UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2021

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File Number: 000-54716

 

NeuroOne Medical Technologies Corporation

(Exact name of Registrant as specified in its charter)

 

Delaware		27-0863354
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
7599 Anagram Drive Eden Prairie, MN		55344
(Address of Principal Executive Offices)		(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: 952-426-1383

 

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class		Trading Symbol(s)		Name of Each Exchange on Which Registered
N/A		N/A		N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer	☐	Non-accelerated filer	☒
Accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

The number of outstanding shares of the registrant’s common stock as of May 13, 2021 was 11,954,543.

 

 

 

NEUROONE MEDICAL TECHNOLOGIES CORPORATION

FORM 10-Q

 

INDEX

 

			Page
	PART 1 – FINANCIAL INFORMATION
Item 1.	Financial Statements		1
	Condensed Balance Sheets as of March 31, 2021 (unaudited) and September 30, 2020		1
	Condensed Statements of Operations for the three and six months ended March 31, 2021 and 2020 (unaudited)		2
	Condensed Statements of Changes in Stockholders’ Equity (Deficit) for the three and six months ended March 31, 2021 and 2020 (unaudited)		3
	Condensed Statements of Cash Flows for the six months ended March 31, 2021 and 2020 (unaudited)		4
	Notes to Condensed Financial Statements (unaudited)		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		34
Item 4.	Controls and Procedures		34
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		35
Item 1A.	Risk Factors		35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		35
Item 3.	Defaults Upon Senior Securities		35
Item 4.	Mine Safety Disclosures		35
Item 5.	Other Information		35
Item 6.	Exhibits		36
SIGNATURES			37

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

NeuroOne Medical Technologies Corporation

Condensed Balance Sheets

 

		As of March 31, 2021				As of September 30, 2020
		(unaudited)
Assets
Current assets:
Cash		$	11,274,185			$	4,036,397
Prepaid and other assets			81,025				118,611
Total current assets			11,355,210				4,155,008
Intangible assets, net			145,365				156,523
Right-of-use asset			255,409				282,211
Property and equipment, net			161,087				166,031
Total assets		$	11,917,071			$	4,759,773
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	345,793			$	762,538
Accrued expenses			373,528				512,762
Convertible promissory notes (Note 8)			—				1,007,206
Deferred revenue			31,047				73,434
Total current liabilities			750,368				2,355,940
Operating lease liability			223,357				254,328
Other liabilities			83,333				83,333
Total liabilities			1,057,058				2,693,601
Commitments and contingencies (Note 4)
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized as of March 31, 2021 and September 30, 2020; no shares issued or outstanding as of March 31, 2021 and September 30, 2020.			—				—
Common stock, $0.001 par value; 100,000,000 shares authorized as of March 31, 2021 and September 30, 2020; 11,910,317 and 7,393,637 shares issued and outstanding as of March 31, 2021 and September 30, 2020, respectively.			35,730				22,181
Additional paid–in capital			46,056,710				32,923,022
Accumulated deficit			(35,232,427	)			(30,879,031	)
Total stockholders’ equity			10,860,013				2,066,172
Total liabilities and stockholders’ equity		$	11,917,071			$	4,759,773

 

See accompanying notes to condensed financial statements

 

 

NeuroOne Medical Technologies Corporation

Condensed Statements of Operations

(unaudited)

 

		For the Three Months Ended								For the Six Months Ended
		March 31,								March 31,
		2021				2020				2021				2020
Product Revenue		$	18,240			$	—			$	89,714			$	—
Cost of product revenue			39,363				—				148,494				—
Product gross profit (loss)			(21,123	)			—				(58,780	)			—
Collaborations revenue			20,113				—				42,387				—
Operating expenses:
General and administrative			1,313,252				1,035,256				2,507,112				2,347,422
Research and development			1,081,429				342,102				2,015,587				843,921
Total operating expenses			2,394,681				1,377,358				4,522,699				3,191,343
Loss from operations			(2,395,691	)			(1,377,358	)			(4,539,092	)			(3,191,343	)
Interest expense			—				—				(3,053	)			(2,697,507	)
Net valuation change of instruments measured at fair value			—				31,716				1,974				(93,858	)
Other income			1,775				—				186,775				—
Loss before income taxes			(2,393,916	)			(1,345,642	)			(4,353,396	)			(5,982,708	)
Provision for income taxes			—				—				—				—
Net loss		$	(2,393,916	)		$	(1,345,642	)		$	(4,353,396	)		$	(5,982,708	)
Net loss per share:
Basic and diluted		$	(0.21	)		$	(0.29	)		$	(0.46	)		$	(1.30	)
Number of shares used in per share calculations:
Basic and diluted			11,238,084				4,634,842				9,419,599				4,593,534

 

See accompanying notes to condensed financial statements

 

 

NeuroOne Medical Technologies Corporation

Condensed Statements of Changes in Stockholders’ Equity (Deficit)

(unaudited)

 

		Common Stock								Additional Paid–In				Accumulated				Total Stockholders’ Equity
		Shares				Amount				Capital				Deficit				(Deficit)
Balance at September 30, 2019			4,497,930			$	13,494			$	15,987,799			$	(17,238,871	)		$	(1,237,578	)
Issuance of common stock under securities purchase agreement			47,223				142				254,858				—				255,000
Issuance of warrants in connection with convertible notes offering			—				—				419,635				—				419,635
Stock-based compensation			—				—				463,084				—				463,084
Issuance of common stock for consulting services			30,002				90				124,503				—				124,593
Issuance of common stock upon vesting of restricted stock units			3,501				11				(11	)			—				—
Net loss			—				—				—				(4,637,066	)			(4,637,066	)
Balance at December 31, 2019			4,578,656				13,737				17,249,868				(21,875,937	)			(4,612,332	)
Conversion of convertible notes into common stock			20,283				61				239,461				—				239,522
Exercise of stock options			14,175				42				1,446				—				1,488
Stock-based compensation			—				—				88,806				—				88,806
Issuance of common stock for consulting services			20,334				61				153,520				—				153,581
Issuance of common stock upon vesting of restricted stock units			40,727				122				289,272				—				289,394
Net loss			—				—				—				(1,345,642	)			(1,345,642	)
Balance at March 31, 2020			4,674,175			$	14,023			$	18,022,373			$	(23,221,579	)		$	(5,185,183	)
Balance at September 30, 2020			7,393,637			$	22,181			$	32,923,022			$	(30,879,031	)		$	2,066,172
Issuance of common stock upon conversion of convertible notes			292,754				878				1,004,354				—				1,005,232
Issuance cost settlement in connection with private placement			—				—				50,400				—				50,400
Stock-based compensation			—				—				245,829				—				245,829
Issuance of common stock upon vesting of restricted stock units			10,450				31				(31	)			—				—
Net loss			—				—				—				(1,959,480	)			(1,959,480	)
Balance at December 31, 2020			7,696,841				23,090				34,223,574				(32,838,511	)			1,408,153
Issuance of common stock in connection with private placement			4,166,682				12,500				8,816,736				—				8,829,236
Issuance of warrants stock in connection with private placement			—				—				3,670,764				—				3,670,764
Issuance costs in connection with private placement			—				—				(1,198,080	)			—				(1,198,080	)
Stock-based compensation			—				—				326,359				—				326,359
Exercise of warrants			39,905				120				212,379				—				212,499
Exercise of stock options			758				2				4,996				—				4,998
Issuance of common stock upon vesting of restricted stock units			6,131				18				(18	)			—				—
Net loss			—				—				—				(2,393,916	)			(2,393,916	)
Balance at March 31, 2021			11,910,317			$	35,730			$	46,056,710			$	(35,232,427	)		$	10,860,013

 

See accompanying notes to condensed financial statements

 

 

NeuroOne Medical Technologies Corporation

Condensed Statements of Cash Flows

(unaudited)

 

		For the six months ended March 31,
		2021				2020
Operating activities
Net loss		$	(4,353,396	)		$	(5,982,708	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization and depreciation			38,030				20,965
Stock-based compensation			572,188				1,119,458
Non-cash interest on convertible notes			—				1,831,940
Issuance costs attributed to financing activities			3,053				865,567
Revaluation of convertible notes			(1,974	)			93,858
Non-cash lease expense			26,802				4,038
Change in assets and liabilities:
Prepaid and other assets			37,585				(40,303	)
Accounts payable			(444,197	)			(34,189	)
Accrued expenses, deferred revenue, operating lease and other liabilities			(162,193	)			(353,704	)
Net cash used in operating activities			(4,284,102	)			(2,475,078	)
Investing activities
Purchase of fixed assets			(2,059	)			(40,224	)
Net cash used in investing activities			(2,059	)			(40,224	)
Financing activities
Proceeds from issuance of convertible promissory notes			—				3,234,800
Issuance costs related to convertible notes			(3,053	)			(417,176	)
Proceeds from issuance of common stock in connection with private placements			8,829,236				255,000
Proceeds from issuance of warrants in connection with private placement			3,670,764				—
Exercise of warrants			212,499				—
Exercise of stock options			4,998				1,488
Issuance costs related to private placements			(1,190,495	)			(72,315	)
Net cash provided by financing activities			11,523,949				3,001,797
Net increase in cash			7,237,788				486,495
Cash at beginning of period			4,036,397				260,749
Cash at end of period		$	11,274,185			$	747,244
Supplemental non-cash financing and investing transactions:
Conversion of convertible notes into equity		$	1,005,232			$	239,522
Unpaid issuance costs and non-cash adjustments attributed to convertible notes and private placement		$	57,985			$	28,756
Broker warrants issued in connection with convertible notes		$	—			$	419,635
Purchased fixed assets in accounts payable and accrued expenses		$	19,869			$	2,500
Operating lease right of use asset obtained in exchange for operating lease		$	—			$	335,119

 

See accompanying notes to condensed financial statements

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

NOTE 1 – Description of Business and Basis of Presentation

 

NeuroOne Medical Technologies Corporation (the “Company” or “NeuroOne”), a Delaware Corporation, is an early-stage medical technology company developing comprehensive neuromodulation cEEG and sEEG monitoring, ablation, and brain stimulation solutions to diagnose and treat patients with epilepsy, Parkinson’s disease, essential tremors, and other brain related disorders.

 

To date, the Company has had limited commercial sales. The Company is currently raising capital to fund the development of its proprietary technology. The Company received 510(k) clearance from the FDA to market the initial cEEG product and submitted an application for 510(k) clearance for a second product in May 2021.

 

The Company is based in Eden Prairie, Minnesota.

 

COVID-19

 

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. As a result of the COVID-19 pandemic, the Company has experienced delays and disruptions in its pre-clinical and clinical trials, as well as interruptions in its manufacturing, supply chain, and research and development operations. Additionally, the development of the Company’s technology was delayed in fiscal year 2020 and early 2021 due to interruption in global manufacturing and shipping due to the COVID-19 pandemic. For example, one of our key manufacturing partners and one of the Company’s suppliers have had staffing issues due to COVID-19, leading to delays in the Company’s development builds and delays in shipping product. Additionally, the Company’s own staff has been impacted by infections and mandatory quarantines. The Company’s plans for further testing or clinical trials may be further impacted by the continuing effects of COVID-19. The global outbreak of COVID-19 continues to rapidly evolve. In April 2020, given the impact of COVID-19 on the Company and in connection with the enactment of the CARES Act, the Company applied for and received loan funding of $83,333 under the Paycheck Protection Program (“PPP”). The Company may be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, and it cannot provide any assurance that it will be eligible for loan forgiveness, or that any amount of the PPP loan will ultimately be forgiven.

 

The extent to which the COVID-19 pandemic may impact the Company’s business and pre-clinical and clinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the effect of the pandemic on its suppliers and distributors and the global supply chain, the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social distancing in the U.S. and other countries, business closures or business disruptions and the effectiveness of actions taken in the U.S. and other countries to contain and treat the disease. The COVID-19 pandemic may also impact the Company’s business because of employee illness, school closures, and other community response measures.

 

The COVID-19 pandemic may also impact the Company’s ability to secure additional financing, or its ability to up-list from our current OTC Market (“OTCQB”). Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on the Company’s results of future operations, financial position, and liquidity for the remainder of fiscal year 2021 and beyond.

