Notes to Condensed Consolidated Financial
Statements
(unaudited)
NOTE
1 – Description of Business and Basis of Presentation
NeuroOne
Medical Technologies Corporation (the “Company”), a Delaware Corporation, is an early-stage 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.
To
date, the Company has recorded no product sales and has a limited expense history. The Company is a development stage company
and its activities to date have included raising capital to fund the development of its proprietary technology and seeking regulatory
clearances required to initiate commercial activities.
The
Company is based in Minnetonka, Minnesota.
Basis
of presentation
The
accompanying condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have
been condensed or omitted pursuant to such rules and regulations. The condensed consolidated financial statements may not include
all disclosures required by U.S. GAAP; however, the Company believes that the disclosures are adequate to make the information
presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited
financial statements and the notes thereto for the nine month transition period ended September 30, 2018 included in the Transition
Report on Form 10-KT, as amended.
The condensed consolidated balance sheet at September 30, 2018 was derived from the audited financial statements of the Company.
In
the opinion of management, all adjustments, consisting of only normal recurring adjustments that are necessary to present fairly
the financial position, results of operations, and cash flows for the interim periods, have been made. The results of operations
for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods.
NOTE
2 – Going Concern
The accompanying condensed consolidated financial
statements have been prepared on the basis that the Company will continue as a going concern. The Company has incurred losses
since inception and had an accumulated deficit of $15,885,371 as of June 30, 2019. The Company does not have adequate liquidity
to fund its operations through September 30, 2019 without raising additional funds. These factors raise substantial doubt about
its ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that
might result from the outcome of this condition. Management intends to continue to seek additional financing to fund operations.
If the Company is not able to raise additional working capital, it will have a material adverse effect on the operations of the
Company and the development of its technology.
Through
June 30, 2019, the Company has completed a $528,000 unsecured loan financing, a $253,000 short-term promissory note financing
(which notes were amended and restated to become convertible promissory notes), a $1,625,120 convertible promissory note financing
of a planned $2.5 million subscription and a second $1,540,000 convertible promissory note financing of a planned $2 million subscription.
All of the convertible notes were ultimately converted into common stock and warrants. In addition, the Company entered into two
private placement transactions of its common stock and warrants beginning in July 2018 and December 2018, whereby $7.3 million
in gross proceeds were raised out of a planned $11.8 million maximum offering under the subscription agreements for both private
placements through June 30, 2019. See Note 13 – Subsequent Events for a description of financings that have closed after
June 30, 2019. The Company does not have adequate liquidity to fund its operations through September 30, 2019 without raising
additional funds. Management intends to continue to seek additional debt and/or equity financing to fund operations. However,
if the Company is unable to raise additional funds, or the Company’s anticipated operating results are not achieved, management
believes planned expenditures may need to be reduced in order to extend the time period that existing resources can fund the Company’s
operations. If management is unable to obtain the necessary capital, it may have to cease operations.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
NOTE
3 – Summary of Significant Accounting Policies
Management’s
Use of Estimates
The
preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements
and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to a concentration of credit risk consist of cash. The Company’s cash is
held by one financial institution in the United States. Amounts on deposit may at times exceed federally insured limits. Management
believes that the financial institution is financially sound, and accordingly, minimal credit risk exists with respect to the
financial institution. As of June 30, 2019, the Company did have deposits in excess of federally insured amounts by $999,931.
Common
Stock Valuation
Due
to the limited market liquidity for the Company’s common stock, the Company utilized methodologies in accordance with the
framework of the American Institute of Certified Public Accountants’ Technical Practice Aid, Valuation of Privately-Held
Company Equity Securities Issued as Compensation, to estimate the fair value of its common stock. The valuation methodology includes
estimates and assumptions that require the Company’s judgment. These estimates and assumptions include a number of objective
and subjective factors, including external market conditions affecting the biotechnology industry sector, and the likelihood of
achieving a liquidity event, such as an offering or sale. Significant changes to the key assumptions used in the valuations may
result in different fair values of common stock at each valuation date.
The
Company estimated its enterprise value on a continuing operations basis, using the market approach, with certain adjustments relating
to the thinly traded status of the Company. The traded price of the Company was deemed not to be an entirely reliable indication
of fair market value given the lack of trading liquidity. Therefore, in addition to applying partial weighting to the traded price,
the Company relied on forward revenue multiples from guideline public companies (“GPC”) for calendar year 2019 and
2020 and on the sales price of the Company’s common stock in recent private placement transactions (see Note 12 –
Stockholders’ Equity (Deficit)). The resulting equity value from the GPC method portion was allocated to common stock using
the option pricing method, and a discount for lack of marketability was applied. Based on the above methodology and weightings,
the Company derived a valuation conclusion of $2.27 and $2.30 per common share as of June 30, 2019 and September 30, 2018, respectively.
The
fair value the Company’s common stock is used as an input into the fair value determination of the warrants, stock option
or other equity awards that the Company has issued or are outstanding liabilities at the reporting date.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
Fair
Value of Financial Instruments
The
Company’s accounting for fair value measurements of assets and liabilities that are recognized or disclosed at fair value
in the condensed consolidated financial statements on a recurring or nonrecurring basis adheres to the Financial Accounting Standards
Board (FASB) fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of
the fair value hierarchy are as follows:
●
|
Level
1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the Company at the
measurement date.
|
|
|
●
|
Level
2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly
or indirectly, for substantially the full term of the asset or liability.
|
|
|
●
|
Level
3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are
not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability
at the measurement date.
|
As
of June 30, 2019 and September 30, 2018, the fair values of cash, other assets, accounts payable, accrued expenses and the unsecured
loans, while outstanding, approximated their carrying values because of the short-term nature of these assets or liabilities.
The estimated fair value of the convertible promissory notes of the Company was based on amortized cost which was deemed to approximate
fair value. The fair value of the warrant liability and the premium conversion derivatives associated with the convertible promissory
notes of the Company, while outstanding, were based on both the estimated fair value of our common stock of $2.29 and $2.30 as
of their conversion on February 28, 2019 and as of September 30, 2018, respectively, and cash flow models discounted at current
implied market rates evidenced in recent arms-length transactions representing expected returns by market participants for similar
instruments and are based on Level 3 inputs. There were no transfers between fair value hierarchy levels during the three
and nine months ended June 30, 2019 and 2018.
The
fair value of financial instruments measured on a recurring basis is as follows:
|
|
As
of June 30, 2019
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Premium
conversion derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
As
of September 30, 2018
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
817,155
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
817,155
|
|
Premium conversion derivatives
|
|
|
308,395
|
|
|
|
—
|
|
|
|
—
|
|
|
|
308,395
|
|
Total liabilities
at fair value
|
|
$
|
1,125,550
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,125,550
|
|
The
following table provides a roll-forward of the warrant liability and premium debt conversion derivatives measured at fair value
on a recurring basis using unobservable level 3 inputs for the nine month periods ended June 30, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Warrant liability
|
|
|
|
|
|
|
Balance as of beginning of period – October 1
|
|
$
|
817,155
|
|
|
$
|
774,172
|
|
Value assigned to warrants in connection with convertible promissory notes
|
|
|
—
|
|
|
|
916,444
|
|
Change in fair value of warrant liability
|
|
|
18,568
|
|
|
|
286,747
|
|
Reclassification to equity upon conversion of convertible promissory notes
|
|
|
(835,723
|
)
|
|
|
—
|
|
Balance as of end of period – June 30
|
|
$
|
—
|
|
|
$
|
1,977,363
|
|
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
|
|
2019
|
|
|
2018
|
|
Premium debt conversion derivatives
|
|
|
|
|
|
|
Balance as of beginning of period – October 1
|
|
$
|
308,395
|
|
|
$
|
441,823
|
|
Value assigned to the underlying derivatives in connection with convertible promissory notes
|
|
|
—
|
|
|
|
346,577
|
|
Change in fair value of premium debt conversion derivatives
|
|
|
111,195
|
|
|
|
(459,791
|
)
|
Reclassification to equity upon conversion of convertible promissory notes
|
|
|
(419,590
|
)
|
|
|
—
|
|
Balance as of end of period – June 30
|
|
$
|
—
|
|
|
$
|
328,609
|
|
Intellectual
Property
The
Company has entered into two licensing agreements with major research institutions, which allows for access to certain patented
technology and know-how. Payments under those agreements are capitalized and amortized to general and administrative expense over
the expected useful life of the acquired technology.
