NEUROONE MEDICAL TECHNOLOGIES Corp 10-Q for FY2021 Q3
NEUROONE MEDICAL TECHNOLOGIES Corp (NMTC)
About this 10-Q
NEUROONE MEDICAL TECHNOLOGIES Corp filed this 10-Q on August 13, 2021, covering the quarter ended June 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $40.1K
- Net loss
- $2.95M
- compared with a net loss of $7.09M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form
(Mark One)
For
the Quarterly Period Ended
OR
For the transition period from ________ to ________
Commission
File Number:
(Exact name of Registrant as specified in its charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |
| (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 | ||
| The |
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.
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).
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 | ☐ | ☒ | |
| 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 August 12, 2021 was
NEUROONE MEDICAL TECHNOLOGIES CORPORATION
FORM 10-Q
INDEX
i
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
NeuroOne Medical Technologies Corporation
Condensed Balance Sheets
| As
of June 30, 2021 | As
of September 30, 2020 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | — | |||||||
| Inventory | — | |||||||
| Prepaid and other assets | ||||||||
| Total current assets | ||||||||
| Intangible assets, net | ||||||||
| Right-of-use asset | ||||||||
| Property and equipment, net | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Convertible promissory notes (Note 8) | ||||||||
| Deferred revenue | ||||||||
| Total current liabilities | ||||||||
| Operating lease liability | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 4) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid–in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to condensed financial statements
1
NeuroOne Medical Technologies Corporation
Condensed Statements of Operations
(unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Product revenue | $ | $ | $ | $ | ||||||||||||
| Cost of product revenue | ||||||||||||||||
| Product gross loss | ( | ) | ( | ) | ||||||||||||
| Collaborations revenue | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Net valuation change of instruments measured at fair value | ||||||||||||||||
| Loss on note extinguishment | ( | ) | ( | ) | ||||||||||||
| Other income | ||||||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share: | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Number of shares used in per share calculations: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
See accompanying notes to condensed financial statements
2
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 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Issuance of common stock under securities purchase agreement | — | |||||||||||||||||||
| Issuance of warrants in connection with convertible notes offering | — | — | — | |||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||
| Issuance of common stock for consulting services | — | |||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | ( | ) | — | — | ||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||
| Balance at December 31, 2019 | ( | ) | ( | ) | ||||||||||||||||
| Conversion of convertible notes into common stock | — | |||||||||||||||||||
| Exercise of stock options | — | |||||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||
| Issuance of common stock for consulting services | — | |||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | — | |||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||
| Balance at March 31, 2020 | $ | ( | ) | ( | ) | |||||||||||||||
| Conversion of convertible notes into common stock | — | |||||||||||||||||||
| Issuance of broker warrants in connection with convertible notes offering | — | — | — | |||||||||||||||||
| Issuance costs in connection with conversion of convertible notes into common stock | — | — | ( | ) | — | ( | ) | |||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||
| Issuance of common stock for consulting services | — | |||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | — | |||||||||||||||||||
| Exercise of stock options | — | |||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Issuance of common stock upon conversion of convertible notes | — | |||||||||||||||||||
| Issuance cost settlement in connection with private placement | — | — | — | |||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | ( | ) | — | — | ||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||
| Balance at December 31, 2020 | ( | ) | ||||||||||||||||||
| Issuance of common stock in connection with private placement | — | |||||||||||||||||||
| Issuance of warrants stock in connection with private placement | — | — | — | |||||||||||||||||
| Issuance costs in connection with private placement | — | — | ( | ) | — | ( | ) | |||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||
| Exercise of warrants | — | |||||||||||||||||||
| Exercise of stock options | — | |||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | ( | ) | — | — | ||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||
| Balance at March 31, 2021 | ( | ) | ||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | ( | ) | — | — | ||||||||||||||||
| Exercise of stock options | — | |||||||||||||||||||
| Exercise of stock warrants | — | |||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See accompanying notes to condensed financial statements
3
NeuroOne Medical Technologies Corporation
Condensed Statements of Cash Flows
(unaudited)
| For
the nine months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization and depreciation | ||||||||
| Stock-based compensation | ||||||||
| Non-cash interest on convertible notes | — | |||||||
| Issuance costs attributed to financing activities | ||||||||
| Fair value change of convertible notes | ( | ) | ( | ) | ||||
