procedure, a medicine is first authorized in one EU Member State, in accordance withthe national procedures of that country. Following this, further marketing authorizations can be sought from other EU countries in a procedurewhereby the countries concerned agree to recognize the validity of the original, national marketing authorization.In some cases, a Pediatric Investigation Plan (PIP) or a request for waiver or deferral, is required for submission prior to submitting a marketingauthorization application. A PIP describes, among other things, proposed pediatric trials and their timing relative to clinical trials in adults. Because Novusintends to pursue pediatric indications for OP0201 before adult indications, a PIP will be submitted to EMA and other EU countries, as required. The PIP willneed to be submitted early during product development, before marketing authorization applications are submitted. The timing of PIP submission cannot beafter initiation of pivotal trials or confirmatory (phase 3) trials.Exclusivity of New Chemical Entities and New Fixed Dose CombinationsIn the EU, new chemical entities, sometimes referred to as new active substances as well as new fixed dose combinations, qualify for eight years ofdata exclusivity upon marketing authorization and an additional two years of market exclusivity. This data exclusivity, if granted, prevents regulatoryauthorities in the EU from referencing the innovator’s data to assess a generic (abbreviated) application for eight years, after which a generic application canbe submitted, and the innovator’s data may be referenced, but not approved for two years. The overall ten-year period will be extended to a maximum ofeleven years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more new therapeuticindications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparison with existingtherapies.Exceptional Circumstances/Conditional ApprovalOrphan drugs or drugs with unmet medical needs may be eligible for EU approval under exceptional circumstances or with conditional approval.Approval under exceptional circumstances may be applicable to orphan products and is used when an applicant is unable to provide comprehensive data onthe efficacy and safety under normal conditions of use because the indication for which the product is intended is encountered so rarely that the applicantcannot reasonably be expected to provide comprehensive evidence, when the present state of scientific knowledge does not allow comprehensiveinformation to be provided, or when it is medically unethical to collect such information. Conditional marketing authorization may be applicable to orphanmedicinal products, medicinal products for seriously debilitating or life-threatening diseases, or medicinal products to be used in emergency situations inresponse to recognized public threats. Conditional marketing authorization can be granted on the basis of less complete data than is normally required inorder to meet unmet medical needs and in the interest of public health, provided the risk-benefit balance is positive, it is likely that the applicant will be ableto provide the comprehensive clinical data, and unmet medical needs will be fulfilled. Conditional marketing authorization is subject to certain specificobligations to be reviewed annually.Accelerated ReviewUnder the centralized procedure in the EU, the maximum timeframe for the evaluation of a marketing authorization application is 210 days(excluding clock stops, when additional written or oral information is to be provided by the applicant in response to questions asked by the EMA’sCommittee for Medicinal Products for Human Use, or CHMP). Accelerated evaluation might be granted by the CHMP in exceptional cases, when a medicinalproduct is expected to be of a major public health interest, particularly from the point of view of therapeutic innovation. In this circumstance, EMA ensuresthat the opinion of the CHMP is given within 150 days, excluding clock stops.Pharmaceutical Coverage, Pricing and ReimbursementSignificant uncertainty exists as to the coverage and reimbursement status of any products for which we obtain regulatory approval. In the U.S. and inother countries, sales of any products for which we receive regulatory approval for commercial sale will depend in part on the availability of coverage andreimbursement from third-party payors. Third-party payors include government authorities, managed care providers, private health insurers and otherorganizations. The process for determining whether a payor will provide coverage for a product may be separate from the process for setting the17reimbursement rate that the payor will pay for the product. Third-party payors may limit coverage to specific products on an approved list, or formulary,which might not include all of the FDA-approved products for a particular indication. Moreover, a payor’s decision to provide coverage for a drug productdoes not imply that an adequate reimbursement rate will be approved. Adequate third- party reimbursement may not be available to enable us to maintainprice levels sufficient to realize an appropriate return on our investment in product development.Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products andservices, in addition to their safety and efficacy. In order to obtain coverage and reimbursement for any product that might be approved for sale, we may needto conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of our products, in addition to the costsrequired to obtain regulatory approvals. Our product candidates may not be considered medically necessary or cost-effective. If third-party payors do notconsider a product to be cost-effective compared to other available therapies, they may not cover the product after approval as a benefit under their plans or,if they do, the level of payment may not be sufficient to allow a company to sell its products at a profit.The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost containment programs to limitthe growth of government-paid healthcare costs, including price controls, restrictions on reimbursement and requirements for substitution of generic productsfor branded prescription drugs. By way of example, the Patient Protection and Affordable Care Act, as amended by the Health Care and EducationReconciliation Act of 2010, collectively, the Affordable Care Act, contains provisions that may reduce the profitability of drug products, including, forexample, increased rebates for drugs sold to Medicaid programs, extension of Medicaid rebates to Medicaid managed care plans, mandatory discounts forcertain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales to federal healthcare programs. Some of theprovisions of the Affordable Care Act have yet to be fully implemented, while certain provisions have been subject to judicial and congressional challenges.In January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, that while not a law, is widely viewed as the first step toward the passageof legislation that would repeal certain aspects of the Affordable Care Act. Further, on January 20, 2017, President Trump signed an Executive Order directingfederal agencies with authorities and responsibilities under the Affordable Care Act to waive, defer, grant exemptions from, or delay the implementation ofany provision of the Affordable Care Act that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals,healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Congress also could consider subsequent legislation to replaceelements of the Affordable Care Act that are repealed. Thus, the full impact of the Affordable Care Act, any law replacing elements of it, or the politicaluncertainty surrounding its repeal or replacement on our business remains unclear. Adoption of government controls, measures and tightening of restrictivepolicies in jurisdictions with existing controls and measures could limit payments for pharmaceuticals.In European countries, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control ofnational healthcare systems that fund a large part of the cost of those products to consumers. Some jurisdictions operate positive and negative list systemsunder which products may only be marketed once a reimbursement price has been agreed to by the government. To obtain reimbursement or pricingapproval, some of these countries may require the completion of clinical trials that compare the cost-effectiveness of a product candidate to currentlyavailable therapies. Other member states allow companies to fix their own prices for medicines but monitor and control company profits. The downwardpressure on healthcare costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to theentry of new products. In addition, in some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country.The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third-party payorsfail to provide adequate coverage and reimbursement. In addition, the emphasis on cost containment measures in the U.S. and other countries has increased,and we expect will continue to increase the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement rates may change at anytime. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorablecoverage policies and reimbursement rates may be implemented in the future.18Other Healthcare Laws and Compliance RequirementsIf we obtain regulatory approval for any of our product candidates, we may be subject to various federal and state laws targeting fraud and abuse inthe healthcare industry. These laws may impact, among other things, our proposed sales, marketing and education programs. In addition, we may be subjectto patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operateinclude: •the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering orpaying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable undera federal healthcare program, such as the Medicare and Medicaid programs; •federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities fromknowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false orfraudulent; •the federal Health Insurance Portability and Accountability Act of 1996, (HIPAA), which created new federal criminal statutes that prohibitexecuting a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters; •the federal transparency laws, including the provision of the Affordable Care Act referred to as the federal Physician Payment Sunshine Act, thatrequires drug and biologics manufacturers to disclose payments and other transfers of value provided to physicians and teaching hospitals andownership interests of physicians and their immediate family members; •HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH) and its implementing regulations,which imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information; and •state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or servicesreimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy and security of health information incertain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating complianceefforts.The Affordable Care Act broadened the reach of the fraud and abuse laws by, among other things, amending the intent requirement of the federal Anti-Kickback Statute and the applicable criminal healthcare fraud statutes contained within 42 U.S.C. § 1320a-7b. Pursuant to the statutory amendment, a personor entity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, theAffordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-KickbackStatute constitutes a false or fraudulent claim for purposes of the civil False Claims Act or the civil monetary penalties statute. Many states have adopted lawssimilar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not onlythe Medicare and Medicaid programs.We are also subject to the U.S. Foreign Corrupt Practices Act (FCPA) which prohibits improper payments or offers of payments to foreign governmentsand their officials for the purpose of obtaining or retaining business. Safeguards we implement to discourage improper payments or offers of payments by ouremployees, consultants, and others may be ineffective, and violations of the FCPA and similar laws may result in severe criminal or civil sanctions, or otherliabilities or proceedings against us, any of which would likely harm our reputation, business, financial condition and result of operations.If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may besubject to penalties, including civil and criminal penalties, exclusion from participation in government healthcare programs, such as Medicare and Medicaidand imprisonment, damages, fines and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate ourbusiness and our results of operations.EmployeesAs of March 22, 2019, Novus had ten employees, all of which were full-time employees. None of our employees are represented by labor unions orcovered by collective bargaining agreements. We consider our relationship with our employees to be good.19Financial Information about SegmentsWe operate in a single reportable segment in the U.S.Reverse MergerOn December 21, 2016, Tokai Pharmaceuticals, Inc. (“Tokai”), a Delaware corporation, Otic, and the stockholders of Otic Pharma, Ltd. (“Otic”) (eacha “Seller” and collectively, the “Sellers”), entered into a Share Purchase Agreement (the “Share Purchase Agreement”), pursuant to which, among 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 (“Otic Shares”) owned bysuch Seller in exchange for the issuance of a certain number of shares of common stock of Tokai, as determined pursuant to the terms of the Share PurchaseAgreement (the “Reverse Merger”). The parties amended and 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 areverse 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 of4,027,693 shares of Tokai’s common stock in exchange for 840,115 Otic Shares. Following the completion of the Reverse Merger, the business beingconducted by Tokai became primarily the business conducted by Otic. In connection with the Reverse Merger, the name of the surviving corporation waschanged to “Novus Therapeutics, Inc.”Emerging Growth CompanyWe qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended (JOBS Act). As an emerginggrowth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies.We would cease to be an emerging growth company on the date that is the earliest of: (i) the last day of the fiscal year in which we have total annual grossrevenues of $1 billion or more; (ii) December 31, 2020; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during theprevious three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.Corporate InformationOtic was founded in the State of Israel in 2008. In 2015, Otic established U.S. operations and moved its corporate headquarters to Irvine, California. In2017, Otic consummated the Reverse Merger with Tokai Pharmaceuticals, Inc., a Delaware corporation that was incorporated on March 26, 2004 andsubsequently changed its name to Novus Therapeutics, Inc. Our executive offices are located at 19900 MacArthur Boulevard, Suite 550, Irvine, California92612. Our telephone number is (949) 238-8090 and our website is novustherapeutics.com. We do not incorporate the information on or accessible throughour website into this Annual Report, and you should not consider any information on, or that can be accessed through, our website as part of this AnnualReport on Form 10-K.You are advised to read this Annual Report on Form 10-K in conjunction with other reports and documents that we file from time to time with theSecurities and Exchange Commission (SEC). In particular, please read our definitive proxy statement, which will be filed with the SEC in connection withour 2019 annual meeting of stockholders, our quarterly reports on Form 10-Q and any current reports on Form 8-K that we may file from time to time. Youmay obtain copies of these reports after the date of this annual report directly from us or from the SEC at its website at www.sec.gov. We make our periodicand current reports available on our internet website, free of charge, as soon as reasonably practicable after such material is electronically filed with, orfurnished to, the SEC.Item 1A. Risk Factors.You should carefully consider the following risk factors, as well as the other information in this Annual Report on Form 10-K, and in our otherpublic filings. The occurrence of any of these risks could harm our business, financial condition, results of operations and/or growth prospects or cause ouractual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time.You should consider all of the risk factors described in our public filings when evaluating our business.20Risks Related to Our OperationsWe have incurred significant operating losses since our inception and expect that we will continue to incur losses over the next several years andmay never achieve or maintain profitability.We have incurred significant annual net operating losses in every year since our inception. We have no products approved for commercial sale andhave not generated any revenue from product sales to date, and we continue to incur significant research and development and other expenses related to ourongoing operations. If OP0201 or any future product candidates we develop are not successfully developed and approved, we may never generate anyrevenue from sales of products. The Company has experienced net losses and negative cash flows from operating activities since its inception. TheCompany’s net loss for the year ended December 31, 2018 is $14.1 million and the Company has an accumulated deficit of $41.6 million. We have notgenerated any revenues from product sales, have not completed the development of any product candidate and may never have a product candidate approvedfor commercialization. We expect it will be several years, if ever, before we have a product candidate ready for commercialization. We have financed ouroperations to date primarily through sales of equity. We have devoted substantially all of our financial resources and efforts to research and development,including pre-clinical studies and our clinical trials. Our net losses may fluctuate significantly from quarter to quarter and year to year and will depend, inpart, on the rate at which we incur expenses and our ability to generate revenue. Net losses and negative cash flows have had, and will continue to have, anadverse effect on our stockholders’ equity and working capital.We are focused primarily on developing OP0201 as a potential first-in-class treatment option for patients at risk for or with otitis media (OM) (middleear inflammation with or without infection). Although we have successfully manufactured a current Good Manufacturing Procedures (cGMP) batch ofOP0201 drug product suitable for clinical trials, this was done on a smaller scale, and we may have difficultly scaling up manufacturing in a timely and cost-effective manner. We are currently conducting four clinical trials to explore the safety, tolerability, and potential efficacy of OP0201. Upon completion ofthese clinical studies, we intend to initiate phase 2 and phase 3 studies, with an initial focus on a development program that, if successful, will lead toregistration of OP0201 in North America and key European markets as a product to treat OM and prevent OM in children. We expect that it will be severalyears, if ever, before we have a product candidate ready for commercialization. If we are unable to successfully generate clinical data for the OP0201 program,we may have greater difficulty raising additional capital on favorable terms, or at all.We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses that we incur mayfluctuate significantly from quarter to quarter. We anticipate that our expenses will increase substantially if and as we: •continue formulation development of our product candidates; •continue device development for our drug-device product candidates; •continue nonclinical and clinical development of our product candidates; •seek to identify and acquire additional product candidates; •acquire or in-license other products and technologies; •enter into collaboration arrangements with regards to product discovery or development; •develop manufacturing processes; •seek marketing approvals for any of our product candidates that successfully complete clinical trials; •establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval; •maintain, expand and protect our intellectual property portfolio; •hire additional personnel; •add operational, financial and management information systems and personnel, including personnel to support our product development andplanned future commercialization efforts; and •operate as a public company.To become and remain profitable, we must develop and eventually commercialize a product or products with significant market potential. This willrequire us to be successful in a range of challenging activities, including completing21clinical trials of our product candidates, obtaining marketing approval for these product candidates and manufacturing, marketing and selling those productsfor which we obtain marketing approval. We may never succeed in these activities and, even if we do, may never generate revenues that are significant orlarge enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Ourfailure to become and remain profitable would decrease the value of the Company, could impair our ability to raise capital, maintain our nonclinical andclinical development efforts, and expand our business or continue our operations and may require us to raise additional capital that may dilute the ownershipinterest of common stockholders. A decline in the value of the Company could also cause stockholders to lose all or part of their investment.We are early in our development efforts and have only two drug candidates, OP0102 and OP0201. If we are unable to successfully develop andcommercialize any drug candidate, or if we experience significant delays in doing so, our business will be materially harmed.We currently do not have any products that have gained regulatory approval. We have invested substantially all our efforts and financial resources inproduct development, including funding our formulation and device development, manufacturing, nonclinical studies, and clinical studies. Our ability togenerate product revenues, which we do not expect will occur for several years, if ever, will depend heavily on the successful development and eventualcommercialization of one or more drug candidates. As a result, our business is substantially dependent on our ability to successfully complete thedevelopment of and obtain regulatory approval for our, or additional product candidates.We have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in newand rapidly evolving fields, particularly in the pharmaceutical area. For example, to execute our business plan, we will need to successfully: •execute formulation, manufacturing, clinical, and nonclinical development activities; •manufacture drug product at commercial scale; •establish and confirm commercially acceptable stability (shelf-life) of our drug products; •in-license or acquire other product candidates and advance them through clinical development; •obtain required regulatory approvals for the development and commercialization of OP0201 or other product candidates; •maintain, leverage and expand our intellectual property portfolio; •build and maintain robust sales, distribution and marketing capabilities, either on our own or in collaboration with strategic partners; •gain market acceptance for any approved and marketed drug products; •obtain and maintain adequate product pricing and reimbursement; •develop and maintain any strategic relationships we elect to enter; and •manage our spending as costs and expenses increase due to product manufacturing, nonclinical development, clinical trials, regulatoryapprovals, post-marketing commitments, and commercialization.If we are unsuccessful in accomplishing these objectives, we may not be able to successfully develop and commercialize our or other productcandidates, and our business will suffer.22Our short operating history may make it difficult to evaluate the success of our business to date and to assess our future viability.We are an early development stage pharmaceutical company. Our ongoing operations to date have been limited to organizing and staffing theCompany, business planning, raising capital, acquiring and developing technology, identifying potential product candidates, undertaking nonclinicalstudies, and, up until the consummation of the Reverse Merger, early stage clinical studies of our most advanced product candidate, OP0101. Subsequent tothe completion of the Reverse Merger, we paused OP0101 and the OP0102 development program and began focusing substantially all our resources on theadvancement of our surfactant product (OP0201) for otitis media. Operations related to OP0201 include arranging for third party vendors to formulate andmanufacture material using cGMP and preparing for phase 1 and phase 2 clinical studies. We have not yet demonstrated our ability to successfully completelarge-scale, pivotal clinical trials, obtain marketing approvals, manufacture a commercial scale product or arrange for a third party to do so on our behalf, orconduct sales and marketing activities necessary for successful product commercialization. It can take many years to develop a new medicine from the time itis discovered to when it is available for treating patients. Consequently, any predictions made about our future success or viability based on our shortoperating history to date may not be as accurate as they could be if we had a longer operating history.In addition, as an early stage business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknownfactors. To successfully market any of our product candidates, we will need to transition from a company with a clinical development focus to a companycapable of supporting commercial activities. We may not be successful in such a transition.Drug development involves a lengthy and expensive process with an uncertain outcome, including failure to demonstrate safety and efficacy to thesatisfaction of the FDA or similar regulatory authorities outside the U.S. We may incur additional costs or experience delays in completing, or ultimatelybe unable to complete, the formulation and commercialization of our product candidates.We will continue to conduct OP0201 formulation and device development as the product advances through clinical development. We are highlydependent on third parties for OP0201 formulation and device development as well as manufacturing of drug product for future clinical trials and commercialsupply.Reformulation work for OP0102 to explore adding a second active ingredient (anesthetic) to address immediate relief of ear pain associated with AOEcommenced in 2016 but was subsequently put on hold. If development of OP0102 is resumed, additional formulation development and clinical studies withthe new OP0102 combination product (antibiotic + anesthetic) will need to be conducted. There is a risk that additional nonclinical and/or clinical safetystudies will be required by the FDA or similar regulatory authorities outside the U.S. and/or that subsequent studies will not match results seen in prior studieswith OP0101.Given the early stage of development for both products, the risk of failure for both of our product candidates is high. Before obtaining marketingapproval from regulatory authorities for the sale of any product candidate, we must complete formulation and device development for our products, conductnonclinical trials, and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Formulation anddevice development, nonclinical and clinical testing are all expensive activities, difficult to design and implement, and can take years to complete. Theoutcome of nonclinical and clinical trials is inherently uncertain. Failure can occur at any time during the development program, including during theclinical trial process. Further, the results of nonclinical studies and early clinical trials of our product candidates, as well as earlier generation formulationsmay not be predictive of the results of later-stage clinical trials. Interim results of a clinical trial do not necessarily predict final results. For instance, theresults of our studies with the earlier generation OP0101 formulation may not be predictive of the results of studies conducted with OP0102 formulation.Moreover, nonclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their productcandidates performed satisfactorily in nonclinical and clinical trials have nonetheless failed to obtain marketing approval of their products. It is impossible topredict when or if any of our product candidates will prove effective, safe and well-tolerated in humans or will receive regulatory approval.23We may experience delays in our clinical trials, and we do not know whether planned clinical trials will begin or enroll subjects on time, need to beredesigned or be completed on schedule, if at all. There can be no assurance that the EMA, or the Medicines & Healthcare Products Regulatory Agency(MHRA; the United Kingdom regulatory authority), will approve Clinical Trial Application’s for any of our product candidates in the future. There is also noassurance that the FDA will not put any of our product candidates on clinical hold in the future. We may experience numerous unforeseen events during, or asa result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates. Clinical trials may bedelayed, suspended or prematurely terminated for a variety of reasons, such as: •delay or failure in reaching agreement with the EMA, MHRA, FDA or a comparable foreign regulatory authority on a trial design that we want toexecute; •delay or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a regulatory authorityregarding the scope or design of a clinical study; •delays in reaching, or failure to reach, agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites; •delays in completing formulation development and manufacturing as a prerequisite to commencing clinical work; •inability, delay, or failure in identifying and maintaining a sufficient number of trial sites, many of which may already be engaged in otherclinical programs; •delay or failure in recruiting and enrolling suitable subjects to participate in a trial; •delay or failure in having subjects complete a trial or return for post-treatment follow-up; •clinical sites and investigators deviating from trial protocol, failing to conduct the trial in accordance with regulatory requirements, or droppingout of a trial, including the possibility we could learn of additional subjects who were exposed by predecessor IND sponsors to investigationaldrugs outside of clinical protocols; •lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements toconduct additional clinical studies and increased expenses associated with the services of our contract research organizations (CROs) and otherthird parties; •clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, toconduct additional clinical trials or abandon product development programs; •the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trialsmay be slower than we anticipate, or participants may drop out of these clinical trials at a higher rate than we anticipate; •we may experience delays or difficulties in the enrollment of patients that our product candidates are designed to target; •our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or atall; •we may have difficulty partnering with experienced CROs and study sites that can identify patients that our product candidates are designed totarget and run our clinical trials effectively; •regulators or institutional review boards (IRBs) may require that we or our investigators suspend or terminate clinical research for variousreasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable healthrisks; •the cost of clinical trials of our product candidates may be greater than we anticipate; •the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may beinsufficient or inadequate; or •there may be changes in governmental regulations or administrative actions. In addition, our development and commercialization activitiescould be harmed or delayed by a shutdown of the U.S. government, including the FDA. For example, a prolonged shutdown may significantlydelay the FDA's ability to timely review and process any submissions we may file or cause other regulatory delays, which could materially andadversely affect our business.24If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we areunable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are onlymodestly positive, or if there are safety concerns, we may: •be delayed in obtaining marketing approval for our product candidates; •not obtain marketing approval at all; •obtain approval for indications or patient populations that are not as broad as intended or desired; •obtain approval with labeling that includes significant use or distribution restrictions or safety warnings that would reduce the potential marketfor our products or inhibit our ability to successfully commercialize our products; •be subject to additional post-marketing restrictions and/or testing requirements; or •have the product removed from the market after obtaining marketing approval.Our product development costs will also increase if we experience delays in testing or marketing approvals. We do not know whether any of ournonclinical studies or clinical trials will need to be restructured or will be completed on schedule, or at all. Significant nonclinical or clinical trial delays alsocould shorten any periods during which we may have the exclusive right to commercialize our product candidates or may allow our competitors to bringproducts to market before we do and impair our ability to successfully commercialize our product candidates and may harm our business and results ofoperations.Additionally, because we are developing a drug-device combination product, we will be subject to greater regulatory scrutiny and technicalchallenges. Devices such as our metered-dose inhaler are regulated by a separate division within the FDA. Even if