Item
1. Financial Statements
NeuroOne
Medical Technologies Corporation
Condensed
Consolidated Balance Sheets
|
|
September 30,
|
|
|
NeuroOne, Inc.
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
70,029
|
|
|
$
|
522,217
|
|
Prepaid expenses and other assets
|
|
|
7,146
|
|
|
|
53,823
|
|
Total current assets
|
|
|
77,175
|
|
|
|
576,040
|
|
Intangible assets, net
|
|
|
190,637
|
|
|
|
180,890
|
|
Total assets
|
|
$
|
267,812
|
|
|
$
|
756,930
|
|
|
|
|
|
|
|
|
|
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Liabilities and Stockholders’ Deficit
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|
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|
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Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
916,734
|
|
|
$
|
264,343
|
|
Short-term promissory notes and unsecured loan
|
|
|
204,074
|
|
|
|
50,000
|
|
Convertible promissory notes, net and accrued interest
|
|
|
1,459,841
|
|
|
|
225,197
|
|
Premium debt conversion derivative
|
|
|
441,823
|
|
|
|
137,650
|
|
Total current liabilities
|
|
|
3,022,472
|
|
|
|
677,190
|
|
Warrant liability
|
|
|
774,172
|
|
|
|
345,960
|
|
Total liabilities
|
|
|
3,796,644
|
|
|
|
1,023,150
|
|
|
|
|
|
|
|
|
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Commitments and contingencies (Note 4)
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|
|
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|
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|
|
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Stockholders’ deficit:
|
|
|
|
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|
|
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Preferred stock, $0.001 par value; 10,000,000 and 5,000,000 shares authorized as of September 30, 2017 and
December 31, 2016, respectively; no shares issued or outstanding as of September 30, 2017 and December 31, 2016.
|
|
|
—
|
|
|
|
—
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|
Common stock, $0.001 par value ; 100,000,000 and 45,000,000 shares authorized as of September 30, 2017 and
December 31, 2016, respectively; and 7,864,994 and 5,216,565 shares issued and outstanding as of September 30, 2017 and December
31, 2016, respectively.
|
|
|
7,865
|
|
|
|
31
|
|
Additional paid–in capital
|
|
|
162,741
|
|
|
|
119
|
|
Accumulated deficit
|
|
|
(3,699,438
|
)
|
|
|
(266,370
|
)
|
Total stockholders’ deficit
|
|
|
(3,528,832
|
)
|
|
|
(266,220
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
267,812
|
|
|
$
|
756,930
|
|
See
accompanying notes to condensed consolidated financial statements
NeuroOne
Medical Technologies Corporation
Condensed
Consolidated Statements of Operations
(unaudited)
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NeuroOne LLC
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|
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NeuroOne LLC
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Three months ended September 30,
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Nine months ended
September 30,
|
|
|
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2017
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|
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2016
|
|
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2017
|
|
|
2016
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
622,141
|
|
|
$
|
1,941
|
|
|
$
|
1,798,131
|
|
|
$
|
6,009
|
|
Research and development
|
|
|
271,651
|
|
|
|
—
|
|
|
|
500,408
|
|
|
|
—
|
|
Total operating expenses
|
|
|
893,792
|
|
|
|
1,941
|
|
|
|
2,298,539
|
|
|
|
6,009
|
|
Loss from operations
|
|
|
(893,792
|
)
|
|
|
(1,941
|
)
|
|
|
(2,298,539
|
)
|
|
|
(6,009
|
)
|
Interest expense
|
|
|
(515,377
|
)
|
|
|
(3,635
|
)
|
|
|
(1,134,529
|
)
|
|
|
(10,698
|
)
|
Net loss and comprehensive loss
|
|
$
|
(1,409,169
|
)
|
|
$
|
(5,576
|
)
|
|
$
|
(3,433,068
|
)
|
|
$
|
(16,707
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
$
|
(0.55
|
)
|
|
|
|
|
Number of shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
7,540,135
|
|
|
