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 ended
Forward-Looking Statements
This Report contains forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the words "may," "might," "will," "could," "would," "should," "expect," "intend," "plan," "objective," "anticipate," "believe," "estimate," "predict," "project," "potential," "target," "seek," "contemplate," "continue" and "ongoing," or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-looking statements include statements about:
? the timing of and our ability to obtain and maintain regulatory
clearance of our cortical strip, grid and depth electrode technology;
? even if our cortical strip, grid electrode and depth electrode
technology is approved for commercial sale, our ability to successfully
commercialize our technology in the United States ;
? our ability to achieve or sustain profitability;
? our ability to raise additional capital and to fund our operations;
? the availability of additional capital on acceptable terms or at all as
or when needed;
? the clinical utility of our cortical strip, grid and depth electrode
including technology under development;
? our ability to develop additional applications of our cortical strip,
grid and depth electrode technology with the benefits we hope to offer
as compared to existing technology, or at all;
? the results of our development and distribution relationship with
Zimmer, Inc. ("Zimmer");
? the performance, productivity, reliability and regulatory compliance of
our third party manufacturers of our cortical strip, grid electrode and
depth electrode technology;
? our ability to develop future generations of our cortical strip, grid
and depth electrode technology;
? our future development priorities;
? the impact of the COVID-19 pandemic and resulting macroeconomic
conditions, including supply chain disruptions, labor shortages and
inflationary pressures, on our business;
? our ability to obtain reimbursement coverage for our cortical strip,
grid and depth electrode technology;
? our expectations about the willingness of healthcare providers to
recommend our cortical strip, grid and depth electrode technology to
people with epilepsy, Parkinson's disease, dystonia, essential tremors,
chronic pain due to failed back surgeries and other related
neurological disorders;
? our future commercialization, marketing and manufacturing capabilities
and strategy;
? our ability to comply with applicable regulatory requirements;
? our ability to maintain our intellectual property position;
? the outcome of legal proceedings with PMT Corporation ("PMT");
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? our expectations regarding international opportunities for
commercializing our cortical strip, grid and depth electrode technology
under including technology under development;
? our estimates regarding the size of, and future growth in, the market
for our technology, including technology under development; and
? our estimates regarding our future expenses and needs for additional
financing.
Forward-looking statements are based on management's current expectations, estimates, forecasts and projections about our business and the industry in which we operate, and management's beliefs and assumptions are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. You should refer to the "Risk Factors" section of our Annual Report on Form 10-K for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.
These forward-looking statements speak only as of the date of this Report.
Except as required by law, we assume no obligation to update or revise these
forward-looking statements for any reason, even if new information becomes
available in the future. You should, however, review the factors and risks and
other information we describe in the reports we will file from time to time with
the
Overview
We are a medical technology company focused on the development and commercialization of thin film electrode technology for cEEG and sEEG recording, spinal cord stimulation, brain stimulation and ablation solutions for patients suffering from epilepsy, Parkinson's disease, dystonia, essential tremors, chronic pain due to failed back surgeries and other related neurological disorders. Additionally, we are investigating the potential applications of our technology associated with artificial intelligence
We are developing our cortical, sheet and depth electrode technology to provide solutions for diagnosis through cEEG recording and sEEG recording and treatment through brain stimulation and ablation, all in one product. A cEEG is a continuous recording of the electrical activity of the brain that identifies the location of irregular brain activity, which information is required for proper treatment. cEEG recording involves an invasive surgical procedure, referred to as a craniotomy. sEEG involves a less invasive procedure whereby doctors place electrodes in targeted brain areas by drilling small holes through the skull. Both methods of seizure diagnosis are used to identify areas of the brain where epileptic seizures originate in order to precisely locate the seizure source for therapeutic treatment if possible.
Deep brain stimulation, or DBS, therapies involve activating or inhibiting the brain with electricity that can be given directly by electrodes on the surface or implanted deeper in the brain via depth electrodes. Introduced in 1987, this procedure involves implanting a power source referred to as a neurostimulator, which sends electrical impulses through implanted depth electrodes, to specific targets in the brain for the treatment of disorders such as Parkinson's disease, essential tremors, dystonia, and chronic pain. The effects of DBS as a potential treatment for Alzheimer's is also being evaluated by researchers. Unlike ablative technologies, the effects of DBS are reversible.
RF ablation is a procedure that uses radiofrequency under the electrode contacts which is directed to the site of the brain tissue that is targeted for removal. The process involves delivering energy to the contacts, thereby heating them and destroying the brain tissue. The ablation does not remove the tissue. Rather, it is left in place and typically scar tissue forms in the place where the ablation occurs. This procedure is also known as brain lesioning as it causes irreversible lesions.
We received 510(k) FDA clearance for our Evo cortical technology in
Prior to FDA approval or clearance of certain of our products, our primary activities were limited to, and our limited resources were 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.