our drug compound is shown to be safe andeffective, our delivery device must also demonstrate that it can reliably deliver a consistent dose of the drug across repeated uses. This is challenging and issubject to a further layer of regulatory review before our product can be approved. If we are unsuccessful in addressing these technical and regulatorychallenges, our prospects could be adversely affected.If we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary regulatory approvals could be delayedor prevented and expenses for the development of our product candidates could increase.We may not be able to initiate or continue clinical trials for our product candidates if we are unable to locate and enroll a sufficient number of eligiblepatients to participate in these trials to demonstrate safety and efficacy. We do not know whether the ongoing or planned clinical trials will enroll subjects ina timely fashion, require redesign of essential trial elements or be completed on its projected schedule. In addition, competitors may have ongoing clinicaltrials for product candidates that treat related or the same indications as our product candidates, and patients who would otherwise be eligible for our clinicaltrials may instead enroll in clinical trials of our competitors’ product candidates. Our inability to enroll a sufficient number of patients for our clinical trialswould result in significant delays and could require us to abandon one or more clinical trials altogether.Patient enrollment is affected by other factors including: •the eligibility criteria for the study in question; •the perceived risks and benefits of the product candidate under study; •the efforts to facilitate timely enrollment in clinical trials; •the inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs,including some that may be for the same disease indication; •the patient referral practices of physicians; •the proximity and availability of clinical trial sites for prospective patients; •ambiguous or negative interim results of our clinical trials, or results that are inconsistent with earlier results; •feedback from regulatory authorities, IRBs, ethics committees (ECs), or data safety monitoring boards, or results from earlier stage or concurrentnonclinical and clinical studies, that might require modifications to the protocol; •decisions by regulatory authorities, IRBs, ECs, or the Company, or recommendations by data safety monitoring boards, to suspend or terminateclinical trials at any time for safety issues or for any other reason; and25 •unacceptable risk-benefit profile or unforeseen safety issues or adverse effects.Enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would cause the value of theCompany to decline and limit our ability to obtain additional financing.If serious adverse events or unacceptable side effects are identified during the development of our product candidates, we may need to abandon orlimit our development of some of our product candidates.If our product candidates are associated with undesirable effects in nonclinical or clinical trials or have characteristics that are unexpected, we mayneed to interrupt, delay or abandon their development or limit development to more narrow uses or subpopulations in which the undesirable side effects orother characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Any occurrences of clinically significant adverse eventswith our product candidates may harm our business, financial condition and prospects significantly.OP0201 is an early‑product candidate, and the side effect profile in humans has not been fully established. Currently unknown, drug-related sideeffects may be identified through ongoing and future OP0201 clinical studies and, as such, these possible drug-related side effects could affect patientrecruitment, the ability of enrolled subjects to complete the trial, or result in potential product liability claims.OP0102 second generation formulation will be an early-product candidate. The side effect profile in animals and humans will need to be fullyestablished. OP0102 may be a product with an unacceptable side effect profile.Risks Related to Our Financial Position and Need for Additional CapitalWe have concluded and disclosed in the footnotes to our consolidated financial statements, included elsewhere within this Annual Report, that wedo not have sufficient cash to fund our operations through 12 months from the date of issuance of the most recent financial statements.Our consolidated financial statements included in this Annual Report have been prepared on a basis that assumes that we will continue as a goingconcern and does not include any adjustments that may result from the outcome of this uncertainty.Our ability to continue as a going concern is dependent upon a number of factors, including our ability to obtain the necessary financing to meet ourobligations and repay our liabilities arising from obligations that become due in the ordinary course of business. Management currently believes that it willbe necessary for us to raise additional funding in the form of an equity financing from the sale of common stock. There can be no guarantee that we willsuccessfully raise all the funding we require. However, substantial doubt about a company’s ability to continue as a going concern is generally viewedunfavorably by current and prospective investors, as well as by analysts and creditors. As a result, it may be more difficult for us to raise the additionalfinancing necessary to continue to operate our business and we may be forced to significantly alter our business strategy, substantially curtail our currentoperations, or cease operations altogether.We will need substantial additional funding. If we are unable to raise capital when needed, we would be compelled to delay, reduce or eliminateour product development programs or commercialization efforts.We expect our expenses to increase in parallel with our ongoing activities, particularly as we continue our nonclinical and clinical development,identify new clinical candidates and initiate clinical trials of, and seek marketing approval for, our product candidates. In addition, if we obtain marketingapproval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing anddistribution. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our nonclinical and clinicaldevelopment programs or any future commercialization efforts.We have sufficient capital to complete the ongoing OP0201 phase 1 clinical studies but will require additional capital to conduct additional OP0201studies and ultimately commercialize OP0201 if approved. We may also need to raise additional funds to pursue other development activities related toadditional product candidates that we may develop. Our funding needs may fluctuate significantly based on a number of factors, such as: •the scope, progress, results and costs of formulation development and manufacture of drug product to support nonclinical and clinicaldevelopment of our product candidates;26 •the extent to which we enter into additional collaboration arrangements regarding product discovery or development, or acquire or in-licenseproducts or technologies; •our ability to establish additional collaborations with favorable terms, if at all; •the costs, timing and outcome of regulatory review of our product candidates; •the costs of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our productcandidates for which we receive marketing approval; •revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;and •the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defendingintellectual property-related claims.Identifying potential product candidates and conducting formulation development, nonclinical testing and clinical trials is a time-consuming,expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approvaland achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will bederived from sales of products that we do not expect to be commercially available for several years, if at all. Accordingly, we will need to continue to rely onadditional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies orproduct candidates.Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equityofferings and debt financings. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale ofequity or convertible debt securities, the ownership interest of common stockholders will be diluted, and the terms of these securities may include liquidationor other preferences that adversely affect the rights of common stockholders. Debt financing and preferred equity financing, if available, may involveagreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expendituresor declaring dividends.We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional funds when needed,we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts.Future sales of shares by existing stockholders could cause the Company’s stock price to decline.If existing stockholders of the Company sell, or indicate an intention to sell, substantial amounts of the Company’s common stock in the publicmarket the trading price of the common stock of the combined company could decline. At December 31, 2018, the Company had approximately 9.4 millionshares outstanding.The Share Purchase Agreement by and among Tokai, Otic, and stockholders of Otic contained a lock-up covenant from the Otic stockholders, whichexpired on November 5, 2017. The lock-up covenant prevented any Otic stockholder from offering, selling, or otherwise disposing of, directly or indirectly,any securities of the Company, or otherwise enter into a transaction that would have similar effect for 180 days following the closing of the Reverse Merger.Concurrent with the Reverse Merger, the Company completed the Private Placement. A registration statement covering the resale of the shares of Companycommon stock issuable in connection with the Private Placement is in effect, allowing up to 400,400 shares of common stock to be sold in the public market.Further, as of November 5, 2017, shares held by directors, executive officers of the Company and other affiliates are eligible for sale in the public market,subject to volume limitations under Rule 144 under the Securities Act.27Because the Reverse Merger resulted in an ownership change under Section 382 of the Internal Revenue Code, for Tokai, Tokai’s pre-merger netoperating loss carryforwards and certain other tax attributes are subject to limitations. The net operating loss carryforwards and other tax attributes ofOtic and of the post-merger Company may also be subject to limitations as a result of ownership changes.If a corporation undergoes an “ownership change” within the meaning of Section 382 of the Code, the corporation’s net operating loss carryforwardsand certain other tax attributes arising from before the ownership change are subject to limitations on use after the ownership change. In general, anownership change occurs if there is a cumulative change in the corporation’s equity ownership by certain stockholders that exceeds 50 percentage pointsover a rolling three-year period. Similar rules may apply under state tax laws. The Reverse Merger resulted in an ownership change for Tokai and,accordingly, Tokai’s net operating loss carryforwards and certain other tax attributes may be subject to limitations (or disallowance) on their use after theReverse Merger. Otic’s net operating loss carryforwards may also be subject to limitation as a result of prior shifts in equity ownership and/or the transaction.Additional ownership changes in the future could result in additional limitations on Tokai’s, Otic’s and the post-merger Company’s net operating losscarryforwards. Consequently, even if the Company achieves profitability, it may not be able to utilize a material portion of Tokai’s, Otic’s, or the post-mergerCompany’s net operating loss carryforwards and other tax attributes, which could have a material adverse effect on cash flow and results of operations.Risks Related to Regulatory Approval of Our Product Candidates and Other Legal Compliance MattersIf we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, or the approvals may be for a narrow indication, wemay not be able to commercialize our product candidates, and our ability to generate revenue may be materially impaired.Our product candidates must be approved by the FDA pursuant to a new drug application in the U.S. and by other regulatory authorities outside theU.S. prior to commercialization in the respective regions. The process of obtaining marketing approvals, both in the U.S. and outside the U.S., is expensiveand takes several years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and noveltyof the product candidates involved. Failure to obtain marketing approval for a product candidate will prevent us from commercializing the productcandidate. We have not received approval to market any of our product candidates from regulatory authorities in any country. We have no experience infiling and supporting the applications necessary to gain marketing approvals for ear, nose, or throat (ENT) products and may engage third-party consultantsto assist in this process. Securing marketing approval requires the submission of extensive nonclinical and clinical data, and other supporting information toregulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing marketing approval also requires thesubmission of information about the product formulation and manufacturing process to, and inspection of manufacturing facilities by, the regulatoryauthorities. Our product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects,toxicities or other characteristics that may preclude our obtaining marketing approval or prevent or limit commercial use. Regulatory authorities havesubstantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and requireadditional nonclinical, clinical or other data. In addition, varying interpretations of the data obtained from nonclinical and clinical studies could delay, limitor prevent marketing approval of a product candidate. Changes in marketing approval policies during the development period, changes in or the enactmentof additional statutes or regulations, or changes in regulatory review for each submitted product application, may also cause delays in or prevent the approvalof an application.Any marketing approval we ultimately obtain may be for fewer or more limited indications than requested or subject to restrictions or post-approvalcommitments that render the approved product not commercially viable or its market potential significantly impaired. In addition, regulatory agencies maynot approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates.If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial prospects for our productcandidates may be harmed and our ability to generate revenues will be materially impaired.Failure to obtain marketing approval in international jurisdictions would prevent our product candidates from being marketed outside the U.S.In order to market and sell our products in the EU and other international jurisdictions outside of the U.S., we or our third-party collaborators mustobtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries andmay require additional nonclinical, clinical or health outcome data. In addition, the time required to obtain approval may differ substantially amongstinternational jurisdictions.28The regulatory approval process outside the U.S. generally includes all the risks associated with obtaining FDA approval. In addition to regulatory approval,in many countries outside the U.S., it is required that the product be approved for reimbursement before the product can be approved for sale in that country.We or these third parties may not obtain approvals from regulatory authorities outside the U.S. on a timely basis, if at all. Approval by the EMA, MHRA, orFDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the U.S. does notensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for marketing approvals and may notreceive necessary approvals to commercialize our products in any market.Any product candidate for which we obtain marketing approval will be subject to extensive post-marketing regulatory requirements and could besubject to post-marketing restrictions or withdrawal from the market, and we may be subject to penalties if we fail to comply with regulatory requirementsor if we experience unanticipated problems with our products, when and if any of them are approved.Our product candidates and the activities associated with their development and commercialization, including their testing, manufacture,recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation that are specific to thosedefined by regulatory authorities in the countries where the product is approved. In the U.S. and other countries that follow the International Conference onHarmonization (ICH), these requirements include submissions of safety and other post-marketing information and reports, registration and listingrequirements, cGMP requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents,including periodic inspections by the FDA and other regulatory authorities, requirements regarding the distribution of samples to physicians andrecordkeeping.The FDA, or other regulatory authorities, may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitorthe safety or efficacy of the product. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for theapproved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’communications regarding use of their products and if we promote our products beyond their approved indications, we may be subject to enforcement actionfor off-label promotion. Violations of the Federal Food, Drug, and Cosmetic Act relating to the promotion of prescription drugs may lead to investigationsalleging violations of federal and state healthcare fraud and abuse laws, as well as state consumer protection laws.In addition, later discovery of previously unknown adverse events or other problems with our products, manufacturers or manufacturing processes, orfailure to comply with regulatory requirements, may yield various results, including: •restrictions on such products, manufacturers or manufacturing processes; •restrictions on the labeling or marketing of a product; •restrictions on product distribution or use; •requirements to conduct post-marketing studies or clinical trials; •warning or untitled letters; •withdrawal of the products from the market; •refusal to approve pending applications or supplements to approved applications that we submit; •recall of products; •fines, restitution or disgorgement of profits or revenues; •suspension or withdrawal of marketing approvals; •refusal to permit the import or export of our products; •product seizure; or •injunctions or the imposition of civil or criminal penalties.Non-compliance with EU requirements regarding safety monitoring or pharmacovigilance, and with requirements related to the development ofproducts for the pediatric population, can also result in significant financial penalties. Similarly, failure to comply with the EU’s requirements regarding theprotection of personal information can also lead to significant penalties and sanctions.29Legislation regulating the pharmaceutical and healthcare industries may increase the difficulty and cost for us to obtain marketing approval ofand commercialize our product candidates and affect the prices we may obtain.In the U.S. and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes intended to containhealthcare costs and modify the regulation of drug and biologic products. These and other regulatory changes could prevent or delay marketing approval ofour product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any product candidates for which we obtainmarketing approval.For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act(collectively, the “PPACA”) substantially changed the way healthcare is financed by both governmental and private insurers, significantly impacting the U.S.pharmaceutical industry. The PPACA, among other things, addresses a new methodology by which rebates owed by manufacturers under the Medicaid DrugRebate Program are calculated for certain drugs, increases the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Programand extends the rebate program to individuals enrolled in Medicaid managed care organizations, and establishes annual fees and taxes on manufacturers ofcertain branded prescription drugs. Implementation of the PPACA remains ongoing, but there is uncertainty as to how the law’s various provisions willultimately affect the industry and whether all aspects of the law will remain in place.In addition to the PPACA, other legislative changes have been proposed and adopted since the PPACA was enacted. In the U.S., the Budget ControlAct of 2011 included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. This policy was initially set toexpire in fiscal year 2021 but has been extended to 2025. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012,which, among other things, reduced Medicare payments to several providers, and increased the statute of limitations period for the government to recoveroverpayments to providers from three to five years. Further, under the Trump administration there may be additional regulatory changes, as well as thepotential repeal (in whole or in part) of the PPACA, that could negatively affect insurance coverage and/or drug prices. Any such new laws may result inadditional reductions in Medicare and other healthcare funding.We expect that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coveragecriteria and additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or othergovernment programs may result in a similar reduction in payments from private payers. The implementation of cost containment measures or otherhealthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our products.Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities forpharmaceutical products. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketingapproval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.We expect that additional state and federal healthcare reform measures and regulations will be adopted in the future. Any of these measures andregulations could limit the amounts that federal and state governments will pay for healthcare products and services, result in reduced demand for our productcandidates or additional pricing pressures and affect our product development, testing, marketing approvals and post-market activities.Laws, restrictions, and other regulatory measures are also imposed by healthcare laws and regulations in international jurisdictions and in thosejurisdictions we face the same issues as in the U.S. regarding difficulty and cost for us to obtain marketing approval and commercialization of our productcandidates and which may affect the prices we may obtain.Governments outside the U.S. tend to impose strict price controls, which may adversely affect our revenues, if any.In some countries, particularly the countries of the EU, the pricing of prescription pharmaceuticals is subject to governmental control. In thesecountries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtainreimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our productcandidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactorylevels, our business could be harmed, possibly materially.30Our relationships with customers and third-party payers will be subject to applicable anti-kickback, fraud and abuse and other healthcare lawsand regulations, which could expose us to criminal sanctions, civil penalties, program exclusion, contractual damages, reputational harm and diminishedprofits and future earnings.Healthcare providers, physicians and third-party payers play a primary role in the recommendation and prescription of any product candidates forwhich we receive marketing approval. Our future arrangements with third-party payers and customers may expose us to broadly applicable fraud and abuseand other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell anddistribute the products for which we receive marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include thefollowing: •the federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receivingor providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase,order or recommendation of, any good or service, for which payment may be made under federal and state healthcare programs such as Medicareand Medicaid; •the federal False Claims Act imposes civil penalties, including civil whistleblower or qui tam actions, against individuals or entities forknowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a falsestatement to avoid, decrease or conceal an obligation to pay money to the federal government; •the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) as amended by the Health Information Technology forEconomic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program andalso imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission ofindividually identifiable health information; •the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making anymaterially false statement in connection with the delivery of or payment for healthcare benefits, items or services; •the federal transparency requirements under the Patient Protection and Affordable Care Act, as amended by the Health Care and EducationReconciliation Act of 2010, require manufacturers of covered drugs, devices, biologics and medical supplies to report to the Department ofHealth and Human Services information related to physician payments and other transfers of value and physician ownership and investmentinterests; and •analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claimsinvolving healthcare items or services reimbursed by non-governmental third-party payers, including private insurers, and some state lawsrequire pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant complianceguidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments tophysicians and other healthcare providers or marketing expenditures.Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevantcompliance guidance promulgated by the federal government and may require drug manufacturers to report information related to payments and othertransfers of value to physicians and other healthcare providers or marketing expenditures. State and foreign laws also govern the privacy and security ofhealth information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thuscomplicating compliance efforts.Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involvesubstantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes,regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any ofthese laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages,fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If anyof the physicians or other providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may besubject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.Laws, restrictions, and other regulatory measures are also imposed by anti-kickback, fraud and abuse, and other healthcare laws and regulations ininternational jurisdictions, and in those jurisdictions we face the same issues as in the31United State regarding exposure to criminal sanctions, civil penalties, program exclusion, contractual damages, reputational harm, and diminished profits andfuture earnings.If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs thatcould harm our business.We may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or futurelaws and regulations may impair our nonclinical or clinical development or production efforts. Our failure to comply with these laws and regulations alsomay result in substantial fines, penalties or other sanctions.Risks Related to the Commercialization of Our Product CandidatesEven if any of our product candidates receives marketing approval, we may fail to achieve the degree of market acceptance by physicians, patients,third-party payers and others in the medical community necessary for commercial success.If any of our product candidates receives marketing approval, we may nonetheless fail to gain sufficient market acceptance by physicians, patients,third-party payers and others in the medical community. In addition, physicians, patients and third-party payers may prefer other novel products to ours. Ifour product candidates do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable.The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including: •the efficacy and safety and potential advantages and disadvantages compared to alternative treatments; •the ability to offer our products for sale at competitive prices; •the convenience and ease of administration compared to alternative treatments; •the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies; •the strength of our marketing and distribution support; •the availability of third-party coverage and adequate reimbursement, including patient cost-sharing programs such as copays and deductibles; •the ability to develop or partner with third-party collaborators to develop companion diagnostics; •the prevalence and severity of any side effects; and •any restrictions on the use of our products together with other medications.If our current product candidates, or a future product candidate receives marketing approval and we, or others, later discover that the product isless effective than previously believed or causes undesirable side effects that were not previously identified, the ability to market the product could becompromised.Clinical trials are conducted in carefully defined subsets of patients who have agreed to enter into clinical trials. Consequently, it is possible that ourclinical trials may indicate an apparent beneficial effect of a product candidate that is greater than the actual positive effect in a broader patient population oralternatively fail to identify undesirable side effects. If, following approval of a product candidate, we, or others, discover that the product is less effectivethan previously believed or causes undesirable side effects that were not previously identified, any of the following events could occur: •regulatory authorities may withdraw their approval of the product or seize the product; •the product may be required to be recalled or changes may be required to the way the product is administered; •additional restrictions may be imposed on the marketing of, or the manufacturing processes for, the product; •regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication; •the creation of a Medication Guide outlining the risks of the previously unidentified side effects for distribution to patients; •additional restrictions may be imposed on the distribution or use of the product via a Risk Evaluation and Mitigation Strategy;32 •we could be sued and held liable for harm caused to patients; •the product may become less competitive; and •our reputation may suffer.Any of these events could have a material and adverse effect on our operations and business. The commercial prospects for our product candidatesmay be harmed and our ability to generate revenues will be materially impaired.We currently have no marketing and sales force. If we are unable to establish effective marketing and sales capabilities or enter into agreementswith third parties to market and sell our product candidates, we may not be able to effectively market and sell our product candidates, if approved, orgenerate product revenues.We currently do not have a marketing or sales team for the marketing, sales and distribution of any of our product candidates that are able to obtainregulatory approval. In order to commercialize any product candidates, we must build on a territory-by-territory basis marketing, sales, distribution,managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and we may not be successful in doing so.If our product candidates receive regulatory approval, we intend to establish an internal sales and marketing team with technical expertise and supportingdistribution capabilities to commercialize our product candidates, which will be expensive and time-consuming, will require significant attention of ourexecutive officers to manage and may nonetheless fail to effectively market and sell our product candidates. Any failure or delay in the development of ourinternal sales, marketing and distribution capabilities would adversely impact the commercialization of any of our products that we obtain approval tomarket. With respect to the commercialization of all or certain of our product candidates, we may choose to collaborate, either globally or on a territory-by-territory basis, with third parties that have direct sales forces and established distribution systems, either to augment our own sales force and distributionsystems or in lieu of our own sales force and distribution systems. If we are unable to enter into such arrangements when needed on acceptable terms or at all,we may not be able to successfully commercialize any of our product candidates that receive regulatory approval, or any such commercialization mayexperience delays or limitations. If we are not successful in commercializing our product candidates, either on our own or through collaborations with one ormore third parties, our future product revenue will suffer, and we may incur significant additional losses.We face substantial competition, which may result in others discovering, developing or commercializing competing products before or moresuccessfully than we do.The development and commercialization of new drug products is highly competitive. We face competition with respect to our current productcandidates and will face competition with respect to any product candidates that we may seek to develop or commercialize in the future, from majorpharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are several large pharmaceutical andbiotechnology companies that currently market and sell products or are pursuing the development of products for the treatment of the disease indications forwhich we are developing our product candidates. Some of these competitive products and therapies are based on scientific approaches that are the same as orsimilar to our approach, and others are based on entirely different approaches. Potential competitors also include academic institutions, government agenciesand other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research,development, manufacturing and commercialization.Specifically, there are a number of companies developing or marketing treatments for AOE, including many major pharmaceutical and biotechnologycompanies. We expect that OP0102 will face competition from numerous FDA-approved therapeutics, including CIPRODEX® and numerous other brandedand generic ear anti-infectives.In OM, there are currently no drug therapies approved for the treatment or prevention of OM. We expect that OP0201 will compete primarily with asurgery where the tympanic membrane is perforated to improve drainage and ventilation of the middle ear (myringotomy or tympanostomy tube insertions) asa means of preventing recurrent or chronic OM. We may also compete with a medical device that uses a small intranasal balloon inserted into the ET toventilate the ET in patients with ETD of a particular type. Surgery may continue to be the preferred treatment for OM in children whereas the intranasalballoon may be the preferred treatment for ET dysfunction in adults. Patients may be prescribed concurrent antibiotic therapy for AOM, but these productswill not be competitive with, but likely used in conjunction with OP0201.Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective,have fewer or less severe side effects, are more convenient or are less expensive than any33products that we may develop. In addition, our ability to compete may be affected in many cases by insurers or other third-party payers seeking to encouragethe use of generic products.Generic products are currently available, with additional products expected to become available over the coming years, potentially creating pricingpressure. If our product candidates achieve marketing approval, we expect that they will be priced at a significant premium over competitive genericproducts.Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resourcesand expertise in research and development, manufacturing, conducting nonclinical studies, conducting clinical trials, obtaining regulatory approvals andmarketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resourcesbeing concentrated among a smaller number of our competitors. Smaller and other early stage companies may also prove to be significant competitors,particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retainingqualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologiescomplementary to, or necessary for, our programs.The insurance coverage and reimbursement status of newly approved products is uncertain. Failure to obtain or maintain adequate coverage andreimbursement for new or current products could limit our ability to market those products and decrease our ability to generate revenue.The availability and extent of reimbursement by governmental and private payers is essential for most patients to be able to afford expensivetreatments. Sales of our product candidates will depend substantially, both domestically and internationally, on the extent to which the costs of our productcandidates will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed bygovernment health administration authorities, private health coverage insurers and other third-party payers. If reimbursement is not available, or is availableonly to limited levels, we may not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursementamount may not be high enough to allow us to establish or maintain pricing sufficient to realize a sufficient return on our investment.There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In the U.S., the principal decisionsabout reimbursement for new medicines are typically made by the Centers for Medicare & Medicaid Services (“CMS”), an agency within the U.S. Departmentof Health and Human Services, as CMS decides whether and to what extent a new medicine will be covered and reimbursed under Medicare. Private payerstend to follow CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for fundamentally novel productssuch as ours, as there is no body of established practices and precedents for these new products. Reimbursement agencies in Europe may be more conservativethan CMS. Outside the U.S., international operations are generally subject to extensive governmental price controls and other market regulations, and webelieve the increasing emphasis on cost-containment initiatives in Europe, Canada, and other countries has and will continue to put pressure on the pricingand usage of our product candidates. In many countries, the prices of medical products are subject to varying price control mechanisms as part of nationalhealth systems. In general, the prices of medicines under such systems are substantially lower than in the U.S. Other countries allow companies to fix theirown prices for medicines but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict theamount that we are able to charge for our product candidates. Accordingly, in markets outside the U.S., the reimbursement for our products may be reducedcompared with the U.S. and may be insufficient to generate commercially reasonable revenues and profits.Moreover, increasing efforts by governmental and third-party payers, in the U.S. and internationally, to cap or reduce healthcare costs may cause suchorganizations to limit both coverage and level of reimbursement for new products approved and, as a result, they may not cover or provide adequate paymentfor our product candidates. Increased expense is incurred to cover costs of health outcome focused research used to generate data necessary to justify thevalue of our products in order to secure reimbursement. We expect to experience pricing pressures in connection with the sale of any of our productcandidates, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes.The downward pressure on healthcare costs in general, particularly prescription drugs and surgical procedures and other treatments, has become very intense.As a result, increasingly high barriers are being erected to the entry of new products into the healthcare market.In addition, many private payers contract with commercial vendors who sell software that provide guidelines that attempt to limit utilization of, andtherefore reimbursement for, certain products deemed to provide limited benefit to existing alternatives. Such organizations may set guidelines that limitreimbursement or utilization of our products.34Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we maydevelop.We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an evengreater risk if we commercially sell any products that we may develop. If we cannot successfully defend against claims that our product candidates orproducts caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in: •decreased demand for any product candidates or products that we may develop; •injury to our reputation and significant negative media attention; •withdrawal of clinical trial participants; •significant costs to defend the related litigation; •substantial monetary awards to trial participants or patients; •loss of revenue; •reduced resources of our management to pursue our business strategy; and •the inability to commercialize any products that we may develop.We currently hold $5.0 million in product liability insurance coverage in the aggregate, with a per incident limit of $5.0 million, which may not beadequate to cover all liabilities that we may incur. We may need to increase our insurance coverage as we expand our clinical trials or if we commencecommercialization of our product candidates. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at areasonable cost or in an amount adequate to satisfy any liability that may arise.Risks Related to Our Dependence on Third PartiesFuture development collaborations may be important to us. If we are unable to enter into or maintain these collaborations, or if thesecollaborations are not successful, our business could be adversely affected.For some of our product candidates, we may in the future determine to seek to collaborate with pharmaceutical and biotechnology companies fordevelopment or commercialization of our product candidates. We face significant competition in seeking appropriate collaborators. Our ability to reach adefinitive agreement for any collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms andconditions of the proposed collaboration and the proposed collaborator’s evaluation of several factors. If we are unable to reach agreements with suitablecollaborators on a timely basis, on acceptable terms, or at all, we may have to curtail the development of a product candidate, reduce or delay its developmentprogram or one or more of our other development programs, delay its potential development schedule or reduce the scope of research activities, or increaseour expenditures and undertake discovery or nonclinical development activities at our own expense. If we fail to enter into collaborations and do not havesufficient funds or expertise to undertake the necessary development activities, we may not be able to further develop our product candidates or continue todevelop our product candidates, and our business may be materially and adversely affected.Future collaborations that we may enter could involve the following risks: •collaborators may have significant discretion in determining the efforts and resources that they will apply to these collaborations; •collaborators may not perform their obligations as expected; •changes in the collaborators’ strategic focus or available funding, or external factors, such as an acquisition, may divert resources or createcompeting priorities; •collaborators may delay discovery, nonclinical or clinical development, provide insufficient funding for product development of targetsselected by us, stop or abandon discovery, nonclinical or clinical development for a product candidate, or repeat or conduct newdiscovery, and nonclinical and clinical development for a product candidate; •collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products orproduct candidates if the collaborators believe that competitive products are more likely to be successfully developed than our products;35 •product candidates discovered in collaboration with us may be viewed by our collaborators as competitive with their own productcandidates or products, which may cause collaborators to cease to devote resources to the development of our product candidates; •disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course ofdevelopment, might cause delays or termination of the discovery, nonclinical or clinical development or commercialization of productcandidates, might lead to additional responsibilities for us with respect to product candidates, or might result in litigation or arbitration,any of which would be time-consuming and expensive; •collaborators may not properly maintain or defend our intellectual property rights or intellectual property rights licensed to us or may useour proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietaryinformation or expose us to potential litigation; •collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability; and •collaborations may be terminated for the convenience of the collaborator and, if terminated, we could be required to raise additionalcapital to pursue further development or commercialization of the applicable product candidates.Additionally, subject to its contractual obligations to us, if a collaborator is involved in a business combination, the collaborator might deemphasizeor terminate the development of any of our product candidates. If one of our collaborators terminates its agreement with us, we may find it more difficult toattract new collaborators and our perception in the business and financial communities could be adversely affected.If our collaborations do not result in the successful development of products or product candidates, product candidates could be delayed, and we mayneed additional resources to develop product candidates. All of the risks relating to product development, regulatory approval and commercializationdescribed in this periodic report also apply to the activities of our collaborators.We contract with third parties for the manufacture of our product candidates for nonclinical and clinical studies and expect to continue to do sofor commercialization. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or products atan acceptable cost and quality, which could delay, prevent or impair our development or commercialization efforts.We have utilized, and intend to continue utilizing, third parties to formulate, manufacture, package, and distribute clinical supplies of our drugcandidates. We have no experience in manufacturing and do not have any manufacturing facilities. Currently, we have sole suppliers for one or more of ouractive pharmaceutical ingredients (“API”), and a different sole manufacturer for each of our product candidates. In addition, these materials are custom-madeand available from only a limited number of sources. In particular, there may be a limited supply source for APIs for OP0201 or other potential productcandidates. Although we believe that our third-party suppliers maintain a significant supply of APIs on hand, any sustained disruption in this supply couldadversely affect our operations. We do not have any long-term agreements in place with our current API suppliers. If we are required to change manufacturers,we may experience delays associated with finding an alternate manufacturer that is properly qualified to produce supplies of our products and productcandidates in accordance with regulatory requirements and our specifications. Any delays or difficulties in obtaining APIs or in manufacturing, packaging ordistributing approved product candidates could negatively affect our sales revenues, as well as delay our clinical trials.We expect to rely on third-party manufacturers or third-party collaborators for the manufacture of commercial supply of any other product candidatesfor which our collaborators or we obtain marketing approval. Despite drug substance and product risk management, this reliance on third parties presents arisk that we will not have sufficient quantities of our product candidates or products or such quantities at an acceptable cost or quality, which could delay,prevent or impair our development or commercialization efforts. Any performance failure on the part of our existing or future manufacturers of drug substanceor drug products could delay clinical development or marketing approval. We do not currently have arrangements in place for redundant supply. If supplierscannot supply us with our requirements, we may be required to identify alternative manufacturers, which would lead us to incur added costs and delays inidentifying and qualifying any such replacement.Formulations and devices used in early studies are not final formulations and devices for commercialization. Additional changes may be required bythe FDA or other regulatory authorities on specifications and storage conditions. These may require additional studies and may result in a delay in ourclinical trials and commercialization activities.36We also expect to rely on other third parties to label, store, and distribute drug supplies for our clinical trials. Any performance failure on the part ofour distributors could delay clinical development or marketing approval of our product candidates or commercialization of our products, producingadditional losses and depriving us of potential product revenue.We may be unable to establish any agreements with third-party manufacturers or to do so on acceptable terms. Even if we are able to establishagreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including: •reliance on the third party for regulatory compliance and quality assurance; •the possible breach of the manufacturing agreement by the third party; •the possible misappropriation of our proprietary information, including our trade secrets and know-how; and •the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us.The third parties we rely on for manufacturing and packaging are also subject to regulatory review, and any regulatory compliance problems withthese third parties could significantly delay or disrupt our clinical or commercialization activities. Third-party manufacturers may not be able to comply withcGMP regulations or similar regulatory requirements outside the U.S. Our failure, or the failure of our third-party manufacturers, to comply with applicableregulations could result in sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal ofapprovals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which couldsignificantly and adversely affect supplies of our products. Additionally, macro-economic conditions may adversely affect these third parties, causing themto suffer liquidity or operational problems. If a key third-party vendor becomes insolvent or is forced to lay off workers assisting with our projects, our resultsand development timing could suffer.Our product candidates and any products that we may develop may compete with other product candidates and products for access to manufacturingfacilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for us.Our current and anticipated future dependence upon others for the manufacture of our product candidates or products may adversely affect our futureprofit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.We depend on CROs and other contracted third parties to perform nonclinical and clinical testing and certain other research and developmentactivities. As a result, the outcomes of the activities performed by these organizations will be, to a certain extent, beyond our control.The nature of outsourcing a substantial portion of our business will require that we rely on CROs and other contractors to assist us with research anddevelopment, clinical testing activities, patient enrollment, data collection, and regulatory submissions to the FDA or other regulatory bodies. As a result, oursuccess will depend partially on the success of these third parties in performing their responsibilities. Although we intend to pre-qualify our CROs and othercontractors and we believe that the contractors selected will be fully capable of performing their contractual obligations, we cannot directly control theadequacy and timeliness of the resources and expertise that they apply to these activities. Additionally, macro-economic conditions may affect ourdevelopment partners and vendors, which could adversely affect their ability to timely perform their tasks. If our contractors do not perform their obligationsin an adequate and timely manner, the pace of clinical development, regulatory approval and commercialization of our drug candidates could besignificantly delayed, and our prospects could be adversely affected.Risks Related to Our Intellectual PropertyIf we are unable to obtain and maintain intellectual property protection for our technology and products or if the scope of the intellectual propertyprotection obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, andour ability to successfully commercialize our technology and products may be impaired.Our success depends in large part on our ability to obtain and maintain patent protection in the EU, the U.S. and other countries with respect to ourproprietary technology and products. We seek to protect our proprietary position by filing patent37applications in the U.S. and internationally that are related to our novel technologies and product candidates. This patent portfolio includes issued patentsand pending patent applications covering pharmaceutical compositions and methods of use.The patent prosecution process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patentapplications at a reasonable cost or in a timely manner. We may choose not to seek patent protection for certain innovations and may choose not to pursuepatent protection in certain jurisdictions, and under the laws of certain jurisdictions, patents or other intellectual property rights may be unavailable orlimited in scope. It is also possible that we will fail to identify patentable aspects of our discovery and nonclinical development output before it is too late toobtain patent protection. Moreover, in some circumstances, we may not have the right to control the preparation, filing and prosecution of patentapplications, or to maintain the patents, covering technology that we license from third parties. Therefore, these patents and applications may not beprosecuted and enforced in a manner consistent with the best interests of our business.The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions andhas in recent years been the subject of much litigation. In addition, the laws of foreign countries may not protect our rights to the same extent as the laws ofthe U.S. For example, India and China do not allow patents for methods of treating the human body. Publications of discoveries in the scientific literatureoften lag behind the actual discoveries, and patent applications in the U.S. and other jurisdictions are typically not published until 18 months after filing, orin some cases not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our owned or licensed patentsor pending patent applications, or that we were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity,enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents beingissued which protect our technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies andproducts. Changes in either the patent laws or interpretation of the patent laws in the EU, the U.S. and other countries may diminish the value of our patentsor narrow the scope of our patent protection.Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and theenforcement or defense of our issued patents. On September 16, 2011, the Leahy-Smith America Invents Act (the “Leahy-Smith Act”), was signed into law.The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications areprosecuted and may also affect patent litigation. The U.S. Patent and Trademark Office (“USPTO”) recently developed new regulations and procedures togovern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, thefirst to file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on theoperation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution ofour patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financialcondition.Moreover, we may be subject to a third-party pre-issuance submission of prior art to the USPTO, or become involved in opposition, derivation,reexamination, inter partes review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others. An adversedetermination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties tocommercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercializeproducts without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications isthreatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates.Even if our owned and licensed patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection,prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our ownedor licensed patents by developing similar or alternative technologies or products in a non-infringing manner.The issuance of a patent is not conclusive as to its inventorship, scope, validity, or enforceability, and our owned and licensed patents may bechallenged in the courts or patent offices in the U.S. and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claimsbeing narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar oridentical technology and products, or limit the duration of the patent protection of our technology and products. Given the amount of time required for thedevelopment, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after suchcandidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others fromcommercializing products similar or identical to our own.38The risks described elsewhere pertaining to our patents and other intellectual property rights also apply to the intellectual property rights that welicense, and any failure to obtain, maintain and enforce these rights could have a material adverse effect on our business. In some cases, we may not havecontrol over the prosecution, maintenance or enforcement of the patents that we license, and our licensors may fail to take the steps that we believe arenecessary or desirable in order to obtain, maintain and enforce the licensed patents. Any inability on our part to protect adequately our intellectual propertymay have a material adverse effect on our business, operating results and financial position.Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and otherrequirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with theserequirements.Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to theUSPTO and various governmental patent agencies outside of the U.S. in several stages over the lifetime of the patents and/or applications. The USPTO andvarious non-U.S. governmental patent agencies require compliance with several procedural, documentary, fee payment and other similar provisions duringthe patent application process. In certain situations, non-compliance can result in abandonment or lapse of the patent or patent application, resulting inpartial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstancewould have a material adverse effect on our business.If we fail to comply with our obligations in the agreements under which we license intellectual property and other rights from third parties orotherwise experience disruptions to our business relationships with our licensors, we could lose license rights that are important to our business.We have acquired rights to our OP0201 technology through a license agreement with Otodyne, Inc. and may in the future enter into other licenseagreements with third parties for other intellectual property rights or assets. These license agreements may impose various diligence, milestone payment,royalty, and other obligations on us. If we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy, we may be requiredto make certain payments to the licensor, we may lose the exclusivity of our license, or the licensor may have the right to terminate the license, in whichevent we would not be able to develop or market products covered by the license. Additionally, the milestone and other payments associated with theselicenses will make it less profitable for us to develop our drug candidates than if we had developed the licensed technology internally.In some cases, patent prosecution of our licensed technology may be controlled solely by the licensor. If our licensors fail to obtain and maintainpatent or other protection for the proprietary intellectual property we license from them, we could lose our rights to the intellectual property or ourexclusivity with respect to those rights, and our competitors could market competing products using the intellectual property. In certain cases, we maycontrol the prosecution of patents resulting from licensed technology. In the event we breach any of our obligations related to such prosecution, we mayincur significant liability to our licensing partners. If disputes over intellectual property and other rights that we have licensed prevent or impair our ability tomaintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected productcandidates.We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time-consuming andunsuccessful.Because competition in our industry is intense, competitors may infringe or otherwise violate our issued patents, patents of our licensors or otherintellectual property. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe theirpatents. In addition, in a patent infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, in whole or in part, construe thepatent’s claims narrowly, or refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology inquestion. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. We mayalso elect to enter into license agreements in order to settle patent infringement claims or to resolve disputes prior to litigation, and any such licenseagreements may require us to pay royalties and other fees that could be significant. Furthermore, because of the substantial amount of discovery required inconnection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure.39We may need to license certain intellectual property from third parties, and such licenses may not be available or may not be available oncommercially reasonable terms.A third party may hold intellectual property, including patent rights, that are important or necessary to the development of our products. It may benecessary for us to use the patented or proprietary technology of third parties to commercialize our products, in which case we would be required to obtain alicense from these third parties on commercially reasonable terms, or our business could be harmed, possibly materially. If we were not able to obtain alicense, or are not able to obtain a license on commercially reasonable terms, our business could be harmed, possibly materially.Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would beuncertain and could have a material adverse effect on the success of our business.Our commercial success depends upon our ability, and the ability of our collaborators, to develop, manufacture, market and sell our productcandidates and use our proprietary technologies without infringing the proprietary rights of third parties. There is considerable intellectual property litigationin the biotechnology and pharmaceutical industries. We may become party to, or threatened with, future adversarial proceedings or litigation regardingintellectual property rights with respect to our products and technology, including interference or derivation proceedings before the USPTO. Third partiesmay assert infringement claims against us based on existing patents or patents that may be granted in the future.If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from such third party to continuedeveloping and marketing our products and technology. However, we may not be able to obtain any required license on commercially reasonable terms or atall. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. Wecould be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetarydamages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us fromcommercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. Claims that we havemisappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.In addition to seeking patents for some of our technology and product candidates, we also rely on trade secrets, including unpatented know-how,technology and other proprietary information, to maintain our competitive position. Any NDAs or similar agreements entered into by the Company may notbe with all relevant parties, or adequately protect the confidentiality of our trade secrets. Moreover, to the extent we enter into such agreements, any of theseparties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remediesfor such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and theoutcome is unpredictable. In addition, some courts inside and outside the U.S. are less willing or unwilling to protect trade secrets. If any of our trade secretswere to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicatethem, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by acompetitor, our competitive position would be harmed.Risks Related to Our Employee Matters, Managing Growth and Macroeconomic ConditionsOur future success depends on our ability to retain executives and key employees and to attract, retain and motivate qualified personnel in thefuture.We are highly dependent on the product development, clinical and business development expertise of the principal members of our management,scientific and clinical team. Although we have entered into employment agreements with our executives and key employees, each of them may terminatetheir employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees.Recruiting and retaining qualified scientific, clinical, manufacturing, sales and marketing personnel is critical to our success. Due to the small size ofthe Company and the limited number of employees, each of our executives and key employees serves in a critical role. The loss of the services of ourexecutive officers or other key employees could impede the achievement of our development and commercialization objectives and seriously harm ourability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an40extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfullydevelop, gain regulatory approval of, and commercialize products. Competition to hire from this limited pool is intense, and we may be unable to hire, train,retain or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similarpersonnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we relyon consultants and advisors, including scientific and clinical advisors, to assist us in formulating drug product, nonclinical development, clinicaldevelopment, regulatory strategy, and commercial strategy. Our consultants and advisors may be employed by employers other than us and may havecommitments under consulting or advisory contracts with other entities that may limit their availability to provide services to us. If we are unable to continueto attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.We expect to expand our research and development function, as well as our corporate operations, and as a result, we may encounter difficulties inmanaging our growth, which could disrupt our operations.We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drugdevelopment, regulatory affairs and, if any of our product candidates receives marketing approval, sales, marketing and distribution. To manage ouranticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continueto recruit and train additional qualified personnel. Due to our limited financial resources, we may not be able to effectively manage the expansion of ouroperations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our managementand business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.We may be subject to claims that our employees or directors have wrongfully used or disclosed alleged trade secrets of their former employers.Many of our employees and certain of our directors were previously employed at universities or other biotechnology or pharmaceutical companies,including our competitors or potential competitors. Although we try to ensure that our employees and directors do not use the proprietary information orknow-how of others in their work for us, we may be subject to claims that we or these employees or directors have used or disclosed intellectual property,including trade secrets or other proprietary information, of any such employee’s or director’s former employer. Litigation may be necessary to defend againstthese claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. A severe orprolonged economic downturn, such as the recent global financial crisis, could result in a variety of risks to our business, including our ability to raiseadditional capital when needed on acceptable terms, if at all. This is particularly true in Europe, where the United Kingdom’s vote to leave the EU has createdadditional economic uncertainty. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption. Any of the foregoingcould harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adverselyimpact our business.Our business and operations would suffer in the event of system failures.Despite the implementation of security measures, our internal computer systems and those of the CROs, collaborators and third-parties on whom werely are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures.Furthermore, we have little or no control over the security measures and computer systems of our third-party collaborators. While we and, to our knowledge,our third-party collaborators have not experienced any such system failure, accident or security breach to date, if such an event were to occur and causeinterruptions in our operations or our third-party collaborators, it could result in a material disruption of our drug development programs. For example, theloss of research data could delay development of our product candidates and the loss of clinical trial data from completed or ongoing or planned clinicaltrials could result in delays in our regulatory approval efforts and we may incur substantial costs to attempt to recover or reproduce the data. Similarly, wehave no control over the security measures and computer systems of the regulatory bodies to whom we provide financial and other sensitive41information. If any disruption or security breach resulted in a loss of or damage to our data or applications, or inappropriate disclosure of confidential orproprietary information, we could incur liability and/or the further development of our product candidates could be delayed.Risks Related to Our Common StockWe expect our stock price to be volatile, and the market price of our common stock may drop unexpectedly.The market price of our common stock could be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical,biopharmaceutical, and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of ourcommon stock to fluctuate include: •our ability to obtain regulatory approvals for our product candidates or other product candidates, and delays or failures to obtain suchapprovals; •failure of any of our product candidates, if approved, to achieve commercial success; •issues in manufacturing our approved products, if any, or product candidates; •the results of our current and any future clinical trials of our product candidates; •the entry into, or termination of, key agreements, including key commercial partner agreements; •the initiation of, material developments in, or conclusion of litigation to enforce or defend any of our intellectual property rights or defendagainst the intellectual property rights of others; •announcements by commercial partners or competitors of new commercial products, clinical progress or the lack thereof, significant contracts,commercial relationships or capital commitments; •the introduction of technological innovations or new therapies that compete with our potential products; •the loss of key employees; •changes in estimates or recommendations by securities analysts, if any, who cover our common stock; •general and industry-specific economic conditions that may affect our research and development expenditures; •changes in the structure of healthcare payment systems; and •period-to-period fluctuations in our financial results.Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance ofindividual companies. These broad market fluctuations may also adversely affect the trading price of our common stock.In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securitieslitigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, whichcould significantly harm our profitability and reputation.If securities analysts do not publish research or reports about our business, or if they publish negative evaluations, the price of our common stockcould decline.The trading market for our common stock may be impacted by the availability or lack of research and reports that third-party industry or financialanalysts publish about the Company. There are many large, publicly traded companies active in the biopharmaceutical industry, which may mean it will beless likely that we receive widespread analyst coverage. Furthermore, if one or more of the analysts who do cover the Company downgrade our stock, ourstock price would likely decline. If we do not receive adequate coverage by reputable analysts that have an understanding of our business and industry, wecould fail to achieve visibility in the market, which in turn could cause our stock price to decline.Our executive officers, directors and principal stockholders, if they choose to act together, will have the ability to control all matters submitted tostockholders for approval.Our executive officers and directors, combined with our principal stockholders, beneficially own shares representing approximately 65.2% of ourcapital stock as of December 31, 2018. As a result, if these stockholders were to choose to act42together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, thesepersons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all ofour assets. This concentration of ownership control may: •delay, defer or prevent a change in control; •entrench our management and the board of directors; or •impede a merger, consolidation, takeover or other business combination involving the Company that other stockholders may desire.We will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.As a public company, we incur significant legal, accounting and other expenses that we did not previously incur as a private company, includingcosts associated with public company reporting requirements. We will also incur costs associated with corporate governance requirements, includingrequirements under the Sarbanes-Oxley Act and rules and regulations promulgated by the SEC and Nasdaq. These rules and regulations are expected toincrease our legal and financial compliance costs and to make some activities more time-consuming and costly. These rules and regulations may also make itdifficult and expensive for the Company to obtain directors’ and officers’ liability insurance. As a result, it may be more difficult for the Company to attractand retain qualified individuals to serve on our board of directors or as executive officers of the Company, which may adversely affect investor confidence inthe Company and could cause our business or stock price to suffer.If we fail to establish and maintain proper and effective internal control over financial reporting, our operating results and our ability to operateour business could be harmed.Ensuring that we will have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financialstatements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Internal control over financial reporting is aprocess designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordancewith accounting principles generally accepted in the U.S. (“GAAP”).Our financial statements have only been prepared in accordance with GAAP since the closing of the Reverse Merger. Since that time, we haveimplemented measures designed to improve our internal controls over financial reporting, including by bringing in additional accounting resources andestablishing new accounting and financial reporting procedures to establish an appropriate level of internal controls over financial reporting. If we are unableto successfully maintain internal controls over financial reporting, the accuracy and timing of our financial reporting, and our stock price, may be adverselyaffected and we may be unable to maintain compliance with the applicable stock exchange listing requirements.Implementing any appropriate changes to our internal controls may distract the officers and employees of the Company, entail substantial costs tomodify its existing processes and take significant time to complete. These changes may not, however, be effective in maintaining the adequacy of the internalcontrols of the Company, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, couldincrease operating costs and harm the business. In addition, investors’ perceptions that the internal controls of the Company are inadequate or that we areunable to produce accurate financial statements on a timely basis may harm the stock price of the Company.Provisions in our corporate charter documents and under Delaware law could make an acquisition of the Company, which may be beneficial to ourstockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.Provisions in our corporate charter and bylaws may discourage, delay or prevent a merger, acquisition or other change in control of the Company thatstockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares. These provisionscould also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of ourcommon stock. In addition, because the board of directors is responsible for appointing the members of our management team, these provisions may frustrateor prevent any attempts by stockholders to replace or remove the current management by making it more difficult for stockholders to replace members of theboard of directors. Among other things, these provisions: •establish a classified board of directors such that not all members of the board are elected at one time;43 •allow the authorized number of our directors to be changed only by resolution of our board of directors; •limit the manner in which stockholders can remove directors from the board; •establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board ofdirectors; •require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by writtenconsent; •limit who may call stockholder meetings; •authorize the board of directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” thatwould work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by ourboard of directors; and •require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certainprovisions of the Company’s charter or bylaws.Moreover, because the Company is incorporated in Delaware, it is governed by the provisions of Section 203 of the DGCL, which prohibits a personwho owns in excess of 15% of its outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction inwhich the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.We do not expect to pay any cash dividends in the foreseeable future.We expect to retain our future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our commonstock will be the sole source of gain, if any, for any stockholders for the foreseeable future.Item 1B. Unresolved Staff Comments.Not applicable.Item 2. Properties.Our executive offices are located in Irvine, California. We lease approximately 5,197 square feet of office space under an operating lease that expiresin September 2021.Item 3. Legal Proceedings.Information pertaining to legal proceedings is provided under the heading “Legal Proceedings” in Note 6, Commitments and Contingencies, to theconsolidated financial statements and is incorporated by reference herein.Item 4. Mine Safety Disclosures.None.44PART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Market InformationOur common stock is traded on the Nasdaq Capital Market under the symbol “NVUS” as of May 11, 2017, subsequent to our Reverse Merger withTokai. Prior to May 11, 2017, our common stock was traded on the Nasdaq Capital Market under the symbol “TKAI” since September 17, 2014.As of March 22, 2019, there were approximately 18 stockholders of record of our common stock.DividendsWe have never declared or paid, and do not anticipate declaring or paying in the foreseeable future, any cash dividends on our common stock. Futuredetermination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existingconditions, including our operating results, financial condition, contractual restrictions, capital requirements, business prospects and other factors that ourboard of directors may deem relevant.Item 6. Selected Financial Data.Per §229.301 of Regulation S-K, the Company, designated a Smaller Reporting Company as defined in §229.10(f)(1) of Regulation S-K, is notrequired to provide the disclosure required by this Item.45Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results ofoperations and financial condition of the Company. The Management’s Discussion and Analysis of Financial Condition and Results of Operations shouldbe read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2018. In addition to historicalinformation, this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. See“Cautionary Note Regarding Forward-Looking Statements” in this report. Our actual results and the timing of events could differ materially from thosediscussed in our forward-looking statements as a result of many factors, including those set forth under the Part I, Item 1A. Risk Factors section andelsewhere in this report, as well as, in other reports and documents we file with the Securities and Exchange Commission from time to time. Except asrequired by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of thisAnnual Report on Form 10-K.ABOUT NOVUS THERAPEUTICSOverviewNovus Therapeutics, Inc. (Novus) is a specialty pharmaceutical company focused on developing products for patients with disorders of the ear, nose,and throat (ENT). Novus has two technologies, each with the potential to be developed for multiple indications. Novus’ lead program (OP0201) is asurfactant-based nasal aerosol drug-device combination product being developed as a potential first-in-class treatment option for patients at risk for, or with,otitis media (OM), which is middle ear inflammation with or without infection. Globally, OM affects more than 700 million adults and children every year,with over half of the cases occurring in children under five years of age. OM is one of the most common disorders seen in pediatric practice, and in the U.S. isa leading cause of health care visits and the most frequent reason children are prescribed antibiotics or undergo surgery. Novus also has a foam-based drugdelivery technology (OP01xx), which may be developed in the future to deliver drugs into the ear, nasal, and sinus cavities.Surfactant Platform (OP02xx)The first product in the surfactant platform program is OP0201, which is being developed as a potential first-in-class treatment option for OM. OM isoften caused by Eustachian tube dysfunction (ETD). OP0201 is a nasal aerosol, drug-device combination product comprised of a novel formulation of asurfactant (dipalmitoylphosphatidylcholine [DPPC]) and a spreading agent (cholesteryl palmitate [CP]) suspended in propellant. The product is administeredintranasally via a pressurized metered-dose inhaler (pMDI). OP0201is intended to be used to restore the normal physiologic activity of the Eustachian tube(ET), which is a small tube that connects from the chamber of the middle ear to the back of the nasopharynx. Together the active ingredients in OP0201(DPPC and CP) effectively absorb to the air-liquid interface of the mucosa and reduce the interfacial surface tension of the ET, which reduces passive pressurerequired for the ET to open. In other words, OP0201 promotes ‘de-sticking’ of the ET so that ventilation of the middle ear is restored.Novus is currently conducting four clinical trials to explore the safety, tolerability, and potential efficacy of OP0201. These trials include a phase 1safety and pharmacodynamic effects study (study C-001), a phase 1 safety and tolerability study (study C-002), a phase 1 safety and exploration of effectsstudy in adults with acute otitis media (study C-004), and an exploratory phase 2a study in children with acute otitis media (study C-006). Upon completionof these clinical studies, Novus intends to initiate phase 2 and phase 3 studies, with an initial focus on a development program that, if successful, will lead toregistration of OP0201 in North America and key European markets as a product to treat OM and prevent OM in children. Additional development activitiesto support registration of OP0201 in other countries, or for other indications, or other patient populations, may occur in the future.Foam Platform (OP01xx)OP0101 and OP0102 are foam-based products intended to be used as a delivery vehicle for drugs to be administered into the ear canals, as well as thenasal and sinus cavities. OP0101 was the initial product utilizing the foam platform. It was developed as an improved treatment option for acute otitis externa(AOE), a common infectious medical condition of the outer ear canal that affects tens of millions of adults and children each year (frequently called“swimmer’s ear”). Novus completed four clinical trials of OP0101 in 353 adult and pediatric subjects, including a successful phase 2b study with a steroid-free,46antibiotic-only formulation of OP0101 that was non-inferior to standard of care, but with a more favorable dosing regimen (once a day dosing instead oftwice a day).In 2016, Novus began development of OP0102, a second-generation formulation designed to rapidly relieve ear pain (an unmet need in AOE) anderadicate infection with less than seven days of treatment. Novus subsequently paused the OP0102 development program to focus resources on the surfactantprogram.RECENT DEVELOPMENTSEquity Distribution AgreementOn August 21, 2017, the Company entered into an equity distribution agreement (the “Equity Distribution Agreement”) with Piper Jaffray & Co.(“Piper Jaffray”), as sales agent, pursuant to which the Company may offer and sell, from time to time, through Piper Jaffray, shares of the Company’s commonstock. In connection with the Equity Distribution Agreement on August 21, 2017, the Company filed a prospectus supplement (the “2017 Prospectus) underwhich the Company was permitted to offer and sell up to $8.5 million in shares of its common stock. From October 2, 2017 through March 9, 2018, theCompany sold 2,463,966 shares of its common stock through Piper Jaffray under the Equity Distribution Agreement and 2017 Prospectus for gross proceedsof approximately $8.5 million. During the year ended December 31, 2018, the Company received approximately $7.5 million in proceeds, net of $232,000 inoffering costs.No further sales will be made under the 2017 Prospectus. On July 23, 2018, the Company filed a new prospectus supplement (the “2018 Prospectus”) under which the Company may offer and sell, from timeto time, through Piper Jaffray, up to an additional $8.8 million in shares of its common stock. No shares have been sold under the 2018 Prospectus as ofDecember 31, 2018.CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATESOur management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have beenprepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amount of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities as of the dateof the financial statements. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience, known trends andevents, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments aboutthe carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates underdifferent assumptions or conditions.Business CombinationsAccounting for acquisitions requires extensive use of estimates and judgment to measure the fair value of the identifiable tangible and intangibleassets acquired, including in-process research and development and liabilities assumed. Additionally, we must determine whether an acquired entity isconsidered a business or a set of net assets because the excess of the purchase price over the fair value of net assets acquired can only be recognized asgoodwill in a business combination. We accounted for the Reverse Merger with Tokai as a business combination under the acquisition method ofaccounting. Consideration paid to acquire Tokai was measured at fair value and included the exchange of Tokai’s common stock. The allocation of thepurchase price resulted in recognition of goodwill.GoodwillGoodwill represents the difference between the consideration transferred and the fair value of the net assets acquired under the acquisition method ofaccounting. Goodwill is not amortized but is evaluated for impairment as of October 1 of each year or earlier if indicators of impairment exist that would,more likely than not, reduce the fair value from its carrying amount.The Company performs its goodwill impairment analysis at the reporting unit level, which aligns with the Company’s reporting structure andavailability of discrete financial information. The Company performs its annual impairment analysis by either comparing the reporting unit’s estimated fairvalue to its carrying amount or doing a qualitative assessment of a47reporting unit’s fair value from the last quantitative assessment to determine if there is potential impairment. The Company may do a qualitative assessmentwhen the results of the previous quantitative test indicated the reporting unit’s estimated fair value was significantly in excess of the carrying value of its netassets and it does not believe there have been significant changes in the reporting unit’s operations that would significantly decrease its estimated fair valueor significantly increase its net assets. If a quantitative assessment is performed the evaluation includes management estimates of cash flow projections basedon internal future projections and/or use of a market approach by looking at market values of comparable companies. Key assumptions for these projectionsinclude revenue growth, future gross and operating margin growth, and its weighted cost of capital and terminal growth rates. The revenue and margin growthis based on increased sales of new products as the Company maintains investments in research and development. Additional assumed value creators mayinclude increased efficiencies from capital spending. The resulting cash flows are discounted using a weighted average cost of capital. Operating mechanismsand requirements to ensure that growth and efficiency assumptions will ultimately be realized are also considered in the evaluation, including timing andprobability of regulatory approvals for Company products to be commercialized. The Company’s market capitalization is also considered as a part of itsanalysis.RESULTS OF OPERATIONSComparison of the Years Ended December 31, 2018 and 2017The following table provides comparative results of operations for the years ended December 31, 2018 and 2017 (in thousands): Year EndedDecember 31, 2018 2017 $ Variance % Variance Operating expenses: Research and Development $6,817 $2,022 $4,795 237%General and Administrative 7,243 11,099 (3,856) -35%Total operating expenses 14,060 13,121 939 7%Loss from operations (14,060) (13,121) (939) 7%Other income (expense), net (5) 5 (10) (200)%Net loss and other comprehensive loss $(14,065) $(13,116) $(949) 7% Research and Development ExpensesThe increase in research and development expenses of $4.8 million for the year ended December 31, 2018 was primarily due to an increase informulation and device development costs of $2.1 million, an increase in clinical development costs of $1.7 million, and an increase in consulting costs of$242,000 related to the advancement of our OP0201 programs. Additionally, personnel costs to support our programs increased $713,000 due to additionalheadcount in clinical operations and regulatory operations and bonus accrual. We expect research and development expenses to increase in subsequentperiods as we advance our OP0201 programs.General and Administrative ExpensesThe decrease in general and administrative expenses of $3.9 million for the year ended December 31, 2018 was primarily due to a reduction of $5.1million in merger‑related expenses, partially offset by an increase of $659,000 in administrative costs associated with operating a public company and a$511,000 increase in personnel related costs due to additional headcount and bonus accrual.Other Income (Expense), NetThe change in other income (expense), net was primarily related to interest income received on interest bearing accounts in the year endedDecember 31, 2017. As cash was used in operations, all cash was needed in operating accounts and there was less balances in interest bearing accounts duringthe year ended December 31,2018. Other expense consisted primarily of realized losses related to foreign currency translation for vendor payments in the2018 period.48LIQUIDITY AND CAPITAL RESOURCESAs of December 31, 2018, we had cash and cash equivalents of $13.0 million, consisting of readily available cash in bank accounts and anaccumulated deficit of $41.6 million. While we believe our cash and cash equivalents are not subject to excessive risk, we maintain significant amounts ofcash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. To date, our operations have been financedprimarily by net proceeds from the sale of preferred and common stock, the issuance of convertible promissory notes, and cash received in the Reverse Mergerwith Tokai.We do not have any approved products for commercial sale and have never generated revenue from product sales, and have incurred significant netlosses since our inception and expect to continue to incur net operating losses for the foreseeable future. We do not expect to receive any revenue from anyproduct candidates that we develop unless and until we obtain regulatory approval and commercialize our product candidates, or enter into collaborativearrangements with third parties. Our primary use of cash is to fund operating expenses, which consist of research and development expenses and general andadministrative expenses. Cash used to fund operating expenses is impacted by the timing of when we pay or prepay these expenses. We expect our expensesto increase in connection with our ongoing activities, particularly as we continue the research and development of, and seek marketing approval for, ourproduct candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercializationexpenses related to product sales, marketing, manufacturing and distribution.We will continue to require additional financing in order to advance OP0201 through clinical development, to manufacture, obtain regulatoryapproval for and to commercialize our product candidates, to develop, acquire or in-license other potential product candidates, and to fund operations for theforeseeable future. Therefore, we will seek to raise additional capital through equity offerings, debt financings or other capital sources, including potentiallycollaborations, licenses and other similar arrangements. Adequate additional funding may not be available to us on acceptable terms on a timely basis, or atall. Any such failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our businessplans and strategies, and may cause us to delay the scope of or suspend one or more of our clinical trials, research and development programs orcommercialization efforts, out-license intellectual property rights to our product candidates or sell unsecured assets, or a combination of the above. Any ofthese actions could materially harm our business. To the extent that we raise additional capital through the sale of equity or convertible debt securities, ourstockholders’ ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect ourstockholders’ rights. Debt financing, if available, would result in fixed payment obligations and may involve agreements that include restrictive covenantsthat limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adverselyimpact our ability to conduct our business. If we raise funds through collaborations, licenses and other similar arrangements with third parties, we may haveto relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may notbe favorable to us. See the section of this Annual Report titled “Risk Factors” for additional risks associated with our substantial capital requirements and thechallenges we may face in raising capital.On May 9, 2017, we completed our Reverse Merger with Tokai, which provided $23.3 million in cash and cash equivalents. Immediately followingthe Reverse Merger, we raised $4.0 million in aggregate gross proceeds from a private placement of our common stock.We plan to continue to fund losses from operations and capital funding needs through cash on hand and future equity or debt financings, as well aspotential additional collaborations or strategic partnerships with other companies. During the third quarter of 2017, we entered into an equity distributionagreement pursuant to which we may sell shares of common stock from time to time in “at-the-market” offerings. Under the 2017 Prospectus, we sold shares ofcommon stock from October 2, 2017 through March 9, 2018 for gross proceeds of approximately $8.5 million. Under the 2018 Prospectus, we may offer andsell up to an additional $8.8 million in shares of common stock. The sale of additional equity or convertible debt could result in additional dilution to ourstockholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financing covenants that wouldrestrict our operations.49Our primary uses of capital are, and we expect will continue to be, funding research efforts and the development of our product candidates,compensation and related expenses, hiring additional staff (including clinical, scientific, operational, financial, and management personnel) and costsassociated with operating as a public company. We expect to incur substantial expenditures in the foreseeable future for the development and potentialcommercialization of our product candidates.As a result of these conditions, we have concluded that substantial doubt about our ability to continue as a going concern exists as conditions andevents, considered in the aggregate, indicate that it is probable that we will be unable to meet our obligations as they become due within one year after thedate that our consolidated financial statements were issued without raising additional capital. The financial information and consolidated financialstatements included in this Annual Report have been prepared on a basis that assumes that we will continue as a going concern, which contemplates therealization of assets and the satisfaction of liabilities and commitments in the normal course of business. This financial information and these financialstatements do not include any adjustments that may result from an unfavorable outcome of this uncertainty. Our ability to continue as a going concern isdependent upon our ability to successfully secure sources of financing and ultimately achieve profitable operations.Cash FlowsThe following table provides a summary of our net cash flow activity for the years ended December 31, 2018 and 2017 (in thousands): Year EndedDecember 31, 2018 2017 Net cash used in operating activities $(11,893) $(14,941)Net cash provided by investing activities — 23,258 Net cash provided by financing activities 7,562 7,869 Net increase (decrease) in cash, cash equivalents, and restricted cash $(4,331) $16,186 Comparison of the Years Ended December 31, 2018 and 2017Net cash used in operating activities for the year ended December 31, 2018 consisted primarily of our net loss of $14.1 million, partially offset bynon-cash items consisting primarily of depreciation and stock-based compensation totaling $1.6 million. Additionally, cash used in operating expenses forthe year ended December 31, 2018 reflected a net increase in cash from changes in operating assets and liabilities of $618,000, primarily due to an increase inour accounts payable and accrued liabilities.Net cash used in operating activities for the year ended December 31, 2017 consisted primarily of our net loss of $13.1 million, partially offset bynon-cash items consisting primarily of depreciation, stock-based compensation, and loss on disposal of fixed assets totaling $650,000. Additionally, cashused in operating expenses for the year ended December 31, 2017 reflected a net decrease in cash from changes in operating assets and liabilities of$2.5 million, primarily due to an increase in our prepaid expenses and the payment of accounts payable and accrued liabilities assumed in the ReverseMerger.There was no cash provided by or used in investing activities for the year ended December 31, 2018.Net cash provided by investing activities for the year ended December 31, 2017 consisted primarily of cash received from the Reverse Merger of$23.3 million.Net cash provided by financing activities for the year ended December 31, 2018 was comprised of net proceeds of $7.5 million from the issuance ofapproximately 2.3 million shares of common stock under the Equity Distribution Agreement, and proceeds from the exercise of stock options in the amountof $71,000.Net cash provided by significant financing activities in the year ended December 31, 2017 was comprised of $4.0 million in proceeds from the StockPurchase Agreement for the purchase of 400,400 shares of Novus common stock, net proceeds of $750,000 for the issuance of approximately 167,000 sharesof common stock under the Equity Distribution Agreement, and proceeds from the exercise of warrants in the amount of $3.1 million.50Contractual ObligationsContractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent liabilities forwhich we cannot reasonably predict future payment. Our contractual obligations primarily result from property leases for office space. Although we do haveobligations for CRO services, the table below excludes potential payments we may be required to make under our agreements with CROs because timing ofpayments and actual amounts paid under those agreements may be different depending on the timing of receipt of goods or services or changes toagreed‑upon terms or amounts for some obligations, and those agreements are cancelable upon written notice by the Company and therefore, not long-termliabilities. Additionally, the expected timing of payment of the obligations presented below is estimated based on current information.The following table represents our contractual obligations as of December 31, 2018, aggregated by type (in thousands): Payments Due by Period Contractual Obligations Total Less than1 year 1 - 3 years 3 - 5 years More than5 years Operating Lease Obligations $514 $180 $334 $— $— Total $514 $180 $334 $— $— See Note 6. Commitments and Contingencies in the notes to the consolidated financial statements for a summary of contracts held by the Company asof December 31, 2018.Off-Balance Sheet ArrangementsWe do not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC.Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Per §229.305 of Regulation S-K, the Company, designated a Smaller Reporting Company as defined in §229.10(f)(1) of Regulation S-K, is notrequired to provide the disclosure required by this Item.Item 8. Financial Statements and Supplementary Data.The Report of Independent Registered Public Accounting Firm, our consolidated financial statements and accompanying notes listed under Part IV,Item 15. Exhibits, Financial Statement Schedules of this Annual Report on Form 10-K are set forth beginning on page F-1 immediately following thesignature page hereof and incorporated by reference herein.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.Not applicableItem 9A. Controls and Procedures.Evaluation of Disclosure Controls and ProceduresAs of December 31, 2018, our management, with the participation of our principal executive officer and principal financial officer, evaluated theeffectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under theExchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in thereports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rulesand forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to bedisclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management,including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Managementrecognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectivesand management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on this evaluation,management concluded that our disclosure controls and procedures were effective in alerting them in a timely manner to material information required to bedisclosed in our periodic reports filed with the SEC.51Internal Control Over Financial ReportingManagement’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) underthe Exchange Act. Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding thepreparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherentlimitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparationand presentation.Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment,management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 Internal Control—Integrated Framework. Based on this assessment, our management has concluded that as of December 31, 2018, our internal control over financial reportingis effective.As an emerging growth company, as defined under the terms of the JOBS Act of 2012, the Company’s independent registered accounting firm is notrequired to issue an attestation report on the internal control over financial reporting.Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) duringthe quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other Information.None.52PART IIIItem 10. Directors, Executive Officers and Corporate Governance.The information required by this Item 10 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2019 AnnualMeeting of Stockholders and is incorporated herein by reference.We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principalexecutive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the code isavailable on the Corporate Governance section of our website, which is located at http://ir.novustherapeutics.com/corporate-governance/governance-overview. We intend to disclose on our website any amendments to, or waivers from, the code of business conduct and ethics that are required to be disclosedpursuant to the disclosure requirements of Item 5.05 of Form 8-K within four business days following the date of the amendment or waiver.Item 11. Executive Compensation.The information required by this Item 11 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2019 AnnualMeeting of Stockholders and is incorporated herein by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.The information required by this Item 12 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2019 AnnualMeeting of Stockholders and is incorporated herein by reference.Item 13. Certain Relationships and Related Transactions, and Director Independence.The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2019 AnnualMeeting of Stockholders and is incorporated herein by reference.Item 14. Principal Accounting Fees and Services.The information required by this Item 14 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2019 AnnualMeeting of Stockholders and is incorporated herein by reference.53PART IVItem 15. Exhibits, Financial Statement Schedules.(a)The following documents are filed as part of this Annual Report on Form 10-K: (1)Financial Statements:The Report of Independent Registered Public Accounting Firm, our consolidated financial statements and accompanying notes are set forthbeginning on page F-1 immediately following the signature page of this Annual Report on Form 10-K. (2)Financial Statement Schedules:The financial statement schedules are omitted as they are either not applicable or the information required is presented in the financialstatements and notes thereto under Part II, Item 8. Financial Statements and Supplementary Data. (3)Exhibits: Exhibit FiledNumber Exhibit Description Incorporated by Reference Herewith Form File No. Exhibit Filing Date 2.1 Amended and Restated Share Purchase Agreement dated as ofMarch 2, 2017, by and among the Registrant, Otic Pharma, Ltd.,and shareholders of Otic Pharma, Ltd., named therein. 10-K 001-36620 2.1 March 3, 2017 3.1 Restated Certificate of Incorporation of Novus Therapeutics,Inc., a Delaware corporation, dated September 22, 2014 8-K 001-36620 3.1 September 26,2014 3.2 Certificate of Amendment to Certificate of Incorporation ofNovus Therapeutics, Inc. (effecting, among other things areverse stock-split), filed with the Secretary of the State ofDelaware on May 9, 2017 8-K 001-36620 3.1 May 15, 2017 3.3 Certificate of Amendment to Certificate of Incorporation ofNovus Therapeutics, Inc. (effecting, among other things achange in the corporation’s name to “Novus Therapeutics,Inc.”), filed with the Secretary of the State of Delaware on May9, 2017 8-K 001-36620 3.2 May 15, 2017 3.4 Amended and Restated Bylaws of Novus Therapeutics, Inc. 8-A/A 001-36620 3.4 June 23, 2017 4.1 Form of Common Stock Certificate 8-A/A 001-36620 4.1 June 23, 2017 10.1 Registration Rights Agreement, dated May 10, 2017, by andamong the Company and the Purchasers 8-K 001-36620 10.1 May 15, 2017 10.2* Form of Indemnification Agreement between NovusTherapeutics, Inc. and each of its directors and executiveofficers 10-Q 001-36620 10.1 August 9, 2017 10.3 Lease Agreement, dated as of September 2, 2015, by andbetween The Irvine Company LLC and Otic Pharma, Inc. 10-Q 001-36620 10.2 August 9, 2017 10.4 First Amendment to Lease Agreement, dated April 19, 2018, byand between The Irvine Company LLC and NovusTherapeutics, Inc. 10-Q 001-36620 10.1 August 7, 2018 54Exhibit FiledNumber Exhibit Description Incorporated by Reference Herewith Form File No. Exhibit Filing Date 10.5* Executive Employment Agreement, dated July 15, 2015,between Otic Pharma, Inc., and Gregory J. Flesher 10-Q 001-36620 10.3 August 9, 2017 10.6 Exclusive License Agreement, dated November 1, 2015, betweenScientific Development and Research, Inc. and Otodyne, Inc., onthe one hand, and Oticpharma, Inc., on the other hand† 10-Q 001-36620 10.4 August 9, 2017 10.7* Offer of Employment, dated July 1, 2017, from NovusTherapeutics, Inc. to Jon Kuwahara 10-Q 001-36620 10.5 August 9, 2017 10.8* Management Continuity Agreement, dated August 7, 2017,between Novus Therapeutics, Inc. and Gregory J. Flesher 10-Q 001-36620 10.6 August 9, 2017 10.9* Management Continuity Agreement, dated August 7, 2017,between Novus Therapeutics, Inc. and Jon S. Kuwahara 10-Q 001-36620 10.7 August 9, 2017 10.10 Equity Distribution Agreement, dated as of August 21, 2017,between Novus Therapeutics, Inc. and Piper Jaffray & Co. 8-K 001-36620 1.1 August 22, 2017 10.11 Otic Pharma Ltd. Global Share Incentive Plan (2012) 10-K 001-36620 10.10 April 2, 2018 10.12 Tokai Pharmaceuticals, Inc. 2007 Stock Incentive Plan 10-K 001-36620 10.11 April 2, 2018 10.13 Tokai Pharmaceuticals, Inc. 2014 Stock Incentive Plan 10-Q 001-36620 10.2 August 7, 2018 10.14 Novus Therapeutics, Inc., 2014 Employee Stock Purchase Plan 10-Q 001-36620 10.3 August 7, 2018 10.15* Executive Employment Agreement, dated November 10, 2015,between Otic Pharma, Inc. and Catherine C. Turkel X 21.1 Subsidiaries of the Registrant X 23.1 Consent of Independent Registered Public Accounting Firm X 31.1 Certification of Principal Executive Officer Pursuant toRules 13a-14(a) and 15d-14(a) under the Securities ExchangeAct of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 31.2 Certification of Principal Financial Officer Pursuant toRules 13a-14(a) and 15d-14(a) under the Securities ExchangeAct of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 32.1# Certification of Principal Executive Officer Pursuant to 18 U.S.C.Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002 X55Exhibit FiledNumber Exhibit Description Incorporated by Reference Herewith Form File No. Exhibit Filing Date 32.2# Certification of Principal Financial Officer Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002 X 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document * Indicates a management contract or compensatory plan † Portions of this exhibit have been omitted and filed separatelywith the Securities and Exchange Commission pursuant to arequest for confidential treatment. # These certifications are not deemed filed by the SEC and are notto be incorporated by reference in any filing we make under theSecurities Act of 1933 or the Securities Exchange Act of 1934,irrespective of any general incorporation language in anyfilings. Item 16. Form 10-K Summary.None.56SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized. Novus Therapeutics, Inc. Date: March 27, 2019By:/s/ Gregory J. Flesher Gregory J. Flesher Chief Executive Officerand Director (PrincipalExecutive Officer) Date: March 27, 2019By:/s/ Jon S. Kuwahara Jon S. Kuwahara Senior Vice PresidentFinance & Administration(Principal Financialand AccountingOfficer) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons onbehalf of the Registrant in the capacities and on the dates indicated. Name Title Date/s/ Gregory J. Flesher Chief Executive Officer and Director March 27, 2019Gregory J. Flesher (Principal Executive Officer) /s/ Jon S. Kuwahara Senior Vice President Finance & Administration March 27, 2019Jon S. Kuwahara (Principal Financial and Accounting Officer) /s/ Keith A. Katkin Chairman of the Board of Directors March 27, 2019Keith A. Katkin /s/ Erez Chimovits Director March 27, 2019Erez Chimovits /s/ Cheryl L. Cohen Director March 27, 2019Cheryl L. Cohen /s/ Gary A. Lyons Director March 27, 2019Gary A. Lyons /s/ John S. McBride Director March 27, 2019John S. McBride 57NOVUS THERAPEUTICS, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firms F-2 Consolidated Balance Sheets as of December 31, 2018 and 2017 F-3 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2018 and 2017 F-4 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018 and 2017 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017 F-6 Notes to Consolidated Financial Statements F-7 F-1Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Novus Therapeutics, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Novus Therapeutics, Inc. (the Company) as of December 31, 2018 and 2017, the relatedconsolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows, for each of the two years in the period ended December31, 2018, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statementspresent fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cashflows for each of the two years in the period ended December 31, 2018, in conformity with U.S generally accepted accounting principles.The Company’s Ability to Continue as a Going ConcernThe accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note2 to the financial statements, the Company has suffered recurring losses and negative cash flows from operations since inception and has stated thatsubstantial doubt exists about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions andmanagement’s plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty. Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financialstatements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations ofthe Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, norwere we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding ofinternal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financialreporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures inthe financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well asevaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company's auditor since 2017. Irvine, CaliforniaMarch 27, 2019 F-2 NOVUS THERAPEUTICS, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share data) December 31, 2018 2017 ASSETS Current assets: Cash and cash equivalents $12,972 $17,233 Restricted cash — 70 Prepaid expenses and other current assets 1,304 1,697 Total current assets 14,276 19,000 Property and equipment, net 14 25 Goodwill 1,867 1,867 Other assets 869 — Total assets $17,026 $20,892 LIABILITIES AND STOCKHOLDERS’ EQUITY Accounts payable $689 $418 Accrued severance — 668 Accrued expenses and other liabilities 1,845 354 Total liabilities 2,534 1,440 Commitments and contingencies (Note 6) Stockholders’ equity: Preferred stock, $0.001 par value, 5,000,000 shares authorized and none issued and outstanding at December 31, 2018 and 2017 — — Common stock, $0.001 par value, 200,000,000 shares authorized at December 31, 2018 and 2017; 9,422,143 and 7,110,414 shares issued and outstanding at December 31, 2018 and 2017, respectively 9 7 Additional paid-in capital 56,054 46,951 Accumulated deficit (41,571) (27,506)Total stockholders’ equity 14,492 19,452 Total liabilities and stockholders’ equity $17,026 $20,892 See accompanying notes to consolidated financial statements.F-3NOVUS THERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(In thousands, except share and per share data) Year EndedDecember 31, 2018 2017 Operating expenses Research and development $6,817 $2,022 General and administrative 7,243 11,099 Total operating expenses 14,060 13,121 Loss from operations (14,060) (13,121)Other income (expense), net (5) 5 Net loss and other comprehensive loss $(14,065) $(13,116)Net loss per share, basic and diluted $(1.56) $(2.30)Weighted-average common shares outstanding, basic and diluted 9,005,352 4,677,610 See accompanying notes to consolidated financial statements. F-4NOVUS THERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In thousands, except share data) Stockholders' Equity Common Stock Preferred Stock Shares Amount Shares Amount AdditionalPaid-InCapital Receipts onAccount ofPreferredStock AccumulatedDeficit Total Balance as of December 31, 2016 394,306 — 19,533,331 19 11,378 291 (14,390) (2,702)Issuance of preferred stock forexercise of warrants — — 7,941,493 8 3,111 — — 3,119 Issuance of common stock forcashless exercise of warrants 152,580 — — — — — — — Conversion of convertible note andaccrued interest to common stock 323,261 1 — — 3,446 — — 3,447 Receipt on account of contingently convertible stock 104,788 — — — 291 (291) — — Conversion of preferred stock andaccrued dividends to common stock 3,052,758 3 (27,474,824) (27) 24 — — — Issuance of common stock inconnection with Reverse Merger 2,515,739 3 — — 23,372 — — 23,375 Issuance of common stock for cash 400,400 — — — 4,000 — — 4,000 Issuance of common stock at-the-market, net of issuance costs 167,356 — — — 750 — — 750 Cancellation of fractional commonstock (774) — — — — — — — Stock-based compensation — — — — 579 — — 579 Net loss and other comprehensiveloss — — — — — — (13,116) (13,116)Balance as of December 31, 2017 7,110,414 7 — — 46,951 — (27,506) 19,452 Issuance of common stock at-the-market, net of issuance costs 2,296,610 2 — — 7,489 — — 7,491 Exercise of options 15,119 — — — 71 — — 71 Stock-based compensation — — — — 1,543 — — 1,543 Net loss and other comprehensiveloss — — — — — — (14,065) (14,065)Balance as of December 31, 2018 9,422,143 $9 — $— $56,054 $— $(41,571) $14,492 See accompanying notes to consolidated financial statements. F-5NOVUS THERAPEUTICS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year EndedDecember 31, 2018 2017 Operating activities Net loss $(14,065) $(13,116)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 11 22 Stock-based compensation 1,543 579 Loss on disposal of equipment — 49 Changes in operating assets and liabilities: Prepaid expenses and other assets (476) (517)Accounts payable and accrued expenses 1,094 (1,958)Net cash used in operating activities (11,893) (14,941)Investing activities Cash received from merger transaction — 23,250 Proceeds from sale of equipment — 8 Net cash provided by investing activities — 23,258 Financing activities Proceeds from issuance of common stock, net 7,491 4,750 Proceeds from exercise of warrants — 3,119 Proceeds from exercise of stock options 71 — Net cash provided by financing activities 7,562 7,869 Net (decrease) increase in cash, cash equivalents and restricted cash (4,331) 16,186 Cash, cash equivalents and restricted cash at beginning of period 17,303 1,117 Cash, cash equivalents and restricted cash at end of period $12,972 $17,303 Supplemental disclosure of cash flow information Noncash activities: Conversion of promissory note and interest to common stock $— $3,447 Conversion of contingently issuable shares to common stock $— $291 Issuance of common stock in merger $— $23,375 Conversion of preferred shares to common stock $— $27 Fair value of assets acquired and liabilities assumed in the merger: Fair value of assets acquired, excluding cash and restricted cash $— $3,072 Fair value of liabilities assumed $— (2,947)Fair value of net assets acquired in the merger $— $125 See accompanying notes to consolidated financial statements.F-6NOVUS THERAPEUTICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1. Description of BusinessNovus Therapeutics is a specialty pharmaceutical company focused on developing products for disorders of the ear, nose, and throat (ENT). Unlessotherwise indicated, references to the terms the “combined company”, “Novus”, the “Company”, refer to Otic Pharma, Ltd. prior to the consummation of theReverse Merger, and Novus Therapeutics, Inc., upon the consummation of the Reverse Merger described herein. The term “Tokai” refers to TokaiPharmaceuticals, Inc., and its subsidiaries prior to the Reverse Merger.Reverse MergerOn December 21, 2016, Tokai, a Delaware corporation, Otic, and the stockholders of Otic Pharma, Ltd., a private limited company organized underthe laws of the State of Israel (“Otic”) (each a “Seller” and collectively, the “Sellers”), entered into a Share Purchase Agreement (the “Share PurchaseAgreement”), pursuant to which, among other things, each Seller agreed to sell to Tokai, and Tokai agreed to purchase from each Seller, all of the commonand preferred shares of Otic (“Otic Shares”) owned by such Seller in exchange for the issuance of a certain number of shares of common stock of Tokai, asdetermined pursuant to the terms of the Share Purchase Agreement (the “Reverse Merger”). The parties amended and restated the Share Purchase Agreementon March 2, 2017.On May 9, 2017, Tokai, Otic, and the Sellers closed the transaction contemplated by the Share Purchase Agreement, and subsequently effected areverse 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 of4,027,693 shares of Tokai’s common stock in exchange for 840,115 Otic Shares. Following the completion of the Reverse Merger, the business beingconducted by Tokai became primarily the business conducted by Otic. In connection with the Reverse Merger, the name of the surviving corporation waschanged to “Novus Therapeutics, Inc.”Private PlacementOn January 31, 2017, Novus entered into a stock purchase agreement (the “Stock Purchase Agreement”) with certain purchasers named therein (the“Purchasers”), pursuant to which the Purchasers agreed to purchase approximately $4.0 million of the Company’s common stock through the purchase of400,400 shares of the Company’s common stock at a price of $9.99 per share (the “Private Placement”). The Private Placement closed on May 10, 2017. Aftergiving effect to the issuance of the shares in the Private Placement, the stockholders of Otic owned approximately 64% of the Company’s common stock. Note 2. Summary of Significant Accounting PoliciesBasis of Presentation and Principles of ConsolidationThe consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). Novus, aDelaware corporation, owns 100% of the issued and outstanding common stock or other ownership interest in Otic. Otic owns 100% of the issued andoutstanding common stock or other ownership interest in its U.S. subsidiary, Otic Pharma, Inc. The functional currency of the Company’s foreign subsidiaryis the U.S. Dollar; however, certain expenses, assets and liabilities are transacted at the local currency. These transactions are translated from the localcurrency 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 significantto the consolidated financial statements.All significant intercompany accounts and transactions among the entities have been eliminated in consolidation.Liquidity and Financial ConditionThe Company has experienced recurring net losses and negative cash flows from operating activities since its inception. The Company recorded a netloss 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 Companyhad cash of $13.0 million, working capital of $11.7 million and an accumulated deficit of $41.6 million. Due to continuing research and developmentactivities, the Company expects to continue to incur net losses into the foreseeable future. In order to continue these activities, theF-7Company will need to raise additional funds through public or private debt and equity financings or strategic collaboration and licensing arrangements. TheCompany’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 marketdemand for the Company’s common stock, which itself is subject to a number of development and business risks and uncertainties, as well as the uncertaintythat 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 orconvertible debt securities to raise additional funding, its existing stockholders may experience dilution, it may incur significant financing costs, and thenew equity or convertible debt securities may have rights, preferences and privileges senior to those of its existing stockholders. If the Company issues debtsecurities to raise additional funding, it would incur additional debt service obligations, it could become subject to additional restrictions limiting its abilityto operate its business, and it may be required to further encumber its assets.Adequate additional funding may not be available to us on acceptable terms on a timely basis, or at all. If the Company is unable to obtain thenecessary level of capital through external financing during the first half of 2019, as contemplated in its operating plan, the Company intends to implementcertain cost cutting measures commencing in the first half of 2019 to reduce its cash flow requirements. Consistent with the actions the Company has taken inthe past, it will execute the appropriate steps to enable the continued operations of the business and preservation of the value of its assets beyond the nexttwelve months, including but not limited to actions such as reduced personnel-related costs, delay or curtailment of the Company’s research anddevelopment activities, and other discretionary expenses that are within the Company’s control. These initiatives, if required, may have an adverse impacton the Company’s ability to achieve certain of its planned objectives during 2019 as it seeks strategic alternatives.At the time of issuance of the consolidated financial statements for the year ended December 31, 2018, the Company concluded that there issubstantial doubt regarding the Company’s ability to continue as a going concern for the twelve months from the date of issuance of the consolidatedfinancial statements for the year ended December 31, 2018. The financial information and the consolidated financial statements included in this AnnualReport have been prepared on a basis that assumes that we will continue as a going concern, which contemplates the realization of assets and the satisfactionof liabilities and commitments in the normal course of business. This financial information and these financial statements do not include any adjustmentsthat may result from an unfavorable outcome of this uncertainty. Our ability to continue as a going concern is dependent upon our ability to successfullysecure sources of financing and ultimately achieve profitable operations.Use of EstimatesThe preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make informed estimates andassumptions that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in the Company’sconsolidated financial statements and accompanying notes. The most significant estimates in the Company’s financial statements relate to stock-basedcompensation, accruals for liabilities, carrying value of goodwill, and other matters that affect the 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 consolidatedfinancial statements.Cash and Cash EquivalentsCash represents cash deposits held at financial institutions. The Company considers all liquid investments purchased with an original maturity ofthree months or less and that can be liquidated without prior notice or penalty to be cash equivalents. The carrying value of cash equivalents approximatetheir fair value due to the short-term maturities of these instruments. 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 December 31, 2018 and 2017.Restricted CashRestricted cash represents cash required to be set aside as security for lease payments or to maintain a letter of credit for the benefit of the landlord forthe Company’s offices. The Company had restricted cash of $0 and $70,000 at December 31, 2018 and 2017, respectively.Fair Value MeasurementsFinancial assets and liabilities are recorded at fair value.F-8The Company measures the fair value of certain of its financial instruments on a recurring basis. A fair value hierarchy is used to rank the quality andreliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of thefollowing three categories:Level 1—Quoted prices (unadjusted) in active markets for identical assets and liabilities.Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as unadjusted quoted prices for similar assets and liabilities,unadjusted quoted prices in the markets that are not active, or other inputs that are observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities.Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.There have been no transfers of assets for liabilities between these fair value measurement classifications during the periods presented.The Company had no financial instruments, assets or liabilities measured at fair value on a recurring basis at December 31, 2018 and 2017.Concentration of Credit Risk and Other Risks and UncertaintiesAs of December 31, 2018 and 2017, all of the Company’s long-lived assets were located in the U.S.Financial instruments that are subject to concentration of credit risk consist primarily of cash equivalents. The Company’s policy is to invest cash ininstitutional money market funds to limit the amount of credit exposure. At times, the Company maintains cash equivalents in short‑term money marketfunds 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 commercialsales can commence. There can be no assurance that its products will receive any of these required approvals. The denial or delay of such approvals mayimpact the Company’s business in the future. In addition, after the approval by the FDA, there is still an ongoing risk of adverse events that did not appearduring 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 andenvironmental regulations, uncertainty of market acceptance of products, product liability, the volatility of its stock price and the need to obtain additionalfinancing.Our facilities and equipment may be affected by natural or man-made disasters. We currently conduct our research, development and managementactivities in Irvine, California, near known earthquake fault zones. We have taken precautions to safeguard our facilities, equipment and systems, includinginsurance, health and safety protocols, and off-site storage of computer data. However, our facilities and systems may be vulnerable to earthquakes, fire,storm, power loss, telecommunications failures, physical and software break-ins, software viruses and similar events which could cause substantial delays inour operations, damage or destroy our equipment or inventory, and cause us to incur additional expenses. In addition, the insurance coverage we maintainmay 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.Business CombinationsAccounting for acquisitions requires extensive use of estimates and judgment to measure the fair value of the identifiable tangible and intangibleassets acquired, including in-process research and development and liabilities assumed. Additionally, the Company must determine whether an acquiredentity is considered a business or a set of net assets because the excess of the purchase price over the fair value of net assets acquired can only be recognizedas goodwill in a business combination. The Company accounted for the merger with Tokai as a business combination under the acquisition method ofaccounting. Consideration paid to acquire Tokai was measured at fair value and included the exchange of Tokai’s common stock and preferred stock. Theallocation of the purchase price resulted in recognition of an intangible asset related to goodwill. The operating activity for Tokai, the acquiree foraccounting purposes, was immediately integrated with Otic post‑merger, therefore it is not practical to segregate results of operations related specifically toTokai since the date of acquisition.F-9As a result of the Reverse Merger, historical common stock, stock options and additional paid-in capital, including share and per share amounts, havebeen retroactively adjusted to reflect the equity structure of the Company.Reportable SegmentsOperating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluatedregularly 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 developmentof products for disorders of the ear, nose, and throat.GoodwillGoodwill represents the difference between the consideration transferred and the fair value of the net assets acquired under the acquisition method ofaccounting. Goodwill is not amortized but is evaluated for impairment as of October 1 of each year or if indicators of impairment exist that would, morelikely than not, reduce the fair value from its carrying amount.The Company performs its goodwill impairment analysis at the reporting unit level, which aligns with the Company’s reporting structure andavailability of discrete financial information. The Company performs its annual impairment analysis by either comparing the reporting unit’s estimated fairvalue to its carrying amount or doing a qualitative assessment of a reporting unit’s fair value from the last quantitative assessment to determine if there ispotential impairment. The Company may do a qualitative assessment when the results of the previous quantitative test indicated the reporting unit’sestimated fair value was significantly in excess of the carrying value of its net assets and it does not believe there have been significant changes in thereporting unit’s operations that would significantly decrease its estimated fair value or significantly increase its net assets. If a quantitative assessment isperformed the evaluation includes management estimates of cash flow projections based on internal future projections and/or use of a market approach bylooking at market values of comparable companies. Key assumptions for these projections include revenue growth, future gross and operating margin growth,and its weighted cost of capital and terminal growth rates. The revenue and margin growth is based on increased sales of new products as the Companymaintains investments in research and development. Additional assumed value creators may include increased efficiencies from capital spending. Theresulting cash flows are discounted using a weighted average cost of capital. Operating mechanisms and requirements to ensure that growth and efficiencyassumptions will ultimately be realized are also considered in the evaluation, including timing and probability of regulatory approvals for Companyproducts to be commercialized. The Company’s market capitalization is also considered as a part of its analysis.The Company’s annual evaluation for impairment of goodwill consists of one reporting unit. In