| Loss on note extinguishment | — | |||||||
| Non-cash lease expense | ||||||||
| Payroll protection program loan forgiveness | ( | ) | — | |||||
| Change in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | — | |||||
| Inventory | ( | ) | — | |||||
| Prepaid and other assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued expenses, deferred revenue, operating lease and other liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities | ||||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Proceeds from issuance of convertible promissory notes | — | |||||||
| Issuance costs related to convertible notes | ( | ) | ( | ) | ||||
| Proceeds from issuance of common stock in connection with private placements | ||||||||
| Proceeds from issuance of warrants in connection with private placement | — | |||||||
| Exercise of warrants | — | |||||||
| Exercise of stock options | ||||||||
| Proceeds from paycheck protection program | — | |||||||
| Issuance costs related to private placements | ( | ) | ( | ) | ||||
| Deferred offering costs | ( | ) | — | |||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash | ||||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental non-cash financing and investing transactions: | ||||||||
| Conversion of convertible notes into equity | $ | $ | ||||||
| Unpaid issuance costs and non-cash adjustments attributed to convertible notes and private placement | $ | $ | ||||||
| Broker warrants issued in connection with convertible notes | $ | — | $ | |||||
| Operating lease right of use asset obtained in exchange for operating lease | $ | — | $ | |||||
See accompanying notes to condensed financial statements
4
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’s common stock commenced trading on The Nasdaq Capital Market on May 26, 2021 under the ticker symbol “NMTC.” Previously, the Company’s common stock was traded on the OTC Markets quotation system on the OTCQB.
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.
As a result of the COVID-19 pandemic, the Company has experienced, and will likely continue to experience, delays and disruptions in
its pre-clinical and clinical trials, as well as interruptions in its manufacturing, supply chain, shipping, and research and development
operations. 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 $
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.
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.
5
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 – Going Concern
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 an accumulated deficit of $
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.
6
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.
7
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 June 30, 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.
8
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
There were no transfers between fair value hierarchy levels during the three and nine months ended June 30, 2021 and 2020.
The fair value of financial instruments measured on a recurring basis is as follows:
| As of June 30, 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 | $ | $ | $ | $ | ||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | ||||||||||||
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 nine months ended June 30 as follows:
| 2021 | ||||
| Convertible notes | ||||
| Balance as of beginning of period – September 30, 2020 | $ | |||
| Change in fair value including accrued interest | ( | ) | ||
| Conversion of convertible promissory notes to common stock | ( | ) | ||
| Balance as of end of period – June 30, 2021 | $ | |||
| 2020 | ||||
| Convertible notes | ||||
| Balance as of beginning of period – September 30, 2019 | $ | |||
| Fair value attributed to convertible promissory notes upon issuance | ||||
| Fair value attributed to note extinguishment | ||||
| Conversion of convertible promissory notes to common stock | ( | ) | ||
| Change in fair value including accrued interest | ( | ) | ||
| Balance as of end of period –June 30, 2020 | $ | |||
Intellectual Property
The
Company has entered into
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
9
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
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.
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.
10
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
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 nine months ended June 30, 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 nine months ended June 30, 2021 and 2020:
| 2021 | 2020 | |||||||
| Warrants | ||||||||
| Stock options | ||||||||
| Restricted stock units | ||||||||
| Convertible notes | ||||||||
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. |
11
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
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.
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 $
12
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
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
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.
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.
13
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
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 against PMT. 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 with respect to its conduct pertaining to the Fredrickson noncompete. On October 12, 2020 the Court awarded NeuroOne $
On May 27, 2021 PMT moved for summary judgment on defendants’ claims for abuse of process and punitive damages, and on August 5, 2021, the district court granted PMT’s motion to dismiss the abuse of process and punitive damage claims asserted by the defendants.
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.
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.