 

Basis of presentation

 

The accompanying unaudited condensed financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. The condensed financial statements may not include all disclosures required by U.S. GAAP; however, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended September 30, 2020 included in the Annual Report on Form 10-K. The condensed balance sheet at September 30, 2020 was derived from the audited financial statements of the Company.

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

In December 2019, the Company merged its wholly owned subsidiary, NeuroOne Inc., into NeuroOne Medical Technologies Corporation. The merger of the Company’s wholly owned subsidiary did not have a financial impact to the periods presented. Upon close of the merger, the Company did not have any remaining entities that required consolidation for financial statement reporting purposes.

 

In the opinion of management, all adjustments, consisting of only normal recurring adjustments that are necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

Reclassifications

 

Certain amounts presented in the prior year period have been reclassified to conform to current period financial statement presentation. The change in accounts payable and accrued expenses reported in the statements of cash flows during the comparable prior year period was reclassified into two separate line item categories and the non-cash portion of the lease liability line item was reclassified to the change in accrued expenses, deferred revenue, operating lease and other liabilities line item.

 

Reverse Stock Split

 

On March 11, 2021, the Company’s Board of Directors (the “Board”) approved a one-for-three reverse stock split of the Company’s issued and outstanding shares of common stock (the “Reverse Stock Split”).

 

All issued and outstanding common stock and per share amounts contained in the financial statements have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented. In addition, a proportionate adjustment was made to the per share exercise price and the number of shares issuable upon the exercise of all outstanding stock options, restricted stock units and warrants to purchase shares of common stock. A proportionate adjustment was also made to the number of shares reserved for issuance pursuant to the Company’s equity incentive compensation plans to reflect the Reverse Stock Split. Any fraction of a share of common stock that was created as a result of the Reverse Stock Split was rounded up to the next whole share. The authorized shares and par value of the common stock and preferred stock were not adjusted as a result of the Reverse Stock Split.

 

NOTE 2 – Liquidity and Capital Resources

 

The accompanying condensed financial statements have been prepared on the basis that the Company will continue as a going concern. The Company has incurred losses since inception, negative cash flows from operations, and has an accumulated deficit of $35.2 million as of March 31, 2021. The Company has not established a source of revenues to cover its full operating costs, and as such, has been dependent on funding operations through the issuance of debt and sale of equity securities. Management believes that the Company, as a result of the cash flows received from the 2021 Private Placement, has adequate liquidity to fund its operations without raising additional funds for at least twelve months from the date of issuance of these financial statements. Management believes additional capital will be required for the Company to reach a point of break-even cash flows. The Company’s future operating activities under the distribution and development agreement with Zimmer, Inc. coupled with its plans to raise capital or issue debt financing may provide additional liquidity in the future, however these actions are not solely within the control of the Company and we are unable to predict the ultimate outcome of these actions to generate the liquidity ultimately required.

 

NOTE 3 – Summary of Significant Accounting Policies

 

Management’s Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, primarily in connection with the convertible promissory notes while outstanding, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

Revenue Recognition

 

The Company entered into a development and distribution agreement which has current and future revenue recognition implications. See Note 7 – Zimmer Development Agreement.

 

Product Revenue

 

Revenues from product sales are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. At the inception of each contract, performance obligations are identified and the total transaction price is allocated to the performance obligations. The Company commenced commercial sales of cEEG strip/grid and electrode cable assembly products in the first quarter of fiscal year 2021.

 

Cost of Product Revenue

 

Cost of product revenue consists of the manufacturing and materials costs incurred by the Company’s third-party contract manufacturer in connection with NeuroOne’s strip and grid cortical electrodes (the “Strip/Grid Products”) and outside supplier materials costs in connection with the Electrode Cable Assembly Products. In addition, cost of product revenue includes royalty fees incurred in connection with the Company’s license agreements.

 

Collaborations Revenue

 

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

 

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Account Standards Codification (“ASC”) Topic 606. Performance obligations may include license rights, development services, and services associated with regulatory submission and approval processes. Significant management judgment is required to determine the level of effort required under an arrangement and the period over which the Company expects to complete its performance obligations under the arrangement. If the Company cannot reasonably estimate when its performance obligations are either completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.

 

As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. The Company uses key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. The Company allocates the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised goods or service underlying each performance obligation.

 

Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer, and the customer can use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

Milestone payments: At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone (such as a regulatory submission) is included in the transaction price. Milestone payments that are not within the control of the Company, such as approvals from regulators, are not considered probable of being achieved until those approvals are received. When the Company’s assessment of probability of achievement changes and variable consideration becomes probable, any additional estimated consideration is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised goods or service underlying each performance obligation and recorded in license, collaboration, and other revenues based upon when the customer obtains control of each element.

 

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

 

Fair Value of Financial Instruments

 

The Company’s accounting for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring or nonrecurring basis adheres to the Financial Accounting Standards Board (“FASB”) fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

 

●

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the Company at the measurement date.

 

●

Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

 

●

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

 

As of March 31, 2021 and September 30, 2020, the fair values of cash, prepaid expenses, other assets, accounts payable and accrued expenses approximated their carrying values because of the short-term nature of these assets or liabilities. The fair value of the convertible notes while outstanding were based on both the fair value of our common stock, discount associated with the embedded redemption features, and cash flow models discounted at current implied market rates evidenced in recent arms-length transactions representing expected returns by market participants for similar instruments and are based on Level 3 inputs.

 

There were no transfers between fair value hierarchy levels during the three and six months ended March 31, 2021 and 2020.

 

The fair value of financial instruments measured on a recurring basis is as follows:

 

As of March 31, 2021

Description

Total

Level 1

Level 2

Level 3

Liabilities:

Convertible Notes

$

—

$

—

$

—

$

—

Total liabilities at fair value

$

—

$

—

$

—

$

—

 

 

		As of September 30, 2020
Description		Total				Level 1				Level 2				Level 3
Liabilities:
Convertible Notes		$	1,007,206			$	—			$	—			$	1,007,206
Total liabilities at fair value		$	1,007,206			$	—			$	—			$	1,007,206

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

The following table provides a roll-forward of the convertible notes at fair value on a recurring basis using unobservable level 3 inputs for the six months ended March 31 as follows:

 

		2021
Convertible notes
Balance as of beginning of period – September 30, 2020		$	1,007,206
Change in fair value including accrued interest			(1,974	)
Conversion of convertible promissory notes to common stock			(1,005,232	)
Balance as of end of period – March 31, 2021		$	—

 

 

		2020
Convertible notes
Balance as of beginning of period – September 30, 2019		$	—
Fair value attributed to convertible promissory notes upon issuance			5,066,740
Conversion of convertible promissory notes to common stock			(239,522	)
Change in fair value including accrued interest			93,858
Balance as of end of period –March 31, 2020		$	4,921,076

 

Intellectual Property

 

The Company has entered into two licensing agreements with major research institutions, which allows for access to certain patented technology and know-how. Payments under those agreements are capitalized and amortized to general and administrative expense over the expected useful life of the acquired technology.

 

Property and Equipment

 

Property and equipment is recorded at cost and reduced by accumulated depreciation. Depreciation expense is recognized over the estimated useful lives of the assets using the straight-line method. The estimated useful life for equipment and furniture ranges from three to seven years and three years for software. Tangible assets acquired for research and development activities and that have alternative use are capitalized over the useful life of the acquired asset. Estimated useful lives are periodically reviewed, and, when appropriate, changes are made prospectively. Software purchased for internal use consists primarily of amounts paid for perpetual licenses to third-party software providers and installation costs. When certain events or changes in operating conditions occur, asset lives may be adjusted and an impairment assessment may be performed on the recoverability of the carrying amounts. Maintenance and repairs are charged directly to expense as incurred.

 

Allowances for Doubtful Accounts

 

The Company records a provision for doubtful accounts, when appropriate, based on historical experience and a detailed assessment of the collectability of its accounts receivable. In estimating the allowance for doubtful accounts, the Company considers, among other factors, the aging of the accounts receivable, its historical write-offs, the credit worthiness of each customer, and general economic conditions. Account balances are charged off against the allowance when the Company believes that it is probable that the receivable will not be recovered. Actual write-offs may be in excess of the Company’s estimated allowance.

 

Inventories

 

Inventories are stated at the lower of cost (using the first-in, first-out “FIFO” method) or net realizable value. The Company calculates inventory valuation adjustments for excess and obsolete inventory, when appropriate, based on current inventory levels, movement, expected useful lives, and estimated future demand of the products and spare parts. The Company’s inventory is currently comprised of cEEG strip/grid and electrode cable assembly finished good product. The Strip/Grid Products are produced by a third-party contract manufacturer and the Electrode Cable Assembly Products are obtained from outside suppliers.

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

Impairment of Long-Lived Assets

 

The Company evaluates its long-lived assets, which consist of licensed intellectual property and property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. The Company assesses the recoverability of long-lived assets by determining whether or not the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

 

Research and Development Costs

 

Research and development costs are charged to expense as incurred. Research and development expenses may include costs incurred in performing research and development activities, including clinical trial costs, manufacturing costs for both clinical and pre-clinical materials as well as other contracted services, license fees, and other external costs. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity is performed or when the goods have been received, rather than when payment is made, in accordance with ASC 730, Research and Development.

 

Selling, General and Administrative

 

Selling, general and administrative expenses consist primarily of personnel-related costs including stock-based compensation for personnel in functions not directly associated with research and development activities. Other significant costs include legal fees relating to corporate matters, intellectual property costs, professional fees for consultants assisting with regulatory, clinical, product development, financial matters, and beginning in the first quarter of fiscal year 2021, sales and marketing in connection with the commercial sale of cEEG strip/grid and electrode cable assembly products.

 

Income Taxes

 

For the Company, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

 

Net Loss Per Share

 

For the Company, basic loss per share of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.

 

Diluted earnings or loss per share of common stock is computed similarly to basic earnings or loss per share except the weighted average shares outstanding are increased to include additional shares from the assumed exercise of any common stock equivalents, if dilutive. The Company’s convertible promissory notes, warrants, stock options and restricted stock units while outstanding are considered common stock equivalents for this purpose. Diluted earnings is computed utilizing the treasury method for the warrants, stock options and restricted stock units. Diluted earnings with respect to the convertible promissory notes utilize the if-converted method. No incremental common stock equivalents were included in calculating diluted loss per share because such inclusion would be anti-dilutive given the net loss reported for the three and six months ended March 31, 2021 and 2020.

 

The following potential common shares were not considered in the computation of diluted net loss per share as their effect would have been anti-dilutive for the three and six months ended March 31, 2021 and 2020:

 

		2021				2020
Warrants			7,514,949				2,796,686
Stock options			1,103,609				451,848
Restricted stock units			10,326				19,698
Convertible notes			—				549,442

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses”. The ASU sets forth a “current expected credit loss” (“CECL”) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. Recently, the FASB issued the final ASU to delay adoption for smaller reporting companies to calendar year 2023. The Company is currently assessing the impact of the adoption of this ASU on its financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). The new guidance modifies the disclosure requirements in Topic 820 as follows:

 

●

Removals: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements.

 

●

Modifications: for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

 

●

Additions: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

 

This guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should all be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The Company adopted the new guidance on October 1, 2020 and it did not have a material impact on its financial statements.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) which amends the existing guidance relating to the accounting for income taxes. This ASU is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of accounting for income taxes and to improve the consistent application of GAAP for other areas of accounting for income taxes by clarifying and amending existing guidance. The ASU is effective for fiscal years beginning after December 15, 2020. The Company does not expect that the adoption of this new guidance will have a material impact on the Company’s financial statements and plans to adopt this guidance on a prospective basis for the provisions applicable to the Company.

 

In August 2020, FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which, among other things, provides guidance on how to account for contracts on an entity’s own equity. This ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, this ASU modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation. The amendments in this ASU are effective for smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its financial statements.

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

NOTE 4 – Commitments and Contingencies

 

WARF License Agreement

 

The Company has entered into an exclusive start-up company license agreement with the Wisconsin Alumni Research Foundation (“WARF”) for WARF’s neural probe array and thin film micro electrode technology (the “WARF Agreement”). The Company entered into an Amended and Restated Exclusive Start-up Company License Agreement (the “WARF License”) with WARF on January 21, 2020, which amended and restated in full the prior license agreement between WARF and NeuroOne, LLC, a predecessor of the Company, dated October 1, 2014, as amended on February 22, 2017, March 30, 2019 and September 18, 2019.