accordance with the Company’s policy, the Companycompleted its most recent annual evaluation for impairment as of October 1, 2018 using the qualitative assessment and determined that no impairmentexisted. No impairments were recorded for the years ended December 31, 2018 and 2017. Long-Lived AssetsProperty and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respectiveassets. Additions, major renewals and improvements are capitalized and repair and maintenance costs are charged to expense as incurred. Leaseholdimprovements are amortized over the remaining life of the initial lease term or the estimated useful lives of the assets, whichever is shorter.The Company reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying value ofan asset may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows relating to the asset are less than itscarrying amount. An impairment loss is measured as the amount by which the carrying amount of an asset exceeds its fair value. Significant managementjudgment is required in the forecast of future operating results that are used in the preparation of expected cash flows. No impairments of tangible assets havebeen identified during the years presented.Research and Development ExpensesResearch 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 anddevelopment costs are expensed as incurred. Amounts due under contracts with third parties may be either fixed fee or fee for service, and may includeupfront payments, monthly payments andF-10payments upon the completion of milestones or receipt of deliverables. Non-refundable advance payments under agreements are capitalized and expensed asthe related goods are delivered or services are performed.The Company’s contracts with third parties to perform various clinical trial activities in the on-going development of potential products. Thefinancial 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 ofthe clinical trial or similar conditions. The Company’s accrual for clinical trials is based on estimates of the services received and efforts expended pursuantto contracts with clinical trial centers and clinical research organizations. These contracts may be terminated by the Company upon written notice and theCompany is generally only liable for actual effort expended by the organizations to the date of termination, although in certain instances the Company maybe further responsible for termination fees and penalties. The Company estimates its research and development expenses and the related accrual as of eachbalance 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 priorperiod accrued estimates for clinical trial activities through December 31, 2018.Net Loss Per ShareBasic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number ofcommon shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividingthe net loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for theperiod determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share calculation, preferred stock, and stockoptions and warrants are considered to be potentially dilutive securities and are excluded from the calculation of diluted net loss per share because theireffect 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. Year EndedDecember 31, 2018 2017 (In thousands, except share and pershare data) Net loss available to stockholders of the company $(14,065) $(13,116)Interest accumulated on preferred shares and on preferred shares contingently issuable for little or no cash — (328)Net loss attributable to stockholders of preferred shares and to stockholders of preferred shares contingently issuable for little or no cash — 2,666 Net loss used in the calculation of basic and diluted loss per share $(14,065) $(10,778)Net loss per share, basic and diluted $(1.56) $(2.30)Weighted-average number of common shares 9,005,352 4,677,610 The computation of diluted earnings per share excludes stock options, warrants, and restricted stock units that are anti-dilutive. For the year endedDecember 31, 2018, common share equivalents of 974,817 shares were anti-dilutive. For the year ended December 31, 2017, common share equivalents of782,340 shares were anti-dilutive.Stock-based CompensationFor stock options granted to employees, the Company recognizes compensation expense for all stock-based awards based on the grant-date estimatedfair value. The fair value of stock options is determined using the Black-Scholes option pricing model, using assumptions which are subjective and requiresignificant judgment and estimation by management. The risk-free rate assumption was based on observed yields from governmental zero-coupon bonds withan equivalent term. The expected volatility assumption was based on historical volatilities of a group of comparable industry companies whose share pricesare publicly available. The peer group was developed based on companies in the pharmaceutical industry. The expected term of stock options represents theweighted-average period that the stock options are expected to be outstanding. Because the Company does not have historical exercise behavior, itdetermined the expected life assumption using the simplified method, which is an average of the options ordinary vesting period and the contractual term.The expectedF-11dividend assumption was based on the Company’s history and expectation of dividend payouts. The Company has not paid and does not expect to paydividends at any time in the foreseeable future. The Company recognizes forfeitures on an actual basis and as such did not estimate forfeitures to calculatestock-based compensation.Stock-based compensation expense related to stock options granted to non-employees is recognized based on the fair value of the stock options,determined using the Black-Scholes option pricing model, as they are earned. The awards generally vest over the period the Company expects to receiveservices from the non-employee. Stock options granted to non-employees are subject to periodic revaluation over their vesting terms.Income TaxesThe asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporarydifferences between the carrying amounts and the tax bases of assets and liabilities. Tax law and rate changes are reflected in income in the period suchchanges are enacted. The likelihood of realizing the tax benefits related to a potential deferred tax asset is evaluated, and a valuation allowance is recognizedto reduce that deferred tax asset if it is more likely than not that all or some portion of the deferred tax asset will not be realized. Deferred tax assets andliabilities are calculated at the beginning and end of the year; the change in the sum of the deferred tax asset, valuation allowance and deferred tax liabilityduring the year generally is recognized as a deferred tax expense or benefit. The effect on deferred tax assets and liabilities of a change in tax rates isrecognized in operations in the period that includes the enactment date.Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and the valuationallowance recorded against net deferred tax assets. We assess the likelihood that deferred tax assets will be recovered as deductions from future taxableincome. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis and includes a review of all availablepositive and negative evidence. Factors reviewed include projections of pre-tax book income for the foreseeable future, determination of cumulative pre-taxbook income after permanent differences, earnings history, and reliability of forecasting. We have provided a full valuation allowance on our deferred taxassets as of December 31, 2018 and 2017 because we believe it is more likely than not that our deferred tax assets will not be realized as of those dates.On December 22, 2017, President Trump signed U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), whichbecame effective January 1, 2018. The Tax Act significantly changed the fundamentals of U.S. corporate income taxation by, among many other things,reducing the U.S. federal corporate income tax rate from 35% to 21%, converting to a territorial tax system, and creating various income inclusion andexpense limitation provisions. We have performed a review of the Tax Act, and recorded amounts related to the revaluation of our deferred taxes and therealization of certain tax credit carryforwards. However, as the Company records a valuation allowance for its entire deferred income tax asset, there was noimpact to the reported amounts in the accompanying consolidated financial statements as a result of the Tax Act.The Company evaluates the accounting for uncertainty in income tax recognized in its consolidated financial statements and determines whether it ismore likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit is recorded inits consolidated financial statements. For those tax positions where it is “not more likely than not” that a tax benefit will be sustained, no tax benefit isrecognized. Where applicable, associated interest and penalties are also recorded. The Company has not accrued any liabilities for any such uncertain taxpositions as of December 31, 2018 or 2017. The Company is subject to U.S. federal and state tax authority examinations for all the years since inception dueto net operating loss and tax credit carryforwards. The net operating losses and tax credits are subject to adjustment until the statute closes on the year theattributes are ultimately utilized.The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service andother tax authorities. In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex taxregulations. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position forrecognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, includingresolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely ofbeing realized upon settlement. While the Company believes it has appropriate support for the positions taken on its tax returns, the Company regularlyassesses the potential outcomes of examinations by tax authorities in determining the adequacy of its provision for income taxes. The Company continuallyassesses the likelihood and amount of potential revisions and adjusts the income tax provision, income taxes payable and deferred taxes in the period inwhichF-12the facts that give rise to a revision become known. For additional information, see Note 8. Income Taxes in the notes to the consolidated financialstatements.Recently Issued Accounting PronouncementsIn August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certaindisclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosurerequirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption ofstockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of thebeginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule was effectiveon November 5, 2018. However, as provided for by the SEC in Q&A 105.09, the Company will defer presenting its analysis of stockholders’ equity in itsquarterly report in Form 10-Q until its quarter ended March 31, 2019. The Company does not expect the adoption of SEC Release No. 33-10532 to have amaterial impact on its financial position, results of operations or cash flows. In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, Customer's Accounting forImplementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"), an amendment to the accounting guidanceon cloud computing service arrangements that changes the accounting for implementation costs incurred in a cloud computing arrangement that is a servicecontract. The update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with therequirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance also requires an entity to expense thecapitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The guidance is effective forfiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact the guidancewill have on its consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the DisclosureRequirements for Fair Value Measurement”, an amendment to the accounting guidance on fair value measurements. The guidance modifies the disclosurerequirements on fair value measurements, including the removal of disclosures of the amount of and reasons for transfers between Level 1 and Level 2 of thefair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The guidance alsoadds certain disclosure requirements related to Level 3 fair value measurements. The guidance is effective for fiscal years, and interim periods within thosefiscal years, beginning after December 15, 2019. The Company does not expect the adoption of this guidance will have a material impact on its consolidatedfinancial statements.In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope ofTopic 718 Compensation—Stock Compensation, to include share-based payments issued to nonemployees for goods or services. Consequently, theaccounting for share-based payments to nonemployees and employees will be substantially aligned. ASU No. 2018-07 supersedes Subtopic 505-50 Equity—Equity-Based Payments to Non-Employees. The amendments in ASU No. 2018-07 are effective for the Company beginning in 2019, with early adoptionpermitted, but no earlier than a company’s adoption date of Topic 606 Revenue from Contracts with Customers. The Company is currently assessing theimpact and timing of adopting this guidance on its consolidated financial statements.In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220), which allows areclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the passing of H.R. 1/Public LawNo. 115-97, commonly known as the Tax Cuts and Jobs Act (the “Act”) and requires certain disclosures about stranded tax effects. The amendments in ASUNo. 2018-02 are effective beginning in 2019, with early adoption permitted, and may be applied either in the period of adoption or retrospectively to eachperiod in which the effect of the change in the U.S. Federal corporate tax rate in the Tax Act is recognized. The Company does not expect the adoption of thisguidance will have an impact on its consolidated financial statements. In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives andHedging (Topic 815)”, which addresses the complexity of accounting for certain financial instruments with down round features. Down round features arefeatures of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equityofferings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertibleF-13instruments) with down round features that require fair value measurement of the entire instrument or conversion option. The amendments in Part I of thisUpdate are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with early adoption permitted. TheCompany is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.In January 2017, the FASB issued ASU No. 2017-04 “Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for GoodwillImpairment,” or ASU 2017-04. ASU 2017-04 allows companies to apply a one-step quantitative test and record the amount of goodwill impairment as theexcess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The amendments ofthe ASU are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted forinterim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently assessing the impact and timing ofadopting this guidance on its consolidated financial. In May 2017, the FASB issued ASU No. 2017-09, “Stock Compensation – Scope of Modification Accounting” or ASU 2017-09. ASU 2017-09provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The newstandard was effective for fiscal years beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. There was noimpact upon adoption. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments (“ASU 2016-13”), an amendment which modifies the measurement and recognition of credit losses for most financial assets and certain otherinstruments. The amendment updates the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the“incurred loss” model with an “expected loss” model. Accordingly, these financial assets will be presented at the net amount expected to be collected. Theamendment also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducingthe carrying amount under the current, other-than-temporary-impairment model. The guidance is effective for fiscal years beginning after December 15, 2019,including interim periods within those fiscal years. Early adoption is permitted for annual periods after December 15, 2018. The Company does not expectthe adoption of this guidance will have a material impact on its consolidated financial statements.In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under this guidance, an entity is required to recognize right-to-use assetsand corresponding lease liabilities for all significant financing and operating leases on its balance sheet that are not considered short-term and disclose keyinformation about leasing arrangements. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. In July 2018,the FASB issued ASU No. 2018-11, Leases (Topic 842) Targeted Improvements, which provides for an alternative transition method by allowing companiesto continue to use the legacy guidance in Topic 840, Leases, including its disclosure requirements, in the comparative periods presented in the year ofadoption of the new leases standard and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption ratherthan the earliest period presented.The Company has adopted the requirements of the new lease standard effective January 1, 2019 and has elected the optional transition method toapply the standard as of the effective date and therefore, the Company will not apply the standard to the comparative periods presented in the consolidatedfinancial statements. The Company will elect the transition package of three practical expedients permitted within the standard, which eliminates therequirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs. The Company will not elect the hindsightpractical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets. Further, the Company will elect ashort-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e. leases withterms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. TheCompany is finalizing its analysis of certain key assumptions that will be utilized at the transition date including the incremental borrowing rate.The standard will have a material impact on the Company’s consolidated balance sheets effective January 1, 2019, but will not have an impact on itsconsolidated statements of operations as of January 1, 2019. The most significant impact will be the recognition of a right-to-use asset and correspondinglease liability for the Company’s sole operating lease—the Company has no finance leases. F-14Note 3. Reverse MergerThe Company completed the Reverse Merger with Tokai as discussed in Note 1. Based on the terms of the Reverse Merger, the Company concludedthat the transaction is a business combination pursuant to ASC 805 Business Combinations, Otic was deemed the acquiring company for accountingpurposes, and the transaction has been accounted for as a reverse acquisition under the acquisition method of accounting for business combinations inaccordance with GAAP. Under the acquisition method of accounting, the total purchase price was allocated to the acquired tangible and intangible assets andassumed liabilities of Tokai based on their estimated fair values as of the Reverse Merger closing date. The excess of the purchase price over the fair value ofassets acquired and liabilities assumed was allocated to goodwill.On May 9, 2017, Tokai issued 4,027,693 shares of its common stock to the stockholders of Otic and the holders of warrants and options of Otic uponthe exercise of such options and warrants in exchange for 840,115 Otic Shares. All warrants were exercised as of the merger date and after consummation ofthe Reverse Merger, Otic stockholders owned a majority of the fully diluted common stock of Novus Therapeutics, Inc.Purchase ConsiderationThe purchase price for Tokai on May 9, 2017, the closing date of the Reverse Merger, was as follows (in thousands): Fair value of Tokai common stock outstanding (1) $14,486 Premium paid (2) 8,889 Purchase price $23,375 (1)Comprised of 2,515,739 shares of common stock outstanding at the date of the Reverse Merger based on the closing price of $5.76 per share on May9, 2017, as adjusted for the one-for-nine reverse stock-split on May 11, 2017.(2)Premium paid over fair value of common stock based on net tangible asset multiple of 1.08x book value of Tokai equity of $21.5 million as of May 9,2017.Allocation of Purchase ConsiderationThe allocation of the estimated purchase price to the acquired assets and liabilities assumed of Tokai, based on their estimated fair values as of May 9,2017, the close of the transaction, was as follows (in thousands): Cash, cash equivalents, and restricted cash $23,250 Prepaids and other current assets 1,132 Property and equipment 73 Goodwill 1,867 Accounts payable, accrued expenses and other liabilities (2,947)Net assets acquired $23,375 The Company engaged a third-party valuation firm to assist management in its analysis of the fair value of Tokai. All estimates, key assumptions, andforecasts were either provided by or reviewed by management. While the Company chose to utilize a third-party valuation firm, the fair value analysis andrelated valuations represent the conclusions of management and not the conclusions or statements of any third party. The excess of the total purchase priceover the fair value of assets acquired and liabilities assumed was allocated to goodwill.The Company believes that the historical values of Tokai’s current assets and current liabilities approximated fair value based on the short-termnature of such items.Goodwill, which relates principally to intangible assets that do not qualify for separate recognition under GAAP, was calculated as the differencebetween the fair value of the consideration expected to be transferred and the values assigned to the identifiable tangible and intangible assets acquired andliabilities assumed. Goodwill is not expected to be deductible for tax purposes.F-15Pro Forma Results in Connection with Reverse MergerThe operating activity for Tokai, the acquiree for accounting purposes, was immediately integrated with Otic post‑merger, therefore it is not practicalto segregate results of operations related specifically to Tokai since the date of acquisition.The unaudited financial information in the following table summarizes the combined results of operations of the Company and Tokai, on a pro formabasis, as if the Reverse Merger had occurred at the beginning of the periods presented (in thousands): Year EndedDecember 31, 2017 Operating expenses Research and development $2,481 General and administrative 9,356 Total operating expenses 11,837 Loss from operations (11,837) Other income, net 45 Net loss and other comprehensive loss $(11,792) Net loss per share, basic and diluted $(2.52) Weighted-average shares outstanding, basic and diluted 4,677,610 The above unaudited pro forma information was determined based on historical GAAP results of Otic and Tokai. The unaudited pro forma combinedresults are not necessarily indicative of what the Company’s combined results of operations would have been if the acquisition was completed at thebeginning of the periods presented. The unaudited pro forma combined net loss includes pro forma adjustments primarily relating to the following non-recurring items directly attributable to the business combination: •Elimination of transaction costs of $7.2 million incurred during the year ended December 31, 2017. The amount has been eliminated on a proforma basis as they are not expected to have a continuing effect on the operating results of the combined company. •An increase in the weighted-average shares outstanding for the period after giving effect to the issuance of Tokai common stock in connectionwith the Reverse Merger and Private Placement. Note 4. Prepaid Expenses, Other Assets, Accrued Expenses and Other LiabilitiesPrepaid expenses and other current assets consisted of the following as of December 31, 2018 and December 31, 2017 (in thousands): Year EndedDecember 31, 2018 2017 Prepaid insurance $413 $1,518 Prepaid other 261 161 Other current assets 630 18 Total prepaid expenses and other current assets $1,304 $1,697 F-16Accrued expenses and other liabilities consisted of the following as of December 31, 2018 and December 31, 2017 (in thousands): Year EndedDecember 31, 2018 2017 Accrued compensation and related expenses $742 $— Accrued clinical 735 85 Accrued professional services 194 158 Accrued vacation 160 111 Accrued other 14 — Total accrued expenses and other liabilities $1,845 $354 Note 5. GoodwillThe changes in the carrying amount of goodwill consisted of the following as of December 31, 2018 and December 31, 2017 (in thousands): GrossCarryingAmount AccumulatedImpairmentLosses Net CarryingAmount Balance as of January 1, 2017 $— $— $— Additions (1) 1,867 — 1,867 Balance as of December 31, 2017 1,867 — 1,867 Additions — — — Balance as of December 31, 2018 $1,867 $— $1,867 (1)Relates to the Reverse Merger (See Note 3. Reverse Merger). Note 6. Commitments and ContingenciesOperating LeasesThe Company leases office space under various operating leases. Total rent expense for all operating leases in the consolidated statements ofoperations and comprehensive loss was approximately $170,000 and $1.0 million for the year ended December 31, 2018 and 2017, respectively.In February 2015, Tokai entered into a sublease for 15,981 square feet of office space in Boston, Massachusetts. The term of the sublease commencedon April 1, 2015 and initially expired on December 31, 2016 until subsequently extended through July 31, 2018. In November 2017, the Companyterminated the lease early and paid an additional $455,000 in advance rent in conjunction with the lease termination.In September 2015, Otic entered into a three-year operating lease for 5,197 square feet of office space in Irvine, California. The lease had an initialexpiration date of August 31, 2018; however, the Company extended the term of the lease through September 30, 2021 by amending the office lease in April2018.Future payments under noncancelable operating leases having initial or remaining terms of one year or more are as follows for the succeeding fiscalyear and thereafter (in thousands): 2019 $180 2020 188 2021 146 Total minimum lease payments $514 F-17Restricted Cash and Letter of CreditThe Company was required to maintain a letter of credit totaling $70,000 for the benefit of the landlord of Tokai’s Boston office. The landlord can drawagainst the letter of credit in the event of default by the Company. The Company held $70,000, which is in restricted cash as part of current assets on theconsolidated balance sheet as of December 31, 2017. Although the Boston office lease was terminated in November 2017, the process to release the restrictedcash was not completed as of December 31, 2017. On March 12, 2018, the restricted cash was released and transferred into general funds.Grants and LicensesIsraeli Innovation Authority GrantFrom 2012 through 2015, the Company received grants in the amount of approximately $537,000 from the Israeli Innovation Authority (previouslythe Office of Chief Scientist) of the Israeli Ministry of Economy and Industry designated for investments in research and development. The grants are linkedto the U.S. dollar and bear annual interest of LIBOR. The grants are to be repaid as royalties from sales of the products developed by the Company from theirinvestments in research and development. Because the Company has not yet earned revenues related to these investments and cannot estimate potentialroyalties, no liabilities related to these grants have been recorded as of each period presented. Repayment of the grant is contingent upon the successfulcompletion of the Company’s R&D programs and generating sales. The Company has no obligation to repay these grants, if the R&D program fails, isunsuccessful or aborted or if no sales are generated. The Company had not yet generated sales as of December 31, 2018; therefore, no liability was recordedfor the repayment in the accompanying consolidated financial statements.Otodyne License AgreementIn November 2015, the Company entered into an exclusive license agreement with Scientific Development and Research, Inc. and Otodyne, Inc.(collectively, the “Licensors”) granting it exclusive worldwide rights to develop and commercialize OP0201, a potential first-in-class treatment option forpatients at risk for or with otitis media (middle ear inflammation with or without infection), which is often caused by 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. andkey European markets (France, Germany, Italy, Spain, and the United Kingdom). The Company is responsible for prosecuting, maintaining, and enforcing allintellectual property and will be the sole owner of improvements. Under the agreement with the Licensors, the Company paid license fees totaling $750,000and 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 IND application to the Company. The Company isobligated to pay up to $42.1 million in development and regulatory milestones if OP0201 is approved for three indications in the U.S., two in Europe, andtwo 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 calendaryear. 