|
|
|
|
|
6,217,076
|
|
|
|
|
|
See accompanying notes to condensed consolidated
financial statements
NeuroOne
Medical Technologies Corporation
Condensed
Consolidated Statements of Cash Flows
(unaudited)
|
|
|
|
|
NeuroOne LLC
|
|
|
|
Nine months ended September 30, 2017
|
|
|
Nine months ended September 30, 2016
|
|
Operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,433,068
|
)
|
|
$
|
(16,707
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
13,368
|
|
|
|
5,823
|
|
Stock-based compensation
|
|
|
76,794
|
|
|
|
|
|
Forgiveness of share subscription agreement for founders’ shares
|
|
|
9,051
|
|
|
|
|
|
Non-cash interest on convertible promissory notes
|
|
|
76,359
|
|
|
|
—
|
|
Non-cash discount amortization on short-term promissory notes and convertible promissory notes
|
|
|
943,427
|
|
|
|
—
|
|
Non-cash note issuance costs attributed to warrant liability
|
|
|
38,119
|
|
|
|
—
|
|
Revaluation of premium debt conversion derivative
|
|
|
90,212
|
|
|
|
—
|
|
Revaluation of warrant liability
|
|
|
(12,707
|
)
|
|
|
—
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
46,677
|
|
|
|
—
|
|
Accrued expenses
|
|
|
642,099
|
|
|
|
10,884
|
|
Net cash used in operating activities
|
|
|
(1,509,669
|
)
|
|
|
—
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of short-term promissory notes and convertible promissory notes
|
|
|
675,705
|
|
|
|
—
|
|
Proceeds from issuance of warrants
|
|
|
502,415
|
|
|
|
—
|
|
Repayment of short-term unsecured loan
|
|
|
(50,000
|
)
|
|
|
—
|
|
Issuance costs related to short-term promissory notes and convertible promissory notes
|
|
|
(38,719
|
)
|
|
|
—
|
|
Issuance costs related to warrants
|
|
|
(31,920
|
)
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
1,057,481
|
|
|
|
—
|
|
Net decrease in cash
|
|
|
(452,188
|
)
|
|
|
—
|
|
Cash at beginning of period
|
|
|
522,217
|
|
|
|
—
|
|
Cash at end of period
|
|
$
|
70,029
|
|
|
$
|
—
|
|
Supplemental non-cash investing and financing transactions:
|
|
|
|
|
|
|
|
|
Bifurcation of premium conversion derivative related to convertible promissory notes
|
|
$
|
213,961
|
|
|
$
|
—
|
|
Accrued issuance costs attributed to short term promissory notes and convertible promissory notes
|
|
$
|
42,811
|
|
|
$
|
—
|
|
Accrued issuance costs attributed to warrant liability
|
|
$
|
38,119
|
|
|
$
|
—
|
|
Common stock issued in connection with purchase of intangible assets
|
|
$
|
23,115
|
|
|
$
|
—
|
|
See
accompanying notes to condensed consolidated financial statements
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
NOTE
1 – Organization and Basis of Presentation
On July 20, 2017, NeuroOne Medical Technologies
Corporation , a Delaware Corporation, (the “Company”), through a wholly owned acquisition subsidiary, acquired 100%
of the outstanding capital stock of NeuroOne, Inc. (“NeuroOne”) in a reverse triangular merger and reorganization
pursuant to Section 368(a) of the Internal Revenue Code (the “Acquisition”). The Acquisition was accounted for as
a capital transaction, or reverse recapitalization. NeuroOne was the accounting acquirer in this transaction. As such, the historical
financial statements of NeuroOne and its predecessor NeuroOne LLC (the “LLC”) reflect operations of the Company for
all periods presented prior to the date of Acquisition. NeuroOne, Inc. was formed on October 7, 2016 and acquired the LLC on October
27, 2016 (the “Merger”) as described more fully below. The accompanying condensed consolidated financial statements
subsequent to the Acquisition include those of the Company, as well as those of its wholly owned subsidiary NeuroOne.
Subsequent
to the Acquisition, the Company’s operating activities are the same as those of NeuroOne, an early-stage medical technology
company, engaged in the development of comprehensive neuromodulation cEEG and sEEG monitoring, ablation, and brain stimulation
solutions to diagnose and treat patients with epilepsy, Parkinson’s disease, dystonia, essential tremors, and other brain
related disorders. The Company is based in Eden Prairie, Minnesota.