 

The WARF License grants to the Company an exclusive license to make, use and sell, in the United States only, products that employ certain licensed patents for a neural probe array or thin-film micro electrode array and method. The Company has agreed to pay WARF a royalty equal to a single-digit percentage of its product sales pursuant to the WARF License, with a minimum annual royalty payment of $50,000 for 2020, $100,000 for 2021 and $150,000 for 2022 and each calendar year thereafter that the WARF License is in effect. The minimum annual royalty payment for calendar year 2020 in the amount of $50,000 was paid by the Company as of March 31, 2021 and was reflected as a component of cost of product revenue for the six month period ended March 31, 2021. In addition, $25,000 of the minimum annual royalty payment for calendar year 2021 was accrued for as of March 31, 2021 and was reflected as a component of cost of product revenue for the three month and six month periods ended March 31, 2021. If the Company or any of its sublicensees contest the validity of any licensed patent, the royalty rate will be doubled during the pendency of such contest and, if the contested patent is found to be valid and would be infringed by the Company if not for the WARF License, the royalty rate will be tripled for the remaining term of the WARF License.

 

WARF may terminate the WARF License if the Company defaults on the payments of amounts due to WARF or fails to timely submit development reports, or breaches any other covenant in the WARF License and fails to remedy such default in ninety (90) days or in the event of certain bankruptcy events involving the Company. WARF may also terminate the WARF License on ninety (90) days’ notice if the Company fails to have commercial sales of one or more FDA-approved products under the WARF License by June 30, 2021. The WARF License otherwise expires by its terms (i) on the date that no valid claims on the patents licensed thereunder remain or (ii) upon the cessation for more than four (4) calendar quarters of the payment, once begun, of earned royalties under certain sections of the WARF License. The Company expects the latest expiration of a licensed patent to occur in 2030. The first commercial sale occurred in December 2020, prior to the June 30, 2021 deadline.

 

Mayo Agreement

 

The Company has an exclusive license and development agreement with the Mayo Foundation for Medical Education and Research (“Mayo”) related to certain intellectual property and development services for thin film micro electrode technology (“Mayo Agreement”). If the Company is successful in obtaining regulatory approval, the Company is to pay royalties to Mayo based on a percentage of net sales of products of the licensed technology through the term of the Mayo Agreement, set to expire May 25, 2037. As of March 31, 2021, $2,691 in royalty fees were incurred given the commencement of commercial sales during the first six months of 2021 and were reflected as a component of cost of product revenue during the period.

 

Legal

 

PMT Litigation

 

From time to time, the Company is subject to litigation and claims arising in the ordinary course of business. In May 2017, NeuroOne received a letter from PMT Corporation (“PMT”), the former employer of Mark Christianson and Wade Fredrickson. PMT claimed that these officers had breached their restrictive covenant obligations with PMT by virtue of their work for NeuroOne and such officer’s prior work during employment with the prior employer, that these officers had breached their confidentiality and non-disclosure obligations to PMT and federal and state law by misappropriating confidential and trade secret information, and that the Company is responsible for tortious interference with contracts. The letter, which purported to attach a noncompete agreement signed by Mr. Fredrickson, demanded that Mr. Fredrickson (who resigned from the Company in June 2017), Mr. Christianson and NeuroOne cease and desist all competitive activities, that Mr. Fredrickson step down from his position and that Mr. Christianson and NeuroOne provide the former employer access to NeuroOne’s systems to demonstrate that it is not using trade secrets or proprietary information nor competing with the former employer.

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

On March 29, 2018, the Company was served with a complaint filed by PMT adding the Company, NeuroOne and Mr. Christianson to its existing lawsuit against Mr. Fredrickson in the Fourth Judicial District Court of the State of Minnesota. The complaint purported to attach Mr. Fredrickson’s noncompete agreement as Exhibit A. In the lawsuit, PMT claims that Mr. Fredrickson and Mr. Christianson breached their non-competition, non-solicitation and non-disclosure obligations, breached their fiduciary duty obligations, were unjustly enriched, engaged in unfair competition, engaged in a civil conspiracy, tortiously interfered with PMT’s contracts and prospective economic advantage, and breached a covenant of good faith and fair dealing. Against Mr. Fredrickson, PMT also alleges that he intentionally or negligently spoliated evidence, made negligent or fraudulent misrepresentations, misappropriated trade secrets in violation of Minnesota law, and committed the tort of conversion and statutory civil theft. Against the Company and NeuroOne, PMT alleges that the Company and NeuroOne were unjustly enriched and engaged in unfair competition. PMT asked the Court to impose a constructive trust over the shares held by Mr. Fredrickson and Mr. Christianson and to award compensatory damages, equitable relief, punitive damages, attorneys’ fees, costs and interest.

 

On April 18, 2018, Mr. Christianson, the Company and NeuroOne, Inc. filed a motion for dismissal, which was heard by the Court on October 11, 2018. The motion for dismissal stated that: the contract claims against Mr. Christianson fail because his agreement was not supported by consideration; the Minnesota Uniform Trade Secrets Act preempts plaintiff’s claims for unfair competition, civil conspiracy and unjust enrichment; plaintiff fails to state a claim regarding alleged breach of the duties of loyalty and good faith/fair dealing; plaintiff cannot legally obtain a constructive trust; plaintiff has insufficiently pled its tortious interference claims; and Plaintiff has not stated a claim for unfair competition. On January 7, 2019, the judge granted the motion for dismissal with respect to PMT’s claim for breach of the duty of good faith and fair dealing, and denied the motion for dismissal with respect to the other claims presented.

 

In April 2019, PMT served the Company, NeuroOne, Inc and Christianson with a proposed Second Amended Complaint, which included new claims against the Company and NeuroOne, Inc for tortious interference with contract and tortious interference with prospective business advantage and punitive damages against the Company, NeuroOne Inc. and Christianson. On June 28, 2019, the Company presented evidence indicating that PMT had participated in a fraud on the Court and sought an Order that PMT had waived the attorney client privilege.

 

On July 16, 2019, the defendants served PMT with a joint notice of motion for sanctions seeking a variety of sanctions for litigation misconduct including, but not limited to, dismissal of the case and an award of attorneys’ fees. The Company, NeuroOne Inc and Mr. Christianson further intend to move for summary judgment on all remaining claims asserted against them as well as for leave to assert counterclaims against PMT for abuse of process.

 

On August 30, 2019, the Hennepin County District Court heard dispositive motions in this case. The district court judge indicated some claims would likely be tried to a jury and encouraged the parties to settle.

 

On September 12, 2019, the district court heard NeuroOne’s motion for sanctions. The district court held the sanctions hearing on December 17, 2019 and December 18, 2019 and indicated that a ruling would be made in approximately 90 days.

 

On April 29, 2020, the district court granted the Company’s motion for sanctions. Additionally, the district court granted the Company’s motion for summary judgment in part with respect to the counts for Christianson’s breach of non-confidentiality agreement, and denied the Company’s motion for summary judgment on all other counts.

 

On August 24, 2020, defendants moved the Court to amend their counterclaims for abuse of process against PMT to add a claim for punitive damages. On October 12, 2020 the Court awarded NeuroOne $185,000 in Rule 11 sanctions and Fredrickson $145,000 in Rule 11 sanctions with respect to its misconduct relating to the Fredrickson noncompete. PMT and its former litigation counsel, Barnes &Thornburg, were jointly and severally liable for these awards, which were paid on December 11, 2020 and have been recognized in other income in the condensed statement of operations. The Court granted NeuroOne’s motion to amend to permit its assertion of the right to assert a punitive damages claim against PMT associated with the additional legal costs incurred by the Company in fighting the allegations relating to the Fredrickson noncompete.

 

Trial has been set for December 2021, but this may be delayed or impacted by the COVID-19 pandemic. The Company intends to continue to defend itself vigorously and to continue to aggressively prosecute its affirmative counterclaim against PMT. The outcome of any claim against the Company by PMT was not estimable as of the issuance of these financial statements.

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

Facility Leases

 

Headquarters Lease

 

On October 7, 2019, the Company entered into a non-cancellable lease agreement (the “Lease”) with Biynah Cleveland, LLC, BIP Cleveland, LLC, and Edenvale Investors (together, the “Landlord”) pursuant to which the Company has agreed to lease office space located at 7599 Anagram Drive, Eden Prairie, Minnesota (the “Premises”). The Company took possession of the Premises on November 1, 2019, with the term of the Lease ending 65 months after such date, unless terminated earlier (the “Term”). The initial base rent for the Premises is $6,410 per month for the first 17 months, increasing to $7,076 per month by the end of the Term. In addition, as long as the Company is not in default under the Lease, the Company shall be entitled to an abatement of its base rent for the first 5 months. In addition, the Company will pay its pro rata share of the Landlord’s annual operating expenses associated with the premises, calculated as set forth in the Lease of which the Company is entitled to an abatement of these operating expense for the first 3 months.

 

During the three and six months ended March 31, 2021, rent expense associated with the facility leases amounted to $31,800 and $61,261, respectively. During the three and six months ended March 31, 2020, rent expense associated with the facility leases amounted to $25,862 and $47,866, respectively.

 

Supplemental cash flow information related to the operating lease was as follows:

 

		For the six months ended March 31,
		2021				2020
Cash paid for amounts included in the measurement of lease liability:
Operating cash flows from operating leases		$	38,462			$	—
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		$	—			$	335,119

 

Supplemental balance sheet information related to the operating lease was as follows:

 

		As of March 31, 2021				As of September 30, 2020
Right-of-use assets		$	255,409			$	282,211
Lease liability		$	284,235			$	312,176
Weighted average remaining lease term (years)			4.0				4.5
Weighted average discount rate			7.0	%			7.0	%

 

Maturity of the lease liability was as follows:

 

			As of March 31, 2021
2021 (period from April 1, 2021 to September 30, 2021)			$	39,423
2022				79,832
2023				81,827
2024				83,873
2025				42,454
Total lease payments				327,409
Less imputed interest				(43,174	)
Total				284,235
Short-term portion				(60,878	)
Long-term portion			$	223,357

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

San Jose Lease:

 

On December 30, 2020, the Company entered into a non-cancellable lease agreement for short term office space in San Jose, California (the “San Jose Lease”) for a three month initial term. After March 31, 2021, the San Jose Lease is cancellable upon a 30-day notice to the landlord. The Company took possession of the office space on January 1, 2021. The base rent under the San Jose Lease is $504 per month.

 

NOTE 5 – Intangibles and Property and Equipment

 

Intangibles

 

Intangible assets rollforward is as follows:

 

		Useful Life
Net Intangibles, September 30, 2020		12-13 years			$	156,523
Less: amortization						(11,158	)
Net Intangibles, March 31, 2021					$	145,365

 

Amortization expense was $5,579 and $11,158 for the three and six months ended March 31, 2021 and 2020, respectively.

 

Property and Equipment

 

Property and equipment held for use by category are presented in the following table:

 

		As of March 31, 2021				As of September 30, 2020
Equipment and furniture		$	217,684			$	195,756
Software			1,895				1,895
Total property and equipment			219,579				197,651
Less accumulated depreciation			(58,492	)			(31,620	)
Property and equipment, net		$	161,087			$	166,031

 

Depreciation expense was $13,715 and $26,872 for the three months and six months ended March 31, 2021, respectively, $5,488 and $9,807 during the three and six months ended March 31, 2020, respectively.

 

NOTE 6 – Accrued Expenses and Other Liabilities

 

Accrued expenses consisted of the following at March 31, 2021 and September 30, 2020:

 

		As of March 31, 2021				As of September 30, 2020
Accrued payroll		$	104,135			$	238,212
Operating lease liability, short term			60,878				57,848
Royalty Payments			25,547				—
Accrued issuance costs			—				50,400
Other			182,968				166,302
Total		$	373,528			$	512,762

 

The “other” category is primarily comprised of board fees.

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

Paycheck Protection Program

 

The CARES Act, signed into law in March 2020, established the Paycheck Protection Program (“PPP”). The PPP authorizes over $600 billion in forgivable loans to small businesses. Loan amounts may be forgiven to the extent proceeds are used to cover documented payroll, mortgage interest, rent, and utility costs over a 24-week measurement period following loan funding. As discussed in Note 1, there can be no assurance that this PPP loan will be forgiven. Loans have a maturity of 2 years and an interest rate of 1%. Prepayments may be made without penalty. In April 2020, the Company received loan funding of $83,333 under the PPP and was recorded as a long-term liability. Interest in connection with the PPP was nominal during the three and six months ended March 31, 2021.