14
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
During
the three and nine months ended June 30, 2021, rent expense associated with the facility leases amounted to $
Supplemental cash flow information related to the operating lease was as follows:
| For
the nine months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liability: | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||
| Operating leases | $ | $ | ||||||
Supplemental balance sheet information related to the operating lease was as follows:
| As
of June 30, 2021 | As
of September 30, 2020 | |||||||
| Right-of-use assets | $ | $ | ||||||
| Lease liability | $ | $ | ||||||
| Weighted average remaining lease term (years) | ||||||||
| Weighted average discount rate | % | % | ||||||
Maturity of the lease liability was as follows:
| As
of June 30, 2021 | ||||
| 2021 (period from July 1, 2021 to September 30, 2021) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total | ||||
| Short-term portion | ( | ) | ||
| Long-term portion | $ | |||
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 $
15
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
NOTE 5 – Prepaid and Other Assets, Intangibles and Property and Equipment
Prepaid and Other Assets
Prepaid and other assets consisted of the following at June 30, 2021 and September 30, 2020:
| As
of June 30, 2021 |
As
of September 30, 2020 |
|||||||
| Prepaid expenses | $ | $ | ||||||
| Deferred offering costs | — | |||||||
| Other | ||||||||
| Total | $ | $ | ||||||
Intangibles
Intangible assets rollforward is as follows:
| Useful Life | ||||||
| Net Intangibles, September 30, 2020 | $ | |||||
| Less: amortization | ( | ) | ||||
| Net Intangibles, June 30, 2021 | $ | |||||
Amortization
expense was $
Property and Equipment
Property and equipment held for use by category are presented in the following table:
| As
of June 30, 2021 |
As
of September 30, 2020 |
|||||||
| Equipment and furniture | $ | $ | ||||||
| Software | ||||||||
| Total property and equipment | ||||||||
| Less accumulated depreciation | ( |
) | ( |
) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense was $
NOTE 6 – Accrued Expenses and Other Liabilities
Accrued expenses consisted of the following at June 30, 2021 and September 30, 2020:
| As
of June 30, 2021 | As
of September 30, 2020 | |||||||
| Accrued payroll | $ | $ | ||||||
| Operating lease liability, short term | ||||||||
| Royalty payments | ||||||||
| Accrued issuance costs | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
The “other” category is primarily comprised of board fees.
16
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”).
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 $
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 - $ |
| ● | Acceptance of all Deliverables for SEEG Products under the Development Plan (as defined in the Development Agreement) by April 30, 2021 - $ |
17
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
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 - $ |
| ● | Acceptance of all Deliverables for SEEG Products under the Development Plan, including the Modified Connector by September 30, 2021 - $ |
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 $ |
| ● | if the Product Availability Date for the SEEG Products occurs after June 30, 2021, but on or before September 30, 2021, then $ |
| ● | if the Product Availability Date for the SEEG Products occurs after September 30, 2021, but on or before December 31, 2021, then $ |
| ● | if the Product Availability Date for the SEEG Products occurs after December 31, 2021, then $ |
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 June 30, 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 $
18
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
A reconciliation of the closing balance of deferred revenue related to the Zimmer Development Agreement is as follows as of June 30, 2021:
| Deferred Revenue | ||||
| Balance as of beginning of period – September 30, 2020 | $ | |||
| Revenue recognized | ( | ) | ||
| Balance as of end of period – June 30, 2021 | $ | |||
The remaining performance obligations reflected in deferred revenue as of June 30, 2021 are expected to be completed in the fourth quarter of fiscal year 2021.
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 nine month periods ended June 30, 2021 was $
Advertising Expense
Advertising
expense is charged to selling, general and administrative expenses during the period that it is incurred. Total advertising expense amounted
to $
NOTE 8 – Convertible Promissory Notes and Warrant Agreements
| As
of June 30, 2021 | As
of September 30, 2020 | |||||||
| Paulson convertible notes, principal | $ | $ | ||||||
| Accrued interest | ||||||||
| Fair value adjustments | ||||||||
| $ | $ | |||||||
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
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 $
19
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
The
2019 Paulson Notes had a fixed interest rate of
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 $
Issuance
costs during the nine month period ended June 30, 2021 in connection with the 2019 Paulson Private Placement were $
20
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
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. |
| ii. |
| iii. |
The
Second 2019 Paulson Notes Amendment was accounted for as a note extinguishment for accounting purposes given the substantive change in
the optional redemption feature’s conversion formula. The fair value change in the 2019 Paulson Notes associated with the extinguishment
was recorded as a loss on notes extinguishment in the accompanying condensed statements of operations in the amount of $
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.
