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, 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 endedSeptember 30, 2020 and our Quarterly Report on Form 10-Q for the quarter endedDecember 31, 2020 , 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 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 ofMarch 31, 2021 , we had an accumulated deficit of$35.2 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.
AtMarch 31, 2021 , we had$11.3 million in cash deposits. Our existing cash and cash equivalents should be sufficient to fund our operating expenses through at least twelve months from the date of this filing. We will, however, 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. 23NeuroOne Medical Technologies Corporation Form 10-Q Recent Developments Reverse Stock Split Effective after the close of business onMarch 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 OnJanuary 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 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$83,333 under the Paycheck Protection Program. 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 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 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 or our ability to up-list from our current OTC Market ("OTCQB"). 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 six months ended
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.
24
NeuroOne Medical Technologies Corporation
Form 10-Q
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 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.
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.
Other Income
Consists of proceeds outside of normal operating activity relating to legal
settlements.
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
March 31,
(unaudited)
Period to
Period
2021 2020 Change
Product revenue $ 18,240 $ - $ 18,240
Cost of product revenue 39,363 - 39,363
Product gross profit (loss) (21,123 ) - (21,123 )
Collaborations revenue 20,113 - 20,113
Operating expenses:
Selling, general and administrative 1,313,252 1,035,256 277,996
Research and development 1,081,429 342,102 739,327
Total operating expenses 2,394,681 1,377,358 1,017,323
Loss from operations (2,395,691 ) (1,377,358 ) (1,018,333 )
Net valuation change of instruments measured at
fair value - 31,716 (31,716 )
Other income 1,775 - 1,775
Loss before income taxes (2,393,916 ) (1,345,642 ) (1,048,274 )
Provision for income taxes - - -
Net loss $ (2,393,916 ) $ (1,345,642 ) $ (1,048,274 ) Product Revenue and Product Gross Profit (Loss)
Product revenue and product gross profit (loss) was$18,000 and$(21,000) , respectively, during the three months endedMarch 31, 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. There was no product revenue or product gross profit (loss) recognized during the comparable prior year period. Collaborations Revenue Collaborations revenue was$20,000 for the three months endedMarch 31, 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 second 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$1.3 million for the three months endedMarch 31, 2021 , compared to$1.0 million for the three months endedMarch 31, 2020 . The$0.3 million increase was primarily due to a net increase in sales and marketing expenses of$0.3 million . Additionally, stock-based compensation decreased by$0.2 million in the current quarter when compared to the prior year period, but was offset by an increase in other operating expenses of$0.2 million on a net basis when compared to the second quarter of fiscal year 2020. 26NeuroOne Medical Technologies Corporation Form 10-Q
Research and development expenses
Research and development expenses were$1.1 million for the three months endedMarch 31, 2021 , compared to$0.3 million during for the three months endedMarch 31, 2020 . The$0.7 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.
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 endedMarch 31, 2021 and 2020 was a zero and a benefit of$32,000 , 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. Other Income Other income during the three months endedMarch 31, 2021 consisted of proceeds from the sale of certain supplies in the amount of$2,000 . We did not have other income during the comparable prior year period.
Comparison of the Six Months Ended
The following table sets forth the results of operations for the six months
ended
For the
six months ended
March 31,
(unaudited)
Period to
Period
2021 2020 Change
Product revenue $ 89,714 $ - $ 89,714
Cost of product revenue 148,494 - 148,494
Product gross profit (loss) (58,780 ) - (58,780 )
Collaborations revenue 42,387 - 42,387
Operating expenses:
Selling, general and administrative 2,507,112 2,347,422 159,690
Research and development 2,015,587 843,921 1,171,666
Total operating expenses 4,522,699 3,191,343 1,331,356
Loss from operations (4,539,092 ) (3,191,343 ) (1,347,749 )
Interest expense (3,053 ) (2,697,507 ) 2,694,454
Net valuation change of instruments measured at
fair value 1,974 (93,858 ) 95,832
Other income 186,775 - 186,775
Loss before income taxes (4,353,396 ) (5,982,708 ) 1,629,312
Provision for income taxes - - -
Net loss $ (4,353,396 ) $ (5,982,708 ) $ 1,629,312
27
NeuroOne Medical Technologies Corporation
Form 10-Q
Product Revenue and Product Gross Profit (Loss)
Product revenue and product gross profit (loss) was$90,000 and$(59,000) during the six months endedMarch 31, 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 initial minimum royalty fee to WARF of$50,000 for calendar year 2020, in connection with our license agreements. There was no product revenue or product gross profit (loss) recognized during the comparable prior year period. Collaborations Revenue
Collaborations revenue was$42,000 for the six months endedMarch 31, 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 six months endedMarch 31, 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$2.5 million for the six months endedMarch 31, 2021 , compared to$2.3 million for the six months endedMarch 31, 2020 . The$0.2 million increase was primarily due to an increase in sales and marketing expenses of$0.4 million and other operating expenses and fees of$0.3 million , offset in part by a decrease in stock-based compensation of$0.6 million .