 

 

NOTE 7 – Zimmer Development Agreement

 

On July 20, 2020, the Company entered into an exclusive development and distribution agreement (the “Development Agreement”) with Zimmer, Inc. (“Zimmer”), pursuant to which the Company granted Zimmer exclusive global rights to distribute the Strip/Grid Products and electrode cable assembly products (the “Electrode Cable Assembly Products”). Additionally, the Company granted Zimmer the exclusive right and license to distribute certain depth electrodes developed by the Company (“SEEG Products”, and together with the Strip/Grid Products and Electrode Cable Assembly Products, the “Products”). The parties have agreed to collaborate with respect to development activities under the Development Agreement through a joint development committee composed of an equal number of representatives of Zimmer and the Company.

 

Under the terms of the Development Agreement, the Company will be responsible for all costs and expenses related to developing the Products, and Zimmer will be responsible for all costs and expenses related to the commercialization of the Products. In addition to the Development Agreement, Zimmer and the Company have entered into a Manufacturing and Supply Agreement (the “MS Agreement”) and a supplier quality agreement (the “Quality Agreement”) with respect to the manufacturing and supply of the Products.

 

Except as otherwise provided in the Development Agreement, the Company will be responsible for performing all development activities, including non-clinical and clinical studies directed at obtaining regulatory approval of each Product. Zimmer has agreed to use commercially reasonable efforts to promote, market and sell each Product following the “Product Availability Date” (as defined in the Development Agreement) for such Product.

 

Pursuant to the Development Agreement, Zimmer made an upfront initial exclusivity fee payment of $2.0 million (the “Initial Exclusivity Fee”) to the Company. In addition, the Company is to receive the following fee payments (the “Interim Fee Bonus”) upon reaching certain milestones:

 

Scenario 1: Except where Zimmer timely delivers a Design Modification Notice pursuant to Section 1.2, if one or more of the events set forth below occurs on or before the deadline indicated for such event and the Product Availability Date (as defined in the Development Agreement) for the SEEG Products occurs on or before June 30, 2021, then the Company shall receive the additional amount indicated for such event as part of the SEEG Exclusivity Maintenance Fee:

 

●

Design freeze for the SEEG Products by November 30, 2020 - $500,000

 

●

Acceptance of all Deliverables for SEEG Products under the Development Plan (as defined in the Development Agreement) by April 30, 2021 - $500,000

 

Scenario 2: Notwithstanding Scenario 1 above, if Zimmer timely delivers a Design Modification Notice to the Company pursuant to Section 1.2, and one or more of the events set forth below occurs on or before the deadline indicated for such event and the Product Availability Date for the SEEG Products occurs on or before June 30, 2021 as determined by Zimmer, then the Company shall receive the additional amount indicated for such event as part of the SEEG Exclusivity Maintenance Fee:

 

●

Acceptance of all Deliverables for SEEG Products under the Development Plan other than the Modified Connector by April 30, 2021 - $500,000

 

●

Acceptance of all Deliverables for SEEG Products under the Development Plan, including the Modified Connector by September 30, 2021 - $500,000

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

For purposes of the Development Agreement, each of the foregoing events shall have occurred only if the Company has demonstrated the achievement of the event to Zimmer’s reasonable satisfaction. Notwithstanding the foregoing, the events in Sections 6.1(c)(ii), (iii) and (iv) of the Development Agreement shall not be deemed to be met if FDA Approval for the SEEG Products is not received prior to the applicable deadline.

 

In addition to the Initial Exclusivity Fee and Interim Fee Bonus, in order to maintain the exclusivity of the SEEG Distribution License, Zimmer must pay the SEEG Exclusivity Maintenance Fee to the Company, on or prior to the SEEG Exclusivity Confirmation Date, in immediately available funds as follows:

 

●

if the Product Availability Date for the SEEG Products occurs on or before June 30, 2021, then $3,000,000, plus the amount of any Interim Fee Bonuses earned pursuant to Section 6.1(c), including any such Interim Fee Bonus earned after June 30, 2021 pursuant to Section 6.1(c)(iv) following the delivery of a Design Modification Notice;

 

●

if the Product Availability Date for the SEEG Products occurs after June 30, 2021, but on or before September 30, 2021, then $3,000,000, plus if Zimmer timely issues a Design A-9 Modification Notice, any Interim Fee Bonus earned pursuant to Section 6.1(c)(iv);

 

●

if the Product Availability Date for the SEEG Products occurs after September 30, 2021, but on or before December 31, 2021, then $2,500,000; and

 

●

if the Product Availability Date for the SEEG Products occurs after December 31, 2021, then $1,500,000.

 

Notwithstanding any other provision of the Development Agreement, if the Product Availability Date for the SEEG Products has not occurred on or before June 30, 2022, Zimmer shall have the right to terminate the SEEG Distribution License by delivering written notice to the Company to that effect and, upon delivery of such notice, Zimmer shall be relieved of all of its obligations hereunder with respect to SEEG Products, including any obligation to pay the SEEG Exclusivity Maintenance Fee or to purchase, market, distribute or sell any SEEG Products. The Initial Exclusivity Fee and the SEEG Exclusivity Maintenance Fee (including any Interim Fee Bonus(es)), once paid, are non-refundable.

 

The Development Agreement will expire on the tenth anniversary of the date of the first commercial sale of the last of the Products to achieve a first commercial sale, unless terminated earlier pursuant to its terms. Either party may terminate the Development Agreement (x) with written notice for the other party’s material breach following a cure period or (y) if the other party becomes subject to certain insolvency proceedings. In addition, Zimmer may terminate the Development Agreement for any reason with 90 days’ written notice, and the Company may terminate the Development Agreement if Zimmer acquires or directly or indirectly owns a controlling interest in certain competitors of the Company.

 

At inception of the Zimmer Development Agreement through March 31, 2021, the Company had identified three performance obligations under the Zimmer Development Agreement and consisted of the following: (1) the Company obligation to grant Zimmer access to its intellectual property; (2) complete SEEG Product development; and (3) complete Strip/Grid Product development. Accordingly, the Company recognized revenue in the amount of $20,113 and $42,387 for the three month and six month periods ended March 31, 2021 related to the development of the Products completed during the period in connection with the Initial Exclusivity Fee payment. The Zimmer Development Agreement was accounted for under the provisions of ASC 606, Revenue from Contracts with Customers.

 

A reconciliation of the closing balance of deferred revenue related to the Zimmer Development Agreement is as follows as of March 31, 2021:

 

		2020
Deferred Revenue
Balance as of beginning of period – September 30, 2020		$	73,434
Revenue recognized			(42,387	)
Balance as of end of period – March 31, 2021		$	31,047

 

The remaining performance obligations reflected in deferred revenue as of March 31, 2021 are expected to be completed in the latter half of fiscal year 2021.

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

Product Revenue

 

In December 2020, the Company commenced commercial sales of its Strip/Grid Products and Electrode Cable Assembly Products in connection with the Development Agreement. Product revenue recognized during the three and six month periods ended March 31, 2021 was $18,240 and $89,714, respectively.

 

Advertising Expense

 

Advertising expense is charged to selling, general and administrative expenses during the period that it is incurred. Total advertising expense amounted to $113,140 and $142,147 for the three and six month periods ended March 31, 2021, respectively. Advertising expense during the prior year period was negligible.

 

NOTE 8 – Convertible Promissory Notes and Warrant Agreements

 

		As of March 31, 2021				As of September 30, 2020
Paulson convertible notes, principal		$	—			$	546,000
Accrued interest			—				63,458
Fair value adjustments			—				397,748
		$	—			$	1,007,206

 

2019 Paulson Convertible Note Offering

 

On November 1, 2019, the Company entered into a subscription agreement with certain accredited investors, pursuant to which the Company, in a private placement (the “2019 Paulson Private Placement”), agreed to issue and sell to the investors 13% convertible promissory notes (each, a “2019 Paulson Note” and collectively, the “2019 Paulson Notes”) and warrants (each, a “2019 Paulson Warrant” and collectively, the “2019 Paulson Warrants”) to purchase shares of the Company’s common stock.

 

The initial closing of the 2019 Paulson Private Placement was consummated on November 1, 2019, and, on that date and through December 3, 2019, the Company issued the 2019 Paulson Notes in an aggregate principal amount of $3,234,800 to the subscribers for gross proceeds equaling the principal amount. The 2019 Paulson Private Placement terminated on December 3, 2019.

 

On April 24, 2020, the Company and holders of a majority in aggregate principal amount of the 2019 Paulson Notes entered into an amendment to the 2019 Paulson Notes (the “Second 2019 Paulson Notes Amendment”) to, among other things:

 

i.

Extended the Maturity Date – The Second 2019 Paulson Notes Amendment extended the maturity date of the 2019 Paulson Notes from May 1, 2020 to November 1, 2020 (in either case, unless a change of control transaction happens prior to such date);

 

ii.

Revised Optional Conversion Terms – The Second 2019 Paulson Notes Amendment provided that the amount of shares to be received upon the a subscriber’s optional conversion of the 2019 Paulson Notes prior to a 2019 Qualified Financing (as defined in the 2019 Paulson Notes) would have equaled: (1) the Outstanding Balance as defined below of such subscriber’s 2019 Paulson Note elected by the subscriber to be converted divided by (2) an amount equal to 0.6 multiplied by the volume weighted average price of the common stock for the ten (10) trading days immediately preceding the date of conversion; and

 

iii.

Revise the Registration Date – The Second 2019 Paulson Notes Amendment provided that promptly following the earlier of (1) May 1, 2020, if the applicable subscriber converted all or a majority of the Outstanding Balance of such subscriber’s 2019 Paulson Note prior to such date; (2) the final closing of a 2019 Qualified Financing; and (3) the maturity date, the Company will enter into a registration rights agreement with the applicable subscriber containing customary and usual terms pursuant to which the Company shall agree to prepare and file with the SEC a registration statement on or prior to the 90th calendar day following the registration date, covering the resale of any common stock received on conversion of such 2019 Paulson Notes, and shares of common stock underlying the Warrants.

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

The 2019 Paulson Notes had a fixed interest rate of 13% per annum and required the Company to repay the principal and accrued and unpaid interest thereon on November 1, 2020 (the “Maturity Date”). Interest on principal amounted to $5,701 during the six month period ended March 31, 2021, and $100,269 and $154,144 during the three and six month periods ended March 31, 2020, respectively, and was recorded under the net valuation change of instruments measured at fair value in the condensed statements of operations. The subscriber, prior to the Second 2019 Paulson Notes Amendment, had the option to convert the outstanding principal and accrued and unpaid interest of such subscriber’s 2019 Paulson Note (the “Outstanding Balance”) into common stock in an amount equal to the Outstanding Balance divided by the ten day volume weighted average closing price of the common stock prior to conversion. In addition, both before and after the Second 2019 Paulson Note Amendment, if the Company raised more than $3,000,000 in an equity financing (the “Qualified Financing”) before the Maturity Date, each subscriber had the option to convert the Outstanding Balance into the securities issued by the Company in such Qualified Financing in an amount equal to (i) the Outstanding Balance divided by (ii) the lower of 0.6 multiplied by (A) the actual per share price of securities issued by the Company in the Qualified Financing or (B) the ten day volume weighted average closing price of the common stock prior to the first closing of a Qualified Financing. If a change of control transaction had occurred prior to a Qualified Financing or the Maturity Date, the 2019 Paulson Notes would have become payable on demand as of the closing date of such transaction. Change of control meant a merger or consolidation with another entity in which the Company’s stockholders did not own more than 50% of the outstanding voting power of the surviving entity or the disposition of all or substantially all of the Company’s assets.

 

The Company elected to account for the 2019 Paulson Notes on a fair value basis under ASC 825 to comprehensively value and streamline the accounting for the embedded conversion options. The fair value of the 2019 Paulson Notes was significantly higher than the proceeds received as of each of the respective issuance dates given the significant redemption discount associated with the Qualified Financing provision. The excess of fair value over proceeds at issuance amounted to $1,831,940 and was recorded to interest expense in the condensed statements of operations during the six months ended March 31, 2020. Subsequent to issuance, the fair value change of the Paulson Notes amounted to a benefit of $(1,974) during the six months ended March 31, 2021, and amounted to a benefit of $(31,716) and an expense of $93,858 during the three and six month periods ended March 31, 2020, respectively, and was recorded under the net valuation change of instruments measured at fair value in the condensed statements of operations.