Impairment
of Long-Lived Assets
The
Company evaluates its long-lived assets, which consists of licensed intellectual property and property and equipment, for impairment
whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. The Company
assesses the recoverability of long-lived assets by determining whether or not the carrying value of such assets will be recovered
through undiscounted expected future cash flows. If the asset is considered to be impaired, the amount of any impairment is measured
as the difference between the carrying value and the fair value of the impaired asset. Through June 30, 2019, the Company has
not impaired any long-lived assets.
Property and
Equipment
Property
and equipment is recorded at cost and reduced by accumulated depreciation. Depreciation expense is recognized over the estimated
useful lives of the assets using the straight-line method. The estimated useful life for all asset classes is currently three years.
Tangible assets acquired for research and development activities and have alternative use are capitalized over the useful life
of the acquired asset. Estimated useful lives are periodically reviewed, and when appropriate, changes are made prospectively.
Software purchased for internal use consists primarily of amounts paid for perpetual licenses to third-party software providers
and installation costs. When certain events or changes in operating conditions occur, asset lives may be adjusted and an impairment
assessment may be performed on the recoverability of the carrying amounts. Maintenance and repairs are charged directly to expense
as incurred.
Debt
Issuance Costs
Debt
issuance costs are recorded as a reduction of the convertible promissory notes when applicable. Amortization of debt issuance
costs is calculated using the straight-line method over the term of the convertible promissory notes, which approximates the effective
interest method, and is recorded in interest expense in the accompanying condensed consolidated statements of operations.
Research
and Development Costs
Research
and development costs are charged to expense as incurred. Research and development expenses may include costs incurred in performing
research and development activities, including clinical trial costs, manufacturing costs for both clinical and pre-clinical materials
as well as other contracted services, license fees, and other external costs. Nonrefundable advance payments for goods and services
that will be used in future research and development activities are expensed when the activity is performed or when the goods
have been received, rather than when payment is made, in accordance with ASC 730,
Research and Development
.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
Warrant
Liability
The
Company issued warrants to purchase equity securities in connection with the issuance or amendment of the convertible promissory
notes. The Company accounts for these warrants as a liability at fair value when the number of shares is not fixed and determinable.
Additionally, issuance costs associated with the warrant liability are expensed as incurred and reflected as interest expense
in the accompanying condensed consolidated statements of operations. The Company adjusts the liability for changes in fair value
until the earlier of the exercise or expiration of the warrants for any period when pricing and number of shares to be exercised
becomes fixed, at which point the warrants will be classified in stockholders’ (deficit) equity provided that there are
sufficient authorized and unissued shares of common stock to settle the warrants and redeem any other contracts that may require
settlement in shares of common stock. Any future change in fair value of the warrant liability, when outstanding, is recognized
in the condensed consolidated statements of operations.
Premium
Debt Conversion Derivatives
The
Company evaluates all conversion and redemption features contained in a debt instrument to determine if there are any embedded
derivatives that require separation from the host debt instrument. An embedded derivative that requires separation is bifurcated
from its host debt instrument and a corresponding discount to the host debt instrument is recorded. The discount is amortized
and recorded to interest expense over the term of the host debt instrument using the straight-line method which approximates the
effective interest method. The separated embedded derivative is accounted for separately on a fair market value basis. The
Company records the fair value changes of a separated embedded derivative at each reporting period while outstanding in the condensed
consolidated statements of operations. The Company determined that the redemption features under the convertible promissory notes
qualified as embedded derivatives and were separated from their debt hosts.
Income
Taxes
For
the Company, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax base and operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that
some portion or all of the deferred tax asset will not be realized.
Net
Loss Per Share
For
the Company, basic loss per share of common stock is computed by dividing net loss by the weighted average number of shares of
common stock outstanding during the period.
Diluted
earnings or loss per share of common stock is computed similarly to basic earnings or loss per share except the weighted average
shares outstanding are increased to include additional shares from the assumed exercise of any common stock equivalents, if dilutive.
The Company’s convertible promissory notes, warrants, restricted stock units and stock options while outstanding are considered
common stock equivalents for this purpose. Diluted earnings is computed utilizing the treasury method for the warrants, restricted
stock units and stock options. Diluted earnings with respect to the convertible promissory notes utilizing the if-converted method
was not applicable during the three and nine month periods ended June 30, 2019 and 2018 as no conditions required for conversion
had occurred during these periods. No incremental common stock equivalents were included in calculating diluted loss per share
because such inclusion would be anti-dilutive given the net loss reported for the three and nine month periods ended June 30,
2019 and 2018.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
The
following potential common shares were not considered in the computation of diluted net loss per share as their effect would have
been anti-dilutive for the three and nine month periods ended June 30, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Warrants
|
|
|
6,836,813
|
|
|
|
189,750
|
(1)
|
Stock options
|
|
|
865,277
|
|
|
|
365,716
|
|
Restricted stock units
|
|
|
42,018
|
|
|
|
—
|
|
(1)
|
As
of June 30, 2018, there were additional potential warrants to be included which would be known, if and when a qualified financing
event greater than $3 million or a change of control transaction occurs in the future.
|
Recent
Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with
Customers (Topic 606)
, which supersedes the revenue recognition requirements in FASB ASC 605. The new guidance primarily states
that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods and services. In January 2017 and September
2017, the FASB issued several amendments to ASU 2014-09, including updates stemming from SEC Accounting Staff Announcement in July
2017. The amendments and updates included clarification on accounting for principal versus agent considerations (i.e., reporting
gross versus net), licenses of intellectual property and identification of performance obligations. These amendments and updates
do not change the core principle of the standard but provide clarity and implementation guidance. The Company has adopted this
standard on October 1, 2018 and selected the modified retrospective transition method. The Company modified its accounting policies
to reflect the requirements of this standard; however, the adoption did not affect the Company’s financial statements and
related disclosures for this period as the Company has yet to generate any revenues.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequently amended the guidance relating largely to transition
considerations under the standard in January 2017 and July 2018. The objective of this update is to increase transparency and
comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information
about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods
within those annual periods. The Company plans to adopt the standard on October 1, 2019, and will apply the modified retrospective
approach to each lease in existence at the adoption date to the extent a lease is subject to this guidance. As such, the Company
would not restate comparative periods and would recognize any cumulative adjustment to retained earnings on the date of the adoption.
The Company also plans to elect the package of practical expedients provided under the standard. Based on the Company’s
assessment to date, the new standard is not expected to have an impact on the Company’s consolidated balance sheets, statements
of operations or statements of cash flows. The finalization of our assessment may result in significant changes to our estimates.