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-singleto mid-single percentage of net sales. There were no milestones achieved during the years ended December 31, 2018 or 2017.Terminated License AgreementsIn October 2013, the Company (through Tokai) entered into a master license agreement with the University of Maryland, Baltimore (“UMB”),pursuant to which, UMB granted the Company an exclusive, worldwide license, with the right to sublicense, and, under certain patents and patentapplications to make, have made, use, sell, offer to sell and import certain anti-androgen steroids, including galeterone, for the prevention, diagnosis,treatment or control of any human or animal disease.In January 2015, the Company (through Tokai) entered into an exclusive license agreement with The Johns Hopkins University (“Johns Hopkins”)pursuant to which Johns Hopkins granted the Company an exclusive, worldwide license under certain patents and patent applications, and a non-exclusivelicense under certain know-how, in each case with the right to sublicense, and to make, have made, use, sell, offer to sell and import certain assays to identifyandrogen receptor variants for use as a companion diagnostic with galeterone.On October 5, 2017, the Company submitted notice of termination to all parties. The Company no longer has any obligations to UMB as of December4, 2017, and to John Hopkins as of January 3, 2018.F-18Legal MattersThe Company is involved in various lawsuits and claims arising in the ordinary course of business, including actions with respect to intellectualproperty, employment, and contractual matters. In connection with these matters, the Company assesses, on a regular basis, the probability and range ofpossible 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 beenincurred 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 todetermine the adequacy of the liabilities accrued and related disclosures. The amount of ultimate loss may differ from these estimates. Each matter presents itsown unique circumstances, and prior litigation does not necessarily provide a reliable basis on which to predict the outcome, or range of outcomes, in anyindividual proceeding. Because of the uncertainties related to the occurrence, amount, and range of loss on any pending litigation or claim, the Companydoes not consider a liability probable and is currently unable to predict their ultimate outcome, and, with respect to any pending litigation or claim where noliability has been accrued, to make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome. Inthe event that opposing litigants in outstanding litigation proceedings or claims ultimately succeed at trial and any subsequent appeals on their claims, anypotential loss or charges in excess of any established accruals, individually or in the aggregate, could have a material adverse effect on the Company’sbusiness, financial condition, results of operations, and/or cash flows in the period in which the unfavorable outcome occurs or becomes probable, andpotentially in future periods.Legal ProceedingsOn September 22, 2014, Tokai completed the initial public offering of its common stock (the IPO”). Subsequent to the IPO, several lawsuits were filedagainst Tokai, Jodie P. Morrison, Lee H. Kalowski, Seth L. Harrison, Timothy J. Barberich, David A. Kessler, Joseph A. Yanchik, III, and the underwriters ofthe IPO. The lawsuits allege that, in violation of the Securities Act of 1933 (“Securities Act”), Tokai’s registration statement for the IPO made false andmisleading statements and omissions about Tokai’s clinical trials for galeterone. Each lawsuit sought, among other things, unspecified compensatorydamages, interest, costs, and attorneys’ fees. Further details on each lawsuit are set forth below. The Company intends to vigorously defend against theseclaims. Given the uncertainty of litigation, the preliminary stage of these cases, and the legal standards that must be met for, among other things, success onthe merits, the Company is unable to predict the ultimate outcome of these actions, and therefore it cannot estimate the reasonably possible loss or range ofloss that may result from these actions. •Jackie888 Action. On August 19, 2016, a purported stockholder of Tokai filed a putative class action lawsuit in the Superior Court of the Stateof California, County of San Francisco, entitled Jackie888, Inc. v. Tokai Pharmaceuticals, Inc., et al., No. CGC-16-553796. The plaintiffsought to represent a class of purchasers of Tokai common stock in or traceable to Tokai’s IPO. On October 19, 2016, the defendants moved todismiss or stay the action on grounds of forum non conveniens, and certain individual defendants moved to quash the plaintiff’s summons forlack of personal jurisdiction. On February 27, 2017, the Superior Court entered an order granting defendants’ motion to stay the lawsuit. OnMay 24, 2018, the plaintiff dismissed its complaint in the Superior Court of the State of California and refiled its complaint in the BusinessLitigation Session of the Superior Court Department of the Suffolk County Trial Court, Massachusetts (“Massachusetts State Court”). On June28, 2018, plaintiff Wu moved to consolidate the Jackie888 Action with the Wu Action (discussed below). On June 29, 2018, plaintiffsJackie888 and Wu filed a consolidated complaint. On July 6, 2018, the Jackie888 Action was consolidated with the Wu Action. Eventsfollowing consolidation are discussed below. •Wu Action. On December 5, 2016, a putative securities class action was filed in the Massachusetts State Court, entitled Wu v. TokaiPharmaceuticals, Inc., et al., 16-3725 BLS (“Wu Action”). The plaintiff seeks to represent a class of purchasers of Tokai common stock in ortraceable to Tokai’s IPO. On December 19, 2016, defendants removed the Wu Action to the U.S. District Court for the District ofMassachusetts, where it was captioned Wu v. Tokai Pharmaceuticals, Inc., et al., 16-cv-12550. On January 6, 2017, plaintiff filed a motion toremand the Wu Action to Massachusetts State Court. On September 28, 2017, the court stayed the case pending a decision by the UnitedStates Supreme Court in Cyan, Inc. v. Beaver County Employees Retirement Fund, S. Ct. Case No. 15-1439. On March 20, 2018, the UnitedStates Supreme Court ruled in Cyan that state courts have subject matter jurisdiction over covered class actions alleging only Securities Actclaims and that such actions are not removable to federal court. On March 22, 2018, plaintiff moved for leave to submit the Cyan decision insupport of plaintiff’s remand motion. On March 27, 2018 the Wu Action was remanded to the Massachusetts State Court. On May 3, 2018,plaintiff filed an amended class action complaint. Following the refiling of the Jackie888 Action in Massachusetts State Court (discussedabove), on June 28, 2018, plaintiff Wu moved to consolidate the Jackie888 Action with the Wu Action. On June 29, 2018, plaintiffs Jackie888and Wu filed a consolidatedF-19 complaint. On July 6, 2018, the Jackie888 Action was consolidated with the Wu Action. Defendants moved to dismiss the consolidatedcomplaint on August 15, 2018, plaintiffs filed their opposition thereto on September 28, 2018, and defendants filed their reply in support oftheir motion on October 19, 2018. In addition, Defendants moved to strike the class allegations in the consolidated complaint on August 15,2018, plaintiffs filed their opposition thereto on September 11, 2018, and defendants filed their reply in support of their motion on September21, 2018. The court held a hearing on November 15, 2018 on defendants’ motion to strike. On December 20, 2018, the court denieddefendants’ motion to strike. The court held a hearing on December 20, 2018 on defendants’ motion to dismiss. On January 8, 2019, the courtdenied defendants’ motion to dismiss. On February 6, 2019, the court entered a scheduling order, pursuant to which discovery on merits issueswas stayed pending the court’s resolution of class certification. Discovery on class certification and standing issues must be completed byJuly 12, 2019. Plaintiffs’ motion for class certification and defendants; motion to dismiss for lack of standing shall be filed on or by August22, 2019, oppositions thereto shall be filed on or by September 19, 2019, and replies in support shall be filed on or by October 10, 2019. Thecourt scheduled a hearing for October 23, 2019 on the motions. •Angelos Action. On July 25, 2017, a purported stockholder of Tokai filed a lawsuit in the U.S. District Court for the District of Massachusetts,entitled Peter B. Angelos v. Tokai Pharmaceuticals, Inc., et al., No. 1:17-cv-11365-MLW. On September 7, 2018, plaintiff filed an amendedcomplaint. Defendants moved to dismiss the amended complaint on October 15, 2018. Plaintiff will oppose defendants’ motion by or onNovember 19, 2018, defendants will file any reply in support of their motion by or on December 17, 2018, and plaintiff filed a sur-reply insupport of his opposition by or on January 8, 2019. The court set a hearing for February 25, 2019 on defendants’ motion to dismiss but latercancelled the hearing. At this time, the hearing has not been rescheduled.IndemnificationIn the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties andprovide for general indemnification. The Company’s exposure under these agreements is unknown because it involves future claims that may be madeagainst 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 itsindemnification obligations. However, the Company may record charges in the future because of these indemnification obligations. No amounts associatedwith such indemnifications have been recorded to date.ContingenciesFrom time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company accruesa liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. There have been nocontingent liabilities requiring accrual at December 31, 2018 and 2017.Note 7. Stock-Based CompensationOtic had one stock compensation plan prior to the Reverse Merger, the 2012 Global Share Incentive Plan (the “2012 Plan”). Under the 2012 Plan,stock options, restricted share units and performance share awards may be granted to the Company’s directors, employees and consultants. Options remainoutstanding under the 2012 Plan. In connection with the Reverse Merger, all such options converted into options to purchase shares of Tokai common stock,as renamed Novus. Subsequent to the reverse merger, no additional grants will be made from the 2012 Plan. Options granted under the 2012 Plan generallyexpire ten years from the date of grant.Prior to the Reverse Merger, Tokai had two stock compensation plans, the 2014 Stock Incentive Plan (the “2014 Plan”) and the 2007 Stock IncentivePlan (the “2007 Plan”). The 2014 Plan permits the Company to make grants of incentive stock options, non-statutory stock options, restricted stock,restricted stock units, stock appreciation rights and other stock-based awards to the Company’s employees, officers, directors, consultants and advisors;however, incentive stock options may only be granted to the Company’s employees. The number of shares initially reserved for issuance under the 2014 Planwas 1,700,000 shares of common stock and may be increased by the number of shares under the 2007 Plan that expire, terminate or are otherwise surrendered,cancelled, forfeited or repurchased by the Company. The number of shares of common stock that may be issued under the plan is also subject to an annualincrease on the first day of each fiscal year equal to the lesser of (i) 1,800,000 shares of the Company’s common stock, (ii) 4% of the number of shares of theCompany’s common stock outstanding on the first day of the applicable fiscal year or (iii) an amount determined by the Company’s board of directors.Options remain outstanding under both the 2007 and the 2014 Plan. The number of shares subject to and the exercise pricesF-20applicable to these outstanding options were adjusted in connection with the one for nine reverse stock-split. As of December 31, 2018, there were 84,612options outstanding under the 2007 plan. Options granted under the 2007 and 2014 Plans generally expire ten years from the date of grant. The Companyintends for the 2014 Plan to be its primary stock compensation plan in the future.Effective as of August 1, 2018, the Board of Directors amended the Company’s 2014 Stock Incentive Plan (the “2014 Plan”) and the Company’s 2014Employee Stock Purchase Plan (the “ESPP” and, together with the 2014 Plan, the “Plans”) to reduce the share reserves under the Plans. These reductions weremade to equitably adjust the share reserves in accordance with the terms of the Plans. As a result of these equitable adjustments: (1) the number of shares ofcommon stock authorized for issuance under the 2014 Plan (excluding shares underlying outstanding awards as of August 1, 2018) was reduced to 766,500shares and the maximum number of shares that can be added to the 2014 Plan under evergreen provision set forth in Section 4(a)(1)(C) of the 2014 Plan wasreduced to 550,000 shares annually; and (2) the number of shares of common stock authorized for future issuance under the ESPP was reduced to 209,500shares (excluding shares previously issued under the ESPP prior to August 1, 2018) and the maximum number of shares that can be added to the ESPP underthe evergreen provision set forth in the ESPP was reduced to 135,000 shares annually. The 2014 Plan and ESPP were amended and restated as of August 1,2018 to reflect these equitable adjustments.Because Otic is considered to be the acquirer for accounting purposes, the pre-Reverse Merger vested stock options granted by Tokai under the 2007Plan and the 2014 Plan are deemed to have been exchanged for equity awards of the Company and as such the portion of the acquisition date fair value ofthese equity awards attributable to pre-Reverse Merger service to Tokai were accounted for as a component of the consideration transferred.The exchange of Otic stock options to purchase Tokai common stock, as renamed Novus, was accounted for as a modification of the awards becausethe legal exchange of the awards is considered a modification of Otic stock options. The modification of the stock options did not result in any incrementalcompensation expense as the modification did not increase the fair value of the stock options.Stock Option ActivityAs of December 31, 2018, a total of 764,966 options were available for grant under the 2014 Plan.The following table shows the stock option activity, as follows: SharesIssuableUnder Options WeightedAverageExercise Price WeightedAverageRemainingContractualTerm AggregateIntrinsicValue (In years) (In thousands) Outstanding as of January 1, 2017 59,777 $18.45 8.8 $4.3 Granted 595,800 5.45 Options assumed in the Reverse Merger 137,139 50.25 Exercised — — Forfeited / Canceled (10,376) 6.85 Outstanding as of December 31, 2017 782,340 14.28 8.8 $8.5 Granted 267,950 5.02 Exercised (15,120) 4.74 Forfeited / Canceled (60,353) 7.31 Outstanding as of December 31, 2018 974,817 $12.31 8.2 $— Options vested and expected to vest as of December 31, 2018 974,817 $12.31 8.2 $— Options exercisable as of December 31, 2018 548,328 $17.57 7.6 $— As of December 31, 2018, the range of exercise prices was between $3.32 and $119.25 for options outstanding.Intrinsic value is calculated as the difference between the exercise price of the underlying options and the fair value of the common stock for theoptions that had exercise prices that were lower than the fair value per share of the common stockF-21on the date of exercise. There was no aggregate intrinsic value of options exercised during the years ended December 31, 2018 and 2017.As of December 31, 2018, total unrecognized stock-based compensation expense related to non-vested equity awards was $1.5 million, which isexpected to be recognized over an estimated weighted-average period of 1.8 years.Stock-based Compensation ExpenseTotal compensation expense related to all of the Company’s stock-based awards for the years ended December 31, 2018 and December 31, 2017 wascomprised of the following (in thousands): Year EndedDecember 31, 2018 2017 Stock-based compensation classified as: Research and development expense $249 $69 General and administrative expense 1,294 510 Total stock-based compensation expense $1,543 $579 Stock-based compensation expense for the year ended December 31, 2018 includes $524,000 of stock-based compensation expense related to aperformance-based option grant which vested during 2018.Valuation AssumptionsThe following table presents the assumptions used in the Black-Scholes option pricing model to determine the fair value of stock options granted inthe periods presented, as follows: Year EndedDecember 31, 2018 2017 Expected stock price volatility 63% - 86% 79% - 86% Risk-free interest rate 2% - 3% 1% - 3% Expected life of option (in years) 5 - 7 5 - 7 Estimated dividend yield 0% 0% Prior to the Reverse Merger, the fair value of the shares of common stock underlying the stock options had been the responsibility of and determinedby the Company’s Board of Directors. Because there had been no public market for the Company’s common stock, the Board of Directors determined fairvalue of common stock at the time of grant of the option by considering a number of objective and subjective factors including independent third partyvaluations of the Company’s common stock, sales prices of convertible preferred stock to unrelated third parties, operating and financial performance, thelack of liquidity of capital stock and general and industry specific economic outlook, among other factors.Note 8. Income TaxesIncome (loss) before income taxes are as follows (in thousands): Year EndedDecember 31, 2018 2017 Losses before income taxes: U.S. $(14,177) $(12,470)Non-U.S. 112 (646)Total $(14,065) $(13,116) The provision (benefit) for income taxes are as follows (in thousands): F-22 Year EndedDecember 31, 2018 2017 2016 Current: $— $— $— Federal — — — State — — — Foreign — — — — — — Deferred Federal — — — State — — — Foreign — — — — — — Provision (benefit) for income taxes $— $— $— The Company is subject to income taxes under U.S. tax laws. The Company was subject to an Israeli corporate tax rate of 24% in 2017. The Companyis subject to an Israeli corporate tax rate of 23% in 2018 and thereafter. The Company was subject to a blended U.S. tax rate (federal as well as state corporatetax) of 35% in 2017 and is subject to a blended U.S. tax rate of 21% in 2018.On December 22, 2017, H.R. 1/Public Law No. 115-97, known as the Tax Cuts and Jobs Act (the “Tax Act”), was signed into law. The effects of thisnew federal legislation are recognized upon enactment, which is the date a bill is signed into law. The Tax Act includes numerous changes in existing taxlaw, including a permanent reduction in the federal corporate income tax rate from 35% to 21%. The rate reduction took effect on January 1, 2018. As aresult of the Tax Act, we recorded a $1.9 million reduction in our net deferred tax assets to reflect the rate reduction in the fourth quarter of 2017. However,the revaluation did not result in any additional net income tax expense as our net deferred tax assets are fully offset by a valuation allowance.The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accountingunder ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting underASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine areasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included inthe financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before theenactment of the Tax Act. As of December 22, 2018, the Company’s accounting for the remeasurement of its deferred tax assets was complete and there wereno changes to the amount previously recorded.Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and the valuationallowance recorded against net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in whichthose tax assets are expected to be realized. A valuation allowance is established when it is more likely than not the future realization of all or some of thedeferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, andincludes a review of all available positive and negative evidence. Factors reviewed include projections of pre-tax book income for the foreseeable future,determination of cumulative pre-tax book income after permanent differences, earnings history, and reliability of forecasting.Based on its review, the Company concluded that it was more likely than not that they would not realize the benefit of its deferred tax assets in thefuture. This conclusion was based on historical and projected operating performance, as well as the Company’s expectation that its operations will notgenerate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets within the statutory carryover periods.Therefore, the Company maintained a full valuation allowance on its deferred tax assets as of December 31, 2018 and 2017.The Company will continue to assess the need for a valuation allowance on its deferred tax assets by evaluating both positive and negative evidencethat may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the statement of operations for the period that theadjustment is determined to be required.F-23A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows: Year EndedDecember 31, 2018 2017 Statutory Federal income tax rate $(2,953) $(4,460)State income taxes, net of Federal tax benefits — — Foreign losses — 59 Tax credits (204) (2)Change in statutory rates — 1,859 Stock-based compensation 72 135 Permanent items 3 693 Other 90 43 Change in valuation allowance 2,992 1,673 Total provision for income taxes $— $— Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2018 and 2017 consisted of the following (inthousands): Year EndedDecember 31, 2018 2017 Net operating loss carryforwards $7,126 $4,516 Research and development tax credits 299 95 Accruals and reserves 159 221 Stock compensation 301 48 Depreciation and amortization 126 139 Total deferred tax assets 8,011 5,019 Less: Valuation allowance (8,011) (5,019)Net deferred tax assets $— $— The following table reconciles the beginning and ending amounts of unrecognized tax benefits for the years presented (in thousands): Year EndedDecember 31, 2018 2017 Gross unrecognized tax benefits at the beginning of the year $181 $— Additions from tax positions taken in the current year 158 75 Additions from tax positions taken in prior years — 106 Reductions from tax positions taken in prior years (11) — Tax settlements — — Gross unrecognized tax benefits at the end of the year $328 $181 The deferred income tax assets have been fully offset by a valuation allowance, as realization is dependent on future earnings, if any, the timing andamount of which are uncertain. The net valuation allowance increased by $3.0 million.The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets.The Company primarily considered such factors as its history of operating losses, the nature of the Company’s deferred tax assets, and the timing, likelihood,and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. At present, theCompany does not believe that it is more likely than not that the deferred tax assets will be realized; accordingly, a full valuation allowance has beenestablished and no deferred tax asset is shown in the accompanying balance sheets.As of December 31, 2018, and December 31, 2017, the Company had federal net operating loss carryforwards of approximately $25.0 million and$12.5 million, respectively, available to reduce future taxable income. As of December 31,F-242018 and December 31, 2017, the Company also has state net operating loss carryforwards of $0.9 million. Both the federal and California net operating losscarryforwards incurred before 2018 begin expiring in 2034 if not utilized. The 2018 federal net operating loss of $12.5 million carryforward does not expire.As of December 31, 2018, and December 31, 2017, the Company had Israeli net operating losses of $8.2 million and $8.4 million, respectively, whichcarryforward indefinitely.As of December 31, 2018 and 2017, the Company has federal research and development tax credit carryforwards of approximately $420,000 and$132,000, respectively. If not utilized, the carryforwards will begin expiring in 2025. As of December 31, 2018 and 2017, the Company has state research anddevelopment credit carryforwards or approximately $161,000 and $67,000, respectively, which do not expire.Pursuant to Internal Revenue Code (IRC) Sections 382 and 383, annual use of the Company’s net operating loss and research and development creditcarryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company has notcompleted an IRC Section 382/383 analysis regarding the limitation of net operating loss and research and development credit carryforwards. Due to theexistence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.The Company’s ability to use its remaining net operating loss and tax credit carryforwards may be further limited if the Company experiences aSection 382 ownership change in connection with future changes in the Company’s stock ownership.In the U.S., the Company files income tax returns in the U.S. Federal jurisdiction and California. The Company’s tax years for 2015 and forward aresubject to examination by the Federal and California tax authorities due to the carryforward of unutilized net operating losses and research and developmentcredits.The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. There wasno accrued interest and penalties associated with uncertain tax positions as of December 31, 2018 and 2017. The Company has not recorded any interest orpenalties in 2018 or 2017.Note 9. Stockholders’ EquityWarrantsDuring 2017, the following transactions represented the exercise of all outstanding warrants for the Company’s preferred stock, for total proceeds ofapproximately $3.1 million: •In March 2017, OrbiMed Israel Partners Limited Partnership, a related party, exercised a warrant to purchase 978,561 shares of Preferred B sharesof the Company at $0.41 per share for an aggregate amount of approximately $400,000. •In May 2017, OrbiMed Israel Partners Limited Partnership, a related party, exercised warrants to purchase 6,458,628 shares of Preferred Bshares of the Company at a price of $0.41 per share for an aggregate amount of approximately $2.6 million. Additionally, 51,477 shares ofcommon stock were issued in a cashless exercise of warrants. •In May 2017, Peregrine Management II Ltd., a related party, exercised warrants to purchase 192,454 shares of Preferred B shares at $0.41 pershare for an aggregate amount of approximately $79,000. Additionally, in a 10,299 shares of common stock were issued in a cashless exercise ofwarrants. •In May 2017, Pontifax, in a cashless exercise of its warrants, purchased 90,804 shares of the Company’s common stock. •In the first half of 2017, individual shareholders, in a cashless exercise, purchased 311,850 of the Company’s preferred stock.As of December 31, 2018 and 2017, no warrants were issued and outstanding. F-25Preferred StockUpon the Reverse Merger, all shares of preferred stock converted to common stock. As of December 31, 2018 and 2017, no shares of preferred stock wereissued and outstanding.Equity Distribution AgreementOn August 21, 2017, the Company entered into an equity distribution agreement (the “Equity Distribution Agreement”) with Piper Jaffray & Co.(“Piper Jaffray”), as sales agent, pursuant to which the Company may offer and sell, from time to time, through Piper Jaffray, up to $8.5 million in shares of itscommon stock. As of December 31, 2017, the Company had sold 167,356 shares of its common stock through the Equity Distribution Agreement for grossproceeds of approximately $774,000. On March 9, 2018, Piper Jaffray sold the remaining 2,296,610 shares of the Company’s common stock under the EquityDistribution Agreement, resulting in total gross proceeds of approximately $7.7 million. No further sales will be made pursuant to the Equity DistributionAgreement.On July 23, 2018, the Company filed a new prospectus supplement (the “2018 Prospectus”) under which the Company may offer and sell, from timeto time, through Piper Jaffray, up to an additional $8.8 million in shares of its common stock. No shares have been sold under the 2018 Prospectus as ofDecember 31, 2018. F-26Exhibit 10.15EXECUTIVE EMPLOYMENT AGREEMENTThis Executive Employment Agreement (the "Agreement"), dated November 10, 2015, is between Otic Pharma, Inc., a Delawarecorporation with operations in California (the "Company"), and Catherine Turkel, an individual (the "Executive"). 1.POSITION AND RESPONSIBILITIESa.Position. The Executive shall be employed by the Company to render services to the Company and itsparent company, Otic Pharma Ltd. (the "Parent") in the position of Senior Vice President Clinical Research and Development andChief Development Officer of the Company commencing on November 10, 2015. The Executive shall report to the Company'sChief Executive Officer and perform such duties and responsibilities as are normally related to such position in accordance with thestandards of the industry and any additional duties now or hereafter assigned to the Executive by the Chief Executive Officer. TheExecutive shall abide by the rules, regulations, and practices as adopted or modified from time to time in the Company's solediscretion.b.Other Activities. Except upon the prior written consent of the Company, the Executive will not, duringthe term of this Agreement, (i) accept any other employment, or (ii) engage, directly or indirectly, in any other business activity(whether or not pursued for pecuniary advantage) that could reasonably be expected to interfere with Executive's duties andresponsibilities hereunder or create a conflict of interest with the Company.c.No Conflict. Executive represents and warrants that the Executive's execution of this Agreement, theExecutive's employment with the Company, and the performance of the Executive's proposed duties under this Agreement shallnot violate any obligations the Executive may have to any other employer, person or entity, including any obligations with respectto proprietary or confidential information of any other person or entity. 2.COMPENSATION AND BENEFITS a.Base Salary. In consideration of the services to be rendered under this Agreement, the Company shall paythe Executive a salary at the rate of $265,000 per year ("Base Salary"). The Base Salary shall be paid in accordance with theCompany's regularly established payroll practice. Executive's Base Salary will be reviewed from time to time in accordance withthe established procedures of the Company for adjusting salaries and may be adjusted upward in the sole discretion of the Board, ora designated committee thereof.b.Annual Performance Bonus. The Executive will be eligible to receive an annual cash performance bonus(the "Performance Bonus") for the achievement of the Performance Goals (as defined below). The amount of such PerformanceBonus shall be determined at the discretion of the Board, or a designated committee thereof, which amount shall be targeted atthirty percent (30%) of Executive's Base Salary in the event of achievement of the Performance Goals in full by the Executive. TheBoard, or such designated committee, shall use as guidance for the determination of the Performance Bonus certain corporate andindividual goals (the "Performance   Goals"), which shall be established annually on a calendar year basis by Executive and the Board (or a designated committeethereof). Any Performance Bonus will be paid to Executive by March 15 of the year following the calendar year with respect towhich a Performance Bonus is earned, so long as the Executive remains employed as of such payment date.c.Benefits. The Executive shall be eligible to participate in the benefits made generally available by theCompany to senior executives, in accordance with the benefit plans established by the Company, and as may be amended from timeto time in the Company's sole discretion. In the event that the Company does not have appropriate medical and dental insurance inplace on the date of this Agreement providing the Executive and his family with medical and dental coverage substantiallyequivalent to that provided by Executive's most recent previous employer, then the Company shall reimburse Executive, on ataxable basis, for the cost of COBRA premiums associated with his continued coverage under the plans of his prior employer untilthe earlier of such time as Executive and his family are (i) eligible to be covered under a Company plan or (ii) no longer eligible forcontinued coverage under the plans of his prior employer, and thereafter shall have no further obligation to reimburse Executive forthe cost of such COBRA premium.d.Vacation. In addition to nationally recognized holidays, the Executive shall be eligible to receive up tofour (4) weeks of paid vacation per year and will receive paid Company holidays subject to the policies and procedures generallyapplicable to similarly situated executives for the Company as may be modified from time to time in the Company's sole discretion.e.Expenses. The Company shall reimburse the Executive for reasonable business expenses incurred in theperformance of the Executive's duties hereunder in accordance with the Company's expense reimbursement guidelines. 3.EQUITY INCENTIVES a.Time-Based Grant. Subject to the completion of a 409A valuation and the resolution of the Board and shareholdersof the Parent (the "Option Grant Conditions"), the Parent shall grant, from the shares available for grant pursuant to the Parent'sShare Option Plan (as amended, modified or restated from time to time, the "Share Incentive Plan"), to the Executive (so long asthe Executive is employed as of the grant date), an option to purchase 80,000 ordinary shares of the Parent (the "First Grant"). TheFirst Grant shall be an incentive stock option (ISO) to the maximum extent permitted by applicable tax laws. The First Grant shallvest and become exercisable as follows: 25% of the shares subject to the First Grant shall vest at the one year anniversary of the dateof commencement of employment of the Executive and the remaining 75% of the shares subject to the First Grant shall vestquarterly over the next three years, provided that all vesting is conditioned on the Executive continuing to provide full-time servicesto the Company or the Parent as of the applicable vesting date (unless otherwise approved by the Board), and shall be subject to theadditional acceleration set forth in Section 4.b. below.b.Performance-Related Grant. Upon satisfaction of the Option Grant Condition, Parent shall grant pursuant to theShare Incentive Plan, from the shares available for grant pursuant to the Share Incentive Plan, to the Executive (so long as theExecutive is employed as of the grant date) an option to purchase 30,000 ordinary shares of the Parent (the "Performance RelatedGrant"). The Performance Related Grant shall be an ISO, to the maximum extent permitted by applicable 2 tax laws. Such Performance Related Grant shall vest and become exercisable in three installments of 10,000 shares each forachievement of (a) a Company approved development plan for the otitis media program by April 30, 2016, (b) a completed phase Istudy for the otitis media program by June 30, 2016, and (c) completion ofan initial offering of the Parent's ordinary shares byDecember 31, 2016, all provided that the Executive is employed upon the achievement of the foregoing.c.Other Agreements. The Executive's entitlement to any equity incentives that may be approved is conditioned uponthe Executive's signing of the applicable equity incentive award agreement and is subject to its terms and the terms of the ShareIncentive Plan, including the vesting requirements outlined above. 4.AT-WILL EMPLOYMENT; TERMINATION BY COMPANY a.At-Will Termination by Company. The Executive's employment with the Company shall be "at-will" atall times. The Company may terminate the Executive's employment with the Company at any time, without any advance notice, forany reason or no reason at all, notwithstanding anything to the contrary contained in or arising from any statements, policies orpractices of the Company relating to the employment, discipline or termination of its employees. Upon and after such termination,all obligations of the Company under this Agreement shall cease, except as otherwise provided herein.b.Severance. Except in situations where the employment of the Executive is tenninated for Cause, by Deathor by Complete Disability (as defined in Section 5 below), in the event that the Company terminates the Executive's employment atany time or the Executive terminates his employment for "Good Reason" as provided for in Section 6(b) below the Executive will beeligible to receive the following payments and severance benefits (collectively, "Severance"): (i)after the first anniversary of the agreement date, an amount equal to three (3) months of the Executive's then-current Base Salary, payable in three (3) equal monthly installments commencing within ten (10) days of theeffective date of the Release, provided that concurrent with an S-1 registration statement for the initial offeringof the Parent's ordinary shares becoming effective, the Severance shall automatically increase to six (6) monthsof the Executive's then-current Base Salary, payable in six (6) equal monthly installments commencing withinten (10) days of the effective date of the Release; (ii)if the Executive elects to continue his medical and/or dental coverage under COBRA, the Company shall paythe premiums for COBRA coverage for Executive and his qualified dependents (or, for such portion of theCOBRA Continuation Period (as defined below) that the Company continues to be obligated to reimburse theExecutive for the cost of COBRA premiums under Section 2.c., to reimburse the Executive for the cost ofCOBRA premiums associated with his continued coverage under the plans of his prior employer) until theearlier of (a) three (3) months following the date of the Executive's termination (six (6) months followingan IPO) or (b) the date the Executive becomes eligible for comparable coverage 3 under another employer's plan(s) (such period, the "COBRA ContinuationPeriod"); and (iii)if such termination is (x) by the Company within the period commencing upon a Deemed Liquidation (asdefined in the Parent's Articles of Association in effect from time to time) and ending six (6) months following aDeemed Liquidation, the vesting of all unvested shares, options, or other equity incentive awards available to orheld by the Executive shall be accelerated such that all such shares, options or other equity incentive awardsshall be deemed vested in full with respect to all service related vesting conditions (but subject to theachievement of any financial targets that may otherwise remain applicable) or (y) by the Executive for "GoodReason" additional vesting only to the extent as provided for in Section 6(b) below. The Executive's eligibility for Severance is conditioned on the Executive having first signed a release agreement in the formattached as Exhibit A (the "Release") and such Release becoming effective pursuant to its terms no later than sixty (60) daysfollowing the date of termination of the Executive's employment (the "Release Deadline"). The Executive shall not be entitled toany Severance if Executive's employment is terminated pursuant to Section 5 for Cause, by Death or by Complete Disability or ifthe Executive's employment is terminated by the Executive (except for a termination for Good Reason, as provided in Section 6.bbelow). Notwithstanding subsection(ii)above, if the Company determines, in its sole discretion, that the Company cannot provide the COBRA premium benefitsset forth in subsection (ii) above without potentially incurring financial costs or penalties under applicable law (including, withoutlimitation, Section 2716 of the Public Health Service Act), the Company shall in lieu thereof pay the Executive a taxable cashamount, which payment shall be made regardless of whether the Executive or the Executive's eligible family members elect grouphealth insurance coverage (the "Health Care Benefit Payment"). The Health Care Benefit Payment shall be paid in monthlyinstallments on the same schedule that the COBRA premiums would otherwise have been paid to the insurer. The Health CareBenefit Payment shall be equal to the amount that the Company would have otherwise paid for COBRA insurance premiums(which amount shall be calculated based on the premium for the first month of coverage), and shall be paid until the expiration ofthe COBRA Continuation Period. 