Acquisition
The
transactions contemplated by the agreement were consummated on July 20, 2017 (the “Closing”) and, pursuant to the
terms of the agreement, (i) all outstanding shares of common stock of NeuroOne, par value $0.0001 per share (the “NeuroOne
Shares”) were exchanged for shares of the Company’s common stock, par value $0.001 per share (the “Company Shares”)
based on the exchange ratio of 17.0103706 Company Shares for every one NeuroOne Share (the “Exchange Ratio”), resulting
in the Company issuing, on July 20, 2017, an aggregate of 6,291,994 Company Shares for all of the then-outstanding NeuroOne Shares,
(ii) all outstanding options of NeuroOne were replaced with options to purchase Company Shares based on the Exchange Ratio, with
corresponding adjustments to their respective exercise prices, pursuant to which the Company reserved 992,265 Company Shares for
issuance upon the exercise of options, (iii) all warrants of NeuroOne, Inc. were replaced with warrants to purchase Company Shares
and (iv) the Company assumed the outstanding convertible promissory notes of NeuroOne. NeuroOne options had been issued pursuant
to the NeuroOne 2016 Equity Incentive Plan. Pursuant to the agreement, the Company assumed the NeuroOne 2016 Equity Incentive
Plan upon the Closing.
NeuroOne
Medical Technologies Corporation
Notes
to Condensed Consolidated Financial Statements, continued
(unaudited)
Pursuant
to the Acquisition, the Company acquired 100% of NeuroOne Shares in exchange for the issuance of Company Shares and NeuroOne became
the Company’s wholly-owned subsidiary. Also at the Closing, Mr. Samad (the majority owner of the Company prior to the Acquisition)
tendered for cancellation 3,500,000 Company Shares held by him as part of the conditions to Closing.
At
the time of Acquisition, the Company had authorized 100,000,000 shares of common stock with a par value of $0.001 and 10,000,000
shares of preferred stock with a par value of $0.001.
All issued and outstanding common
stock share amounts, options for common stock and per share amounts contained in the condensed consolidated financial statements
were retroactively adjusted to reflect the Exchange Ratio for all periods presented. The number of authorized shares for common
and preferred stock and their respective par values per share as of December 31, 2016 reflect those of the Company prior to the
Acquisition.
Merger
The
LLC was formed on December 12, 2013 and operated as a limited liability company until it was merged with and into NeuroOne on
October 27, 2016 with NeuroOne as the surviving entity of the “Merger”. NeuroOne was formed on October 7, 2016 under
different ownership than the LLC. As a result of the Merger, all of the properties, rights, privileges, powers and franchises
of the LLC vested in NeuroOne, and all debts, liabilities and duties of the LLC became the debts, liabilities and duties of NeuroOne
with the exception of the LLC’s license agreement with Wisconsin Alumni Research Foundation (“WARF”) which required
WARF’s approval for transfer (See Note 4 – Commitments and Contingencies). The purpose of the Merger was to change
the jurisdiction of NeuroOne’s incorporation from Minnesota to Delaware, change the ownership of the LLC’s underlying
assets, and to convert from a limited liability company to a corporation.
NeuroOne
and the LLC were not entities under common control. As the LLC did not have an integrated set of activities that contained the
required complement of inputs, processes and outputs to be considered a business, the Merger was accounted for as an asset acquisition
as prescribed under Accounting Standards Codification (ASC) 805 –
Business Combinations
.
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 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 fiscal year ended December 31, 2016 included in the NeuroOne Current Report on Form 8-K filed on July 20, 2017. The condensed
balance sheet at December 31, 2016 was derived from the audited financial statements of NeuroOne.
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.
NeuroOne
Medical Technologies Corporation
Notes
to Condensed Consolidated Financial Statements, continued
(unaudited)
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 $3,699,438 as of September 30, 2017.
Prior to the Merger, the LLC also incurred losses since its inception and had cumulative losses of $49,930 as of the date of the
Merger. The Company does not have adequate liquidity to fund its operations throughout fiscal 2018 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 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 September 30, 2017, the Company
has completed both a $253,000 short-term promissory note financing and a $1,625,120 convertible promissory note financing of a
planned $2.5 million subscription. The Company does not have adequate liquidity to fund its operations throughout fiscal 2017 without
raising additional funds. Management believes that the currently available resources from the short-term promissory note and convertible
promissory note financings combined with funds expected to be raised in the last quarter of fiscal 2017 will be sufficient to enable
the Company to meet its operating plan through at least September 30, 2018. 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.
