NEUROONE MEDICAL TECHNOLOGIES CORPORATION 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 endedSeptember 30, 2019 . 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 endedSeptember 30, 2019 and subsequent reports filed with or furnished to theSecurities 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 We are a medical technology company focused on the development and commercialization of thin film electrode technology for continuous electroencephalogram (cEEG) and stereoelectroencephalography (sEEG) recording, brain stimulation and ablation solutions for patients suffering from epilepsy, Parkinson's disease, dystonia, essential tremors and other related brain related disorders. Additionally, we are investigating the potential applications of our technology associated with artificial intelligence. We are based inEden Prairie, Minnesota . 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 cortical strip, grid electrode and depth electrode technology are still under development and we have not generated any revenue from commercial sales. We have incurred losses since inception. As ofJune 30, 2020 , we had an accumulated deficit of$30.3 million , primarily as a result of expenses incurred in connection with our research and development programs, from general and administrative expenses associated with our operations and interest expense, fair value adjustments and loss on extinguishments related to our debt. We expect to continue to incur significant expenses and increasing operating and net losses for the foreseeable future. 23NeuroOne Medical Technologies Corporation Form 10-Q
Our main source of cash to date has been proceeds from the issuances of notes, common stock, warrants and unsecured loans. See "-Liquidity and Capital Resources-Historical Capital Resources" below.
AtJune 30, 2020 , we had$3.8 million in cash deposits. Our existing cash and cash equivalents will not be sufficient to fund our operating expenses through the end of the twelve month period following the issuance of this Form 10-Q. We need to obtain substantial additional funding in connection with our continuing operations through public or private equity or debt financings or other sources, which may include collaborations with third parties. 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
Zimmer Development Agreement
OnJuly 20, 2020 , the Company entered into an exclusive development and distribution agreement (the "Development Agreement") withZimmer, Inc. ("Zimmer"), pursuant to which the Company granted Zimmer exclusive global rights to distribute NeuroOne's strip and grid cortical electrodes (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 the Company 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 payment of$2.0 million to the Company, the announcement of which triggered the automatic conversion of the Company's 2020 Notes pursuant to their terms. Additionally, in order to maintain the exclusivity of its distribution license for the SEEG Products, Zimmer must pay an additional fee to the Company within 60 days following the Product Availability Date for the SEEG Products. 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. COVID-19 OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughoutthe United States and around the world. As a result of the COVID-19 pandemic, the Company has experienced delays and disruptions in our pre-clinical and clinical trials, as well as interruptions in our manufacturing, supply chain, and research and development operations. The global outbreak of COVID-19 continues to rapidly evolve. InApril 2020 , given the impact of COVID-19 on the Company, the Company applied for and received loan funding of approximately$83,333 under the PPP. 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 ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social distancing in theU.S. and other countries, business closures or business disruptions and the effectiveness of actions taken in theU.S. and other countries to contain and treat the disease. The COVID-19 pandemic may also impact our ability to secure additional financing or our ability to up-list from our current OTC Market ("OTCQB"), and may result in further modifications to our debt agreements. 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 fiscal year 2020. 24NeuroOne Medical Technologies Corporation Form 10-Q Financial Overview Revenue To date, we have not generated any revenue. We do not expect to generate revenue unless or until we develop and commercialize our cortical strip, grid electrode and depth electrode technology. If we fail to complete the development of our cortical strip, grid electrode and depth electrode technology, or any other product candidate we may pursue in the future, in a timely manner, or fail to obtain certain regulatory approvals, we may never be able to generate any revenue. General and Administrative
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 product costs. We anticipate that our general and administrative expenses will significantly increase in the future to support our continued research and development activities, potential commercialization of our cortical strip, grid electrode and depth electrode technology 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 pre-clinical testing and clinical trials and will depend on the duration, costs and timing to complete our pre-clinical programs and clinical trials. Interest Expense Interest expense primarily consists of amortized discount costs and interest costs as applicable related to our 2019 Paulson Notes, 2020 Paulson Notes and the Series 3 Notes while outstanding as described further below.