5.OTHER TERMINATIONS BY COMPANY a.Termination for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the Executive commits acrime involving dishonesty or physical harm to any person; (ii) the Executive willfully engages in conduct that is in bad faithand materially injurious to the Company and/or the Parent, including but not limited to, misappropriation of trade secrets, fraud or embezzlement;(iii)the Executive commits a material breach of this Agreement, which breach is not cured within thirty (30) days afierdelivery of written notice to the Executive by the Company; (iv) the Executive willfully refuses to implement or follow a lawfulpolicy or directive of the Company or the Parent, which breach is not cured within thirty (30) days after delivery of written notice toExecutive by the Company; or (v) the Executive engages in gross misfeasance or malfeasance demonstrated by a pattern of grossfailure to perform job duties diligently and professionally. The Company may terminate the Executive's employment for Cause atany time, without any advance notice except 4 as required by law. The Company shall pay the Executive all compensation to which the Executive is entitled up through the date oftermination, subject to any other rights or remedies of the Company under law; and thereafter all obligations of the Company underthis Agreement shall cease.b.Termination By Death. Executive's employment shall terminate automatically upon the Executive'sdeath. The Company shall pay to the Executive's beneficiaries or estate, as appropriate, any compensation then due and owing.Thereafter, all obligations of the Company under this Agreement shall cease. Nothing in this Section shall affect any entitlement ofthe Executive's heirs or devisees to the benefits of any life insurance plan or other applicable benefits.c.Termination By Complete Disability. If the Executive becomes Completely Disabled (as defined below),the Company may terminate Executive's employment. "Completely Disabled" shall mean the inability of the Executive to performhis duties under this Agreement, even with reasonable accommodation, because he has become permanently disabled within themeaning of any policy of disability income insurance covering employees of the Company then in force, or, if the Company has nopolicy of disability income insurance covering employees of the Company in force when the Executive becomes disabled, theinability of the Executive to perform the Executive's duties under this Agreement, whether with or without reasonableaccommodation, by reason of any incapacity, physical or mental, which the Board, based on medical advice or an opinion providedby a licensed physician mutually acceptable to the Board and the Executive (or the Executive's legal representative), determines tohave incapacitated the Executive from satisfactorily performing all of his usual services for the Company, with or withoutreasonable accommodation, for a period of at least 180 days during any 12-month period (whether or not consecutive). Based uponsuch medical advice or opinion, such determination of the Board shall be final and binding. The Company shall pay to theExecutive all compensation to which the Executive is entitled up through the date of termination, and thereafter all obligations of theCompany under this Agreement shall cease. Nothing in this Section shall affect the Executive's rights under any disability plan inwhich the Executive is a participant. 6.TERMINATION BY EXECUTIVEa.At-Will Termination by Executive. The Executive may terminate employment with the Company at anytime for any reason or no reason at all, upon four (4) weeks' advance written notice. During such notice period the Executive shallcontinue to diligently perform all of the Executive's duties hereunder. The Company shall have the option, in its sole discretion, tomake the Executive's termination effective at any time prior to the end of such notice period as long asthe Company pays the Executive all compensation to which the Executive is entitled up throughthe last day of the four week notice period.b.Termination for Good Reason. The Executive may terminate his employment for "Good Reason,"subject to satisfaction of the conditions set forth below. For purposes of this Agreement, "Good Reason" means a resignation basedon any of the following events occurring in each case without Executive's consent: i.a material diminution in Executive's authority, duties, or responsibilities; 5 n. a material diminution in Executive's Base Salary;m. a change in the geographic location at which the Executive must perform the services to a location outside of thegreater Los Angeles area; oriv. any other action or inaction that constitutes a material breach of the terms of thisAgreement.To constitute a resignation for Good Reason: (i) Executive must provide written notice to the Board within thirty (30) days of theinitial existence of the event constituting Good Reason, (ii) Executive may not terminate his or her employment unless the Companyor Parent (as applicable and acting at the direction of the Board) fails to remedy the event constituting Good Reason within sixty(60) days after such notice has been deemed given pursuant to this Agreement, and (iii) Executive must terminate employment withthe Company and/or Parent (as applicable) no later than 30 days after the end of the 60-day period in which the Company and/orParent (as applicable) fails to remedy the event constituting Good Reason. If the Executive terminates his employment for GoodReason, the Executive will be eligible to receive payments and severance benefits pursuant to Section 4.b, with section 4.b(iii)limited to six (6) months accelerated vesting, but conditioned on the Executive's execution, delivery and non-revocation of therelease set forth as Exhibit A. 7.TERMINATION OBLIGATIONS a.Return of Property. The Executive agrees that all property (including without limitation all equipment,tangible proprietary information, documents, records, notes, contracts and computer-generated materials) furnished to or created orprepared by the Executive incident to the Executive's employment belongs to the Company and shall be promptly returned to theCompany upon termination of the Executive's employment.b.Resignation and Cooperation. Upon te11nination of the Executive's employment, the Executive shall bedeemed to have resigned from all offices, committee memberships and directorships then held with the Company, the Parent or anyof their respective subsidiaries, except as may otherwise be agreed upon in writing by the Company, the Parent and the Executive inconnection with such termination. Following any termination of employment, the Executive shall cooperate with the Company andthe Parent in the winding up of pending work on behalf of the Company and the Parent and the orderly transfer of work to otheremployees. The Executive shall also cooperate with the Company and the Parent in the defense of any action brought by any thirdparty against the Company or the Parent that relates to the period in which the Executive was employed by the Company or withrespect to any matters for which the Executive had knowledge or responsibility during his tenure and the Company will reimbursethe Executive for all reasonable out of pocket expenses incurred by the Executive in so cooperating.c.Continuing Obligations. The Executive understands and agrees that Executive's obligations under Sections7, 8 and 9 herein (including Exhibit B) shall survive the termination of the Executive's employment for any reason and thetermination of this Agreement. 6 8.INVENTIONS AND PROPRIETARY INFORMATION; PROHIBITION ONTHIRD PARTY INFORMATION a, Proprietary Information Agreement. The Executive agrees to sign and be bound by the terms of the Company'sProprietary Information and Inventions Agreement ("Proprietary Information Agreement") which is attached as Exhibit B.b. Non-Disclosure of Third Party Information. The Executive represents and waiTants and covenants that the Executiveshall not disclose to the Company or the Parent, or use, or induce the Company or the Parent to use, any proprietary information ortrade secrets of others at any time, including but not limited to any proprietary information or trade secrets of any formeremployer, if any; and the Executive acknowledges and agrees that any violation of this provision shall be grounds for theExecutive's immediate termination and could subject the Executive to substantial civil liabilities and criminal penalties. TheExecutive further specifically and expressly acknowledges that no officer or other employee or representative of the Company orthe Parent has requested or instructed the Executive to disclose or use any such third party proprietary information or trade secrets. 9.ARBITRATIONAny dispute arising out of, or relating to, this Agreement or the breach thereof (excluding any breach of the Employee ProprietaryInformation and Inventions Assignment Agreement), or regarding the interpretation thereof, shall be exclusively decided by bindingarbitration conducted in California in the County where the Company's headquarters are then located in accordance with the rules ofthe JAMS Employment Arbitration Rules & Procedures then in effect before a single arbitrator appointed in accordance with suchrules. Judgment upon any award rendered therein may be entered and enforcement obtained thereon in any court havingjurisdiction. The arbitrator shall have authority to grant any form of appropriate relief, whether legal or equitable in nature, includingspecific performance. Each of the parties agrees that service of process in such arbitration proceedings shall be satisfactorily madeupon it if sent by registered mail addressed to it at the address referred to in Section 12 below. The arbitrator shall have the authorityto award costs and fees to the prevailing party as provided by applicable law to the same extent as a court. Otherwise, each partyshall pay its own costs and attorney's fees. The Company shall pay the costs and fees of the arbitrator and reimburse Employee forany filing fees paid to initiate arbitration. Judgment on the arbitration award may be entered by any court of competent jurisdiction. 10.AMENDMENTS; WAIVERS; REMEDIESThis Agreement may not be amended or waived except by a writing signed by the Executive and by a duly authorizedrepresentative of the Company other than the Executive. Failure to exercise any right under this Agreement shall not constitute awaiver of such right. Any waiver of any breach of this Agreement shall not operate as a waiver of any subsequent breaches. Allrights or remedies specified for a party herein shall be cumulative and in addition to all other rights and remedies of the partyhereunder or under applicable law. 7 11.ASSIGNMENT; BINDING EFFECTa.Assignment. The performance of the Executive is personal hereunder, and the Executive agrees that theExecutive shall have no right to assign and shall not assign or purport to assign any rights or obligations under this Agreement. ThisAgreement may be assigned or transferred by the Company; and nothing in this Agreement shall prevent the consolidation, mergeror sale of the Company or a sale of any or all or substantially all of its assets.b.Binding Effect. Subject to the foregoing restriction on assignment by the Executive, this Agreement shallinure to the benefit of and be binding upon each of the parties; the affiliates, officers, directors, agents, successors and assigns of theCompany; and the heirs, devisees, spouses, legal representatives and successors of the Executive. 12.NOTICES All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have beenduly given if delivered: (a) by hand; (b) by e mail, (c) by a nationally recognized overnight courier service; or (d) by United Statesfirst class registered or certified mail, return receipt requested, to the principal address of the other party, as set forth below. The dateof notice shall be deemed to be the earlier of (i) actual receipt of notice by any permitted means, or(ii) five business days following dispatch by overnight delivery service or the United States Mail. The Executive shall be obligatedto notify the Company in writing of any change in the Executive's address. Notice of change of address by the Company or theExecutive shall be effective only when done in accordance with this paragraph.Company's Notice Address: OticPharma Inc.19900 MacArthur Boulevard, Suite 550Irvine, CA 92612 Attn: Chief Executive Officer Executive's Notice Address: Last known residential address of Executive on file with Company 13.SEVERABILITYIf any provision of this Agreement shall be held by a court or arbitrator to be invalid, unenforceable, or void, such provision shallbe enforced to the fullest extent permitted by law, and the remainder of this Agreement shall remain in full force and effect. In theevent that the time period or scope of any provision is declared by a court or arbitrator of competent jurisdiction to exceed themaximum time period or scope that such comi or arbitrator deems enforceable, then 8 such court or arbitrator shall reduce the time period or scope to the maximum time period or scope permitted by law. 14.TAXESa.Withholding. All amounts paid under this Agreement (including without limitation Base Salary and Severance) shall be paid less allapplicable state and federal tax withholdings and any other withholdings required by any applicable jurisdiction or authorized by the Executive.b.Section 409A. Notwithstanding anything to the contrary herein, the following provisions apply to the extent benefits provided herein aresubject to Section 409A of the Internal Revenue Code of 1986, as amended (the "Code") and the regulations and other guidance thereunder and any statelaw of similar effect (collectively "Section 409A"). Severance benefits shall not commence until the Executive has a "separation from service" for purposesof Section 409A. Each payment of severance benefits is a separate "payment" for purposes of Treas. Reg. Section l.409A-2(b)(2)(i), and the severancebenefits are intended to satisfy the exemptions from application of Section 409A provided under Treasury Regulations Sections l.409A-l(b)(4), 1.409A-l(b)(5) and l.409A-l(b)(9). However, if such exemptions are not available and the Executive is, upon separation from service, a "specified employee" forpurposes of Section 409A, then, solely to the extent necessary to avoid adverse personal tax consequences under Section 409A, the timing of the severancebenefits payments shall be delayed until the earlier of (i) six (6) months and one day after the Executive's separation from service, or (ii) Executive'sdeath.If the severance benefits are not covered by one or more exemptions from the application of Section 409A and the Releasecould become effective in the calendar year following the calendar year in which the Executive separates from service, the Releasewill not be deemed effective any earlier than the Release Deadline, and the severance benefits will not be payable to the Executiveuntil the calendar year following the calendar year in which the Executive separates from service. Except to the minimum extent thatpayments must be delayed because the Executive is a "specified employee" or until the effectiveness or deemed effectiveness of theRelease, all amounts will be paid as soon as practicable in accordance with the other provisions of this Agreement.To the extent that any taxable reimbursements of expenses provided under this Agreement are subject to Section 409A, suchreimbursements will be administered as follows: (i) the amount of any such expense reimbursement or in-kind benefit providedduring the Executive's taxable year shall not affect any expenses eligible for reimbursement in any other taxable year, (ii) thereimbursement of the eligible expense shall be made no later than the last day of the Executive's taxable year that immediatelyfollows the taxable year in which the expense was incurred, and (iii) the Executive's right to any reimbursement shall not be subjectto liquidation or exchange for another benefit or payment.The benefits provided under this Agreement are intended to qualify for an exemption from application of Section 409A orcomply with its requirements to the extent necessary to avoid adverse personal tax consequences under Section 409A, and anyambiguities herein shall be interpreted accordingly. 9 c.280G. Notwithstanding anything to the contrary, in the event that any of the payments or benefits provided for in this Agreement or anyother agreement or arrangement between the Executive and the Company (collectively, the "Payments") constitute "parachute payments" within themeaning of Section 280G of the Code and, but for this Section 14.c., would be subject to the excise tax imposed by Section 4999 of the Code (the"Excise Tax"), then such Payments shall be either (i) provided in full, or (ii) provided as to such lesser extent which would result in no portion of suchbenefit being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes andthe Excise Tax, results in the receipt by the Executive on an after-tax basis of the greatest amount of benefits notwithstanding that all or some portion of suchbenefits may be subject to the Excise Tax (the "Reduced Amount"). If a reduction in a Payment is required pursuant to the preceding sentence and theReduced Amount is determined pursuant to clause (i) of the preceding sentence, the reduction shall occur in the manner (the "Reduction Method") thatresults in the greatest economic benefit for Executive. If more than one method of reduction will result in the same economic benefit, the items so reducedwill be reduced pro rata (the "Pro Rata Reduction Method"). If this Section 14.c. is applied to reduce an amount payable to the Executive, and the InternalRevenue Service successfully asserts that, despite the reduction, the Executive has nonetheless received payments which are in excess of the maximumamount that could have been paid to him without being subjected to any excise tax, then, unless it would be unlawful for the Company to make such aloan or similar extension of credit to the Executive, the Executive may repay such excess amount to the Company as though such amount constitutes aloan to the Executive made at the date of payment of such excess amount, bearing interest at 120% of the applicable federal rate (as determined undersection 1274(d) of the Code in respect of such loan).Notwithstanding any provision of this Section 14.c to the contrary, if the Reduction Method or the Pro Rata Reduction Methodwould result in any portion of the Payment being subject to taxes pursuant to Section 409A of the Code that would not otherwise besubject to taxes pursuant to Section 409A of the Code, then the Reduction Method and/or the Pro Rata Reduction Method, as thecase may be, shall be modified so as to avoid the imposition of taxes pursuant to Section 409A of the Code as follows: (i) as a firstpriority, the modification shall preserve to the greatest extent possible, the greatest economic benefit for the Executive as determinedon an after•tax basis; (ii) as a second priority, Payments that are contingent on future events (e.g., being terminated without Cause),shall be eliminated before Payments that are not contingent on future events; and (iii) as a third priority, Payments that are "deferredcompensation" within the meaning of Section 409A of the Code shall be reduced before Payments that are not "deferredcompensation" within the meaning of Section 409A of the Code.Unless the Company and the Executive otherwise agree in writing, any determination required under this paragraph shall bemade by the Company's independent public accountants (the "Accountants"), whose detennination shall be conclusive and bindingupon all parties. For purposes of making the calculations required by this section, the Accountants may make reasonableassumptions concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application ofSections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information anddocuments as the 10 Accountants may reasonably request in order to make a determination under this section. The Company shall bear all costs of theAccountants in connection with any calculations contemplated by this section.If the Reduction Method or Pro Rata Reduction Method in Section 14.c. is applied to reduce an amount payable to theExecutive, and the Internal Revenue Service successfully asserts that, despite such reduction, the Executive has nonethelessreceived payments which are in excess of the maximum amount that could have been paid to him without being subjected to anyExcise Tax, then the Executive shall promptly repay such excess amount to the Company so that no portion of theremaining payment is subject to the Excise Tax. 15.GOVERNING LAWThis Agreement shall be governed by and construed in accordance with the laws of the State of California. 16.INTERPRETATION This Agreement shall be construed as a whole, according to its fair meaning, and not in favor of or against any party. Sections andsection headings contained in this Agreement are for reference purposes only, and shall not affect in any manner the meaning orinterpretation of this Agreement. Whenever the context requires, references to the singular shall include the plural and the plural thesingular. 17.COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be deemed an original of this Agreement,but all of which together shall constitute one and the same instrument. 18.AUTHORITY Each party represents and warrants that such party has the right, power and authority to enter into and execute this Agreement andto perform and discharge all of the obligations hereunder; and that this Agreement constitutes the valid and legally bindingagreement and obligation of such party and is enforceable in accordance with its terms. 19.ENTIRE AGREEMENT This Agreement is intended to be the final, complete, and exclusive statement of the terms of the Executive's employment by theCompany and may not be contradicted by evidence of any prior or contemporaneous statements or agreements, except foragreements specifically referenced herein, including without limitation the Proprietary Information andInventions Agreement attached as Exhibit B. To the extent that the practices, policies or procedures of the Company, now or inthe future, apply to the Executive and are inconsistent with the terms of this Agreement, the provisions of this Agreement shallcontrol. Any subsequent change in the Executive's duties, position, or compensation will not affect the validity or scope of thisAgreement. 11 [Remainder of Page Left Intentionally Blank] 12 IN WITNESS WHEREOF, THE PARTIES HAVE DULY EXECUTED THIS AGREEMENT AS OF THE DATEFIRST WRITTEN ABO VE. OTIC PHARMA INC.THE EXECUTIVE 13 Date").Your employment with the Company terminated on , 20_(the "Separation EXHIBIT A General Release Agreement SEPARATION AGREEMENT AND GENERAL RELEASE Catherine Turkel ("You") and Otic Pharma Inc.; a Delaware corporation (the "Company"), (collectively, the "Parties'')have agreed to enter into this Separation Agreement and General Release ("Agreement") on the following terms: If you seek reimbursement of any business expenses, you agree to submit your final expense reimbursement statement nolater than the date you return the signed original of this Agreement to the Company, along with receipts or other supportingdocumentation. The Company will reimburse valid business expenses in accordance with its standard expense reimbursementpolicies. To bring a smooth closure to your relationship with the Company, the Company would like to offer you severancebenefits in exchange for a general release of claims. Accordingly, you and the Company incorporate the above recitals into this Agreement, and agree as follows: 1.Subject to your compliance with your promises and agreements contained in this Agreement and providedyou do not revoke this Agreement, the Company agrees to provide you with the Severance Benefits set forth in Section 4.b. orSection 6.b., as applicable, of the Executive Employment Agreement between you and the Company, dated as of [],2015. 2.In exchange for the Severance Benefits and the Company's other promises contained in thisAgreement, you completely release the Company, its affiliated, related, parent or subsidiary entities, and its present and formerowners, directors, officers, investors, attorneys, and employees (the "Released Parties") from any and all claims you may now haveor have ever had against the Company including all claims arising from your employment including, but not limited to, any claimsarising under the Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Older Workers BenefitsProtection Act, the WARN Act or any state counterpart, the California Fair Employment and Housing Act, the California Labor Codeor any other claims for violation of any federal, state, or municipal statutes or common law, including, without limitation, claims foralleged retaliation or wrongful termination of any kind, and any and all claims for attorneys' fees and costs (the "ReleasedClaims"); provided, however, that "Released Claims" shall exclude in any event (a) any rights or claims for indemnification youmay have pursuant to any indemnification agreement with the Company, any policy of insurance, the charter, bylaws, or operatingagreements of the Company, or under applicable law; (b) any rights under stock options, stock purchase agreements and equityplans of the Company, defined benefit, defined contribution or other plan by virtue of his employment with the Company, (c) anyrights 14 or claims to workers compensation or unemployment compensation; (d) any rights that are not waivable as a matter of law; and (e)any rights or claims arising under or from this Agreement. The Parties intend for this release to be enforced to the fullest extentpermitted by law. 3.You represent that you have not initiated, filed, or caused to be filed and agree not to initiate, file, causeto be filed, or otherwise pursue any Released Claims against any of the Released Parties. You understand that this paragraph doesnot prevent you from filing a charge with or participating in an investigation by a governmental administrative agency; provided,however, that you hereby waive any right to receive any monetary award resulting from such a charge or investigation andprovided further that you agree not to encourage any person, including any cunent or former employee of the Company, to file anykind of claim whatsoever against the Company. 4.You agree that because this release specifically covers known and unknown claims, you waive yourrights under Section 1542 of the California Civil Code, or under any comparable law of any other jurisdiction. Section 1542 states:"A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time ofexecuting the release, which if known by him or her must have materially affected his or her settlement with the debtor."5.The Company and you also agree that this Agreement, and each of its terms, including the negotiationsleading up to it, are confidential and neither of you will discuss the Agreement, or any of its terms or the negotiations leading up toit, with anyone except as applicable our respective attorneys, spouse or advisors without the other party's prior written consent.Further, the Company and you agree that neither will make or publish, either orally or in writing, any disparaging statementregarding the other, the Released Parties, or the other's employees, officers, directors, or customers, or in any way wrongfullyimpede or interfere with the other's customer relationships. The Company and you understand and agree that the terms of thisSection 5 are material terms of this Agreement; without which neither of you would have entered into this Agreement. 6.Any requests for references regarding your employment by potential future employers or other third-parties shall be referred to the then current Chief Executive Officer of the Company who shall respond only that consistent with theCompany's policy, the Company will confirm only dates of employment and last position held and shall provide that information. 7.You further acknowledge that this Agreement represents the entire agreement and understandingbetween the Parties regarding its subject matter, supersedes and replaces any and all prior agreements and understandings regardingits subject matter, with the exception of the Employee Proprietary Information and Inventions Assignment Agreement that yousigned as a condition of your employment ("Proprietary Information Agreement"), and shall not be modified in any way exceptin writing executed by the you and the then current Chief Executive Officer of the Company. This Agreement shall be governedby the laws of the State of California, excluding its laws relating to choice of law. You also agree that if any term or portion of thisAgreement is found to be unenforceable under applicable law, such finding shall not invalidate the whole Agreement, but theAgreement shall be construed as not containing the particular term or 15 portion held to be invalid and the rights and obligations of the parties shall be construed and enforced accordingly. This Agreementis severable.8.You understand and agree that this Agreement provides you with consideration to which you are nototherwise entitled under the Company's policies and practices or otherwise. You acknowledge that you have 21 days to considerthis Agreement and you are advised to consult an attorney before signing the Agreement. You may sign the Agreement in fewerthan 21 days if you choose to do so. You agree that even if there are any modifications made to the Agreement before you sign it,the 21 day period will not restart. You also acknowledge that you may revoke this Agreement within 7 days of signing it bydelivering notice to that effect to the then current Chief Executive Officer of the Company at the Company's principal executiveoffice in a manner calculated to be received by the Company by close of business on the seventh day after you sign the Agreement.You understand and agree that this Agreement shall not become effective or enforceable until the 7-day revocation period hasexpired.9.The payments made under this Agreement are intended to be exempt from application of section 409Aof the Internal Revenue Code of 1986, as amended, and applicable guidance issued thereunder ("Section 409A"), and structured tobe distributed in the short-term deferral period, as defined under Treasury Regulation section l.409A-l(b)(4), or the separation payexemption, as provided in Treasury Regulation section l.409A l(b)(9). The timing of payments should be interpreted and construedconsistent with these exemptions to Section 409A, or to the extent such exemptions are not available, in compliance with therequirements of Section 409A. 10.You understand and agree that this Agreement is not an admission of guilt or wrongdoing by theCompany and that the Company does not believe or admit that they have done anything wrong. 11.Except as provided m this Agreement you will not receive any benefits or compensation. 12.Finally, you acknowledge that you have been afforded every opportunity to and have read thisAgreement, are fully aware of its contents and legal effect, and have chosen to enter into this Agreement freely, without coercion,and based on your own judgment. [Remainder of Page Left Intentionally Blank] 16YOU: By:----------Name: Catherine TurkelTitle: ----------- Date: ----------THE COMPANY: By: Name: ------------TitIe: ------------ Date:---------- Date delivered to employee: ,. 20_ 17 EXHIBITB Proprietary Information and Invention Assignment Agreement 18  EXHIBITB PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT As a condition of my employment with Otic Pharma Inc. and its parents (including but not limited to Otic Pharma Ltd.), subsidiaries, affiliates,successors or assigns (collectively, the "Company"), and in consideration of my employment with the Company and my receipt of the compensationnow and hereafter paid to me by the Company, I agree to the following terms under this Proprietary Information and Inventions Agreement (this"Intellectual Property Agreement"): 1.Employment (a)I understand and acknowledge that my employment with the Company is for an unspecified duration and constitutes "at-will"employment. I acknowledge that this employment relationship may be terminated at any time, with or without good cause or for any or no cause, atthe option either of the Company or myself, with or without notice. (b)I agree that,

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