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 September 30, 2017, the Company did not have deposits in excess of federally insured amounts.
Prior
to October 27, 2016, the LLC did not maintain a bank account. Any expenses incurred while the LLC was organized as a limited liability
company were paid by the sole member of the LLC.
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 measurement date.
|
NeuroOne
Medical Technologies Corporation
Notes
to Condensed Consolidated Financial Statements, continued
(unaudited)
As
of September 30, 2017 and December 31, 2016, the fair values of cash, other assets, accrued expenses and the unsecured loan approximated
their carrying values because of the short-term nature of these assets or liabilities. The estimated fair value of the short-term
promissory notes and 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 premium conversion derivative associated with the convertible promissory
notes was based on cash flow models discounted at current implied market rates evidenced in recent arms-length transactions representing
expected returns by market participants for similar instruments which were based on Level 3 inputs. There were no transfers
between fair value hierarchy levels during the three and nine month periods ended September 30, 2017.
The
fair value of financial instruments measured on a recurring basis is as follows:
|
|
As of September 30, 2017
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
774,172
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
774,172
|
|
Premium conversion derivative
|
|
|
441,823
|
|
|
|
—
|
|
|
|
—
|
|
|
|
441,823
|
|
Total liabilities at fair value
|
|
$
|
1,215,995
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,215,995
|
|
|
|
As of December 31, 2016
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
345,960
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
345,960
|
|
Premium conversion derivative
|
|
|
137,650
|
|
|
|
—
|
|
|
|
—
|
|
|
|
137,650
|
|
Total liabilities at fair value
|
|
$
|
483,610
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
483,610
|
|
The
following table provides a roll-forward of the warrant liability and premium conversion derivative measured at fair value on a
recurring basis using unobservable level 3 inputs for the nine months ended September 30, 2017:
Warrant liability
|
|
Nine months ended
September 30,
2017
|
|
Balance as of beginning of period
|
|
$
|
345,960
|
|
Issuance of warrants in connection with convertible promissory notes
|
|
|
440,919
|
|
Change in fair value of warrant liability
|
|
|
(12,707
|
)
|
Balance as of end of period
|
|
$
|
774,172
|
|
Premium conversion derivative
|
|
Nine months ended
September 30,
2017
|
|
Balance as of beginning of period
|
|
$
|
137,650
|
|
Value assigned to the underlying derivative in connection with convertible notes
|
|
|
213,961
|
|
Change in fair value of premium conversion derivative
|
|
|
90,212
|
|
Balance as of end of period
|
|
$
|
441,823
|
|
There
were no financial instruments measured on a fair value recurring basis during the nine month period ended September 30, 2016.
NeuroOne
Medical Technologies Corporation
Notes
to Condensed Consolidated Financial Statements, continued
(unaudited)
Intellectual
Property
NeuroOne
and the LLC have entered into two licensing agreements with major research institutions, which allows for access to certain patented
technology and know-how. Milestone 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 their long-lived assets, which consists entirely of licensed intellectual property 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 September 30, 2017, the Company has
not impaired any long-lived assets.
Debt
Issuance Costs
Debt
issuance costs are recorded as a reduction of the short-term promissory notes and convertible promissory notes. Amortization of
debt issuance costs is calculated using the straight-line method over the term of respective short-term and 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 comprise 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
.
Warrant
Liability
The
Company issued warrants to purchase equity securities in connection with the issuance of the convertible promissory notes (see
Note 8 – Convertible Promissory Notes and Warrant Agreements). The Company accounts for these warrants as a liability at
fair value as the number of shares were not fixed and determinable at the issuance date. Additionally, issuance costs associated
with the warrants are expensed as incurred and reflected as interest expense in the accompanying condensed consolidated statements
of operations. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or
expiration of the warrant, or until such time, if any, as the 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 will be recognized as a component of interest expense in the condensed
consolidated statements of operations.