In
July 2017, the FASB issued ASU No. 2017-11,
Earnings Per Share, Distinguishing Liabilities from Equity and Derivatives and
Hedging
, which changes the accounting and earnings per share for certain instruments with down round features. The amendments
in this ASU should be applied using a cumulative-effect adjustment as of the beginning of the fiscal year or retrospective adjustment
to each period presented and is effective for annual periods beginning after December 15, 2018 for public business entities,
including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the requirements
of this new guidance and has not yet determined its impact on the Company’s consolidated financial statements.
In
June 2018, the FASB issued ASU 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting
(ASU 2018-07), which expands the scope of Topic 718 to include share-based payment transactions for
acquiring goods and services from nonemployees. An entity should generally apply the requirements of Topic 718 to nonemployee
awards except in circumstances where there is specific guidance on inputs to an option pricing model and the attribution of cost.
ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services
to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The guidance also clarifies
that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted
in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606
, Revenue from
Contracts with Customers
(ASC 606)
.
This guidance is effective for annual reporting periods beginning after December
15, 2018, with early adoption permitted, but no earlier than an entity’s adoption date of ASC 606. The Company early adopted
ASU 2018-07 effective October 1, 2018. The guidance did not have an impact to the Company’s financial statements.
In
August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement
(ASU 2018-13)
.
The new guidance modifies the disclosure requirements in
Topic 820 as follows:
|
●
|
Removals:
the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of
transfers between levels; and the valuation processes for Level 3 fair value measurements.
|
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
|
●
|
Modifications:
for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation
of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated
the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure
is to communicate information about the uncertainty in measurement as of the reporting date.
|
|
●
|
Additions:
the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair
value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements.
|
This
guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should all be
applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments
should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is
permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional
disclosures until their effective date. The Company is currently evaluating the impact of the new guidance on its financial statements.
NOTE
4 – Commitments and Contingencies
Legal
From time to time, the Company is subject
to litigation and claims arising in the ordinary course of business. In May 2017, NeuroOne received a letter from PMT Corporation
(“PMT”), the former employer of Mark Christianson and Wade Fredrickson. PMT claimed that these officers had breached
their restrictive covenant obligations with PMT by virtue of their work for NeuroOne and such officer’s prior work during
employment with the prior employer, that these officers had breached their confidentiality and non-disclosure obligations to PMT
and federal and state law by misappropriating confidential and trade secret information, and that the Company is responsible for
tortious interference with contracts. The letter which purported to attach a noncompete agreement signed by Mr. Fredrickson demanded
that Mr. Fredrickson (who resigned from the Company in June 2017), Mr. Christianson and NeuroOne cease and desist all competitive
activities, that Mr. Fredrickson step down from his position and that Mr. Christianson and NeuroOne provide the former employer
access to NeuroOne’s systems to demonstrate that it is not using trade secrets or proprietary information nor competing
with the former employer.
On March 29, 2018, the Company was served
with a complaint filed by PMT adding the Company, NeuroOne and Mr. Christianson to its existing lawsuit against Mr. Fredrickson
in the Fourth Judicial District Court of the State of Minnesota. The complaint purported to attach Mr. Fredrickson’s noncompete
agreement as Exhibit A. In the lawsuit, PMT claims that Mr. Fredrickson and Mr. Christianson breached their non-competition, non-solicitation
and non-disclosure obligations, breached their fiduciary duty obligations, were unjustly enriched, engaged in unfair competition,
engaged in a civil conspiracy, tortiously interfered with PMT’s contracts and prospective economic advantage, and breached
a covenant of good faith and fair dealing. Against Mr. Fredrickson, PMT also alleges that he intentionally or negligently spoliated
evidence, made negligent or fraudulent misrepresentations, misappropriated trade secrets in violation of Minnesota law, and committed
the tort of conversion and statutory civil theft. Against the Company and NeuroOne, PMT alleges that the Company and NeuroOne
were unjustly enriched and engaged in unfair competition. PMT asked the Court to impose a constructive trust over the shares held
by Mr. Fredrickson and Mr. Christianson and to award compensatory damages, equitable relief, punitive damages, attorneys’
fees, costs and interest.
On April 18, 2018, Mr. Christianson, the
Company and NeuroOne, Inc. filed a motion for dismissal, which was heard by the Court on October 11, 2018. The motion for dismissal
states that: the contract claims against Mr. Christianson fail because his agreement was not supported by consideration; the Minnesota
Uniform Trade Secrets Act preempts plaintiff’s claims for unfair competition, civil conspiracy and unjust enrichment; plaintiff
fails to state a claim regarding alleged breach of the duties of loyalty and good faith/fair dealing; plaintiff cannot legally
obtain a constructive trust; plaintiff has insufficiently pled its tortious interference claims; and Plaintiff has not stated
a claim for unfair competition. On January 7, 2019, the judge granted the motion for dismissal with respect to PMT’s claim
for breach of the duty of good faith and fair dealing, and denied the motion for dismissal with respect to the other claims presented.
In April 2019 PMT served the Company, NeuroOne,
Inc and Christianson with a proposed Second Amended Complaint which included new claims against the Company and NeuroOne, Inc
for tortious interference with contract and tortious interference with prospective business advantage and punitive damages against
the Company, NeuroOne Inc. and Christianson. On June 28, 2019 the Company presented evidence indicating that PMT had participated
in a fraud on the Court, and sought an Order that PMT had waived the attorney client privilege.
On July 16, 2019 Defendants served PMT
with a joint notice of motion for sanctions seeking a variety of sanctions for litigation misconduct including, but not limited
to, dismissal of the case and an award of attorneys’ fees. The Company, NeuroOne Inc and Mr. Christianson further intend
to move for summary judgment on all remaining claims asserted against them as well as for leave to assert counterclaims against
PMT for abuse of process. A hearing date on these motions, as well as on PMT’s motion to amend its complaint to add additional
claims including punitive damages, has been set for August 30, 2019. No hearing date has yet been set on Defendants’ joint
motion for sanctions. The Company, NeuroOne, Inc. and Mr. Christianson (who has not worked for PMT since February 2012) intend
to continue to defend themselves vigorously.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
The
outcome and potential loss related to this matter is unknown and as of June 30, 2019 and the date of these condensed consolidated
financial statements the Company has not accrued a reserve for this matter.
Facility
Lease
The
Company entered into a non-cancellable facility lease for its operations and headquarters for an eleven month term beginning on
December 1, 2018. The monthly rent under the lease is $4,763. During the three and nine months ended June 30, 2019, rent expense
associated with the facility lease amounted to $14,289 and $33,341, respectively.
NOTE
5 – Intangibles and Property and Equipment
Intangibles
Intangible
assets consisted of the following at June 30, 2019:
|
|
Useful Life
|
|
|
|
Net Intangibles, September 30, 2018
|
|
12-13 Years
|
|
$
|
200,081
|
|
Less: amortization
|
|
|
|
|
(15,933
|
)
|
Net Intangibles, June 30, 2019
|
|
|
|
$
|
184,148
|
|
Amortization
expense was $5,311and $4,952 for the three months ended June 30, 2019 and 2018, respectively, and $15,933 and $14,168 for the
nine months ended June 30, 2019 and 2018, respectively.
Property
and Equipment
Property
and equipment held for use by category are presented in the following table:
|
|
June
30,
2019
|
|
|
September 30,
2018
|
|
Equipment
|
|
$
|
52,057
|
|
|
$
|
—
|
|
Software
|
|
|
1,895
|
|
|
|
—
|
|
Total property and equipment
|
|
|
53,952
|
|
|
|
—
|
|
Less accumulated depreciation
|
|
|
(694
|
)
|
|
|
—
|
|
Property and equipment, net
|
|
$
|
53,258
|
|
|
$
|
—
|
|
Depreciation
expense was $694 for three and nine months ended June 30, 2019.