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, 2020 Paulson Notes, warrant liability and the premium conversion derivatives during the particular period these instruments are outstanding.
Loss on note extinguishment
Loss on note extinguishment includes the loss associated with debt instrument modifications and conversions accounted for as debt extinguishments.
25
NeuroOne Medical Technologies Corporation
Form 10-Q
Results of Operations
Comparison of the Three Months Ended
The following table sets forth the results of operations for the three months
ended
For the three months ended
June 30,
(unaudited)
Period to
Period
2020 2019 Change
Operating expenses:
General and administrative $ 1,146,339 $ 1,440,166 $ (293,827 )
Research and development 447,154 422,781 24,373
Total operating expenses 1,593,493 1,862,947 (269,454 )
Loss from operations (1,593,493 ) (1,862,947 ) 269,454
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 )
Loss before income taxes (7,091,060 ) (1,862,947 ) (5,228,113 )
Provision for income taxes - - -
Net loss $ (7,091,060 ) $ (1,862,947 ) $ (5,228,113 ) General and administrative expenses
General and administrative expenses were$1.1 million for the three months endedJune 30, 2020 , compared to$1.4 million for the three months endedJune 30, 2019 . The decrease was primarily due to a net decrease in legal and accounting fees of$0.2 million , employee related expenses of approximately$0.1 million and other operational related costs of$0.1 million , on a net basis, offset in part by an increase in stock-based compensation costs of$0.1 million .
Research and development expenses
Research and development expenses were
Interest expense Interest expense for the three months endedJune 30, 2020 and 2019 was$4.7 million and zero, respectively. Interest in the current 2020 period 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 described further below. Interest expense was comprised of issuance costs of$1.0 million and day-one interest at issuance of$3.8 million representing the amount by which fair value exceeded the 2020 Paulson Note proceeds. Interest on principal in connection with the 2019 Paulson Notes and 2020 Paulson Notes is included in the net valuation change of instruments measured at fair value line item. During the three months endedJune 30, 2019 , no interest expense was incurred as there was no debt outstanding.
Net valuation change of instruments measured at fair value:
The net valuation change of instruments measured at fair value for the 2019 Paulson Notes and 2020 Paulson Notes for the three months endedJune 30, 2020 was a benefit of$(1.3) million . The change was due to fluctuations in our common stock fair value, the number of potential shares of common stock issuable upon conversion of the 2019 Paulson Notes and 2020 Paulson Notes and due to the accretion of interest on principal. There was no net valuation change of instruments measured at fair value during the three months endedJune 30, 2019 . Loss on note extinguishment Non-cash loss on note extinguishment for the three months endedJune 30, 2020 was$2.0 million . The 2019 Paulson notes were amended onApril 24, 2020 to add a 40% discount to the optional conversion feature and to extend the maturity date by six months. TheApril 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 endedJune 30, 2019 . 26NeuroOne Medical Technologies Corporation Form 10-Q
Comparison of the Nine months ended
The following table sets forth the results of operations for the nine months
ended
For the nine months ended
June 30,
(unaudited)
Period to
Period
2020 2019 Change
Operating expenses:
General and administrative $ 3,493,761 $ 3,391,634 $ 102,127
Research and development 1,291,075 1,068,260 222,815
Total operating expenses 4,784,836 4,459,894 324,942
Loss from operations (4,784,836 ) (4,459,894 ) (324,942 )
Interest expense (7,446,770 ) (284,557 ) (7,162,213 )
Net valuation change of instruments measured at
fair value 1,175,685 (129,763 ) 1,305,448
Loss on note extinguishment (2,017,847 ) (553,447 ) (1,464,400 )
Loss before income taxes (13,073,768 ) (5,427,661 ) (7,646,107 )
Provision for income taxes - - -
Net loss $ (13,073,768 ) $ (5,427,661 ) $ (7,646,107 ) General and administrative expenses
General and administrative expenses were$3.5 million for the nine months endedJune 30, 2020 , compared to$3.4 million for the nine months endedJune 30, 2019 . The slight increase was primarily due to a net increase of stock-based compensation of$1.0 million and other marketing costs of approximately$0.1 million , offset largely by a decrease in payroll related costs of$0.4 million , legal and accounting fees of$0.4 million and board of director related costs of$0.2 million .
