Earnings Call Transcript - NMTC Q1 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the NeuroOne Medical Technologies Corporation First Quarter of Fiscal 2022 Earnings Conference Call. Today's call will be conducted by the company’s Chief Executive Officer, Dave Rosa; and its Chief Financial Officer, Ron Mcclurg. Before I turn the call over to Mr. Rosa, I’d like to remind you that this conference call will include forward-looking statements within the meaning of U.S. Federal Securities laws with respect to future operations, financial results, events, trends, and performance, which are based on management's beliefs and assumptions as of today's call or other specified date. Forward-looking statements may involve known and unknown risks, uncertainties, and other factors, which may cause actual results to differ materially from those expressed or implied by such statements. See our earnings release and SEC filings for information regarding specific risks and uncertainties that could cause actual results to differ. Except as required by law, we undertake no obligation to update such forward-looking statements. With that said, I'll turn the call over to Dave Rosa, CEO of NeuroOne. Dave?

Dave Rosa, CEO

Thanks operator and good afternoon to everyone. During and since the first quarter, we continue to make progress in advancing our Thin Film Electrode Platform Technology with respect to both the diagnostic and therapeutic applications. I'll start first with diagnostic applications. As you may recall, in September 2021, our EVO sEEG Depth Electrodes received FDA clearance for use up to 24 hours. In fiscal Q1, we submitted to the FDA a request for clearance of the device for temporary use, that is less than 30 days use, with recording, monitoring, and stimulation equipment for the recording, monitoring, and stimulation of electrical signals of the subsurface level of the brain. We submitted responses to questions from the FDA regarding our submission on February 9, 2022, and the FDA acknowledged receipt of our response on February 10, 2022. If and when FDA clearance for less than 30 day use is received, the company will begin to fulfill stocking orders that have already been placed by Zimmer Biomet, our distribution partner for the EVO family product line. As a reminder, the company may have the opportunity to receive additional milestone payments from Zimmer Biomet. In addition, we displayed our EVO cortical electrode product line in Zimmer Biomet's booth at the American Epilepsy Society meeting in December of 2021. We also presented a poster at the meeting titled 'First FDA-cleared thin film electrode for intracranial recording and monitoring of brain activity, device testing, and initial clinical use.' Shifting to our combined diagnostic and therapeutic ablation electrodes, we've continued to make progress on this program. And as a reminder, this system is expected to save time and money and is intended to improve patient outcomes by combining both the diagnostic and therapeutic applications into one device, ideally one hospitalization, improving the way epilepsy and potentially other neurological conditions are treated today. In addition to providing resources to the program, we continue to work closely with our hardware development partner RBC Medical Innovations towards the completion of prototypes of the RF generator, which we expect in calendar Q3 of this year. Following the completion of the RF generator prototypes, we expect to submit a 510(k) application for FDA clearance in the first calendar quarter of 2023. Now, moving to our chronic use electrode development. During and since fiscal Q1, we continued to make progress with the development of this technology. Most recently, we announced the successful completion of accelerated five-year testing, which demonstrated reliable recording without any issues associated with fluid pervasion. This could potentially expand utilization of these electrodes to long-term recording for patients suffering from Parkinson's disease, epilepsy, chronic back pain due to failed back surgeries, as well as the research markets. We expect to release the results of our accelerated five years stimulation testing later this quarter. Our initial focus with our chronic stimulation program is to target the spinal cord stimulation market, which currently represents over $3 billion in the U.S. market alone. We also bolstered our management team in January of 2022 with the appointment of Chad Wilhelmy as Vice President of Quality Control and Regulatory Affairs. Mr. Wilhelmy joins NeuroOne from HLT Medical, a subsidiary of the Bracco Group, where he was Vice President of Quality Assurance. Chad's appointment further strengthens our executive leadership team and deepens our capabilities as we build the platform for future growth and expansion. On the financial side, we also successfully completed an equity financing during fiscal Q1, with gross proceeds of $13.35 million, which Ron Mcclurg will touch on as well. In closing, the company made great progress in fiscal Q1 in a wide variety of areas, including commercialization, development, and raising capital, which will allow us to continue to execute our plan to introduce meaningful advances in thin film electrode technology for a variety of neurological applications. Thank you for your time and attention. I would now like to turn the call over to Ron Mcclurg for a more in-depth review of our fiscal first quarter financial results.