Paulson 2020 Convertible Note Financing
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
Between
May 1, 2020 and June 30, 2020, the Company issued 2020 Paulson Notes in an aggregate principal amount of $
The
2020 Paulson Notes bear interest at a fixed rate of
If the Company had raised more than $5,000,000 in an equity financing before the maturity date (the “2020 Qualified Financing”), without any action on the part of the Subscribers, all of the outstanding principal and accrued and unpaid interest of the Notes (the “Outstanding Balance”) would have been converted into that number of shares of the securities issued by the Company in the closing on the date a 2020 Qualified Financing occurred equal to: (i) the Outstanding Balance divided by (ii) the lower of 0.6 multiplied by (A) the actual per share price of the securities issued by the Company in the closing on the date a 2020 Qualified Financing occurred and (B) the volume weighted average price of the common stock for ten (10) trading days immediately preceding the 2020 Qualified Financing.
21
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
If
the Company had announced a transaction between the Company and any other company (or an affiliate of any such company) that was included
in the S&P 500 Health Care Index as published from time to time by S&P Dow Jones Indices LLC that included an investment or upfront
payments resulting in gross proceeds to the Company of at least $
At any time, at the sole election of the holder of such 2020 Paulson Note, all or a portion of the Outstanding Balance could have been converted into that number of shares of common stock equal to: (i) the Outstanding Balance elected by the holder to be converted divided by (ii) 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.
If a change of control transaction had occurred prior to the conversion of the 2020 Paulson Notes or the maturity date, the 2020 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 2020 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 2020 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 redemption provisions. The excess of fair value over proceeds at issuance amounted to $
Each
2020 Paulson Warrant grants 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 2020 Paulson Notes divided by 5.61, with an exercise price per share equal to $
In
connection with the 2020 Paulson Private Placement, Paulson received a cash commission equal to
22
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
Between May 4, 2020 and June 30, 2020, certain Subscribers elected to convert $1,870,352 of the outstanding principal and interest of such Subscribers’ 2020 Paulson Notes into 678,122 shares of common stock (41,305 shares of common stock were not formally issued until July 2020). In July 2020, the balance of the 2020 Paulson Notes were converted into common stock upon the announcement of the Zimmer Development Agreement that qualified as a Strategic Transaction.
NOTE 9 – Stock-Based Compensation
During the three and nine month periods ended June 30, 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 | Nine Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| General and administrative | $ | $ | $ | $ | ||||||||||||
| Research and development | ||||||||||||||||
| Total stock-based compensation | $ | $ | $ | $ | ||||||||||||
Stock Options
During
the three month periods ended June 30, 2021 and 2020, under the 2017 Equity Incentive Plan (the “2017 Plan”), the Company
granted
The
total expense for the three months ended June 30, 2021 and 2020 related to stock options was $
The weighted-average assumptions used in the Black-Scholes option-pricing model are as follows for the stock options granted during the three and nine month periods ended June 30, 2021 and 2020:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Expected stock price volatility | % | % | % | % | ||||||||||||
| Expected life of options (years) | ||||||||||||||||
| Expected dividend yield | % | % | % | % | ||||||||||||
| Risk free interest rate | % | % | % | % | ||||||||||||
During
the three month periods ended June 30, 2021 and 2020,
23
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
Restricted Stock Units
During
the three and nine month periods ended June 30, 2021,
Other Stock-Based Awards
In
April 2021, two consulting agreements were executed whereby a total of
In
August 2020, an additional consulting agreement was executed whereby
In
October 2019, two consulting agreements were executed whereby up to
In
February 2020, an additional consulting agreement was executed whereby up to
Compensation
expense related to the stock awards granted under the consulting agreements and to the former 2019 Paulson Note holder referenced above
amounted to $
General
2017 Plan Evergreen Provision
Under
the 2017 Plan,
As
of June 30, 2021,
24
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
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 June 30, 2021, the Company had $
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.
