NVUS 2018 Annual Report

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 and reliability of the information used to determine fair values. Financial assets and liabilities

carried at fair value will be classified and disclosed in one of the following three categories: Level 1 ² Quoted prices (unadjusted) in active markets for identical assets and liabilities.

Level 2 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 for substantially the full term of the assets or liabilities. Level 3 ² 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 Uncertainties As of December 31, 2018 and 2017 DOO RI WKH &RPSDQ\¶V ORQJ -lived assets were located in the U.S. Financial instruments that are subject to concentration of credit risk consist primarily of cash equivalents. The &RPSDQ\¶V SROLF\ LV WR LQYHVW FDVK LQ LQVWLWXWLRQDO PRQH\ PDUNHW IXQGV WR OLPLW WKH DPRXQW RI FUHGLW H[SRVXUH At times, the Company maintains cash equivalents in short-term money market funds and it has not experienced any losses on its cash equivalents. 7KH &RPSDQ\¶V SURGXFWV ZLOO UHTXLUH DSSURYDO IURP WKH 8 6 )RRG DQG 'UXJ $GPLQLVWUDWLRQ FDA) and foreign regulatory agencies before commercial sales can commence. There can be no assurance that its products will receive any of WKHVH UHTXLUHG DSSURYDOV 7KH GHQLDO RU GHOD\ RI VXFK DSSURYDOV PD\ LPSDFW WKH &RPSDQ\¶V EXVLQHVV LQ WKH IXWXUH In addition, after the approval by the FDA, there is still an ongoing risk of adverse events that did not appear during the product approval process. The Company is subject to risks common to companies in the pharmaceutical industry, including, but not limited to, new technological innovations, clinical development risk, establishment of appropriate commercial partnerships, protection of proprietary technology, compliance with government and environmental regulations, uncertainty of market acceptance of products, product liability, the volatility of its stock price and the need to obtain additional financing. Our facilities and equipment may be affected by natural or man-made disasters. We currently conduct our research, development and management activities in Irvine, California, near known earthquake fault zones. We have taken precautions to safeguard our facilities, equipment and systems, including insurance, health and safety protocols, and off-site storage of computer data. However, our facilities and systems 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 in our operations, damage or destroy our equipment or inventory, and cause us to incur additional expenses. In addition, the insurance coverage we maintain may not be adequate to cover our losses in any circumstance and may not continue to be available to use on acceptable terms, or at all. identifiable tangible and intangible assets acquired, including in-process research and development and liabilities assumed. Additionally, the Company must determine whether an acquired entity 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 recognized as goodwill in a business combination. The Company accounted for the merger with Tokai as a business combination under the acquisition method of DFFRXQWLQJ &RQVLGHUDWLRQ SDLG WR DFTXLUH 7RNDL ZDV PHDVXUHG DW IDLU YDOXH DQG LQFOXGHG WKH H[FKDQJH RI 7RNDL¶V FRPPRQ stock and preferred stock. The allocation of the purchase price resulted in recognition of an intangible asset related to goodwill. The operating activity for Tokai, the acquiree for accounting purposes, was immediately integrated with Otic post-merger, therefore it is not practical to segregate results of operations related specifically to Tokai since the date of acquisition. Business Combinations Accounting for acquisitions requires extensive use of estimates and judgment to measure the fair value of the

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