 

Each 2019 Paulson Warrant granted the holder the option to purchase the number of shares of common stock equal to (i) 0.5 multiplied by (ii) the principal amount of such subscriber’s 2019 Paulson Notes divided by 5.61, with an exercise price per share equal to $5.61. As of the final closing on December 3, 2019, the Company issued 2019 Paulson Warrants exercisable for 288,305 shares of common stock in connection with all closings of the 2019 Paulson Private Placement. The 2019 Paulson Warrants are immediately exercisable and expire on November 1, 2022. The exercise price is subject to adjustment in the event of any stock dividends or splits, reverse stock split, recapitalization, reorganization or similar transaction, as described therein. The 2019 Paulson warrants were deemed to be a free-standing instrument and were accounted for as equity. Given that the fair value of the 2019 Paulson Notes exceeded the proceeds received at issuance, there was no value attributed to the 2019 Paulson Warrants in the condensed financial statements.

 

Issuance costs during the six month period ended March 31, 2021 in connection with the 2019 Paulson Private Placement were $3,053 and related to legal costs. Issuance costs incurred during the six months ended March 31, 2020 were $865,567. During the first quarter of 2020, Paulson Investment Company (“Paulson”) received a cash commission equal to 12% of the gross proceeds from the sale of the 2019 Paulson Notes which amounted to $388,176, and 10-year warrants to purchase an amount of common stock equal to 86,492 shares of common stock at an exercise price equal to $5.61 per share (the “Broker Warrants”) at a fair value $419,635. Lastly, issuance costs during the first quarter of fiscal year 2020 included legal and third party fees in the amount of $57,756. The issuance costs during both periods were recorded as a component of interest in the accompanying statements of operations.

 

During the first quarter of fiscal year 2021, the remaining holders of the 2019 Paulson Notes elected to convert the remaining outstanding principal and accrued and unpaid interest in the amount of $615,159 into 292,754 shares of common stock.

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

NOTE 9 – Stock-Based Compensation

 

During the three and six month periods ended March 31, 2021 and 2020, stock-based expense related to stock-based awards was included in general and administrative and research and development costs as follows in the accompanying condensed statements of operations.

 

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2021				2020				2021				2020
General and administrative		$	253,586			$	495,690			$	435,379			$	1,059,458
Research and development			72,773				36,091				136,809				60,000
Total share-based compensation		$	326,359			$	531,781			$	572,188			$	1,119,458

 

Stock Options

 

During the three month periods ended March 31, 2021 and 2020, under the 2017 Equity Incentive Plan (the “2017 Plan”), the Company granted 580,002 and 6,667 stock options, respectively, to its employees, consultants and scientific advisory board members. During the six month periods ended March 31, 2021 and 2020, the Company granted 621,671 and 273,336, respectively, to its employees, consultants and scientific advisory board members. Vesting generally occurs over an immediate to 48 month period based on a time of service condition although vesting acceleration is provided under one grant in the event that certain milestones are met. The grant date fair value of the grants issued during the three month periods ended March 31, 2021 and 2020 was $3.02 and $3.45 per share, respectively. The grant date fair value of the grants issued during the six month periods ended March 31, 2021 and 2020 was $2.92 and $3.18 per share, respectively.

 

The total expense for the three months ended March 31, 2021 and 2020 related to stock options was $217,466 and $88,806, respectively. The total expense for the six months ended March 31, 2021 and 2020 related to stock options was $317,612 and $526,888, respectively. The total number of stock options outstanding as of March 31, 2021 and September 30, 2020 was 1,103,609 and 492,842, respectively.

 

The weighted-average assumptions used in the Black-Scholes option-pricing model are as follows for the stock options granted during the three and six month period ended March 31, 2021 and 2020:

 

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2021				2020				2021				2020
Expected stock price volatility			56.0	%			54.3	%			55.9	%			52.8	%
Expected life of options (years)			6.1				5.4				6.0				5.7
Expected dividend yield			0	%			0	%			0	%			0	%
Risk free interest rate			0.6	%			1.4	%			0.6				1.7	%

 

During the three month periods ended March 31, 2021 and 2020, 34,752 and 15,622 stock options vested, respectively and 10,146 and 86,771 stock options were forfeited during these periods, respectively. During the six month periods ended March 31, 2021 and 2020, 106,527 and 140,898 stock options vested, respectively and 10,146 and 89,270 stock options were forfeited during these periods, respectively.

 

Restricted Stock Units

 

During the three and six months ended March 31, 2020, 55,952 restricted stock units (“RSUs”) were granted. No RSUs were granted during the three and six month period ended March 31, 2021. During the three months ended March 31, 2021 and 2020, 7,992 and 40,925 RSUs vested, respectively, and no RSUs were forfeited during these periods. During the six months ended March 31, 2021 and 2020, 16,376 and 44,427 RSUs vested, respectively, and zero and 2,335 RSUs were forfeited during these periods. The total expense for the three months ended March 31, 2021 and 2020 related to these RSUs was $40,493 and $289,394, respectively. The total expense for the six months ended March 31, 2021 and 2020 related to these RSUs was $83,576 and $314,395, respectively.

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

Other Stock-Based Awards

 

In August 2020, an additional consulting agreement was executed whereby 40,000 shares of common stock were issued, subject to Company repurchase. The stock award under the agreement vests over a six-month period. As of March 31, 2020, 40,000 shares were vested under this agreement of which 13,334 and 33,334 shares vested during the three and six months ended March 31, 2021, respectively. Compensation expense related to the stock award granted under this consulting agreement amounted to $68,400 and $171,000 for the three and six months ended March 31, 2021, respectively, and was included in the total stock-based expense.

 

In October 2019, two consulting agreements were executed whereby up to 38,334 shares of common stock were issuable of which 30,000 shares of common stock were issued and vested as of March 31, 2020 under these agreements. In addition, an additional consulting agreement was executed in February 2020 whereby up to 30,000 shares of common stock were issuable of which 12,000 shares of common stock were issued and vested as of March 31, 2020. Vesting for these awards was based on a time-based vesting condition that ranged over a three to nine month period commencing upon the execution of the consulting agreements. Compensation expense related to the stock awards granted under these consulting agreements amounted to $153,581 and $278,175 during the three and six months ended March 31, 2020, respectively, and was included in the total stock-based expense. The expense was based on the fair value of the underlying common stock at the point of vesting which ranged from $6.00 to $7.95 per share.

 

General

 

2017 Plan Evergreen Provision

 

Under the 2017 Plan, the shares reserved automatically increase on January 1st of each year, for a period of not more than ten years from the date the 2017 Plan is approved by the stockholders of the Company, commencing on January 1, 2019 and ending on (and including) January 1, 2027, to an amount equal to 13% of the fully-diluted shares outstanding as of December 31st of the preceding calendar year. Notwithstanding the foregoing, the Board may act prior to January 1st of a given year to provide that there will be no January 1st increase in the share reserve for such year or that the increase in the share reserve for such year will be a lesser number of shares of common stock than would otherwise occur pursuant to the preceding sentence. “Fully Diluted Shares” as of a date means an amount equal to the number of shares of common stock (i) outstanding and (ii) issuable upon exercise, conversion or settlement of outstanding awards under the 2017 Plan and any other outstanding options, warrants or other securities of the Company that are (directly or indirectly) convertible or exchangeable into or exercisable for shares of common stock, in each case as of the close of business of the Company on December 31 of the preceding calendar year. On January 1, 2021, 484,623 shares were added to the 2017 Plan as a result of the evergreen provision.

 

As of March 31, 2021, 486,214 shares were available for future issuance on a combined basis under the 2016 Equity Incentive Plan and 2017 Plan. Unrecognized stock-based compensation was $2,049,822 as of March 31, 2021. The unrecognized share-based expense is expected to be recognized over a weighted average period of 0.7 years.

 

NOTE 10 – Concentrations

 

Credit Risk

 

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash. The Company’s cash is held by one financial institution in the United States. Amounts on deposit may at times exceed federally insured limits. The Company has not experienced any losses on its deposits since inception, and management believes that minimal credit risk exists with respect to these financial institutions. As of March 31, 2021, the Company had $11,024,185 of deposits in excess of federally insured amounts.

 

Revenue

 

One customer accounts for all of the Company’s product and collaborations revenue.

 

Supplier concentration

 

One contract manufacturer produces all of the Company’s Strip/Grid Products.

 

 

NeuroOne Medical Technologies Corporation

Notes to Condensed Financial Statements

(unaudited)

 

NOTE 11 – Income Taxes

 

The effective tax rate for the three and six months ended March 31, 2021 and 2020 was zero percent. As a result of the analysis of all available evidence as of March 31, 2021 and September 30, 2020, the Company recorded a full valuation allowance on its net deferred tax assets. Consequently, the Company reported no income tax benefit during the three and six months ended March 31, 2021 and 2020. If the Company’s assumptions change and the Company believes that it will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be recognized as a reduction of future income tax expense. If the assumptions do not change, each period the Company could record an additional valuation allowance on any increases in the deferred tax assets.

 

NOTE 12 – Stockholders’ Equity

 

2021 Private Placement

 

On January 12, 2021, the Company entered into a Common Stock and Warrant Purchase Agreement with certain accredited investors, pursuant to which the Company, in the 2021 Private Placement, agreed to issue and sell an aggregate of 4,166,682 shares of the common stock of the Company and warrants to purchase an aggregate of 4,166,682 shares of common stock (the “2021 Warrants”) at an aggregate purchase price of $3.00 per share of common stock and corresponding warrant, resulting in total gross proceeds of $12.5 million before deducting placement agent fees and estimated offering expenses. The 2021 Warrants have an initial exercise price of $5.25 per share. The 2021 Warrants are immediately exercisable and will expire on the fifth anniversary of issuance. Prior to expiration, subject to the terms and conditions set forth in the 2021 Warrants, the holders of such 2021 Warrants may exercise the 2021 Warrants for shares of common stock by providing notice to the Company and paying the exercise price per share for each share so exercised or by utilizing the “cashless exercise” feature contained in each 2021 Warrant. The fair value of the 2021 Warrants was $7.3 million and was based on the Black-Scholes pricing model. Input assumptions used were as follows: a risk-free interest rate of 0.5%; expected volatility of 56.0%; expected life of 5 years; expected dividend yield of 0%; and the underlying traded stock price. $3.7 million of the total proceeds was allocated to the 2021 Warrants based on the relative fair value allocation method, which has been reflected in stockholders’ equity. The 2021 Warrants were classified in stockholders’ equity as the number of shares were fixed and determinable, and no other provisions precluded equity treatment. The private placement closed on January 14, 2021.

 

2019 Common Stock Offering

 

On October 23, 2019, the Company entered into Securities Purchase Agreements with certain accredited investors, pursuant to which the Company, in a private placement, has issued and sold 47,223 shares of the Company’s common stock to the accredited investors at a price of $5.40 per share, for gross proceeds amounting to $255,000. The Company filed a registration statement with the SEC covering the resale of the shares of common stock sold in the private placement on August 11, 2020.

 

Warrant Activity and Summary

 

The following table summarizes warrant activity during the six month period ended March 31, 2021:

 

		Warrants				Exercise Price Per Warrant				Weighted Average Exercise Price				Weighted Average Term (years)
Outstanding and exercisable at September 30, 2020			3,390,320			$	5.40 - 9.00			$	7.05				2.89
Issued			4,166,682			$	5.25			$	5.25				—
Exercised			(42,053	)		$	5.61-8.25			$	5.71				—
Forfeited			—			$	—			$	—				—
Outstanding and exercisable at March 31, 2021			7,514,949			$	5.25-9.00			$	6.06				3.73

 

 

NeuroOne Medical Technologies Corporation

Form 10-Q

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes included in Part I “Financial Information”, Item I “Financial Statements” of this Quarterly Report on Form 10-Q (the “Report”) and the audited financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended September 30, 2020.

 

Forward-Looking Statements

 

Certain statements contained in this Report are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give current expectations or forecasts of future events or our future financial or operating performance. We may, in some cases, use words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, and similar expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements.