NOTE 11 – Income Taxes
The
effective tax rate for the three and nine months ended June 30, 2021 and 2020 was
NOTE 12 – Stockholders’ Equity
2021 Shelf Registration
On
June 4, 2021, NeuroOne filed a Form S-3 shelf registration statement under the Securities Act, which was declared effective by the SEC
on June 14, 2021 (the “2021 Shelf”) under which the Company may offer and sell, from time to time in its sole discretion,
securities having an aggregate offering price of up to $
25
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements
(unaudited)
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
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
Warrant Activity and Summary
The following table summarizes warrant activity during the nine month period ended June 30, 2021:
| Warrants | Exercise Price Per Warrant | Weighted Average Exercise Price | Weighted Average Term (years) | |||||||||||||
| Outstanding and exercisable at September 30, 2020 | $ | $ | ||||||||||||||
| Issued | $ | $ | ||||||||||||||
| Exercised | ( | ) | $ | $ | ||||||||||||
| Forfeited | $ | $ | ||||||||||||||
| Outstanding and exercisable at June 30, 2021 | $ | $ | ||||||||||||||
NOTE 13 – Subsequent Events
Facility Lease
On
July 1, 2021, the Company entered into a non-cancellable facility lease (the “New Lease”), pursuant to which the Company
agreed to rent office space for its research and development operations located at 718 University Avenue, Suite #111, Los Gatos, California.
The term of the New Lease is eighteen months. The facility space under the New Lease is approximately 1,162 square feet. The Company
took possession of the office space on July 2, 2021. The initial monthly rent under the New Lease is approximately $
26
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 June 30, 2021, we had an accumulated deficit of $38.2 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 June 30, 2021, we had $9.0 million in cash deposits. Our existing cash and cash equivalents is not sufficient to fund our operating expenses through at least twelve months from the date of this filing. We will 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.
Recent Developments
Change of Independent Registered Public Accounting Firm for Fiscal 2021
On June 18, 2021, the Audit Committee (the “Audit Committee”) of the Board of the Company (i) engaged Baker Tilly US, LLP (“Baker Tilly”) to serve as the Company’s independent registered public accounting firm for the Company’s fiscal year ending September 30, 2021, and (ii) determined to dismiss BDO USA, LLP (“BDO”), the Company’s independent registered public accounting firm for the year ending September 30, 2020 and the quarters ending December 31, 2020 and March 31, 2021.
27
NeuroOne Medical Technologies Corporation
Form 10-Q
2021 Shelf Registration
On June 4, 2021, NeuroOne filed a Form S-3 shelf registration statement under the Securities Act, which was declared effective by the SEC on June 14, 2021 (the “2021 Shelf”) under which the Company may offer and sell, from time to time in its sole discretion, securities having an aggregate offering price of up to $150 million.
Nasdaq Capital Market
The Company’s common stock commenced trading on The Nasdaq Capital Market on May 26, 2021 under the ticker symbol “NMTC.” Previously, the Company’s common stock was traded on the OTC Markets quotation system on the OTCQB.
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. As a result of the COVID-19 pandemic, the Company has experienced, and will likely continue to experience, 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, which was forgiven by the U.S. Small Busing Administration on June 9, 2021.
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. 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 three and nine months ended June 30, 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.
28
NeuroOne Medical Technologies Corporation
Form 10-Q
Product Gross Loss
Product gross 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 and 2020 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 and 2020 Paulson Notes.
Loss on notes extinguishment
Loss on note extinguishment includes the loss associated with debt instrument modifications and conversions accounted for as debt extinguishments.
Other Income
Consists of proceeds outside of normal operating activity relating to legal settlements and to the forgiveness of the paycheck protection program loan.
29
NeuroOne Medical Technologies Corporation
Form 10-Q
Results of Operations
Comparison of the Three Months Ended June 30, 2021 and 2020
The following table sets forth the results of operations for the three-months ended June 30, 2021 and 2020, respectively.
