Earnings Call Transcript - NMTC Q4 2021

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the NeuroOne Medical Technologies Corporation Fourth Quarter 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, James Carbonara. Sir, the floor is yours.

James Carbonara, Host

Thank you, operator, and once again, welcome to the NeuroOne Medical Technologies Corporation fourth quarter and full year fiscal 2021 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 law 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. There are 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 welcome everyone. During our fiscal fourth quarter, we continued to make great strides in both our development efforts for our therapeutic technologies as well as progress towards commercializing our second diagnostic product, the Evo sEEG Electrode product line. As a reminder from last quarter's call, we have FDA 510(k) clearance for the EVO cortical diagnostic electrode and are currently marketing the product lines through Zimmer Biomet as our exclusive distributor. Our EVO cortical electrodes are a portfolio of high-definition strip and grid, thin-film diagnostic electrodes for recording brain activity, stimulation, and monitoring for less than 30 days. Applications include identifying problematic areas of the brain during epilepsy surgery and intraoperative mapping for brain tumors. This product line represents our smallest opportunity as it relies on more invasive surgical procedures than sEEG electrode technology. I mentioned during last quarter's call that we were targeting commercialization of the sEEG electrodes by year-end, pending 510(k) clearance. We received clearance for implantation less than 24 hours from the FDA in September 2021 for similar indications as our EVO cortical product line. At that time, we decided to conduct additional testing to submit to the FDA for extended use for recording brain activity, stimulation, and monitoring for less than 30 days. I'm pleased to confirm that we submitted this application at the end of November and hope to have clearance from the FDA by the first calendar quarter of 2022. sEEG electrodes represent the bulk of diagnostic procedures performed today, due to their less invasive placement. This product is expected to be used with Zimmer's ROSA robotic platform, as it also is included in our development and distribution agreement. Zimmer Biomet has already begun to place their initial orders for the product, and our manufacturing has begun. If and when FDA clearance for less than 30 days use has been received, the company will begin to fill the orders. As a reminder, the company has the opportunity to receive additional payments from Zimmer Biomet based on meeting certain performance milestones. Moving to our ablation therapeutic electrode system, we had previously reported we were targeting the completion of animal feasibility studies in the fourth quarter with the potential to complete the project by the end of the calendar year 2022. As a reminder, the system is being designed to both record brain activity and ablate brain tissue using the same electrode. Currently, two separate hospital visits and surgeries are required to treat these patients who have seizures due to epilepsy or brain tumors that contribute to the seizures. Combining both diagnostic and therapeutic functions in one device is intended to save time and money and potentially contribute to improved patient outcomes. We also previously reported our intent to market both the electrode and radiofrequency generator to offer a complete system to our customers. I'm pleased to report that we signed a partnership agreement with RBC Medical Innovations, a recognized leader in the development and manufacturing of electromechanical therapeutic therapies to both develop and manufacture our RF generator. We also successfully completed an animal feasibility study with the assistance of Dr. Robert Gross, a neurosurgeon at Emory University in Atlanta, Georgia. We continue to make progress on the testing of our electrodes that would be used for chronic recording and/or stimulation. This would apply for indications such as mental health conditions like OCD/depression, Parkinson's disease, epilepsy, back pain due to failed back surgeries, and other potential conditions requiring permanently implanted electrodes. Our initial focus is to target the spinal cord stimulation market, which currently represents over $3 billion in the U.S. market alone. The company initiated long-term durability testing in the third fiscal quarter and expects to report on the results next quarter. We also continued work on the development of higher definition electrodes that might be useful for current applications as well as artificial intelligence. We have sent devices for testing to the Mayo Clinic and Carnegie Mellon University and look forward to providing additional updates as we receive those results. Another area of focus for the company has been the effort to generate pre- and post-market clinical data to support our technologies. In the third and fourth fiscal quarters, the company presented at the Congress of Neurological Surgeons, the Society for Neuroscience, and the American Epilepsy Society Conferences. In addition, we also successfully completed an equity financing with gross proceeds of $13.35 million after our fiscal year-end. I would now like to turn the call over to Ron for a more in-depth review of our fiscal fourth quarter and full-year financial results. Ron?