NOTE
6 – Accrued Expenses
Accrued
expenses consisted of the following at June 30, 2019 and September 30, 2018:
|
|
June 30,
2019
|
|
|
September 30,
2018
|
|
License fees
|
|
$
|
—
|
|
|
$
|
65,000
|
|
Legal services
|
|
|
338,709
|
|
|
|
833,470
|
|
Accrued issuance costs
|
|
|
262,930
|
|
|
|
204,000
|
|
Accrued payroll
|
|
|
221,815
|
|
|
|
276,639
|
|
Other
|
|
|
117,550
|
|
|
|
211,913
|
|
|
|
$
|
941,004
|
|
|
$
|
1,591,022
|
|
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
NOTE
7 – Short-Term Promissory Notes and Unsecured Loan
Short-Term
Promissory Notes
The
Company issued short-term unsecured and interest-free promissory notes (the “Short-Term Notes”) for aggregate gross
proceeds of $253,000 in August 2017 which included free standing equity warrants. The Short-Term Notes were subsequently amended
in November 2017 to extend the maturity date and increase the number of shares of Common Stock issuable upon exercise of the related
warrants. The Short-Term Notes were also amended in March 2018 to become convertible, include new interest payment provisions
and new conversion features and to provide for the issuance of a replacement warrant (the “Replacement Warrant”) and
an additional warrant (the “Additional Warrant”) described more fully below. During the three and nine months ended
June 30, 2018, interest on the principal was $5,060 and $6,184, respectively.
Effective
July 2, 2018, the Company entered into debt conversion agreements with each Short-Term Note subscriber to (i) convert the outstanding
principal and accrued and unpaid interest (the “Outstanding Balance”) under the Short-Term Notes into shares of the
Company’s common stock based on the Outstanding Balance divided by $1.80 per share (the “Short-Term Note Conversion
Shares”); (ii) cancel and extinguish the Short-Term Notes; and (iii) amend and restate the Replacement Warrants and Additional
Warrants, as described more fully below, to make them immediately exercisable upon the conversion, at a per share exercise price
equal to $1.80 per share. As consideration for the early conversion of the Short-Term Notes, the Company issued each subscriber
a new warrant (the “Short-Term Note Payment Warrants”), exercisable for up to the number of shares of common stock
equal to the number of Short-Term Note Conversion Shares received by such subscriber; at a per share exercise price of $1.80 per
share. The Short-Term Note Payment Warrants became exercisable commencing on July 2, 2018, and expire on November 21, 2021.
Prior
to the debt conversion agreements, the November 2017 and the March 2018 amendments were both accounted for under the
provisions of extinguishment accounting. A loss on note extinguishments in the accompanying condensed consolidated statements
of operations for the three and nine months ended June 30, 2018 was recorded in the amount of zero and $330,797,
respectively, which represented the difference between the face value of the Short-Term Notes over the combined carrying
values of the Short-Term Notes and warrants on the date of the amendments. The fair value increase of the Short-Term Notes
and the warrants as amended over its adjusted carrying value at the time of the November 2017 amendment was $117,280 which
was recorded as additional paid-in capital. The fair value decrease of the Short-Term Notes and the warrants as amended over
its adjusted carrying value at the time of the March 2018 amendment was $1,170 and was recorded as a reduction to additional
paid-in capital. During the three and nine months ended June 30, 2018, interest related to amortization of discounts
associated with the separation of the equity warrants and issuance costs amounted to zero and $21,627,
respectively.
The
March 2018 amendment of the Short-Term Notes contained a 125% conversion premium in the event that a Short Term Note Qualified
Financing occurred at a price under $2.25 per common share. The Company determined that the redemption feature under the Short-Term
Notes qualified as an embedded derivative and was reflected as a liability in the amount of $49,668 at the time of the March 2018
amendment with a corresponding offset to extinguishment loss described above. Subsequent to the amendment, the embedded derivative
was accounted for separately on a fair market value basis. The Company recorded the fair value changes of the premium debt conversion
derivative associated with the Short-Term Notes in the condensed consolidated statements of operations for a benefit of $(46,471)
and $(46,428) for the three and nine months ended June 30, 2018, respectively.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
In
addition, the March 2018 amendment provided for the issuance of Replacement Warrants that were deemed to be free-standing instruments
and were accounted for as a liability given the variable number of shares issuable in connection with a possible change of control
conversion event. The Company recorded an initial liability of $137,722 upon issuance of the Replacement Warrants with an offset
to extinguishment loss as described above. The fair value changes of the warrant liability associated with the Short-Term Notes
were recorded at each reporting date in the condensed consolidated statements of operations which amounted to an expense of $12,701
and $10,331 for the three and nine months ended June 30, 2018, respectively. A Monte Carlo simulation model was used to estimate
the aggregate fair value of the Replacement Warrants as of June 30, 2018. Input assumptions used were as follows: a risk-free
interest rate of 2.65%; expected volatility of 50%; expected life of 3.39 years; and expected dividend yield of 0%. The underlying
stock price used in the analysis was on a non-marketable basis and was according to the market approach, considering both the
traded price and forward multiples from guideline public companies, using allocation and marketability-discount methodologies.
As
noted above, the Short-Term Notes were converted into shares of common stock and were not outstanding during the three and nine
month period ended June 30, 2019.
Unsecured
Loans
In December 2018, the Company received gross
proceeds from an unsecured loan represented by one promissory note in the amount of $100,000 from a stockholder owning over 5%
of the Company’s common stock. The loan was interest free and required that the Company repay the principal in full on the
earlier of the closing of an equity round of financing of the Company resulting in more than $5 million in gross proceeds or December
12, 2019. The loan was fully repaid by June 30, 2019.
In
November 2018, the Company received cash gross proceeds from unsecured loans represented by two promissory notes in the amounts
of $45,000 and $100,000 from a stockholder owning or affiliated with stockholders owning over 5% of the Company’s common
stock. The loans were interest free and required that the Company repay the principal in full on the earlier of the closing of
an equity round of financing of the Company resulting in more than $5 million in gross proceeds or November 14, 2019. The loans
were fully repaid by June 30, 2019.
On
May 17, 2018, the Company received cash proceeds of $168,000 from unsecured loans, represented by two promissory notes from a
stockholder owning or affiliated with stockholders owning over 5% of the Company’s common stock. The loans were interest
free and required that the Company repay the principal in full on the earlier to occur of (i) May 17, 2019 or (ii) the closing
of an equity round of financing of the Company that raises more than $5 million in gross proceeds. The loans included customary
events of default provisions. The loans were fully repaid by June 30, 2019.
On
March 20, 2018, the Company received cash proceeds from an unsecured loan, represented by a promissory note, for $115,000 from
a stockholder owning over 5% of the Company’s common stock. The loan was interest free and the Company repaid the principal
in full in the second quarter of 2019 as required on the earlier to occur of (i) March 20, 2019 or (ii) the closing of an equity
round of financing of the Company that raises more than $3 million in gross proceeds. The loan included customary events of default
provisions.