Research and development expenses
Research and development expenses were$1.3 million for the nine months endedJune 30, 2020 , compared to$1.1 million during for the nine months endedJune 30, 2019 . The 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. Interest expense
Interest expense for the nine months endedJune 30, 2020 and 2019 was$7.4 million and$0.3 million , respectively. The increase 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 valueline item. Interest expense during the nine months endedJune 30, 2019 was comprised of interest on principal of$51,000 and amortization of debt discount costs of$0.2 million related to the Series 3 Notes. 27NeuroOne Medical Technologies Corporation Form 10-Q
Net valuation change of instruments measured at fair value:
The net valuation change of instruments measured at fair value for the 2019 Paulson Notes, 2020 Paulson Notes, warrants and premium conversion derivatives for the nine months endedJune 30, 2020 and 2019 was a benefit of$(1.2) and an expense of$0.1 million , respectively. The change is due to accrued interest on the 2019 Paulson Notes and 2020 Paulson Notes and due to fluctuations in our common stock fair value, the number of potential shares of common stock issuable upon conversion of the 2019 Paulson Notes, 2020 Paulson Notes, or the Series 3 Notes while outstanding. Loss on note extinguishment Non-cash loss on note extinguishment for the nine months endedJune 30, 2020 and 2019 was$2.0 million and$0.6 million , respectively. The 2019 Paulson notes as described further below were amended onApril 24, 2020 to principally add a 40% discount to the optional conversion feature and to extend the maturity date by six months. TheApril 2020 amendment was accounted for as a note extinguishment given the significant modification made to the optional conversion feature. The Series 3 Notes were converted onFebruary 28, 2019 and the conversion was accounted for as a note extinguishment given the bifurcated embedded premium debt conversion feature.
Liquidity and Capital Resources
Historical Capital Resources As ofJune 30, 2020 , our principal source of liquidity consisted of cash deposits of$3.8 million . We have not generated any revenue, and we anticipate that we will continue to incur losses for the foreseeable future. We anticipate that our expenses will increase substantially as we develop 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 to date has been proceeds from the issuances of notes with warrants, common stock with warrants and unsecured loans, the terms of which are further described below.
2020 Paulson Convertible Notes
OnApril 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. BetweenApril 30, 2020 andJune 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 onJune 30, 2020 . The 2020 Paulson Notes bear interest at a fixed rate of 13% per annum and require the Company to repay the principal and accrued and unpaid interest thereon on the earlier of (i)December 31, 2020 and (ii) a change of control transaction. If the Company raises 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") shall convert into that number of shares of the securities issued by the Company in the closing on the date a 2020 Qualified Financing occurs 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 occurs and (B) the volume weighted average price ("VWAP") of the common stock for ten (10) trading days immediately preceding the 2020 Qualified Financing. 28NeuroOne Medical Technologies Corporation Form 10-Q If the Company announces a transaction between the Company and any other company (or an affiliate of any such company) that is included in the S&P 500 Health Care Index as published from time to time byS&P Dow Jones Indices LLC that includes an investment or upfront payments resulting in gross proceeds to the Company of at least$2,000,000 upon the execution of such transaction or definitive agreement, and provides for terms of collaboration, manufacturing, distribution, licensing or supply of the Company's products (a "Strategic Transaction") before the maturity date, without any action on the part of the subscribers, the Outstanding Balance shall be converted into that number of shares of common stock equal to: (i) the Outstanding Balance divided by (ii) the lower of 0.6 multiplied by (A) the VWAP of the common stock for the ten (10) trading days immediately preceding the first announcement of the Strategic Transaction or (B) closing price of the common stock on the day preceding the first announcement by the Company of a Strategic Transaction. At any time, at the sole election of the holder of such 2020 Paulson Note, all or a portion of the Outstanding Balance may be 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 occurs prior to the conversion of the 2020 Paulson Notes or the maturity date, the 2020 Paulson Notes would become payable on demand as of the closing date of such transaction. Change of control means a merger or consolidation with another entity in which the Company's stockholders do 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. 