Premium
Debt Conversion Derivative
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 to interest expense at each reporting period. The Company
issued convertible promissory notes that contained a 125% conversion premium in the event that a qualified financing occurs at
a price under $2.25 per common share (see Note 8 – Convertible Promissory Notes and Warrant Agreements). We also issued
2017 Convertible Notes that contained a 125% conversion premium in the event that a qualified financing occurs at a price under
$2.8125 per common share (see Note 13 – Subsequent Events). The Company determined that the redemption feature under the
convertible promissory notes qualified as an embedded derivative and was separated from its debt host.
NeuroOne
Medical Technologies Corporation
Notes
to Condensed Consolidated Financial Statements, continued
(unaudited)
Income
Taxes
For NeuroOne, 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 of all of the deferred tax asset
will not be realized.
The
LLC operated as a single-member LLC from formation on December 12, 2013 until it was merged into NeuroOne on October 27, 2016.
As such, it was a disregarded legal entity for income tax purposes. Accordingly, no provision for income taxes was included in
the financial statements for the period from January 1, 2016 through October 26, 2016.
Net
Loss Per Share
The
LLC was a single-member LLC for which no units were outstanding. Accordingly, earnings per share is not presented for the LLC.
For
NeuroOne, 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 stock options, convertible promissory notes and warrants are considered common stock equivalents for this
purpose. Diluted earnings is computed utilizing the treasury method for the stock options and warrants. Diluted earnings with
respect to the convertible promissory notes utilizing the if-converted method was not applicable during the three and nine months
ended September 30, 2017 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 months ended September 30, 2017.
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 September 30, 2017:
Warrants
|
|
|
1,074,181
|
|
Stock options
|
|
|
365,716
|
|
Recent
Accounting Pronouncements
In
January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments — Overall: Recognition and Measurement
of Financial Assets and Financial Liabilities
. The guidance affects the accounting for equity investments, financial liabilities
under the fair value option and the presentation and disclosure requirements of financial instruments. The guidance is effective
in the first quarter of fiscal 2018 for public entities and for all other entities in the first quarter of fiscal 2019. Early
adoption is permitted for the accounting guidance on financial liabilities under the fair value option. The Company is currently
evaluating the impact of the new guidance on its financial statements.
In
May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
(ASU 2016-09)
, which provides guidance about which changes to the terms or conditions of a share-based payment award
require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods
beginning after December 15, 2017. 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 financial statements.
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
and after December 15, 2019 for all other 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
financial statements.
NeuroOne
Medical Technologies Corporation
Notes
to Condensed Consolidated Financial Statements, continued
(unaudited)
NOTE
4 – Commitments and Contingencies
WARF
License Agreement
On
October 1, 2014, the LLC entered into an exclusive start-up company license agreement with the Wisconsin Alumni Research Foundation
(“WARF”) for WARF’s neural probe array and thin film electrode technology (the “2014 WARF Agreement”).
The LLC was to make $110,000 in milestone payments depending on achievement of certain development and approval milestones or
within twelve months of signing the 2014 WARF Agreement. Additionally, if the LLC was successful in obtaining regulatory approval,
the LLC was to pay royalties to WARF on a percentage of net sales of products of the licensed technology. Under the terms of the
2014 WARF Agreement, amounts that remained unpaid more than 30 days after they were due, accrued interest at 1 percent per month.
Milestone payments due in 2015 were not made to WARF. From October 27, 2016 until the 2014 WARF Agreement was amended as described
below, the LLC was in default under the 2014 WARF Agreement. In addition, the LLC was not able to transfer the rights and obligations
under the 2014 WARF Agreement to NeuroOne at the time of the Merger (October 27, 2016) without the consent of WARF, which was
received when the 2014 WARF Agreement was amended in February 2017 as described below. In connection with the Merger and in accordance
with ASC 805-50, NeuroOne estimated the fair value of consideration payable to WARF and recorded an intangible asset of $90,000
with a corresponding accrued expense.