NOTE
8 – Convertible Promissory Notes and Warrant Agreements
|
|
As
of
June 30,
2019
|
|
|
As
of
September 30,
2018
|
|
2017
convertible promissory notes, net of discounts
|
|
$
|
—
|
|
|
$
|
1,306,776
|
|
Accrued
interest
|
|
|
—
|
|
|
|
87,028
|
|
|
|
$
|
—
|
|
|
$
|
1,393,804
|
|
2016
Convertible Promissory Notes
From
November 2016 to June 2017, the Company issued convertible promissory notes (the “Convertible Notes”) in an aggregate
principal amount of $1,625,120 and common stock purchase warrants (the “Warrants”) and entered into subscription agreements
with subscribers. The Company amended the Convertible Notes in December 2016 and November 2017 and the Warrants in June 2017 and
November 2017 to, among other things, change the terms of the underlying Warrants that included the removal of down round pricing
protection.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
On
July 2, 2018, the Company entered into debt conversion agreements with each Convertible Note subscriber to (i) convert the Outstanding
Balance under the Convertible Notes into shares of the Company’s common stock based on the Outstanding Balance divided by
$1.80 per share (the “2016 Note Conversion Shares”); (ii) cancel and extinguish the Convertible Notes; and (iii) amend
and restate the Warrants to make them immediately exercisable upon the conversion, at a per share exercise price equal to $1.80
per share. As consideration for the early conversion of the Convertible Notes, the Company issued each subscriber an additional
new warrant (the “2016 Note Payment Warrants”), exercisable for up to the number of shares of common stock equal to
the number of 2016 Note Conversion Shares received by such subscriber; at a per share exercise price of $1.80 per share. The 2016
Note Payment Warrants became exercisable commencing on July 2, 2018 and expire on November 21, 2021.
The
November 2017 amendment to the notes resulted in a substantial modification to the original Convertible Notes whereby the maturity
date was extended and the terms associated with the Warrants were revised. The Company recorded the Convertible Note amendment
under the provisions of extinguishment accounting. The fair value of the underlying Convertible Notes was $97,223 lower than the
carrying value of the Convertible Notes on the date of the modification. The $97,223 difference was recorded as a discount to
the debt with a gain on convertible note extinguishments in the accompanying condensed consolidated statements of operations for
the nine months ended June 30, 2018.
During
the three and nine months ended June 30, 2018, interest on the principal was $32,502 and $97,507, respectively, and interest related
to amortization of discounts related to the bifurcation of premium derivative liability, separation of warrants, revaluation discounts
and issuance costs amounted to $34,970 and $331,303, respectively. The fair value changes related to the underlying premium conversion
derivative amounted to a benefit of $(313,303) and ($419,279) during the three and nine month periods ended June 30, 2018, respectively.
The fair value changes relating to the warrant liability amounted to an expense of $116,111 and $257,194 during the three and
nine month periods ended June 30, 2018, respectively.
As
noted above, the Convertible Notes were converted into shares of common stock and were not outstanding during the three and nine
month periods ended June 30, 2019.
2017
Convertible Notes
From
October 2017 to May 2018, the Company issued convertible notes (the “2017 Convertible Notes”) in an aggregate principal
amount of $1,540,000 that bear interest at a fixed rate of 8% per annum and warrants to purchase shares of the Company’s
capital stock (the “New Warrants”). During the three and nine months ended June 30, 2019, interest on the principal
was zero and $51,333, respectively, and $28,733 and $56,227 during the three and nine months ended June 30, 2018, respectively.
The
Company initially entered into a subscription agreement with certain accredited investors and closed the initial private placement
of the 2017 Convertible Notes in October 2017. In December 2017, the Company and holders of a majority in aggregate principal
amount of the 2017 Convertible Notes entered into an amended and restated subscription agreement to amend the terms of the 2017
Convertible Notes and New Warrants. On December 31, 2018, the 2017 Convertible Notes were amended again to extend the maturity
date from December 31, 2018 to June 30, 2019. The amendment was accounted for as a troubled debt restructuring given the Company’s
financial condition and given the concession granted by the lenders with regards to pushing out the maturity date to June 30,
2019 with no corresponding compensation paid for the extension. The future undiscounted cash flows of the 2017 Convertible Notes
as amended exceeded their carrying value as of December 31, 2018. As such, no gain was recognized on December 31, 2018 and no
adjustments were made to the 2017 Convertible Note carrying value.
The
2017 Convertible Notes required the Company to repay the principal and accrued and unpaid interest thereon on June 30, 2019 (the
“2017 Convertible Notes Maturity Date”). If the Company consummated an equity round of financing resulting in more
than $3 million in gross proceeds before June 30, 2019 (the “2017 Convertible Notes Qualified Financing”), the outstanding
principal and accrued and unpaid interest on the 2017 Convertible Notes would have automatically converted into the securities
issued by the Company in the 2017 Convertible Notes Qualified Financing equal to the outstanding principal and accrued interest
on the 2017 Convertible Notes divided by 80% of the price per share of the securities issued by the Company in the 2017 Convertible
Notes Qualified Financing. The New Warrants would have also become exercisable upon a 2017 Convertible Notes Qualified Financing
for an amount of shares equal to the number of shares received by the holder in the 2017 Convertible Notes Qualified Financing
at the same price per share of the securities issued in the 2017 Convertible Notes Qualified Financing.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
Prior
to the December 2017 amendment, if the Company had raised more than $3,000,000 in an equity financing before October 4, 2022,
the outstanding principal and accrued and unpaid interest on the 2017 Convertible Notes would have automatically converted into
the securities issued by the Company in such financing based on the greater number of such securities resulting from either (i)
the outstanding principal and accrued interest on the 2017 Convertible Notes divided by $2.25 or (ii) the outstanding principal
and accrued interest on the 2017 Convertible Notes multiplied by 1.25, divided by the price paid per security in such financing.
The New Warrants would have also become exercisable in conjunction with the 2017 Convertible Notes Qualified Financing.
Lastly,
if a change of control transaction occurred prior to the earlier of a 2017 Convertible Notes Qualified Financing or the 2017 Convertible
Notes Maturity Date, the 2017 Convertible Notes would have, at the election of the holders of a majority of the outstanding principal
of the 2017 Convertible Notes, either become payable on demand as of the closing date of such transaction, or become convertible
into shares of common stock immediately prior to such transaction at a price per share equal to the lesser of (i) the per share
value of the common stock as determined by the Board as if in connection with the granting of stock based compensation or in a
private sale to a third party in an arms-length transaction or (ii) at the per share consideration to be paid in such transaction.
Change of control meant 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. The New Warrants would have also become exercisable upon a change of control transaction for an amount of shares equal
to the number of shares received by the holder upon conversion in connection with such transaction at the same price per share
that the 2017 Convertible Notes converted in the change of control transaction.
The
December 2017 amendment resulted in a substantial modification to the original 2017 Convertible Notes whereby the maturity date
was moved up to December 2018 from October 2022 and the terms associated with the embedded features were revised as described
above. The Company recorded the 2017 Convertible Note amendment under the provisions of extinguishment accounting. The fair value
of the underlying Convertible Notes was $294,615 higher than the carrying value of the Convertible Notes net of unamortized debt
discount on the date of the modification. The $294,615 difference as well as legal costs associated with the amendment in the
amount of $8,945 were recorded as a loss on convertible notes extinguishment totaling $303,560 in the accompanying condensed consolidated
statements of operations for the nine months ended June 30, 2018. After the modification, there remained a debt discount of $27,371
of which zero and $6,575 was amortized during the three and nine months ended June 30, 2019, respectively, and $6,503 and $14,221
during the three and nine months ended June 30, 2018, respectively.