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 1.87, with an exercise price per share equal to$1.87 . The 2020 Paulson Warrants are immediately exercisable and expire onApril 30, 2023 . The exercise price is subject to adjustment in the event of any stock dividends or splits, reverse stock split, recapitalization, reorganization or similar transaction. In connection with the 2020 Paulson Private Placement, Paulson received a cash commission equal to 12% of the gross proceeds from the sale of the 2020 Paulson Notes, and at the final closing of the 2020 Paulson Private Placement, Paulson received 7-year warrants to purchase an amount of common stock equal to 410,911 ("Broker Warrants"). The Broker Warrants have an exercise price equal to$1.87 . 2020 Paulson Note Conversions BetweenMay 4, 2020 andJuly 22, 2020 , certain Subscribers elected to convert$3,590,353 of the outstanding principal and interest of such Subscribers' 2020 Paulson Notes into 4,012,334 shares of common stock. OnJuly 23, 2020 , the remaining$1,613,961 of the outstanding principal and interest of the 2020 Paulson Notes were automatically converted into 1,605,532 shares of Common Stock following the announcement of a Strategic Transaction (as defined in the 2020 Paulson Notes).
2019 Paulson Convertible Notes
OnNovember 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 onNovember 1, 2019 , and, on that date and throughDecember 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 onDecember 3, 2019 . 29NeuroOne Medical Technologies Corporation Form 10-Q
Second Amendment of 2019 Paulson Notes
OnApril 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 Paulson Amendment") to, among other things:
i. Extend the Maturity Date - The Second Paulson Amendment extends the
maturity date of the 2019 Paulson Notes from
2020 (in either case, unless a change of control transaction happens prior
to such date);
ii. Revise Optional Conversion Terms - The Second Paulson Amendment provides
that the amount of shares to be received upon the a subscriber's optional
conversion of the 2019 Paulson Notes prior to a Qualified Financing (as
defined in the 2019 Paulson Notes) will be equal to: (1) the outstanding
balance of such subscriber's 2019 Paulson Note elected by the subscriber
to be converted divided by (2) an amount equal to 0.6 multiplied by the
volume weighted average price of the common stock for the ten (10) trading
days immediately preceding the date of conversion; and
iii. Revise the Registration Date - The Second Paulson Amendment provides that
promptly following the earlier of (1)
subscriber has converted all or a majority of the outstanding balance of
such subscriber's 2019 Paulson Note prior to such date; (2) the final
closing a Qualified Financing; and (3) the maturity date, the Company
will enter into a registration rights agreement with the applicable
subscriber containing customary and usual terms pursuant to which the
Company shall agree to prepare and file with the
statement on or prior to the 90th calendar day following the registration
date, covering the resale of any common stock received on conversion of
such 2019 Paulson Notes, and shares of common stock underlying the
Warrants.
There were no other significant changes to terms under the Second Paulson Amendment.
2019 Paulson Note Conversion BetweenApril 24, 2020 andJune 30, 2020 , certain holders elected to convert outstanding principal and accrued and unpaid interest of 2019 Paulson Notes in the amount of to convert outstanding principal and accrued and unpaid interest in the amount of$2,838,724 into 2,176,119 shares of common stock. Common Stock Offering OnOctober 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 141,666 shares of the Company's common stock to the accredited investors at a price of$1.80 per share, for gross proceeds amounting to$0.3 million before deducting offering expenses. In connection with the private placement, the Company has agreed to issue and sell to accredited investors up to a maximum of 555,555 shares for total gross proceeds to the Company of up to$1,000,000 . The Company intends to use the net proceeds from this private placement for funding operations or working capital and general corporate purposes. The Company filed a registration statement with theSEC covering the resale of the shares of common stock sold in the private placement onAugust 11, 2020 .