 

These forward-looking statements reflect our management’s beliefs and views with respect to future events, are based on estimates and assumptions as of the date of this Report and are subject to risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those in these forward-looking statements. We discuss many of these risks in greater detail under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2020 and our Quarterly Report on Form 10-Q for the quarter ended December 31, 2020, and subsequent reports filed with or furnished to the Securities and Exchange Commission (the “SEC”). Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

 

Any forward-looking statement made by us in this Report speaks only as of the date hereof or as of the date specified herein. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable laws or regulations.

 

Overview

 

To date, our primary activities have been limited to, and our limited resources have been dedicated to, performing business and financial planning, raising capital, recruiting personnel, negotiating with business partners and the licensors of our intellectual property and conducting research and development activities. Our Evo cortical technology (“cEEG”) has received 510(k) clearance from the FDA for recording, monitoring, and stimulating brain tissue for up to 30 days for which we have begun to generate revenue beginning in the first quarter of fiscal 2021 from the sale of products based on our Evo cortical technology. Our other products are still under development.

 

We have incurred losses since inception. As of March 31, 2021, we had an accumulated deficit of $35.2 million, primarily as a result of expenses incurred in connection with our research and development, selling, general and administrative expenses associated with our operations and interest expense, fair value adjustments and loss on extinguishments related to our debt, offset in part by collaborations and product revenues. We expect to continue to incur significant expenses and increasing operating and net losses for the foreseeable future until and unless we generate a higher level of revenue from commercial sales.

 

Our main source of cash to date, outside of collaborations and product revenues, has been proceeds from the issuances of notes, common stock, warrants and unsecured loans. See “—Liquidity and Capital Resources—Historical Capital Resources” below.

 

At March 31, 2021, we had $11.3 million in cash deposits. Our existing cash and cash equivalents should be sufficient to fund our operating expenses through at least twelve months from the date of this filing. We will, however, need to obtain substantial additional funding in connection with our continuing operations through public or private equity or debt financings or other sources such as additional product revenue and milestone payments from our current collaboration with Zimmer. However, we may be unable to raise additional funds when needed on favorable terms or at all. Our failure to raise such capital as and when needed would have a negative impact on our financial condition and our ability to develop and commercialize our cortical strip, grid electrode and depth electrode technology and future products and our ability to pursue our business strategy. See “—Liquidity and Capital Resources—Funding Requirements and Outlook” below.

 

 

NeuroOne Medical Technologies Corporation

Form 10-Q

 

Recent Developments

 

Reverse Stock Split

 

Effective after the close of business on March 31, 2021, the Company completed a 1-for-3 reverse stock split of its common stock. All share and per share amounts in this Quarterly Report have been reflected on a post-split basis.

 

2021 Private Placement

 

On January 12, 2021, we entered into a Common Stock and Warrant Purchase Agreement (the “2021 Purchase Agreement”) with certain accredited investors (the “Purchasers”), pursuant to which the Company, in a private placement (the “2021 Private Placement”), agreed to issue and sell an aggregate of 4,166,682 shares (the “Shares”) of the common stock of the Company, and warrants to purchase an aggregate of 4,166,682 shares of common stock (the “2021 Warrants”) at an aggregate purchase price of $3.00 per share of common stock and corresponding warrant, resulting in total gross proceeds of $12.5 million before deducting placement agent fees and offering expenses. The 2021 Warrants have an initial exercise price of $5.25 per share. See “—Liquidity and Capital Resources—Historical Capital Resources” section below for additional information with regard to the 2021 Private Placement.

 

COVID-19

 

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States and around the world. As a result of the COVID-19 pandemic, the Company has experienced delays and disruptions in our pre-clinical and clinical trials, as well as interruptions in our manufacturing, supply chain, and research and development operations. The global outbreak of COVID-19 continues to rapidly evolve. In April 2020, given the impact of COVID-19 on the Company, the Company applied for and received loan funding of $83,333 under the Paycheck Protection Program.

 

The extent to which the COVID-19 pandemic may impact our business and pre-clinical and clinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the effect of the pandemic on our suppliers and distributors and the global supply chain, the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social distancing in the U.S. and other countries, business closures or business disruptions and the effectiveness of actions taken in the U.S. and other countries to contain and treat the disease. The COVID-19 pandemic may also impact our business as a result of employee illness, school closures, and other community response measures.

 

The COVID-19 pandemic may also impact our ability to secure additional financing or our ability to up-list from our current OTC Market (“OTCQB”). Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on the Company’s results of future operations, financial position, and liquidity in for the remainder of fiscal year 2021 and beyond.

 

Financial Overview

 

Product Revenue

 

Our product revenue during the six months ended March 31, 2021 was derived from the sale of strip/grid and electrode cable assembly products based on Evo cortical technology. For the foreseeable future, we anticipate that we will generate additional revenue from the sale of products based on Evo cortical technology.

 

We have received FDA 510(k) clearance for our cortical strip electrode, but we do not expect to generate any revenue from the sale of our other products until we develop and obtain all required regulatory approvals or clearances for and commercialize depth electrode technology. If we fail to complete the development of the depth electrode technology, or any other product candidate we may pursue in the future, in a timely manner, or fail to obtain regulatory approval, we may never be able to generate revenue from product sales sufficient to sustain operations.

 

 

NeuroOne Medical Technologies Corporation

Form 10-Q

 

Product Gross Profit (Loss)

 

Product gross profit (loss) represents our product revenue less our cost of product revenue. Our cost of product revenue consists of the manufacturing and materials costs incurred by our third-party contract manufacturer in connection with our Strip/Grid Products and outside supplier materials costs in connection with the Electrode Cable Assembly Products. In addition, cost of product revenue includes royalty fees incurred in connection with our license agreements.

 

Collaborations Revenue

 

Collaborations revenue was derived from the upfront initial exclusivity fee payment under the Zimmer Development Agreement. We anticipate that we may earn additional revenues stemming from additional milestone and royalty payments from Zimmer, however, the hitting of milestones or level of sales required to earn royalty payments is uncertain.

 

Selling, General and Administrative

 

Selling, general and administrative expenses consist primarily of personnel-related costs including stock-based compensation for personnel in functions not directly associated with research and development activities. Other significant costs include legal fees relating to corporate matters, intellectual property costs, professional fees for consultants assisting with regulatory, clinical, product development, financial matters, and beginning in the first quarter of fiscal year 2021, sales and marketing in connection with the commercial sale of cEEG strip/grid and electrode cable assembly products. We anticipate that our general and administrative expenses will significantly increase in the future to support our continued research and development activities, further commercialization of our cortical strip technology, potential commercialization of our grid electrode and depth electrode technology, if approved, and the increased costs of operating as a public company. These increases will include increased costs related to the hiring of additional personnel and fees for legal and professional services, as well as other public-company related costs.

 

Research and Development

 

Research and development expenses consist of expenses incurred in performing research and development activities in developing our cortical strip, grid electrode and depth electrode technology. Research and development expenses include compensation and benefits for research and development employees including stock-based compensation, overhead expenses, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, costs related to regulatory operations, fees paid to consultants and other outside expenses. Research and development costs are expensed as incurred and costs incurred by third parties are expensed as the contracted work is performed. Lastly, de minimis income from the sale of prototype products and related materials are offset against research and development expenses.

 

We expect our research and development expenses to significantly increase over the next several years as we develop our cortical strip, grid electrode and depth electrode technology and conduct preclinical testing and clinical trials and will depend on the duration, costs and timing to complete our preclinical programs and clinical trials.

 

Interest Expense

 

Interest expense primarily consists of interest costs related to our 2019 Paulson Notes.

 

Net valuation change of instruments measured at fair value

 

The net valuation change of instruments measured at fair value include the change in fair value of the 2019 Paulson Notes.

 

Other Income

 

Consists of proceeds outside of normal operating activity relating to legal settlements.

 

 

NeuroOne Medical Technologies Corporation

Form 10-Q

 

Results of Operations

 

Comparison of the Three Months Ended March 31, 2021 and 2020

 

The following table sets forth the results of operations for the three-months ended March 31, 2021 and 2020, respectively.

 

		For the three months ended March 31, (unaudited)
		2021				2020				Period to Period Change
Product revenue		$	18,240			$	—			$	18,240
Cost of product revenue			39,363				—				39,363
Product gross profit (loss)			(21,123	)			—				(21,123	)
Collaborations revenue			20,113				—				20,113
Operating expenses:
Selling, general and administrative			1,313,252				1,035,256				277,996
Research and development			1,081,429				342,102				739,327
Total operating expenses			2,394,681				1,377,358				1,017,323
Loss from operations			(2,395,691	)			(1,377,358	)			(1,018,333	)
Net valuation change of instruments measured at fair value			—				31,716				(31,716	)
Other income			1,775				—				1,775
Loss before income taxes			(2,393,916	)			(1,345,642	)			(1,048,274	)
Provision for income taxes			—				—				—
Net loss		$	(2,393,916	)		$	(1,345,642	)		$	(1,048,274	)

  

Product Revenue and Product Gross Profit (Loss)

 

Product revenue and product gross profit (loss) was $18,000 and $(21,000), respectively, during the three months ended March 31, 2021. The product revenue during the second quarter related to the sale of our Strip/Grid Products and Electrode Cable Assembly Products. Cost of product revenue consisted of the manufacturing and materials costs incurred by our third-party contract manufacturer in connection with our Strip/Grid Products and outside supplier materials costs in connection with the Electrode Cable Assembly Products. In addition, cost of product revenue included royalty fees incurred in connection with our license agreements. There was no product revenue or product gross profit (loss) recognized during the comparable prior year period.

 

Collaborations Revenue

 

Collaborations revenue was $20,000 for the three months ended March 31, 2021. Revenue during the period was derived from the Zimmer Development Agreement and represented the portion of the upfront initial development fee payment eligible for revenue recognition during the second quarter of fiscal year 2021. The amount of revenue recognized related to the upfront fee was based on development completed in connection with SEEG Products, and to a lesser extent, the Strip/Grid Products. There was no collaborations revenue recognized during the comparable prior year period.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses were $1.3 million for the three months ended March 31, 2021, compared to $1.0 million for the three months ended March 31, 2020. The $0.3 million increase was primarily due to a net increase in sales and marketing expenses of $0.3 million. Additionally, stock-based compensation decreased by $0.2 million in the current quarter when compared to the prior year period, but was offset by an increase in other operating expenses of $0.2 million on a net basis when compared to the second quarter of fiscal year 2020.

 

 

NeuroOne Medical Technologies Corporation

Form 10-Q

 

Research and development expenses

 

Research and development expenses were $1.1 million for the three months ended March 31, 2021, compared to $0.3 million during for the three months ended March 31, 2020. The $0.7 million increase period over period was attributed to supporting development activities, which primarily included salary-related expenses and costs related to consulting services, materials and supplies associated with the development of SEEG Products and to a lesser extent Strip/Grid Products.

 

Net valuation change of instruments measured at fair value:

 

The net valuation change of instruments measured at fair value for the 2019 Paulson Notes for the three months ended March 31, 2021 and 2020 was a zero and a benefit of $32,000, respectively. The change was due to accrued interest on the 2019 Paulson Notes and due to fluctuations in our common stock fair value and the number of potential shares of common stock issuable upon conversion of the 2019 Paulson Notes while outstanding.

 

Other Income

 

Other income during the three months ended March 31, 2021 consisted of proceeds from the sale of certain supplies in the amount of $2,000. We did not have other income during the comparable prior year period.

 

Comparison of the Six Months Ended March 31, 2021 and 2020

 

The following table sets forth the results of operations for the six months ended March 31, 2021 and 2020, respectively.