We have incurred losses since inception. As of
Prior to FDA approval of certain of our products, our main source of cash was proceeds from the issuances of notes, common stock, warrants and unsecured loans. See "-Liquidity and Capital Resources-Capital Resources" below. While we have begun to generate revenue from the sale of products based on our cEEG and sEEG technology and through milestone payments from our current collaboration with Zimmer, 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, and we will need to obtain substantial additional funding in connection with our continuing operations through public or private equity or debt financings, through collaborations or partnerships with other companies or other sources.
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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-Liquidity Outlook" below
Recent Developments and Upcoming Milestones
Corporate Updates
In
We completed feasibility bench top testing with a new design of our diagnostic
and ablation depth electrode in the first calendar quarter of 2021, and signed a
contract with RBC Medical Innovations to develop and manufacture hardware (a
radio frequency generator) for the system in the third calendar quarter of 2021.
We are targeting the third calendar quarter of 2022 for completion of a
prototype of hardware and the submission of an application for FDA clearance in
early calendar 2023. We also completed an animal feasibility study at
COVID-19
On
? development of our technology has been and may continue to be delayed in fiscal
year 2021 and continuing into fiscal 2022 due to interruptions in global
manufacturing and shipping as a result of the COVID-19 pandemic and
macroeconomic conditions, including as one of our key manufacturing partners
and one of the Company's suppliers had staffing issues leading to delays in the
Company's development builds and delays in shipping product;
? the Company's own staff has been impacted by infections and mandatory
quarantines;
? the Company is currently experiencing and may continue to experience product
shortages of its primary component, polyimide film, due to supply chain
shortages attributed to COVID related issues;
? the Company is experiencing and may continue to experience delays in timelines
for product availability and delivery from vendors, including related to
staffing shortages, both generally and due to employee illness, and due to
increases in demand from other larger or more longstanding customers of our
suppliers placing large orders due to concerns with supply chain disruption and
the impact of COVID-19.
The Company's plans for further testing or clinical trials and costs to obtain components may be further impacted by the continuing effects of COVID-19, supply chain challenges and inflationary pressures.
The global outbreak of COVID-19 continues to rapidly evolve as new variants
emerge. 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
impact of inflation, the ultimate geographic spread of the disease and its
variants, the duration of the outbreak, travel restrictions and social
distancing in the
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 fiscal year 2022 and beyond.
Financial Overview Product Revenue
Our product revenue was derived from the sale of strip/grid, depth electrode and electrode cable assembly products based on Evo cortical and sEEG technology. For the foreseeable future, we anticipate that we will generate additional revenue from the sale of products based on Evo cortical and sEEG technology.
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We have received FDA 510(k) clearance for our cortical strip electrode, but we do not expect to generate any significant 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 for human use. 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.
Product Gross Profit (Loss)
Product gross profit (loss) represents our product revenue less our cost of product revenue. Our cost of product revenue consists of the manufacturing and materials costs incurred by our third-party contract manufacturer in connection with our strip/grid and depth electrode 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 achievement and timing of future milestones or level of sales required to earn royalty payments from Zimmer is uncertain. For a discussion of milestones and royalty payments under the Zimmer Development Agreement, see "-Liquidity and Capital Resources-Liquidity Outlook" below and see "Note 7 - Zimmer Development Agreement" included in our condensed financial statements included in "Part 1, Item 1 - Financial Statements" in this Report.
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 financial and administrative matters, and sales and marketing in connection with the commercial sale of cEEG strip/grid, sEEG depth electrode and electrode cable assembly products. We anticipate that our selling, 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 further 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 consists of interest costs related to our convertible notes issued in 2019 (the "2019 Paulson Notes") outstanding during the first quarter of fiscal year 2021.
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 outstanding during the first quarter of fiscal year 2021.
Other Income
Other income primarily consists of interest income related to our cash deposits and proceeds outside of normal operating activity relating to legal settlements.
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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
December 31,
(unaudited)
Period to
Period
2021 2020 Change
Product revenue $ 33,748 $ 71,474 $ (37,726 )
Cost of product revenue 46,844 109,131 (62,287 )
Product gross profit (loss) (13,096 ) (37,657 ) 24,561
Collaborations revenue 6,374 22,274 (15,900 )
Operating expenses:
Selling, general and administrative 1,742,141 1,193,860 548,281
Research and development 1,060,462 934,158 126,304
Total operating expenses 2,802,603 2,128,018 674,585
Loss from operations (2,809,325 ) (2,143,401 ) (665,924 )
Interest expense - (3,053 ) 3,053
Net valuation change of instruments measured at
fair value - 1,974 (1,974 )
Other income 1,850 185,000 (183,150 )
Loss before income taxes (2,807,475 ) (1,959,480 ) (847,995 )
Provision for income taxes - - -
Net loss $ (2,807,475 ) $ (1,959,480 ) $ (847,995 ) Product Revenue and Product Gross Profit (Loss)
Product revenue was
Collaborations Revenue
Collaborations revenue was
Selling, general and administrative expenses
Selling, general and administrative expenses were
Research and development expenses
Research and development expenses were
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Interest expense
Interest expense for the three months ended
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
Other Income
Other income during the three month period ended
Liquidity and Capital Resources
Overview
As of
Capital Resources
Our sources of cash to date have been limited collaboration and product revenues and proceeds from the issuances of notes with warrants, common stock with and without warrants and unsecured loans, with the terms of our most recent financings described below.