Paycheck Protection Program Loan
In connection with the CARES Act, the Company received loan funding of approximately$83,000 under the Paycheck Protection Program. Loan amounts are forgiven to the extent proceeds are used to cover documented payroll, mortgage interest, rent, and utility costs over a 24 week measurement period following loan funding. There can be no assurance this PPP loan will be forgiven. Loans have a maturity of 2 years and an interest rate of 1%. Prepayments may be made without penalty. 30NeuroOne Medical Technologies Corporation Form 10-Q
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
FromDecember 28, 2018 throughJuly 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 at an initial exercise price of$3.00 per share (the "2019 Warrants"), to the New Purchasers. The 2019 Warrants are exercisable beginning on the date of issuance and will expire onDecember 28, 2023 , five years from the date of the first closing of the 2019 Unit Private Placement. The initial closing of the 2019 Unit Private Placement was consummated onDecember 28, 2018 . The Company issued and sold an aggregate of 2,338,179 of the 2019 Units at$2.50 per Unit to the New Purchasers, for total gross proceeds to the Company of approximately$5,845,448 before deducting offering expenses.
2018 Private Placement FromJuly 9, 2018 throughNovember 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 at an initial exercise price of$3.00 per share (the "2018 Warrants"). The 2018 Warrants are exercisable beginning on the date of issuance and will expire onJuly 9, 2023 , five years from the date of the first closing. The 2018 Warrants were accounted for as free standing equity instruments and classified as additional paid-in capital in the accompanying condensed balance sheets based on their relative fair value to the underlying common shares issued. The initial closing of the 2018 Private Placement was consummated onJuly 9, 2018 and was terminated onDecember 12, 2018 . As of the termination of the 2018 Private Placement onDecember 12, 2018 , the Company had issued and sold an aggregate of 615,200 of the 2018 Units at a price of$2.50 per Unit to the Purchasers, for total gross proceeds to the Company of$1,538,000 before deducting offering expenses.
Series 3 Notes and Warrants (2017 Convertible Notes)
FromOctober 2017 toMay 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"). OnFebruary 28, 2019 , the outstanding principal and interest on the Series 3 Notes converted into 839,179 shares of common stock and 839,179 common stock purchase warrants with an exercise term of approximately 4.8 years and an exercise price of$3.00 per share. In addition, each holder has the option to purchase additional shares of our capital stock equal to 839,179 shares of capital stock of the Company at a per share exercise price equal to$2.50 . The warrants exercisable at$2.50 per share have a five year term which commenced onFebruary 28, 2019 . The exercise price and number of the shares issuable upon exercising the Series 3 Warrants are subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization, business combination or similar transaction, as described therein. Series 2 Notes and Warrants
In
31
NeuroOne Medical Technologies Corporation
Form 10-Q
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 that bear interest at a fixed
rate of 8% per annum and warrants to purchase shares of the Company's capital
stock (the "Series 1 Notes"). The Series 1 Notes were converted into 1,002,258
shares of Common Stock and warrants exercisable for 2,004,516 shares of Common
Stock were issued on July 2, 2018 at a per share exercise price of $1.80 per
share. The warrants will expire on November 21, 2021 .
Unsecured Loans
From
Refer to "-Liquidity and Capital Resources-Historical Capital Resources" in our Annual Report on Form 10-K for the year endedSeptember 30, 2019 for additional information related to financings prior to fiscal year 2020.