The
2017 Convertible Notes contained a conversion discount in the event of a 2017 Convertible Notes Qualified Financing to equal the
outstanding principal and accrued interest on the 2017 Convertible Notes divided by 80% of the price per share of the securities
issued by the Company in the 2017 Convertible Notes Qualified Financing. The embedded feature qualified as an embedded derivative
and was separated from its debt host. The bifurcation of the embedded derivative from its debt host resulted in a discount to
the 2017 Convertible Notes in the amount of $77,085 and $296,909 for the convertible debt issued during the three and nine months
ended June 30, 2018, respectively; there were no issuances of 2017 Convertible Notes during the three and nine months ended June
30, 2019. The discount was being amortized to interest expense over the term of the 2017 Convertible Notes through December 31,
2018 using the straight-line method which approximated the effective interest method. The amortization expense was zero and $62,158
for the three and nine months ended June 30, 2019, respectively, and $53,987 and $84,823 for the three and nine months ended June
30, 2018, respectively. The embedded derivative was accounted for separately on a fair market value basis. The Company recorded
the fair value changes of the premium debt conversion derivative associated with all of the 2017 Convertible Notes in the condensed
consolidated statements of operations which amounted to an expense of zero and $111,195 for the three and nine months ended June
30, 2019, respectively, and $4,126 and $5,916 for the three and nine months ended June 30, 2018, respectively.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
The
New Warrants were deemed to be free-standing instruments and were accounted initially as a liability given the variable number
of shares issuable in connection with a change of control conversion event and ultimately as equity upon conversion of the 2017
Convertible Notes on February 28, 2019 discussed further below. A Monte Carlo simulation model was used to estimate the aggregate
fair value of the New Warrants up to the conversion date of the 2017 Convertible Notes. Input assumptions used were as follows:
risk-free interest rate of 2.52% and 2.94% as of February 28, 2019 and September 30, 2018, respectively; expected volatility of
50% as of February 28, 2019 and September 30, 2018; expected life of 5.0 and 5.21 years as of February 28, 2019 and September
30, 2018, respectively; and expected dividend yield of 0% as of February 28, 2019 and September 30, 2018. The underlying stock
price used in the analysis was on a non-marketable basis and was according to the market approach, considering the traded price,
forward multiples from guideline public companies and recent private placement transactions, using allocation and marketability-discount
methodologies. The 2017 Convertible Note proceeds assigned to the New Warrants were $203,287 and $778,722 during the three and
nine month period ended June 30, 2018, respectively, and recorded as a warrant liability. There were no proceeds assigned to warrants
in connection with issuances of 2017 Convertible Notes during the three and nine month period ended June 30, 2019. The discount
was amortized to interest expense over the term of the 2017 Convertible Notes through December 31, 2018 using the straight-line
method which approximated the effective interest method. The amortization expense was zero and $163,060 for the three and nine
month periods ended June 30, 2019, respectively, and $141,510 and $221,987 for the three and nine month periods ended June 30,
2018, respectively. The Company also recorded the fair value changes of the warrant liability associated with all of the
2017 Convertible Notes in the condensed consolidated statements of operations which amounted to an expense of zero and $18,568
for the three and nine months ended June 30, 2019, respectively, and amounted to an expense of $11,205 and $19,222 for the three
and nine months ended June 30, 2018, respectively.
In
connection with the 2017 Convertible Notes, the Company incurred original issuance costs in the amount of $8,133 which consisted
of legal costs and were recorded as issuance cost discounts to the 2017 Convertible Notes, of which zero and $1,431 was amortized
to interest expense during the three and nine months ended June 30, 2019, respectively, and $1,138 and $1,671 was amortized to
interest expense during the three and nine months ended June 30, 2018, respectively.
On
February 28, 2019 following the 2017 Convertible Notes Qualified Financing, the outstanding principal and interest on the 2017
Convertible Notes were 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 $3.00 per share. The conversion was accounted for as a debt extinguishment
given the bifurcation of the embedded premium debt conversion feature. The fair value of the newly issued common shares and warrants
associated with the 2017 Convertible Notes conversion relative to the carrying value of the debt and fair value of warrant liability
and premium derivative liability on the conversion date was $553,447 and was recorded as a loss on note extinguishments in the
accompanying condensed consolidated statements of operations for the nine months ended June 30, 2019. In addition, the previously
issued New Warrants became immediately exercisable for 839,179 shares of common stock.
NOTE
9 – Defined Contribution Plan
The
Company adopted a 401(k) defined contribution plan (the “401K Plan”) on January 1, 2017, which was amended and restated
on March 1, 2018 (the “Restatement”), for all employees over age 21. Employees can defer up to 100% of their compensation
through payroll withholdings into the 401K Plan subject to federal law limits. The Company began matching in the fourth quarter
of 2017 on deferrals at 100% of deferrals up to 3% of one’s contributions and 50% on deferrals over 3%, but not exceeding
5% of one’s contributions up through the Restatement. The Company’s matching contributions to employee deferrals became
discretionary after the Restatement. The Company may also make discretionary profit sharing contributions under the 401K Plan
in the future, but it has not done so through June 30, 2019.
Employee
contributions and any employer matching contributions made to satisfy certain non-discrimination tests required by the Internal
Revenue Code are 100% vested upon contribution. Discretionary employer matches to employee deferrals vest over a six year period
beginning on the second anniversary of an employee’s date of hire. Discretionary profit sharing contributions vest over
a five year period beginning on the first anniversary of an employee’s date of hire. The amount of matching contributions
made during the three and nine month periods ended June 30, 2019 was zero and a benefit reduction of $(4,359), respectively. The
amount of matching contributions made during the three and nine month periods ended June 30, 2018 was $3,421 and $30,421, respectively.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
NOTE
10 – Stock-Based Compensation
Share-based
compensation expense was included in general and administrative and research and development expenses as follows in the accompanying
condensed consolidated statements of operations:
|
|
Three Months Ended
|
|
|
Nine months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
General and administrative
|
|
$
|
169,658
|
|
|
$
|
115,000
|
|
|
$
|
310,763
|
|
|
$
|
367,000
|
|
Research and development
|
|
|
62,430
|
|
|
|
4,510
|
|
|
|
110,522
|
|
|
|
6,947
|
|
Total share-based compensation
|
|
$
|
232,088
|
|
|
$
|
119,510
|
|
|
$
|
421,285
|
|
|
$
|
373,947
|
|
Equity
Awards
During
the three and nine month periods ended June 30, 2019, under the 2017 Equity Incentive Plan (the “2017 Plan”), the
Company granted 350,119 and 675,667 stock options to its board of directors, employees, consultants and scientific advisory board
members where vesting commences upon grant ranging over an immediate to 48 month period based on a time of service vesting condition.
The grant date fair value of grants was $1.13 per share during both the three and nine month periods ended June 30, 2019. In
addition, during the three and nine month periods ended June 30, 2019, the Company granted 42,018 restricted stock units (“RSUs”)
under the 2017 Plan to its board of directors where vesting occurs monthly over a twelve month period. The grant date fair value
of RSUs was $2.38 per unit during both the three and nine month periods ended June 30, 2019. There were no options or RSUs granted
during the three and nine month periods ended June 30, 2018.
The
weighted-average assumptions used in the Black-Scholes option-pricing model are as follows for the stock options granted during
the three and nine month periods ended June 30, 2019:
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
Expected stock price volatility
|
|
|
50.7
|
%
|
|
|
50.4
|
%
|
Expected life of options (years)
|
|
|
5.4
|
|
|
|
5.6
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk free interest rate
|
|
|
2.2
|
%
|
|
|
2.4
|
%
|
During
the three and nine months ended June 30, 2019, 222,633 and 262,308 stock options vested, respectively. During the three and nine
months ended June 30, 2018, no stock options vested. During the three and nine months ended June 30, 2019, 85,051 and 178,606
stock options were exercised, respectively. No stock options were exercised during the three and nine months ended June 30, 2018.