 

		For the six months ended March 31, (unaudited)
		2021				2020				Period to Period Change
Product revenue		$	89,714			$	—			$	89,714
Cost of product revenue			148,494				—				148,494
Product gross profit (loss)			(58,780	)			—				(58,780	)
Collaborations revenue			42,387				—				42,387
Operating expenses:
Selling, general and administrative			2,507,112				2,347,422				159,690
Research and development			2,015,587				843,921				1,171,666
Total operating expenses			4,522,699				3,191,343				1,331,356
Loss from operations			(4,539,092	)			(3,191,343	)			(1,347,749	)
Interest expense			(3,053	)			(2,697,507	)			2,694,454
Net valuation change of instruments measured at fair value			1,974				(93,858	)			95,832
Other income			186,775				—				186,775
Loss before income taxes			(4,353,396	)			(5,982,708	)			1,629,312
Provision for income taxes			—				—				—
Net loss		$	(4,353,396	)		$	(5,982,708	)		$	1,629,312

 

 

 

NeuroOne Medical Technologies Corporation

Form 10-Q

 

Product Revenue and Product Gross Profit (Loss)

 

Product revenue and product gross profit (loss) was $90,000 and $(59,000) during the six months ended March 31, 2021, respectively. The product revenue consisted of Strip/Grid Products and Electrode Cable Assembly Products sales. Cost of product revenue consisted of the manufacturing and materials costs incurred by our third-party contract manufacturer in connection with our Strip/Grid Products and outside supplier materials costs in connection with the Electrode Cable Assembly Products. In addition, cost of product revenue included royalty fees incurred, including the initial minimum royalty fee to WARF of $50,000 for calendar year 2020, in connection with our license agreements. There was no product revenue or product gross profit (loss) recognized during the comparable prior year period.

 

Collaborations Revenue

 

Collaborations revenue was $42,000 for the six months ended March 31, 2021. Revenue during the period was derived from the Zimmer Development Agreement and represented the portion of the upfront initial development fee payment eligible for revenue recognition during the six months ended March 31, 2021. The amount of revenue recognized related to the upfront fee was based on development completed in connection with SEEG products, and to a lesser extent, the Strip/Grid Products. There was no collaborations revenue recognized during the comparable prior year period.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses were $2.5 million for the six months ended March 31, 2021, compared to $2.3 million for the six months ended March 31, 2020. The $0.2 million increase was primarily due to an increase in sales and marketing expenses of $0.4 million and other operating expenses and fees of $0.3 million, offset in part by a decrease in stock-based compensation of $0.6 million.

 

Research and development expenses

 

Research and development expenses were $2.0 million for the six months ended March 31, 2021, compared to $0.8 million during for the six months ended March 31, 2020. The $1.2 million increase period over period was attributed to supporting development activities, which primarily included salary-related expenses and costs related to consulting services, materials and supplies associated with the development of SEEG Products and to a lesser extent Strip/Grid Products.

 

Interest expense

 

Interest expense for the six months ended March 31, 2021 was $3,000 and consisted of issuance costs in connection with our 2019 Paulson Notes described further below.

 

Interest expense for the six months ended March 31, 2020 was $2.7 million and consisted of non-cash interest expense in connection with our 2019 Paulson Notes described further below. Interest expense was comprised of issuance costs of $0.9 million and day-one interest at issuance of $1.8 million representing the amount by which fair value exceeded note proceeds.

 

Net valuation change of instruments measured at fair value:

 

The net valuation change of instruments measured at fair value for the 2019 Paulson Notes for the six months ended March 31, 2021 and 2020 was a benefit of $2,000 and an expense of $0.1 million, respectively. The change was due to accrued interest on the 2019 Paulson Notes and due to fluctuations in our common stock fair value and the number of potential shares of common stock issuable upon conversion of the 2019 Paulson Notes while outstanding.

 

Other Income

 

Other income during the six months ended March 31, 2021 consisted principally of proceeds received in connection with the PMT Corporation litigation in the amount of $0.2 million. We did not have other income during the comparable prior year period.

 

 

NeuroOne Medical Technologies Corporation

Form 10-Q

 

Liquidity and Capital Resources

 

Historical Capital Resources

 

As of March 31, 2021, our principal source of liquidity consisted of cash deposits of $11.3 million. We have just begun to generate revenue from commercial sales during the first quarter of fiscal year 2021, and we anticipate that we will continue to incur losses for the foreseeable future until and unless we generate an adequate level of revenue from commercial sales to cover expenses.

 

We anticipate that our expenses will increase substantially as we develop and commercialize our cortical strip, grid electrode and depth electrode technology and pursue pre-clinical and clinical trials, seek regulatory approvals, contract to manufacture any products, establish our own sales, marketing and distribution infrastructure to commercialize our cortical strip, grid electrode and depth electrode technology under development, if approved, hire additional staff, add operational, financial and management systems and continue to operate as a public company.

 

Our source of cash, outside of collaboration and product revenues, to date has been proceeds from the issuances of notes with warrants, common stock with and without warrants and unsecured loans, the terms of which are further described below. See also “—Funding Requirements and Outlook” below.

 

2021 Private Placement

 

On January 12, 2021, we entered into the “2021 Purchase Agreement with certain accredited investors, pursuant to which the Company, in a private placement (the “2021 Private Placement”), agreed to issue and sell an aggregate of 4,166,682 shares (the “Shares”) of the common stock of the Company, and warrants to purchase an aggregate of 4,166,682 shares of common stock (the “2021 Warrants”) at an aggregate purchase price of $3.00 per share of common stock and corresponding warrant, resulting in total gross proceeds of $12.5 million before deducting placement agent fees and estimated offering expenses. The 2021 Warrants have an initial exercise price of $5.25 per share. The 2021 Warrants became immediately exercisable beginning on the date of issuance and will expire on the fifth anniversary of such date. Prior to expiration, subject to the terms and conditions set forth in the 2021 Warrants, the holders of such 2021 Warrants may exercise the 2021 Warrants for shares of common stock by providing notice to the Company and paying the exercise price per share for each share so exercised or by utilizing the “cashless exercise” feature contained in each 2021 Warrant. The 2021 Private Placement closed on January 14, 2021.

 

In connection with the 2021 Private Placement, the Company agreed to file a registration statement with the SEC covering the resale of the Shares, the 2021 Warrants and the shares of common stock issuable upon exercise of the 2021 Warrants. The Company has agreed to file such registration statement within 30 days of the execution of the 2021 Purchase Agreement on January 12, 2021 and filed such registration statement on February 10, 2021.

 

Common Stock Offerings

 

On July 24, 2020, we entered into a Securities Purchase Agreement (“2020 Purchase Agreement”) with an accredited investor pursuant to which we, in a private placement, issued and sold 25,000 shares of the Company’s common stock for gross proceeds in the amount of $135,000. Under the 2020 Purchase Agreement, we agreed to use the net proceeds from the private placement for funding operations or working capital and general corporate purposes. We granted the investor indemnification rights with respect to representations, warranties and agreements under the 2020 Purchase Agreement.

 

On October 23, 2019, the Company entered into Securities Purchase Agreements with certain accredited investors, pursuant to which the Company, in a private placement, issued and sold 47,223 shares of the Company’s common stock to the accredited investors at a price of $5.40 per share, for gross proceeds amounting to $0.3 million before deducting offering expenses. The Company filed a registration statement with the SEC covering the resale of the shares of common stock sold in the private placement on August 11, 2020.

 

2020 Paulson Convertible Notes

 

On April 30, 2020, the Company entered into a subscription agreement with certain accredited investors, pursuant to which the Company, in a private placement (the “2020 Paulson Private Placement”), agreed to issue and sell to the investors 13% convertible promissory notes (each, a “2020 Paulson Note” and collectively, the “2020 Paulson Notes”) and warrants (each, a “2020 Paulson Warrant” and collectively, the “2020 Paulson Warrants”) to purchase shares of the Company’s common stock.

 

 

NeuroOne Medical Technologies Corporation

Form 10-Q

 

Between April 30, 2020 and June 30, 2020, the Company issued 2020 Paulson Notes in an aggregate principal amount of $5.1 million to the Subscribers. The final closing under the 2020 Paulson Private Placement occurred on June 30, 2020. In July 2020, all remaining 2020 Paulson Notes outstanding were automatically converted into common stock following the announcement of a Strategic Transaction (as defined in the 2020 Paulson Notes) with Zimmer, Inc. Refer to “—Liquidity and Capital Resources—Historical Capital Resources” in our Annual Report on Form 10-K for the year ended September 30, 2020 for additional information related to the 2020 Paulson Convertible Notes.

 

2019 Paulson Convertible Notes

 

On November 1, 2019, the Company entered into a subscription agreement with certain accredited investors, pursuant to which the Company, in a private placement (the “2019 Paulson Private Placement”), agreed to issue and sell to the investors 13% convertible promissory notes (each, a “2019 Paulson Note” and collectively, the “2019 Paulson Notes”) and warrants (each, a “2019 Paulson Warrant” and collectively, the “2019 Paulson Warrants”) to purchase shares of the Company’s common stock.

 

The initial closing of the private placement was consummated on November 1, 2019, and, on that date and through December 3, 2019, the Company issued 2019 Paulson Notes in an aggregate principal amount of $3,234,800 to the Subscribers for gross proceeds equaling the principal amount. The private placement terminated on December 3, 2019. Between April 24, 2020 and December 15, 2020, all of the holders elected to convert outstanding principal and accrued and unpaid interest of 2019 Paulson Notes in the amount of $3,453,883 into shares of common stock. Refer to “—Liquidity and Capital Resources—Historical Capital Resources” in our Annual Report on Form 10-K for the year ended September 30, 2020 for additional information related to the 2019 Paulson Convertible Notes.

 

Paycheck Protection Program Loan

 

In connection with the CARES Act, the Company received loan funding of approximately $83,000 under the Paycheck Protection Program (“PPP”). PPP loan amounts are forgiven to the extent proceeds are used to cover documented payroll, mortgage interest, rent, and utility costs over a 24-week measurement period following loan funding. There can be no assurance this PPP loan will be forgiven. PPP loans have a maturity of 2 years and an interest rate of 1%. Prepayments may be made without penalty.

 

Financings Prior to Fiscal Year 2020

 

Our sources of cash prior to fiscal year 2020 were generated from the following financing arrangements:

 

2019 Unit Private Placement

 

From December 28, 2018 through July 1, 2019, the Company entered into Subscription Agreements (each, a “2019 Purchase Agreement”) with certain accredited investors (the “New Purchasers”), pursuant to which the Company, in a new private placement (the “2019 Unit Private Placement”), agreed to issue and sell Units (the “2019 Units”), each consisting of (i) one share of common stock and (ii) a warrant to purchase one share of common stock for total gross proceeds to the Company of $5,845,448 before deducting offering expenses. Refer to “—Liquidity and Capital Resources—Historical Capital Resources” in our Annual Report on Form 10-K for the year ended September 30, 2020 for additional information related to the 2019 Unit Private Placement.

 

2018 Private Placement

 

From July 9, 2018 through November 30, 2018 (the final closing), the Company entered into subscription agreements (each, a “Purchase Agreement”) with certain accredited investors (the “Purchasers”), pursuant to which the Company, in a private placement (the “2018 Private Placement”), agreed to issue and sell to the Purchasers units (each, a “2018 Unit”), each consisting of (i) one share of common stock and (ii) a warrant to purchase one share of common stock for total gross proceeds to the Company of $1,538,000 before deducting offering expenses. Refer to “—Liquidity and Capital Resources—Historical Capital Resources” in our Annual Report on Form 10-K for the year ended September 30, 2020 for additional information related to the 2018 Private Placement.

 

 

NeuroOne Medical Technologies Corporation

Form 10-Q

 

Series 3 Notes and Warrants (2017 Convertible Notes)

 

From October 2017 to May 2018, the Company issued convertible notes (the “Series 3 Notes” or “2017 Convertible Notes”) in an aggregate principal amount of $1.5 million that bear interest at a fixed rate of 8% per annum and warrants to purchase shares of the Company’s capital stock (the “Series 3 Warrants”). On February 28, 2019, the outstanding principal and interest on the Series 3 Notes converted into shares of common stock and common stock purchase warrants. Refer to “—Liquidity and Capital Resources—Historical Capital Resources” in our Annual Report on Form 10-K for the year ended September 30, 2020 for additional information related to the Series 3 Notes and Warrants (2017 Convertible Notes).

 

Series 2 Notes and Warrants

 

In August 2017, the Company entered into a subscription agreement in an aggregate principal amount of $253,000 to certain accredited investors (the “Series 2 Notes”). On July 2, 2018, the Series 2 Notes were converted into shares of common stock and warrants. Refer to “—Liquidity and Capital Resources—Historical Capital Resources” in our Annual Report on Form 10-K for the year ended September 30, 2020 for additional information related to the Series 2 Notes and warrants.