Research and development expenses
Research and development expenses were$2.0 million for the six months endedMarch 31, 2021 , compared to$0.8 million during for the six months endedMarch 31, 2020 . The$1.2 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 six months ended
Interest expense for the six months endedMarch 31, 2020 was$2.7 million and consisted of non-cash interest expense in connection with our 2019 Paulson Notes described further below. Interest expense was comprised of issuance costs of$0.9 million and day-one interest at issuance of$1.8 million representing the amount by which fair value exceeded note proceeds.
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 six months endedMarch 31, 2021 and 2020 was a benefit of$2,000 and an expense of$0.1 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. Other Income Other income during the six months endedMarch 31, 2021 consisted principally of proceeds received in connection with thePMT Corporation litigation in the amount of$0.2 million . We did not have other income during the comparable
prior
year period.
28
NeuroOne Medical Technologies Corporation
Form 10-Q
Liquidity and Capital Resources
Historical Capital Resources As ofMarch 31, 2021 , our principal source of liquidity consisted of cash deposits of$11.3 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 OnJanuary 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 onJanuary 14, 2021 . In connection with the 2021 Private Placement, the Company agreed to file a registration statement with theSEC 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 onJanuary 12, 2021 and filed such registration statement onFebruary 10, 2021 . Common Stock Offerings OnJuly 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. OnOctober 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 theSEC covering the resale of the shares of common stock sold in the private placement onAugust 11, 2020 .
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. 29NeuroOne Medical Technologies Corporation Form 10-Q 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 . InJuly 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) withZimmer, Inc. Refer to "-Liquidity and Capital Resources-Historical Capital Resources" in our Annual Report on Form 10-K for the year endedSeptember 30, 2020 for additional information related to the 2020 Paulson Convertible 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 . BetweenApril 24, 2020 andDecember 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 endedSeptember 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"). PPP 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. PPP loans have a maturity of 2 years and an interest rate of 1%. Prepayments may be made without penalty.
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 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 endedSeptember 30, 2020 for additional information related to the 2019 Unit Private Placement. 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 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 endedSeptember 30, 2020 for additional information related to the 2018 Private Placement. 30NeuroOne Medical Technologies Corporation Form 10-Q
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 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 endedSeptember 30, 2020 for additional information related to the Series 3 Notes and Warrants (2017 Convertible Notes). Series 2 Notes and Warrants
In
Series 1 Notes and Warrants FromNovember 2016 toJune 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 endedSeptember 30, 2020 for additional information related to the Series 1 Notes and warrants. Unsecured Loans
From
Funding Requirements and Outlook
AtMarch 31, 2021 , we had$11.3 million in cash deposits. Our existing cash and cash should be sufficient to fund our operating expenses through at least twelve months from the date of this filing. Prior to the close of the 2021 Private Placement, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the years endedSeptember 30, 2020 and 2019, 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 adequate liquidity to fund our operating expenses. While our future operating activities under the distribution and development agreement withZimmer, 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 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. The minimum annual royalty payment for calendar year 2020 in the amount of$50,000 was paid inJanuary 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. 31NeuroOne 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 was due until we started selling our products. As ofMarch 31, 2020 ,$2,691 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 endedSeptember 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 six Months EndedMarch 31, 2021 2020
Net cash used in operating activities
(2,059 ) (40,224 )
Net cash provided by financing activities 11,523,949 3,001,797 Net increase in cash
$ 7,237,788 $ 486,495
Net cash used in operating activities
Net cash used in operating activities was$4.3 million for the six months endedMarch 31, 2021 , which consisted of a net loss of$4.4 million partially offset principally by non-cash stock-based compensation, depreciation, amortization related to intangible assets, revaluation of convertible notes and operating lease expense, totaling approximately$0.6 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$0.5 million . The change in operating assets and liabilities was primarily attributable to a net decrease in accounts payable and accrued expenses attributed to the timing of payments. Net cash used in operating activities was$2.5 million for the six months endedMarch 31, 2020 , which consisted of a net loss of$6.0 million partially offset primarily by non-cash interest, stock-based compensation, depreciation, amortization related to intangible assets, revaluation of convertible notes, totaling approximately$3.9 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$0.4 million . The change in operating assets and liabilities was primarily attributable to a decrease in accounts payable and accrued expenses and to an increase in our prepaid expenses. 32NeuroOne Medical Technologies Corporation Form 10-Q
Net cash used by investing activities
Net cash used by investing activities was
Net cash provided by financing activities
Net cash provided by financing activities was$11.5 million for the six months endedMarch 31, 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 six months endedMarch 31, 2021 resulting in additional cash proceeds of$0.2 million . Net cash provided by financing activities was$3.0 million for the six months endedMarch 31, 2020 , which consisted primarily of net proceeds received upon the issuance of the 2019 Paulson Notes and common stock offering totaling$3.0 million in the aggregate and proceeds from the exercise of stock options in
the amount of$1,000 . 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 six months endedMarch 31, 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.
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.
33
NeuroOne Medical Technologies Corporation
Form 10-Q
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 endedSeptember 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.
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