Lastly, no stock options were forfeited during the three and nine months ended June 30, 2019 and 2018.
Evergreen
provision
Under
the 2017 Plan, the shares reserved automatically increase on January 1st of each year, for a period of not more than ten
years from the date the 2017 Plan is approved by the stockholders of the Company, commencing on January 1, 2019 and ending on
(and including) January 1, 2027, to an amount equal to 13% of the fully-diluted shares outstanding as of December 31st of
the preceding calendar year. Notwithstanding the foregoing, the Board may act prior to January 1st of a given year to provide
that there will be no January 1st increase in the share reserve for such year or that the increase in the share reserve for such
year will be a lesser number of shares of common stock than would otherwise occur pursuant to the preceding sentence. “Fully
Diluted Shares” as of a date means an amount equal to the number of shares of common stock (i) outstanding and (ii) issuable
upon exercise, conversion or settlement of outstanding awards under the 2017 Plan and any other outstanding options, warrants
or other securities of the Company that are (directly or indirectly) convertible or exchangeable into or exercisable for shares
of common stock, in each case as of the close of business of the Company on December 31 of the preceding calendar year. On January
1, 2019, 498,848 shares were added to 2017 Plan as a result of the evergreen provision.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
As
of June 30, 2019, 1,489,759 shares were available for future issuance on a combined basis under the 2016 Equity Incentive Plan
and 2017 Plan. Unrecognized stock-based compensation was $544,107 as of June 30, 2019. The unrecognized share-based expense is
expected to be recognized over a weighted average period of 2.8 years.
Other
Stock-Based Awards
250,000
shares of common stock were reserved in February 2018 as a result of a consulting agreement for investor relations services executed
in February 2018. Under the agreement, 50,000 and 150,000 shares of common stock were awarded during the nine month periods ended
June 30, 2019 and 2018, respectively, subject to time-based vesting conditions. The compensation expense related to the vested
common shares was included in the total stock-based expense referenced above which totaled $115,000 and $367,000 for the nine
month periods ended June 30, 2019 and 2018, respectively. The expense was based on the fair value of the underlying common stock
at the point of vesting which ranged from $2.30 and $2.52 per share during the periods presented. The underlying stock price used
in the analysis was on a non-marketable basis and was according to the market approach, considering both the traded price and
forward multiples from guideline public companies, using allocation and marketability-discount methodologies. As of November
2018, all shares under the February 2018 share reserve were issued from the Company’s authorized but unissued shares, but
were not eligible to be issued under the 2016 Plan or 2017 Plan reserves.
In
addition, the Company previously had formal obligations to issue future common stock options relating to several consulting agreements.
A total of 38,874 stock options were granted in May 2019 related to these consulting agreements. The corresponding stock-based
expense related to the stock-based awards was included in research and development expense in the accompanying condensed consolidated
statements of operations.
NOTE
11 – Income Taxes
The
effective tax rate for the three and nine months ended June 30, 2019 and 2018 was zero percent. As a result of the analysis of
all available evidence as of June 30, 2019 and September 30, 2018, the Company recorded a full valuation allowance
on its net deferred tax assets. Consequently, the Company reported no income tax benefit during the three and nine
months ended June 30, 2019 and 2018. If the Company’s assumptions change and the Company believes that it will be able
to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets
will be recognized as a reduction of future income tax expense. If the assumptions do not change, each period the Company could
record an additional valuation allowance on any increases in the deferred tax assets.
NOTE
12 – Stockholders’ Equity (Deficit)
2018
Private Placement
From
July 9, 2018 through November 30, 2018 (the final closing), the Company entered into subscription agreements (each, a “Purchase
Agreement”) with certain accredited investors (the “Purchasers”), pursuant to which the Company, in a private
placement (the “2018 Private Placement”), agreed to issue and sell to the Purchasers units (each, a “Unit”),
each consisting of (i) 1 share (each, a “Share”) of common stock and (ii) a warrant to purchase 1 share of common
stock at an initial exercise price of $3.00 per share (the “2018 Warrants”). The initial closing of the 2018 Private
Placement was consummated on July 9, 2018. As of the termination of the 2018 Private Placement on December 12, 2018, the Company
had issued and sold an aggregate of 615,200 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 (zero and 170,000 Units were sold during the three and nine month
periods ended June 30, 2019, respectively).
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
Under
the Purchase Agreement, the Company agreed to use the net proceeds from the 2018 Private Placement to pay the outstanding principal
and accrued interest on its 2017 Convertible Notes if such notes did not convert prior to maturity, to pay the principal on its
unsecured term loans, for research and development, clinical studies, legal fees and sales and marketing expenses, as well as
working capital and general corporate purposes. The Company granted the Purchasers indemnification rights with respect to its
representations, warranties and agreements under the Purchase Agreement.
The
2018 Warrants are exercisable beginning on the date of issuance and will expire on July 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 consolidated balance sheets based on their relative fair value to the underlying common shares issued.
The relative fair value of the 2018 Warrants issued during the nine month period ended June 30, 2019 was $115,674 and was based
on the Black-Scholes pricing model. Input assumptions used were as follows on a weighted average basis: a risk-free interest rate
of 2.9%; expected volatility of 49.8%; expected life of 4.6 years; and expected dividend yield of 0%. The underlying stock price
used in the analysis was on a non-marketable basis and was according to the market approach, considering both the traded price
and forward multiples from guideline public companies, using allocation and marketability-discount methodologies.
In
February 2019, the Company amended its engagement letter with one of its placement agents in the 2018 Private Placement, HRA Capital
(“HRA”), acting through its affiliate, Corinthian Partners, LLC, each of which are affiliates of one of the Company’s
greater than 5% stockholders. Pursuant to the original agreement (prior to the amendment), the Company agreed to pay HRA 10% of
the gross proceeds (the “HRA Fee”) received by the Company in subsequent private placement transactions from investors
with whom HRA or Corinthian Partners, LLC had material contact with for purposes of the engagement letter (the “Prospects”),
provided such compensation would only be paid in connection with private placement transactions that closed within 12 months of
the expiration of the engagement letter (the “Tail Period”). The Company agreed to issue to HRA warrants to purchase
shares of Common Stock (or common stock equivalents) in an amount equal to 10% of the shares purchased by Prospects during the
Tail Period (“HRA Warrants”).
In
February 2019, the Company and HRA agreed (i) to extend the Tail Period until June 30, 2019, (ii) to modify the HRA Fee so that
HRA is entitled to receive a cash fee equal to 8% of the gross proceeds received by the Company from Prospects in all subsequent
private placement transactions and (iii) to modify the HRA Warrants so that they are exercisable to purchase shares of Common
Stock (or common stock equivalents) in an amount equal to 8% of the shares of Common Stock purchased by Prospects in subsequent
private placements (collectively, the “HRA Amendments”). Upon issuance, the HRA Warrants will be immediately exercisable
and expire five years from the closing of the related transaction.
In
connection with the 2018 Private Placement, the Company recorded issuance costs in the amount of a credit of $(18,052) during
the three months ended June 30, 2019 stemming largely from the February 2019 HRA commission structure change, and an expense of
$17,614 during the nine month period ended June 30, 2019. The issuance costs included commissions to the brokers equal to 8% of
the gross proceeds from the sale of the Units that qualify for the commission which amounted to $6,440 during the nine month period
ended June 30, 2019. In addition to the brokers’ commission, the issuance costs included the estimated value of the 5-year
warrants to be issued to the brokers to purchase an amount of common stock equal to 8% of the total amount of qualifying Shares
sold in the 2018 Private Placement at an exercise price of $3.00 per share upon the close of the 2018 Private Placement. A commission
liability increase in the amount of $3,834 was recorded during the nine month period ended June 30, 2019 related to the 36,096
broker warrants issuable upon the close of the 2018 Private Placement. Lastly, third party legal costs in the amount $7,340 comprised
the balance of the issuance costs incurred during the nine month period ended June 30, 2019.