 

Series 1 Notes and Warrants

 

From November 2016 to June 2017, the Company issued convertible promissory notes in an aggregate principal amount of $1.6 million and warrants to purchase shares of the Company’s capital stock (the “Series 1 Notes”). The Series 1 Notes were converted into shares of common stock and warrants. Refer to “—Liquidity and Capital Resources—Historical Capital Resources” in our Annual Report on Form 10-K for the year ended September 30, 2020 for additional information related to the Series 1 Notes and warrants.

 

Unsecured Loans

 

From March 2018 to December 2018, the Company received gross proceeds from unsecured loans in the amount of $528,000. The unsecured loans were repaid in full as of June 30, 2019.

 

Funding Requirements and Outlook

 

At March 31, 2021, we had $11.3 million in cash deposits. Our existing cash and cash should be sufficient to fund our operating expenses through at least twelve months from the date of this filing. Prior to the close of the 2021 Private Placement, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the years ended September 30, 2020 and 2019, noting the existence of substantial doubt about our ability to continue as a going concern. This uncertainty arose from management’s review of our results of operations and financial condition and its conclusion that, based on our operating plans, we did not have adequate liquidity to fund our operating expenses. While our future operating activities under the distribution and development agreement with Zimmer, Inc. coupled with our plans to raise capital or issue debt financing, may provide additional liquidity in the future, these actions are not solely within our control. If we are unable to raise additional funds, or if our anticipated operating results are not achieved, we believe planned expenditures may need to be reduced in order to extend the time period that existing resources can fund our operations. If we are unable to obtain the necessary capital, it may have a material adverse effect on our operations and the development of our technology, or we may have to cease operations altogether.

 

We have agreements with the Wisconsin Alumni Research Foundation (“WARF”) and the Mayo Foundation for Medical Education and Research (“Mayo”) that require us to make certain milestone and royalty payments.

 

On January 22, 2020, we entered into an Amended and Restated License Agreement (the “WARF License”) with WARF, which amended and restated in full our prior license agreement with WARF, dated October 1, 2014 (the “Original WARF License”). Under the WARF License, we have agreed to pay WARF a royalty equal to a single-digit percentage of our product sales pursuant to the WARF License, with a minimum annual royalty payment of $50,000 for 2020, $100,000 for 2021 and $150,000 for 2022 and each calendar year thereafter that the WARF License is in effect. The minimum annual royalty payment for calendar year 2020 in the amount of $50,000 was paid in January 2021. If we or any of our sublicensees contest the validity of any licensed patent, the royalty rate will be doubled during the pendency of such contest and, if the contested patent is found to be valid and would be infringed by us if not for the WARF License, the royalty rate will be tripled for the remaining term of the WARF License.

 

 

NeuroOne Medical Technologies Corporation

Form 10-Q

 

Under the Amended and Restated License and Development Agreement with Mayo (the “Mayo Development Agreement”), we have agreed to pay Mayo a royalty equal to a single-digit percentage of our product sales pursuant to the Mayo Development Agreement. Nothing further was due until we started selling our products. As of March 31, 2020, $2,691 in royalty payments were earned by Mayo given the commencement of commercial sales in fiscal year 2021.

 

Refer to the Company’s Annual Report on Form 10-K for the year ended September 30, 2020 with regard to: “Item 1—Business—WARF License,” “Business—Mayo Foundation for Medical Education and Research License and Development Agreement,” “Item 1A—Risk Factors—Risks Relating to Our Business—We depend on intellectual property licensed from WARF for our technology under development, and the termination of this license would harm our business” and “Item 1A—Risk Factors—We depend on our partnership with Mayo to license certain know how for the development and commercialization of our technology.”

 

To continue to fund operations, we will need to secure additional funding or take steps to reduce expenses. We may obtain additional financing in the future through the issuance of our common stock and securities convertible into our common stock, through other equity or debt financings or through collaborations or partnerships with other companies. We may not be able to raise additional capital on terms acceptable to us, or at all. Further, any failure to raise capital when needed could compromise our ability to execute on our business plan.

 

The development and commercialization of our cortical strip, grid electrode and depth electrode technology is subject to numerous uncertainties, and we have based these estimates on assumptions that may prove to be substantially different than we currently anticipate and could use our cash resources sooner than we expect. Additionally, the process of developing medical devices is costly, and the timing of progress in pre-clinical tests and clinical trials is uncertain. Our ability to successfully transition to profitability will be dependent upon achieving certain regulatory approval and then a level of product sales adequate to support our cost structure. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities.

 

Cash Flows

 

The following is a summary of cash flows for each of the periods set forth below.

 

		For the six Months Ended
		March 31,
		2021				2020
Net cash used in operating activities		$	(4,284,102	)		$	(2,475,078	)
Net cash used by investing activities			(2,059	)			(40,224	)
Net cash provided by financing activities			11,523,949				3,001,797
Net increase in cash		$	7,237,788			$	486,495

 

Net cash used in operating activities

 

Net cash used in operating activities was $4.3 million for the six months ended March 31, 2021, which consisted of a net loss of $4.4 million partially offset principally by non-cash stock-based compensation, depreciation, amortization related to intangible assets, revaluation of convertible notes and operating lease expense, totaling approximately $0.6 million in the aggregate. The net change in our net operating assets and liabilities associated with fluctuations in our operating activities resulted in a cash use of $0.5 million. The change in operating assets and liabilities was primarily attributable to a net decrease in accounts payable and accrued expenses attributed to the timing of payments.

 

Net cash used in operating activities was $2.5 million for the six months ended March 31, 2020, which consisted of a net loss of $6.0 million partially offset primarily by non-cash interest, stock-based compensation, depreciation, amortization related to intangible assets, revaluation of convertible notes, totaling approximately $3.9 million in the aggregate. The net change in our net operating assets and liabilities associated with fluctuations in our operating activities resulted in a cash use of $0.4 million. The change in operating assets and liabilities was primarily attributable to a decrease in accounts payable and accrued expenses and to an increase in our prepaid expenses.

 

 

NeuroOne Medical Technologies Corporation

Form 10-Q

 

Net cash used by investing activities

 

Net cash used by investing activities was $2,000 and $40,000 during the six months ended March 31, 2021 and 2020, respectively, and consisted of outlays for furniture and equipment.

 

Net cash provided by financing activities

 

Net cash provided by financing activities was $11.5 million for the six months ended March 31, 2021, which consisted primarily of net proceeds received from the 2021 Private Placement in the amount of $11.3 million. There were also exercises of stock options and warrants during the six months ended March 31, 2021 resulting in additional cash proceeds of $0.2 million.

 

Net cash provided by financing activities was $3.0 million for the six months ended March 31, 2020, which consisted primarily of net proceeds received upon the issuance of the 2019 Paulson Notes and common stock offering totaling $3.0 million in the aggregate and proceeds from the exercise of stock options in the amount of $1,000.

 

Critical Accounting Policies

 

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles require us to make estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expense during the periods presented. We believe that the estimates and judgments upon which we rely are reasonably based upon information available to us at the time that we make these estimates and judgments. To the extent that there are material differences between these estimates and actual results, our financial results will be affected. The accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in Note 3 — “Summary of Significant Accounting Policies” to our condensed financial statements included in “Part 1, Item 1 – Financial Statements” in this Report.

 

During the six months ended March 31, 2021, we commenced commercial sales of the Strip/Grid Products and Electrode Cable Assembly Products. As a result, we added the following critical accounting policies below:

 

Product Revenue

 

Revenues from product sales are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. At the inception of each contract, performance obligations are identified and the total transaction price is allocated to the performance obligations.

 

Cost of Product Revenue

 

Cost of product revenue consists of the manufacturing and materials costs incurred by our third-party contract manufacturer in connection with our Strip/Grid Products and outside supplier materials costs in connection with the Electrode Cable Assembly Products. In addition, cost of product revenue includes royalty fees incurred in connection with our license agreements.

 

Allowances for Doubtful Accounts

 

We record a provision for doubtful accounts, when appropriate, based on historical experience and a detailed assessment of the collectability of our accounts receivable. In estimating the allowance for doubtful accounts, we consider, among other factors, the aging of the accounts receivable, our historical write-offs, the credit worthiness of each customer, and general economic conditions. Account balances are charged off against the allowance when we believe that it is probable that the receivable will not be recovered. Actual write-offs may be in excess of our estimated allowance.

 

 

NeuroOne Medical Technologies Corporation

Form 10-Q

 

Inventories

 

Inventories are stated at the lower of cost (using the first-in, first-out “FIFO” method) or net realizable value. We calculate inventory valuation adjustments for excess and obsolete inventory, when appropriate, based on current inventory levels, movement, expected useful lives, and estimated future demand of the products and spare parts. Our inventory is currently comprised of cEEG strip/grid and electrode cable assembly finished good products. The strip/ grid products are produced by a third-party contract manufacturer and the electrode cable assembly products are obtained from outside suppliers.

 

There were no additional material changes to our critical accounting policies or estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended September 30, 2020.

 

Recent Accounting Pronouncements

 

Refer to Note 3 — “Summary of Significant Accounting Policies” to our condensed financial statements included in “Part 1, Item 1 – Financial Statements” in this Report for a discussion of recently issued accounting pronouncements.

 

Off Balance Sheet Arrangements

 

None.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable for smaller reporting companies.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

We designed and evaluate our disclosure controls and procedures recognizing that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance and not absolute assurance of achieving the desired control objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15(d)- 15(e) promulgated under the Exchange Act as of March 31, 2021. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2021.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

NeuroOne Medical Technologies Corporation

Form 10-Q

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The material legal proceedings in which we are involved are discussed in Note 4, “Commitments and Contingencies,” of the Notes to the Condensed Financial Statements in this Quarterly Report on Form 10-Q, and are hereby incorporated by reference.

 

Item 1A. Risk Factors

 

There have been no material changes in our risk factors previously disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2020 and the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2020. You should carefully consider the risks and uncertainties described therein.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

All unregistered issuance of securities during the period covered by this Report have been previously disclosed in the Company’s current reports on Form 8-K.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable to our Company.

 

Item 5. Other Information

 

None.

 

 

NeuroOne Medical Technologies Corporation

Form 10-Q

 

Item 6. Exhibits

 

3.1		Certificate of Incorporation of NeuroOne Medical Technologies Corporation (incorporated by reference to Exhibit 3.4 on the Registrant’s Current Report on Form 8-K filed on June, 29, 2017).
3.2		Certificate of Amendment to Amended and Restated Certificate of Incorporation of NeuroOne Medical Technologies Corporation (incorporated by reference to Exhibit 3.1 on the Registrant’s Current Report on Form 8-K filed on March 31, 2021).
3.3		Bylaws of NeuroOne Medical Technologies Corporation (incorporated by reference to Exhibit 3.5 on the Registrant’s Current Report on Form 8-K filed on June 29, 2017).
10.1+		Employment Offer Letter, dated as of January 1, 2021, by and between Ron McClurg and the Company (incorporated by reference to Exhibit 10.1 on the Registrant’s Current Report on Form 8-K filed with the SEC on January 7, 2021).
10.2		Form of Warrant (incorporated by reference to Exhibit 4.1 on the Registrant’s Current Report on Form 8-K filed with the SEC on January 15, 2021).
10.3*		Form of Common Stock and Warrant Purchase Agreement (incorporated by reference to Exhibit 10.1 on the Registrant’s Current Report on Form 8-K filed with the SEC on January 15, 2021).
Exhibit 31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1		Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2		Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 101.INS		XBRL Instance Document.
Exhibit 101.SCH		XBRL Taxonomy Extension Schema Document.
Exhibit 101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
Exhibit 101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
Exhibit 101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
Exhibit 101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

 

+

Indicates management contract or compensatory plan.

*

Schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish any omitted schedules or exhibits upon the request of the Securities and Exchange Commission. A list of the omitted schedules and exhibits to this agreement is as follows: Exhibit A: Schedule of Purchasers; Exhibit B: Form of Warrant; Exhibit C: Selling Stockholder Questionnaire; and Exhibit D: Form of Lock-Up.

 

 

NeuroOne Medical Technologies Corporation

Form 10-Q

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: May 14, 2021

 

NeuroOne Medical Technologies Corporation

 

By:	/s/ David Rosa
	David Rosa
	Chief Executive Officer
	(Principal Executive Officer)
By:	/s/ Ronald McClurg
	Ronald McClurg
	Chief Financial Officer
	(Principal Financial Officer)