| For
the three months ended June 30, (unaudited) | ||||||||||||
| 2021 | 2020 | Period
to Period Change | ||||||||||
| Product revenue | $ | 40,096 | $ | — | $ | 40,096 | ||||||
| Cost of product revenue | 61,935 | — | 61,935 | |||||||||
| Product gross loss | (21,839 | ) | — | (21,839 | ) | |||||||
| Collaborations revenue | 17,451 | — | 17,451 | |||||||||
| Operating expenses: | ||||||||||||
| Selling, general and administrative | 2,129,474 | 1,146,339 | 983,135 | |||||||||
| Research and development | 901,134 | 447,154 | 453,980 | |||||||||
| Total operating expenses | 3,030,608 | 1,593,493 | 1,437,115 | |||||||||
| Loss from operations | (3,034,996 | ) | (1,593,493 | ) | (1,441,503 | ) | ||||||
| Interest expense | — | (4,749,263 | ) | 4,749,263 | ||||||||
| Net valuation change of instruments measured at fair value | — | 1,269,543 | (1,269,543 | ) | ||||||||
| Loss on note extinguishment | — | (2,017,847 | ) | 2,017,847 | ||||||||
| Other income | 83,387 | — | 83,387 | |||||||||
| Loss before income taxes | (2,951,609 | ) | (7,091,060 | ) | 4,139,451 | |||||||
| Provision for income taxes | — | — | ||||||||||
| Net loss | $ | (2,951,609 | ) | $ | (7,091,060 | ) | $ | 4,139,451 | ||||
Product Revenue and Product Gross Loss
Product revenue and product gross loss was $40,000 and $(62,000), respectively, during the three months ended June 30, 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 of approximately $26,000. There was no product revenue or product gross loss recognized during the comparable prior year period.
Collaborations Revenue
Collaborations revenue was $17,000 for the three months ended June 30, 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 third 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 $2.1 million for the three months ended June 30, 2021, compared to $1.1 million for the three months ended June 30, 2020. The $1.0 million increase was primarily due to an increase in sales and marketing expenses of $0.2 million, stock-based compensation of $0.5 million, payroll related costs of $0.2 million and public company related costs of $0.1 million in the current quarter when compared to the prior year period.
30
NeuroOne Medical Technologies Corporation
Form 10-Q
Research and development expenses
Research and development expenses were $0.9 million for the three months ended June 30, 2021, compared to $0.4 million during for the three months ended June 30, 2020. The $0.5 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 three months ended June 30, 2020 was attributed to non-cash interest expense in connection with our 2020 Paulson Notes and a nominal amount related to the 2019 Paulson Notes, both of which are described further below, and was comprised of issuance costs of $1.0 million and day-one interest at issuance of $3.8 million representing the amount by which fair value exceeded the 2020 Paulson Note proceeds. Interest on principal in connection with the 2019 Paulson Notes and 2020 Paulson Notes is included in the net valuation change of instruments measured at fair value line item. During the three months ended June 30, 2021, no interest expense was incurred as there was no debt outstanding.
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 June 30, 2021 and 2020 was none and a benefit of $1.3 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.
Loss on note extinguishment
Non-cash loss on note extinguishment for the three months ended June 30, 2020 was $2.0 million. The 2019 Paulson notes were amended on April 24, 2020 to add a 40% discount to the optional conversion feature and to extend the maturity date by six months. The April 2020 amendment was accounted for as a note extinguishment given the significant modification made to the optional conversion feature. There were no note extinguishments during the three months ended June 30, 2021.
Other Income
Other income during the three months ended June 30, 2021 consisted of the forgiveness of the paycheck protection program loan in the amount of $0.1 million. We did not have other income during the comparable prior year period.
31
NeuroOne Medical Technologies Corporation
Form 10-Q
Comparison of the Nine Months Ended June 30, 2021 and 2020
The following table sets forth the results of operations for the nine months ended June 30, 2021 and 2020, respectively.
| For
the nine months ended June 30, (unaudited) |
||||||||||||
| 2021 | 2020 | Period
to Period Change |
||||||||||
| Product revenue | $ | 129,810 | $ | — | $ | 129,810 | ||||||
| Cost of product revenue | 210,429 | — | 210,429 | |||||||||
| Product gross loss | (80,619 | ) | — | (80,619 | ) | |||||||
| Collaborations revenue | 59,838 | — | 59,838 | |||||||||
| Operating expenses: | ||||||||||||
| Selling, general and administrative | 4,636,586 | 3,493,761 | 1,142,825 | |||||||||
| Research and development | 2,916,721 | 1,291,075 | 1,625,646 | |||||||||
| Total operating expenses | 7,553,307 | 4,784,836 | 2,768,471 | |||||||||
| Loss from operations | (7,574,088 | ) | (4,784,836 | ) | (2,789,252 | ) | ||||||
| Interest expense | (3,053 | ) | (7,446,770 | ) | 7,443,717 | |||||||
| Net valuation change of instruments measured at fair value | 1,974 | 1,175,685 | (1,173,711) | |||||||||
| Loss on note extinguishment | — | (2,017,847 | ) | 2,017,847 | ||||||||
| Other income | 270,162 | — | 270,162 | |||||||||
| Loss before income taxes | (7,305,005 | ) | (13,073,768 | ) | 5,768,763 | |||||||
| Provision for income taxes | — | — | — | |||||||||
| Net loss | $ | (7,305,005 | ) | $ | (13,073,768 | ) | $ | 5,768,763 | ||||
Product Revenue and Product Gross Loss
Product revenue and product gross loss was $0.1 million and $(0.2) million during the nine months ended June 30, 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 royalty fees to WARF and Mayo of $0.1 million in connection with our license agreements. There was no product revenue or product gross loss recognized during the comparable prior year period.