This
agreement was subsequently amended in February 2017 (as so amended, the “2017 WARF Agreement”) whereby WARF consented
to the transfer of the rights and obligations under the license agreement from the LLC to NeuroOne (which are now the Company’s
rights and obligations, following the Acquisition). In the 2017 WARF Agreement, a contingent payment amount of $120,000 is due
in the event that the Company completes a qualified financing. The Company is also obligated to pay royalties to WARF based on
a percentage of net sales of products of licensed technology with minimum royalties of $50,000 and $100,000 for calendar years
2019 and 2020, respectively, and $150,000 per year beginning in 2021 through the duration of the 2017 WARF Agreement. Subject
to earlier termination, the WARF License otherwise expires by its terms on the date that no valid claims on the patents licensed
thereunder remain. The Company expects the latest expiration of a licensed patent to occur in 2030. The 2017 WARF Agreement is
also subject to certain cancellation provisions with 90 days’ notice should the Company elect not to continue to use the
licensed technology.
The
Company has agreed to diligently develop, manufacture, market and sell products under the WARF License in the United States during
the term of the agreement and, specifically, that the Company will submit a business plan to WARF by February 1, 2018 and file
an application for 510(k) marketing clearance with the FDA by February 1, 2019. WARF may terminate the 2017 WARF Agreement in
the event that the Company fails to meet these milestones on 30 days’ written notice, if the Company defaults on the payments
of amounts due to WARF or fails to timely submit development reports, actively pursue the development plan or breaches any other
covenant in the 2017 WARF Agreement and fails to remedy such default in 90 days or in the event of certain bankruptcy events involving
the Company. WARF may also terminate this license (i) on 90 days’ notice if the Company fails to have commercial sales of
one or more FDA-approved products under the 2017 WARF Agreement by March 31, 2019 or (ii) if, after royalties earned on sales
begin to be paid, such earned royalties cease for more than four calendar quarters.
NeuroOne
Medical Technologies Corporation
Notes
to Condensed Consolidated Financial Statements, continued
(unaudited)
Mayo
Agreement
On October 3, 2014, the LLC entered into
an exclusive license and development agreement with the Mayo Foundation for Medical Education and Research (“Mayo”)
related to certain intellectual property and development services for thin film electrode technology (“2014 Mayo Agreement”).
The LLC was to make milestone payments depending on achievement of certain development and approval milestones and sales targets,
none of which were met as of December 31, 2015. Additionally, if the LLC was successful in obtaining regulatory approval, the
LLC was to pay royalties to Mayo based on a percentage of net sales of products of the licensed technology through the term of
the 2014 Mayo Agreement, set to expire May 25, 2037. Also, the LLC was obligated to issue common stock to Mayo if certain events
occurred. Upon the LLC’s Merger with NeuroOne on October 27, 2016, the rights under the 2014 Mayo Agreement transferred
to NeuroOne, and certain milestones were attained. Therefore, NeuroOne recorded $300 related to 10,000 shares of common stock
issued to Mayo and $91,709 for the intellectual property. Milestone payments due under the 2014 Mayo Agreement and accrued were
$91,709 as of September 30, 2017 and December 31, 2016. Under the terms of the 2014 Mayo Agreement, amounts that remained unpaid
accrued interest at 2 percent above the prime rate. Milestone payments due in 2016 were not made to Mayo. As such, prior to the
amendment of the 2014 Mayo Agreement in May 2017), NeuroOne was in default under the 2014 Mayo Agreement. Mayo and NeuroOne amended
and restated the 2014 Mayo Agreement in May 2017 (as so amended and restated, the “2017 Mayo Agreement”). Pursuant
to the 2017 Mayo Agreement, NeuroOne issued 50,556 shares of common stock to Mayo to settle the amount of common stock NeuroOne
was previously obligated to issue under the 2014 Mayo Agreement and to amend the terms of the 2014 Mayo Agreement. NeuroOne recorded
an additional $23,115 to intangible assets related to the fair value of the 2017 stock issuance to Mayo. As a part of the 2017
Mayo Agreement, as amended in November 2017, the $91,709 milestone payment is to be paid upon the earlier of a qualified financing
or December 31, 2017.
Other
NeuroOne
received a letter in May 2017 from the former employer of certain employees of NeuroOne, claiming that NeuroOne and those individuals
have wrongfully used or disclosed alleged trade secrets of the former employer and that the individuals breached non-competition
or non-solicitation agreements with such party. The Company and the individuals intend to vigorously defend against these claims,
if litigation results.