Ron Mcclurg, CFO

Thank you, Dave. Product revenue for the first quarter of fiscal 2022 was $34,000 compared to product revenue of $71,000 in the first quarter of fiscal 2021. Collaboration revenue was $6,000 in the first quarter of fiscal '22, compared to collaboration revenue of $22,000 in the first quarter of fiscal '21. Collaboration revenue was derived from our Zimmer Development Agreement and represented the portion of the upfront initial development fee payment that was eligible for revenue recognition as of December 31, 2021. Our total operating expenses in the first quarter of fiscal 2022 were $2.8 million, compared to approximately $2.1 million in the same period of the prior year. R&D expense in the first quarter was $1.1 million, compared with approximately $0.9 million in the same period of 2021. SG&A expense in the first quarter fiscal 2022 was $1.7 million, compared with $1.2 million in the prior year period. Our net loss for the first quarter of fiscal '22 was $2.8 million, or $0.18 per share, compared to a net loss of $2 million, or $0.26 per share in the first quarter of fiscal 2021. As of December 31, 2021, the company had cash of approximately $16.2 million, compared to $6.9 million at September 30, 2021. The cash balance at December 31, 2021 includes proceeds from an underwritten registered public offering of 4,172,000 shares of common stock at a price of $3.20 a share, resulting in gross proceeds of approximately $13.35 million. The company had no debt outstanding at December 31, 2021. That concludes my remarks, and I'll now pass it back to the Operator to open up the call for Q&A.

Alex Knopick, Analyst

Dave, I was hoping you could expand on the questions that came back to you from the FDA on the depth electrode, what were the nature of these questions?

Dave Rosa, CEO

Yeah, Alex. So really, there were a few things. One was just some basic questions about the compounds that were found and if we knew where they were coming from, so they wanted us to elaborate more on that, which we did. And then the others were just a little bit on explaining more of the results. They acknowledged in the letter that we followed the methodology that they had recommended. But they just had some basic questions just on some of the results. And again, we've said this before, but we passed the testing, per what the FDA regulations require. But they just wanted a little bit more clarity on that. And then there were just some basic questions about labeling. But the questions on the compounds and methodology were really it.

Alex Knopick, Analyst

I understand you’ve discussed this previously, and you mentioned it again, but regarding the bio-comp aspect, you seem quite confident about the materials discovered. There are no uncertainties about proceeding with the project, just a need for some clarification from their side?

Dave Rosa, CEO

Well, keep in mind, the only thing that the FDA is reviewing is the results of the biocompatibility testing. So there's nothing outside of these two tests that they were reviewing. And yes, we firmly believe and our consultants that actually put the analysis together agreed that we all fall within the required guidelines as it pertains to results for these testings. So am I confident? Yes. We just got to wait for the FDA to come back. And if they have any additional clarifications, hopefully, we'll find that out in the next couple of weeks and get this done.

Alex Knopick, Analyst

I was just going to say on that point, given your experience in other medical devices, and these rounds of question, do you think another back and forth is going to be needed with the FDA?

Dave Rosa, CEO

I think it's difficult to answer because I'm basing this on a partial submission. This submission only involves two tests, and there weren't many questions—just a few. Typically, there's some back and forth, but if the FDA has questions, they would likely reach out to us directly, probably via a phone call instead of through emails. So, I believe the next step will be quicker than before due to this more interactive process.

Alex Knopick, Analyst

Any updates on how Zimmer is preparing for more commercialization once this is approved? Specifically, updates on the FDA's own drill bit submission and education with representatives in the epilepsy centers?

Dave Rosa, CEO

So I'll handle the education piece first. We actually have a meeting later this month with them to go over all the details for this. So those plans, they have been actively planning for the limited release of the product. We haven't started the official training yet, so we're waiting for a little more direction from them. But again, when you go back and look at the fact that they have placed orders, already multiple orders, this is not something that I think they wanted to lay too long. We don't, or I should say, in our discussions with them, they've indicated they have not yet heard back from the FDA. So there's not much more I can give you on that. But hopefully, in the next week or so, I'm assuming that they should also expect to hear back from the FDA on that.

Alex Knopick, Analyst

And then it looks like you're pretty confident on the ablation electrode in that 510(k). Just what's the chance that that could morph into a PMA as you move forward here. And then on the submission timelines for the 510(k), I would assume that incorporates all the need to generate bench data in animal studies, just how concrete are those submission timelines that you put out today?

Dave Rosa, CEO

I will address your first question about our level of confidence. The initial analysis from our regulatory consultant suggested strong confidence that this would be classified as a 510(k). Additionally, about 30 days ago, we consulted with a second external organization, experienced in this area, which also recommended submitting this as a 510(k), stating it was quite straightforward. While I don’t consider myself an FDA expert, I trust consulting firms that have successfully navigated this process before. We have identified clear predicate devices that utilize RF ablation of brain tissue. I share the confidence of my consultants, and their recommendations are structured such that it may actually yield them less revenue than a more complicated route. Regarding the testing and submission, yes, the necessary tests are factored in. We still believe that Q1 is the suitable timeline. We need to receive the generator from RBC and conduct testing on it, as all our prior tests were performed with competitive generators. Despite some ongoing challenges with COVID and supply chains, everyone remains optimistic about meeting that timeline.

Alex Knopick, Analyst

And actually, on that point, is any of the design and development work that you need to do? Is that solely on the RF generator? Or is there any more work that needs to be done the actual electrode itself?