Ron Mcclurg, CFO

Thank you, Dave. Product revenue was $48,000 in the fourth quarter of fiscal 2021 and $178,000 for the full fiscal year compared to no product revenue in the prior year period. Collaboration revenue is $5,000 in the fourth quarter of fiscal 2021 and $65,000 for the full fiscal year compared to collaboration revenue of $1.9 million in the fourth quarter and full year of fiscal 2020. Collaboration revenue for the 2020 periods was derived from the Zimmer development agreement and represented the portion of the upfront initial development fee payment that was eligible for revenue recognition as of September 30th, 2020. Total operating expenses in the fourth quarter of fiscal 2021 were $2.6 million compared with $2.0 million in the same period of the prior year. R&D expenses in the fourth quarter were $1.0 million, compared with $0.8 million in the same period of fiscal 2020. SG&A expense in the fourth quarter of fiscal 2021 was $1.6 million compared with $1.3 million in the prior year period. Total operating expenses for all of fiscal 2021 were $10.2 million compared with $6.8 million in the prior year. R&D expense for all of fiscal 2021 was $3.9 million compared to $2.1 million in fiscal 2020. SG&A expense for all of fiscal 2021 was $6.3 million compared with $4.8 million in the prior year. Net loss was $2.6 million for the fourth quarter of fiscal 2021 compared to a net loss of $0.6 million in the prior year period. Net loss was $9.9 million for the full year fiscal 2021 compared to a net loss of $13.6 million in fiscal 2020. As of September 30th, 2021, the company had cash of $6.9 million compared to $4 million at September 30th, 2020. The cash balance at September 30th, 2021 does not include proceeds from an underwritten registered public offering of 4,172,000 shares of its common stock at a price of $3.20 per share, resulting in gross proceeds of approximately $13.35 million received subsequent to year-end. The company had no debt outstanding at September 30th, 2021. That concludes my remarks. I'll now pass it back to Dave. Dave?

Dave Rosa, CEO

Thanks, Ron. And looking at the past fiscal year, I want to highlight some of NeuroOne's accomplishments. The commercial launch of our first product, the EVO cortical electrode family; 510(k) clearance of our second product, the EVO sEEG electrodes for less than 24-hour use; design freeze for the sEEG product line occurred by December 15th, 2020, as required for a milestone payment under the Zimmer Biomet distribution and development deal. The appointment of Ron Mcclurg as CFO, an experienced senior financial executive, and the appointment of Hijaz Haris as Vice President of Marketing, formerly of Medtronic. Completion of a financing for gross proceeds of $12.5 million, in addition to adding prominent institutional investors. A successful NASDAQ up-listing that will help position us to generate even greater interest in the company from leading institutional investment firms across the broader national and international investment community. Partnership with RBC Medical Innovations to develop and manufacture our ablation electrode power source. Successful completion of feasibility testing of our ablation electrode facilitated by Dr. Robert Gross at Emory University. Initiation of testing for the company's chronic use electrode platform. Receipt of initial orders for EEG electrodes from Zimmer Biomet. Establishment of an Electrode Technology Development Center located in California. A completion of a public offering raising gross proceeds of $13.35 million after year-end. In closing, the company made great progress in fiscal 2021 in a wide variety of areas, including commercialization, development, and capital raises, which will allow us to continue to execute our plan with the intent to introduce meaningful advances in electrode technology for a variety of neurological applications. I want to thank you for your time and attention and operator, now, we'll open it up for any questions.

Operator, Operator

Certainly. Ladies and gentlemen, the floor is now open for questions. Your first question is coming from Alex Knopick from Craig-Hallum Capital. Your line is live.

Alex Knopick, Analyst

Great. Good morning, everyone. The resubmission of the Depth Electrode was around rerunning the biocompatibility test. Can you just walk through the test results? Did anything stand out to you, or was everything pretty much solid green light, good to go?

Dave Rosa, CEO

Everything aligned with the acceptance criteria. Alex, there was a very thorough analysis for one of the tests, specifically an extraction test that evaluates any substances found in solution over a 30-day period while the electrode is in place. The report for that analysis was approximately 140 pages long. Our biocompatibility expert, a former FDA reviewer, mentioned to me the day after Thanksgiving that he is currently working with several companies. I inquired if he noticed any weaknesses or potential risks, and he responded that among all the companies he collaborates with, yours is the only one with clean data. He's usually quite cautious and tends to underpromise while overdelivering, so I was pleased to receive that feedback from him.