On
2021 Private Placement
On
In connection with the 2021 Private Placement, the Company agreed to file a
registration statement with the
Funding Requirements
As noted above, certain of our cash requirements relate to the funding of our
ongoing product development and commercialization operations and our milestone
and royalty obligations under our intellectual property licenses with the
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On
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. See "Note 4 - Commitments and Contingencies" included in our condensed financial statements included in "Part 1, Item 1 - Financial Statements" in this Report for more information about the WARF License and the Mayo Development Agreement.
Our other cash requirements within the next twelve months include accounts payable, accrued expenses, purchase commitments and other current liabilities. Our other cash requirements greater than twelve months from various contractual obligations and commitments include operating leases and contracted services. Refer to "Note 4 - Commitments and Contingencies" included in our condensed financial statements included in "Part 1, Item 1 - Financial Statements" in this Report for further detail of our lease obligations and the timing of expected future payments. Contracted services include agreements with third-party service providers for clinical research, product development, manufacturing, supplies, payroll services, equipment maintenance services, and audits for periods up to fiscal 2023.
We expect to satisfy our short-term and long-term obligations through cash on hand and, until we generate an adequate level of revenue from commercial sales to cover expenses, if ever, from future equity and debt financings.
Liquidity Outlook
For a discussion of potential fee payments under the Zimmer Development Agreement, see "Note 7 - Zimmer Development Agreement" included in our condensed financial statements included in "Part 1, Item 1 - Financial Statements" in this Report. The Company does not intend to deliver saleable product to Zimmer unless and until it receives regulatory clearance to expand the use of its Evo sEEG Electrode technology for up to 30 days, at which point the Company and Zimmer intend to commence negotiations regarding payments of applicable milestone payments described therein, notwithstanding the deadlines for the Product Availability Date and the Acceptance of all Deliverables for SEEG Products. Zimmer has exclusive global rights to distribute our strip and grid cortical electrodes, depth electrodes and electrode cable assembly products. Zimmer's failure to timely develop or commercialize these products would have a material adverse effect on our business and operating results. Further, our inability to agree with Zimmer on dates of completion for product development, regulatory clearance and commercialization milestones on which various fee payments to the Company are based under the Zimmer Development Agreement could have a material adverse impact on our financial and operating results.
At
The development and commercialization of our cortical strip, grid electrode and depth electrode technology is subject to numerous uncertainties, and we 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 further regulatory approvals and achieving 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 Three Months
Ended
December 31,
2021 2020
Net cash used in operating activities
(61,491 ) -
Net cash provided by financing activities 12,023,604 4,996,947
Net increase in cash $ 9,282,977 $ 3,092,715
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Net cash used in operating activities
Net cash used in operating activities was
Net cash used in operating activities was
Net cash used by investing activities
Net cash used by investing activities consisted of outlays for furniture and
equipment during the three months ended
Net cash provided by financing activities
Net cash provided by financing activities was
Net cash provided by financing activities was
Critical Accounting Estimates
Our financial statements are prepared in accordance with
Of these policies, the following are considered critical to an understanding of our condensed financial statements included in "Part 1, Item 1 - Financial Statements" in this Report as they require the application of the most subjective and the most complex judgments:
Revenues:
For discussion about the determination of collaborations revenue, product revenue and cost of product revenue, see "Note 7 - Zimmer Development Agreement" included in our condensed financial statements included in "Part 1, Item 1 - Financial Statements" in this Report. To date, we have not had, nor expect to have in the future, significant variable consideration adjustments related to product revenue, such as chargebacks, sales allowances and sales returns.
Stock-based Compensation
For discussions about the application of grant date fair value associated with our stock-based compensation, see "Note 9 - Stock-Based Compensation" included in our condensed financial statements included in "Part 1, Item 1 - Financial Statements" in this Report.
Income Tax Assets and Liabilities
Income tax assets and liabilities include income tax valuation allowances. For
additional information, see "Note 11 - Income Taxes" included in our condensed
financial statements included in "Part 1, Item 1 - Financial Statements" in this
Report and "Note 11 - Income Taxes" in Part II, Item 8 "Financial Statements" of
our Annual Report on Form 10-K for the year ended
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Contingencies
We are subject to numerous contingencies arising in the ordinary course of business, including legal contingencies. For additional information, see "Note 4 - Commitments and Contingencies" included in our condensed financial statements included in "Part 1, Item 1 - Financial Statements" in this Report.
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.
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