Collaborations Revenue
Collaborations revenue was $60,000 for the nine months ended June 30, 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 nine months ended June 30, 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 $4.6 million for the nine months ended June 30, 2021, compared to $3.5 million for the nine months ended June 30, 2020. The $1.1 million increase was primarily due to an increase in sales and marketing expenses of $0.7 million, payroll related costs of $0.2 million, public company and governance costs of $0.4 million and other operating expenses and fees of $0.1 million, offset in part by a decrease in stock-based compensation of $0.1 million and legal costs of $0.2 million.
Research and development expenses
Research and development expenses were $2.9 million for the nine months ended June 30, 2021, compared to $1.3 million during for the nine months ended June 30, 2020. The $1.6 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.
32
NeuroOne Medical Technologies Corporation
Form 10-Q
Interest expense
Interest expense for the nine months ended June 30, 2021 was $3,000 and consisted of issuance costs in connection with our 2019 Paulson Notes described further below.
Interest expense during the nine months ended June 30, 2020 was primarily attributed to non-cash interest expense in connection with our 2019 Paulson Notes and 2020 Paulson Notes. Interest expense attributed to the 2019 Paulson Notes and 2020 Paulson Notes was comprised of issuance costs of $1.8 million and day-one interest at issuance of $5.6 million representing the amount by which fair value exceeded note proceeds. Interest on principal in connection with the 2019 Paulson Notes and 2020 Paulson Notes is included in the net valuation change of instruments measured at fair value line item.
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 nine months ended June 30, 2021 and 2020 was a benefit of $2,000 and $1.2 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.
Loss on note extinguishment
Non-cash loss on note extinguishment for the nine months ended June 30, 2020 was $2.0 million. The 2019 Paulson notes were amended on April 24, 2020 (the “April 2020 Amendment”) to add a 40% discount to the optional conversion feature and to extend the maturity date by six months. The April 2020 Amendment was accounted for as a note extinguishment given the significant modification made to the optional conversion feature. There were no note extinguishments during the nine months ended June 30, 2021.
Other Income
Other income during the nine months ended June 30, 2021 consisted principally of proceeds received in connection with the PMT Corporation litigation in the amount of $0.2 million and the forgiveness of the paycheck protection program loan in the amount of $0.1 million. We did not have other income during the comparable prior year period.
Liquidity and Capital Resources
Historical Capital Resources
As of June 30, 2021, our principal source of liquidity consisted of cash deposits of $9.0 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.
33
NeuroOne Medical Technologies Corporation
Form 10-Q
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.
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”), which was forgiven by the U.S. Small Business Administration on June 9, 2021.
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.
34
NeuroOne Medical Technologies Corporation
Form 10-Q
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.
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 June 30, 2021, we had approximately $9.0 million in cash deposits. Our existing cash and cash is not sufficient to fund our operating expenses through at least twelve months from the date of this filing. 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.
35
NeuroOne Medical Technologies Corporation
Form 10-Q
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.