Alex Knopick, Analyst

No, that's very good to hear. Maybe just on the conversations you've had now with the FDA since resubmitting the 510(k), if I remember correctly, it should be a special 510(k), so a 30-day review clock. Have you had any discussions with the FDA? I know the FDA is backlogged, so your expectation of approval in Q1 2022 makes sense. But is there any update with the FDA around that?

Dave Rosa, CEO

The FDA has informed us that they don't need any more information and that our submission was complete with everything they required. This is positive news. They also mentioned they would like to respond to us before Christmas. They seemed a bit surprised by the amount of information we provided. To give you some context, the FDA had presented us with several options for addressing the submission for less than 30 days of use. One option was to justify not conducting additional testing, but we considered that a high-risk move. Instead, we performed a couple of their recommended robust tests to ensure that the product met the biocompatibility requirements, which we felt confident about. Currently, the FDA has started their review and aims to provide feedback before Christmas. Given the backlog at the FDA, I am hopeful we will hear from them before the end of the year. However, considering the current environment, it might be more realistic to expect feedback in January. The good news is that the submission is complete, they had no further requests, and they have prioritized the review based on our communication with them.

Alex Knopick, Analyst

That's great. That's good to hear. Maybe expand on Zimmer's launch plan, once the Depth Electrode is approved. Just what has been the initial response from the neuro centers that Zimmer has already reached out to? And just given the initial stocking orders, how are you thinking about a full commercial launch here with gross one? Just anything about ordering patterns going forward?

Dave Rosa, CEO

That's a valid question. We've been pleased to see Zimmer raising their forecast ahead of the launch. As we've noted before, they are providing accessories to ensure our electrode can be utilized with the robot. Once these accessories are ready and we receive FDA clearance to ship the product, we will initiate the process. We're essentially waiting on the FDA and confirming that they have sufficient inventory and are prepared with their accessories. Regarding enthusiasm, there's a significant amount of excitement and thorough planning, particularly in contrast to the cortical launch, where we were nearly finished with the product before receiving clearance, leading to less preparation time. They are dedicating considerable resources and personnel to expedite this as much as possible. However, in these launches, I believe it's important to proceed carefully. We want to avoid a situation where we launch the product at all centers only to encounter unforeseen issues. Therefore, an initial limited launch is planned, but Zimmer is eager to scale up as soon as we can supply more product. Concerning ordering patterns, they've been somewhat inconsistent as they continue to increase the quantities, so it's uncertain how this will progress throughout this year or the next.

Alex Knopick, Analyst

Yes. Okay. And then just two more questions and just you walk through the necessary actions to get FDA approval of the ablation electrode, and then just what are the key items to watch there?

Dave Rosa, CEO

We plan to hold a pre-submission meeting with the FDA to gain further clarity on our status. As previously mentioned, we are approaching this as a 510(k) submission. There are other ablation technologies that have received 510(k) clearance, but we want to ensure that the FDA agrees with our approach. We expect to hear back from the FDA around February or March. If they are on board with our strategy, the next steps will involve completing the system development and testing. At this point, we do not anticipate needing any clinical data, but we want to confirm this with the FDA. We are treating this as a standard 510(k) submission that will allow us to add an indication for our expected 30-day diagnostic use, including the capability to perform ablation procedures with the device. It is better to wait for further clarification from the FDA, but we are confident that we have a solid strategy and are progressing in that direction.

Alex Knopick, Analyst

Yes, understood. And then just the last question, and this one's a longer-term question here. But can you work through the game plan around a chronic electrode, just how to get that ready for use and whether or not for spinal cord stimulation or deep brain stimulation? Just a little bit about the game plan there?

Dave Rosa, CEO

Yes, so, the first thing we feel we have to do is demonstrate that the electrodes will have the durability that's required to last at least five years. So, when you look at historically, the issues with thin-film technologies like ours, it's always revolved around fluid getting in between the layers of the film and shorting the circuit. Or, imagine the fact that these are a lot thinner, so there's less metal that's involved with the electrodes. And considering just pushing current through these electrodes and stimulating 24/7, whether it's in the brain or in the spine, what happens over time is the metal eventually degrades at some point and there's obviously the potential to lose the ability to stimulate in that area. So, step one is with the technology that we have, will it last? I really anticipate we'll be releasing the information in probably the February timeframe, which is when all the samples will reach a five-year time limit in terms of testing. So, that's step one. And then step two more to your question is okay, so where do you go from there? And for me, getting to the market as quickly as possible is really critical. We have an opportunity to license a pulse generator technology, which had previous clearance from the FDA for spinal cord stimulation. Assuming that the electrodes are ready, we would make some tweaks to that system, license it, make some changes, but be able to avoid all the development and testing that's required to go to the FDA. We'll still have to obviously, or we still anticipate that we'll have to have clinical data demonstrating that the device will do what we say it will do, but being able to avoid or minimize the testing required and the development time is just huge. So, that's why we're really prioritizing spinal cord stimulation. It's already generating a significant amount of revenue; it's the highest among any indication. Given that we can gain access to a pulse generator that's already been cleared by the FDA represents a huge time and cost savings for us.