Dave Rosa, CEO

There's work that needs to be done on some of the accessories that would be used with the electrode. But the majority of the real work is the generator. There's still some additional testing that we'll be doing with the electrodes but most of what we're working on now is outside of the electrode, its accessories, and hardware.

Alex Knopick, Analyst

And then just last question from me just maybe expand on the next steps here with the chronic use electrode, just how did it turn out from the accelerated aging data we have here and for commercialized products?

Dave Rosa, CEO

Yeah, so that's obviously a longer timeline. What I think really opens the door for us in terms of therapeutic applications is the set of data that we'll be releasing next, which is stimulation. It's a little bit harder to predict how much time it's going to take to what I'll say, perfect the manufacturing process, because there's still a fair amount of time associated with that. It's not something that you should expect to see in the next 12, up to 24 months in terms of a commercial product. We have some ideas about how to enter that market more quickly by partnering with a company that has an already approved pulse generator for chronic stimulation. So that should really help with the timeline in terms of having to redo some of the testing that we would have initially had to do if we designed it ourselves. So we think we can take some time, but I think probably the bigger question is going to be, how long is it going to take us to perfect the manufacturing process so that we can manufacture these in high volume with high yields. And we don't have the answer to that. But I'm hoping that at our next call, we have better clarity on that.

Operator, Operator

The next question is coming from Ben Haynor from Alliance Global Partners.

Ben Haynor, Analyst

To start, I want to follow up on our previous discussion. You mentioned in a recent press release that you're entering the research market, and you briefly touched on the strategic licensing angle. Could you provide more details about what the research market could look like? Additionally, have you had any conversations with strategic partners regarding upfront chronic use?

Dave Rosa, CEO

Yes, Ben. Regarding the size of the research market, we don't have a precise estimate yet, but based on my five years with the company, I can say that the research market has been a recurring topic. Each time we release information, similar to our recent announcement about recording capabilities with electrodes over five years, we frequently receive inquiries like, 'Can you create an electrode for research purposes?' There are companies that exclusively offer devices for research. While I can't specify if that market is worth $50 million or $20 million, I believe, based on insights from companies in this sector, it could range between $10 million and $20 million, which I find significant in terms of recording capabilities. Additionally, we are currently working on a project with a local institution that is not finalized yet, but we are likely to embark on research related to an indication we haven't explored, using these electrodes for research purposes. We are actively seeking any published information about the market size. Regarding strategic discussions, I mentioned three years ago, even before we were listed on NASDAQ, that we had talks with strategics. Typically, their feedback has been positive, but they want to see data confirming that the electrodes can perform for chronic applications. In short, I believe these discussions will pick up or re-emerge once we release the results from our chronic testing, which we expect to happen this quarter.

Ben Haynor, Analyst

Regarding the R&D front, I believe we have developed some devices for high definition electrodes, possibly in collaboration with Mayo and Carnegie Mellon. Do you have any feedback on that or an update on the high definition electric front?

Dave Rosa, CEO

Yeah, so the Mayo did use them. They implanted them in pigs. Unfortunately, the pigs caught infections, and they wound up dying before the timeframe expired that we were looking to test that. So we don't have that raw data yet, although the Mayo has said that they are going to analyze it and send it to us. But I'd really like to rerun some of those tests so that – we’re not taking these out only a week, that we're really pushing these for 30, 60, 90 days. The problem is preventing these animals from getting an infection because keep in mind, these are all open wounds. It's not like the electrodes and the hardware implanted in the animal. So that's been challenging for them to manage. And we have not heard back yet from Carnegie Mellon.

Ben Haynor, Analyst

And then I guess lastly for me, you were in the Zimmer Biomet booth at the American Epilepsy Society meeting here, what was the feedback on the cortical electrodes at the meeting?

Dave Rosa, CEO

So are you talking about from physicians or from the Zimmer sales force?

Ben Haynor, Analyst

Well, I guess both.

Dave Rosa, CEO

I realize that my previous question might have been misguided. The physicians who visited our booth were clearly interested. The first thing that stood out to them was the thin and flexible nature of the film, which is different from what they have used before. The feedback we received from the Zimmer sales team indicates that hospitals prefer to carry electrodes from a single manufacturer rather than mixing brands. Until we launch the sEEG electrode and receive FDA clearance, the cortical electrodes remain more of a special order item due to low volume. However, the doctors recognize its value. When they learn about the brain-friendly characteristics of the device, which appears to cause less inflammation than traditional electrodes, their interest grows even more. I can confidently say that there is considerable excitement from both the Zimmer sales team and the neurosurgeons regarding the sEEG electrodes. On one hand, it will enable us to have our products available on the hospital shelves instead of being special order items. On the other hand, this is where the volume lies in diagnostics, leading to significant enthusiasm on both counts for getting the product out there.

Operator, Operator

We have no further questions in queue. Okay. Looks like Dave Rosa’s line has dropped. Ron, are you there?

Ron Mcclurg, CFO

I am. If there's no further questions we'll turn it back over to you. We thank everybody for the time this afternoon.

Operator, Operator

Thank you. Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.