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 June 30, 2020, $3,894 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 nine Months Ended | ||||||||
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash used in operating activities | $ | (6,573,520 | ) | $ | (3,697,970 | ) | ||
| Net cash used by investing activities | (31,970 | ) | (66,068 | ) | ||||
| Net cash provided by financing activities | 11,559,834 | 7,327,246 | ||||||
| Net increase in cash | $ | 4,954,344 | $ | 3,563,208 | ||||
Net cash used in operating activities
Net cash used in operating activities was $6.6 million for the nine months ended June 30, 2021, which consisted of a net loss of $7.3 million partially offset principally by non-cash stock-based compensation, depreciation, amortization related to intangible assets, revaluation of convertible notes, operating lease expense and the forgiveness of the paycheck protection program loan, totaling approximately $1.5 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 $0.7 million. The change in operating assets and liabilities was primarily attributable to a decrease in accounts payable and accrued expenses attributed to the timing of payments coupled to a lesser extent with an increase in accounts receivable, inventory and prepaid and other assets.
Net cash used in operating activities was $3.7 million for the nine months ended June 30, 2020, which consisted of a net loss of $13.1 million partially offset primarily by non-cash interest, stock-based compensation, depreciation, amortization related to intangible assets, operating lease expense, revaluation of convertible notes and loss on notes extinguishment, totaling approximately $9.8 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 approximately $0.5 million. The change in operating assets and liabilities was primarily attributable to a decrease in accounts payable and accrued expenses and by an increase in our prepaid expenses.
36
NeuroOne Medical Technologies Corporation
Form 10-Q
Net cash used by investing activities
Net cash used by investing activities was $32,000 and $66,000 during the nine months ended June 30, 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 $11.6 million for the nine months ended June 30, 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 nine months ended June 30, 2021 resulting in additional cash proceeds of $0.3 million, offset in part by deferred offering costs of $24,000.
Net cash provided by financing activities was $7.3 million for the nine months ended June 30, 2020, which consisted primarily of net proceeds received upon the issuance of the 2019 and 2020 Paulson Notes and the common stock offering totalling $7.2 million in the aggregate, and $0.1 million in proceeds received from the Paycheck Protection Program.
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 nine months ended June 30, 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.
37
NeuroOne Medical Technologies Corporation
Form 10-Q
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.
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 June 30, 2021. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 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 June 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
38
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 Reports on Form 10-Q for the quarters ended December 31, 2020 and March 31, 2021. 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.
Item 6. Exhibits
| + | Indicates management contract or compensatory plan. |
39
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: August 13, 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) |
40
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a) OR 15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, David Rosa, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of NeuroOne Medical Technologies Corporation for the period ended June 30, 2021;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: August 13, 2021 | /s/ David Rosa | ||
| Name: | David Rosa | ||
| Title: | Chief Executive Officer | ||
| (Principal Executive Officer) | |||
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a) OR 15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, Ronald McClurg, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of NeuroOne Medical Technologies Corporation for the period ended June 30, 2021;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: August 13, 2021 | /s/ Ronald McClurg | ||
| Name: | Ronald McClurg | ||
| Title: | Chief Financial Officer | ||
| (Principal Financial Officer) | |||
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER,
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002*
Pursuant to the requirement set forth in Rule 13a-14(b) or Rule 15d-14(b) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code, David Rosa, Chief Executive Officer of NeuroOne Medical Technologies Corporation (the “Company”) hereby certifies that, to the best of his knowledge:
1. The Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2021, to which this Certification is attached as Exhibit 32.1 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, and
2. The information contained in the Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Report and results of operations of the Company for the period covered by the Report.
| /s/ David Rosa |
|
David Rosa Chief Executive Officer (Principal Executive Officer)
|
| Dated: August 13, 2021 |
* This certification accompanies the report to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of NeuroOne Medical Technologies Corporation under the Securities Act of 1933, as amended, or the Exchange Act made before or after the date of the report, irrespective of any general incorporation language contained in such filing.
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER,
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002*
Pursuant to the requirement set forth in Rule 13a-14(b) or Rule 15d-14(b) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code, Ronald McClurg, Chief Financial Officer of NeuroOne Medical Technologies Corporation (the “Company”) hereby certifies that, to the best of his knowledge:
1. The Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2021, to which this Certification is attached as Exhibit 32.2 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, and
2. The information contained in the Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Report and results of operations of the Company for the period covered by the Report.
| /s/ Ronald McClurg |
|
Ronald McClurg Chief Financial Officer (Principal Financial Officer) |
| Dated: August 13, 2021 |
* This certification accompanies the report to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of NeuroOne Medical Technologies Corporation under the Securities Act of 1933, as amended, or the Exchange Act made before or after the date of the report, irrespective of any general incorporation language contained in such filing.