Alex Knopick, Analyst

That's great. Really appreciate the update. Thank you.

Dave Rosa, CEO

Thank you.

Operator, Operator

Thank you. Your next question is coming from Ben Haynor from Alliance Global Partners. Your line is live.

Ben Haynor, Analyst

Hey, good morning, gentlemen. Can you hear me okay?

Dave Rosa, CEO

Sound great, Ben.

Ben Haynor, Analyst

Good deal. Congrats on all the progress and thanks for all that color here. I was just wondering on the Zimmer forecasts; you mentioned how they've been consistently increasing those. Is it safe to presume that that's based upon the feedback and the reception that they've got in, kind of, feeling out the market and the potential market for the product?

Dave Rosa, CEO

I can't share specific details about what Zimmer is doing, but they have clearly invested significant time in engaging with physicians to gather feedback on the electrode. We have provided them with samples, and they recently had discussions at the American Epilepsy Society Meeting earlier this month. In summary, there is notable enthusiasm in the community and confidence that the product will be effective, accepted, and desired by neurosurgeons. We still need to launch the product and encourage its use, which is why we are starting with a limited launch. However, the initial feedback has been very positive and encouraging.

Ben Haynor, Analyst

Okay, great. That's helpful. Do you have an estimate on when the accessories from Zimmer will be ready? While you can only manage your own side, given the increasing forecasts, how prepared are you to ramp up manufacturing?

Dave Rosa, CEO

We are increasing our orders with our vendors. However, similar to any product launch, especially for a new product, we can't immediately produce high volumes right from the start. It's important to ensure that the manufacturing process is running smoothly and to gain confidence before ramping up production. We are urging our vendors to produce at levels we've never asked for before. Since we expect to be commercially ready by Q1, they have some time to start building inventory ahead of the actual launch. Our vendors are confident in their ability to manufacture the product, but it will depend on the quantities and how quickly they can meet Zimmer's requirements. Currently, we believe we can satisfy their annual requirements throughout 2022, starting slowly and increasing over time. That’s our plan for now, and so far, everything is on track. COVID is certainly having an impact. Interestingly, for the past two years, we did not face any issues, but now companies are increasing their orders with our suppliers, which could potentially slow things down. However, we have proactively prepared for this. The main unknown factor is how COVID might affect the situation if circumstances don't change. I'm somewhat surprised it took two years to feel any impact.

Ben Haynor, Analyst

The color there is helpful. Regarding the clinical data, is there anything we should look out for? I know there have been recent presentations and publications. Do you have a strategy in place for the ablation electrode concerning publications or clinical data that you plan to share?

Dave Rosa, CEO

Yes, I believe there are still opportunities for us to explore in the diagnostic area, particularly with cortical electrodes. There are procedures related to traumatic brain injury where neurosurgeons would greatly benefit from the ability to insert an electrode. While they currently perform these procedures, the lack of a thin-film electrode means they can't make a very small incision for insertion. Therefore, we are considering conducting a small post-market study to demonstrate the capability of using our existing strip electrodes for this purpose. The formation of the Ablation Advisory Board, which includes neurosurgeons, aims to leverage their expertise as we approach the final stages, specifically to help us develop post-market data. We will have data from animal studies, but ultimately, I prioritize obtaining human data. These centers will assist us in generating the necessary clinical data.

Ben Haynor, Analyst

Okay, great. Well, that's all I had gentlemen. Thanks for taking the questions.

Dave Rosa, CEO

All right, guys. Any other questions?

Operator, Operator

Thank you. There are no further questions in the queue. Thank you everyone for joining today's call. You may now disconnect your lines.

Dave Rosa, CEO

Thanks very much.