In
connection with the 2018 Private Placement, the Company entered into registration rights agreements with each of the Purchasers
pursuant to which the Company agreed to file a registration statement with the SEC covering the resale of the shares of common
stock sold in the 2018 Private Placement and the shares of common stock issuable upon exercise of the 2018 Warrants. The Company
agreed to file such registration statement within 75 days of the final closing of the 2018 Private Placement. Each registration
rights agreement included customary indemnification rights in connection with the registration statement. The registration statement was filed with the SEC on February 11, 2019, and declared effective by the SEC on February 28,
2019.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
2019
Private Placement
On December 12, 2018, the Board of Directors
of the Company terminated the 2018 Private Placement. From December 28, 2018 through June 30, 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 Private Placement”), agreed to issue and sell
Units (the “2019 Units”), each consisting of (i) 1 share of common stock and (ii) a warrant to purchase 1 share of
common stock at an initial exercise price of $3.00 per share (the “2019 Warrants”), to the New Purchasers. The initial
closing of the 2019 Private Placement was consummated on December 28, 2018. The Company issued and sold an aggregate of 2,292,179
Units at $2.50 per Unit to the New Purchasers, for total gross proceeds to the Company of approximately $5,730,448 before deducting
offering expenses from December 28, 2018 through June 30, 2019 (388,200 and 2,292,179 Units were sold during the three and nine
month period ended June 30, 2019, respectively). The 2019 Private Placement was terminated on July 1, 2019 (See Note 13- Subsequent
Events).
In
connection with the 2019 Private Placement, the Company has agreed to issue and sell to accredited investors up to a maximum of
4,000,000 2019 Units (the “Maximum Offering”) at a price of $2.50 per 2019 Unit for total gross proceeds to the Company
of up to $10,000,000. The Maximum Offering may be increased by the Company in its sole discretion, without notice. If the Company
issues the Maximum Offering amount, 4,000,000 shares of common stock would be issuable upon exercise of the 2019 Warrants. Under
the 2019 Purchase Agreement, the Company has agreed to use the net proceeds from the 2019 Private Placement to pay the outstanding
principal and accrued interest on its convertible promissory notes if such notes do not convert prior to maturity, to pay the
principal on its unsecured term loans, for research and development, clinical studies, legal fees and sales and marketing expenses,
as well as working capital and general corporate purposes. The Company has granted the New Purchasers indemnification rights with
respect to its representations, warranties and agreements under the 2019 Purchase Agreement.
The
2019 Warrants are exercisable beginning on the date of issuance and will expire on December 28, 2023, five years from the date
of the first closing of the 2019 Private Placement. Prior to expiration, subject to the terms and conditions set forth in the
2019 Warrants, the holders may exercise the 2019 Warrants for shares of common stock by providing notice to the Company and paying
the $3.00 per share exercise price for each share so exercised. The relative fair value of the 2019 Warrants issued during the
three and nine month period ended June 30, 2019 was $261,950 and $1,563,191, respectively, and was based on the Black-Scholes
pricing model. Input assumptions used were on a weighted average basis as follows: a risk-free interest rate of 2.1% and 2.4%
for the three and nine months ended June 30, 2019, respectively; expected volatility of 50.7% and 50.6% for the three and nine
months ended June 30, 2019, respectively; expected life of 4.6 years and 4.8 years for the three and nine months ended June 30,
2019, respectively; and expected dividend yield of 0% for the three and nine months ended June 30, 2019. The underlying stock
price used in the analysis was on a non-marketable basis and was according to the market approach, considering traded price, forward
multiples from guideline public companies and recent private placement transactions, using allocation and marketability-discount
methodologies.
In
connection with the 2019 Private Placement, Paulson Investment Company, LLC (“Paulson”) received a cash commission
equal to 12% of the gross proceeds from the sale of the 2019 Units sold by Paulson. In addition to the brokers’ commission,
the Company issued 5-year warrants to Paulson to purchase an amount of Common Stock equal to 10% of the total amount of Shares
sold in the 2019 Private Placement at an exercise price of $2.75 per share upon the termination of the 2019 Private Placement.
HRA received a cash commission equal to 8% of the gross proceeds from the sale of the 2019 Units sold by HRA. In addition to the
brokers’ commission, the Company issued 5-year warrants to HRA to purchase an amount of Common Stock equal to 8% of the
total amount of Shares sold by HRA in the 2019 Private Placement at an exercise price of $3.00 per share upon the termination
of the 2019 Private Placement.
The
issuance costs incurred during the three and nine month period ended June 30, 2019 under the 2019 Private Placement were $117,393
and $929,821, respectively. Issuance costs incurred through June 30, 2019 included cash commissions equal to $641,654 and third
party legal costs in the amount of $97,350. In addition, issuance costs included the estimated value of the 5-year warrants in
the amount of $190,817 to be issued to the brokers to purchase an amount of common stock equal to 193,417 shares.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
Warrant
Activity and Summary
The
following table summarizes warrant activity during the nine month period ended June 30, 2019:
|
|
|
|
|
Exercise Price
|
|
|
Weighted Average
|
|
|
Weighted
Average
|
|
|
|
Warrants
|
|
|
Per Warrant
|
|
|
Exercise Price
|
|
|
Term
(years)
|
|
Outstanding and exercisable at September 30, 2018
|
|
|
2,927,572
|
|
|
$
|
1.80
- 3.00
|
|
|
$
|
1.98
|
|
|
|
3.39
|
|
Issued
|
|
|
4,140,537
|
|
|
$
|
2.50
- 3.00
|
|
|
$
|
2.90
|
|
|
|
—
|
|
Exercised
|
|
|
(231,296
|
)
|
|
$
|
1.80
|
|
|
$
|
1.80
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Outstanding and exercisable at June 30, 2019
|
|
|
6,836,813
|
|
|
$
|
1.80
- 3.00
|
|
|
$
|
2.54
|
|
|
|
3.79
|
|
As
of June 30, 2019, 244,073 warrants were committed to be issued in connection with 2018 Private Placement and 2019 Private Placement
at an exercise price ranging from $2.75 to $3.00 per share.
NOTE
13 – Subsequent Events
2019
Private Placement – Subsequent Issuances and Termination
The
Company issued 2019 Units for aggregate gross proceeds of $115,000 on July 1, 2019 upon which the Company terminated the 2019
Private Placement. See Note 12 – Stockholders Equity (Deficit) for more information on the 2019 Units.
Broker Warrants
In connection with the 2019 Private Placement,
on July 1, 2019, the Company issued (i) 5-year warrants to Paulson and its affiliates to purchase 193,417 shares of common stock
at an exercise price of $2.75 per share and (ii) 5-year warrants to Corinthian Partners, LLC, an affiliate of HRA, and certain
other HRA affiliates, to purchase 17,760 shares of common stock at an exercise price of $3.00 per share.
In connection with the 2018 Private Placement
and prior convertible note offerings, on July 1, 2019, the Company issued to affiliates of HRA (i) 5-year warrants to purchase
36,096 shares of common stock at an exercise price of $3.00 per share, and (ii) 5-year warrants to purchase 135,512 shares of common
stock at an exercise price of $2.00 per share.
NeuroOne Medical
Technologies Corporation
Form 10-Q