Funding Requirements and Outlook
We have no current source of revenue to sustain our present activities, and we do not expect to generate revenue until, and unless, we successfully commercialize our cortical strip, grid electrode and depth electrode technology. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity and debt financings as well as collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third-party partners, we may have to relinquish valuable rights to our technologies, future revenue streams or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or through collaborations, strategic alliances or licensing arrangements when needed, we may be required to delay, limit, reduce or terminate our product development, future commercialization efforts, or grant rights to develop and market our cortical strip, grid electrode and depth electrode technology that we would otherwise prefer to develop and market ourselves. Our independent registered public accounting firm included an explanatory paragraph in its report on our annual financial statements as of and for the year endedSeptember 30, 2019 and as of and for the nine month transition period endedSeptember 30, 2018 , noting the existence of substantial doubt about our ability to continue as a going concern. This uncertainty arose from management's review of our results of operations and financial condition and its conclusion that, based on our operating plans, we did not have sufficient existing working capital to fund our operating expenses. As ofJune 30, 2020 , the outstanding principal and accrued and unpaid interest on the 2019 Paulson Notes and 2020 Paulson Notes in the aggregate was$3,904,112 . However, if we fail to complete a qualified financing or a strategic transaction as provided under the 2019 Paulson Notes and 2020 Paulson Notes, the remaining 2019 Paulson Notes and 2020 Paulson Notes will be immediately due and payable upon their respective maturity dates, and we may not have sufficient cash to pay the principal and accrued and unpaid interest thereon. We have agreements with theWisconsin Alumni Research Foundation ("WARF") and theMayo Foundation for Medical Education and Research ("Mayo") that require us to make certain milestone and royalty payments. OnJanuary 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, datedOctober 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. 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. 32NeuroOne Medical Technologies Corporation Form 10-Q
Under the Amended and Restated License and Development Agreement with Mayo (the "Mayo Development Agreement"), we have agreed to pay Mayo a royalty equal to a single-digit percentage of our product sales pursuant to theMayo Development Agreement. Nothing further is due until we start selling our products. Refer to the Company's Annual Report on Form 10-K for the year endedSeptember 30, 2019 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." Our existing cash and cash equivalents will not be sufficient to fund our operating expenses without raising additional funds. 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, we may not be able to pay off or modify terms of our existing debt, and any failure to raise capital or to amend existing debt that may be due as and when needed could compromise our ability to execute on our business plan. The development 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 EndedJune 30, 2020 2019
Net cash used in operating activities
(66,068 ) (118,952 )
Net cash provided by financing activities 7,327,246 5,605,537 Net increase in cash
$ 3,563,208 $ 1,233,546
Net cash used in operating activities
Net cash used in operating activities was$3.7 million for the nine months endedJune 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, 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. 33NeuroOne Medical Technologies Corporation Form 10-Q
Net cash used in operating activities was$4.3 million for the nine months endedJune 30, 2019 , which consisted of a net loss of$5.4 million partially offset by non-cash interest, note discount amortization, revaluation of premium debt conversion derivatives and warrant liabilities, non-cash note extinguishment, amortization and depreciation related to intangible assets and property and equipment, and stock-based compensation, totaling approximately$1.4 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$0.2 million . The change in operating assets and liabilities was primarily attributable to a net decrease in accrued expenses and by a net increase in our prepaid expenses associated with fluctuations in our operating activities.
Net cash used by investing activities
Net cash used by investing activities was
Net cash used by investing activities was
Net cash provided by financing activities
Net cash provided by financing activities was$7.3 million for the nine months endedJune 30, 2020 , which consisted primarily of net proceeds received upon the issuance of the 2019 and 2020 Paulson Notes and the common stock offering totaling$7.2 million in the aggregate, and$0.1 million in proceeds received from the Paycheck Protection Program. Net cash provided by financing activities was$5.6 million for the nine months endedJune 30, 2019 which consisted primarily of net proceeds received upon the issuance of the Units in the 2019 and 2018 Private Placements in the amount of approximately$5.5 million . Additionally, cash provided by financing activities also included proceeds from stock option and warrant exercises in the aggregate of$0.4 million , offset in part by net repayments over proceeds relating to our unsecured loans in the amount of$283,000 during the nine month period.
Critical Accounting Policies
Our financial statements are prepared in accordance withU.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 three and nine months endedJune 30, 2020 , we elected to record the convertible notes issued at fair value which is based on both the fair value of our common stock 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. 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 endedSeptember 30, 2019 .
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.
34
NeuroOne Medical Technologies Corporation
Form 10-Q© Edgar Online, source