NOTE
5 – Intangibles
Intangible
assets consisted of the following at September 30, 2017:
|
|
Useful
Life
|
|
|
|
License
agreement, October 27, 2016
|
|
12-13
years
|
|
$
|
182,159
|
|
Less: amortization
|
|
|
|
|
(1,269
|
)
|
Net Intangibles,
December 31, 2016
|
|
|
|
|
180,890
|
|
License agreement
amendment
|
|
|
|
|
23,115
|
|
Less: amortization
|
|
|
|
|
(13,368
|
)
|
Net Intangibles,
September 30, 2017
|
|
|
|
$
|
190,637
|
|
Amortization
expense was $4,264 and $13,368 for NeuroOne and the Company for the three and nine months ended September 30, 2017, respectively,
and $1,941 and $5,823 for the LLC for the three and nine months ended September 30, 2016.
NOTE
6 – Accrued Expenses
Accrued
expenses consisted of the following at September 30, 2017 and December 31, 2016:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Accrued license fees
|
|
$
|
182,009
|
|
|
$
|
182,009
|
|
Accrued services
|
|
|
531,607
|
|
|
|
31,186
|
|
Accrued issuance costs
|
|
|
32,306
|
|
|
|
22,015
|
|
Accrued compensation and payroll related costs
|
|
|
170,812
|
|
|
|
28,252
|
|
Accrued interest
|
|
|
—
|
|
|
|
881
|
|
Total accrued expenses
|
|
$
|
916,734
|
|
|
$
|
264,343
|
|
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
In August 2017, the Company’s Board
of Directors authorized and the Company issued short-term unsecured promissory notes (the “Short-Term Notes”) for aggregate
gross proceeds of $253,000 prior to issuance costs of $3,030 which were discounted from the Short-Term Notes and are being amortized
ratably to interest expense over the term of the Short-Term Notes. For the three and nine month period ended September 30, 2017,
discount amortization charged to interest expense related to the issuance costs was $733. The Short-Term Notes do not bear interest
on principal and require the Company to repay the principal upon maturity on February 18, 2018.
In
addition, upon maturity, under the provisions of the Short-Term Notes, the holders will receive 126,500 common stock purchase
warrants upon maturity with a term of 5 years at an exercise price of $1.80 which will be immediately exercisable upon issue.
A portion of the proceeds from the Short-Term Notes was allocated to the warrants based on their relative fair value to the underlying
Short-Term Notes. The proceeds allocated to the warrants were recorded as additional paid in capital in the accompanying condensed
consolidated balance sheets and were discounted from the Short-Term Notes in the amount of $61,496. The relative fair value of
the warrants was based on the Black-Scholes method with the following assumptions: risk-free interest rate 1.77 percent; expected
volatility 48 percent; expected life 5.5 years; and expected dividend yield 0 percent. The underlying stock price used in the
analysis is on a non-marketable basis and is according to a separate 409A valuation analysis. The discount related to the warrants
is being amortized to interest expense ratably over the term of the Short-Term Notes which amounted to $14,868 during the three
and nine month period ended September 30, 2017.
Unsecured
Loan
NeuroOne
received a $50,000 short-term unsecured loan in November 2016 from the placement agent for its convertible promissory note financing
(see Note 8 – Convertible Promissory Notes and Warrant Agreements). NeuroOne incurred no fees or interest costs for this
temporary loan and it was repaid in full in February 2017.
NOTE
8 – Convertible Promissory Notes and Warrant Agreements
Convertible
Promissory Notes
In
November 2016 and then amended in June 2017, the Company’s Board of Directors authorized the Company to issue convertible
promissory notes (the “Convertible Notes”) and common stock purchase warrants for aggregate gross proceeds of up to
$2.5 million.
As
of September 30, 2017, the Company has issued $1,625,120 of Convertible Notes and common stock purchase warrants to investors.
The Convertible Notes are unsecured. The Convertible Notes bear interest at a fixed rate of 8 percent per annum and require the
Company to repay the principal and accrued and unpaid interest thereon at the earlier of November 21, 2017 or the consummation
of the next equity or equity-linked round of financing resulting in more than $3.0 million in gross proceeds (a “Qualified
Financing”). If a Qualified Financing occurs before November 21, 2017, the outstanding principal and accrued and unpaid
interest on the Convertible Notes automatically converts into the securities issued by the Company in such financing based on
the greater number of securities resulting from either the outstanding principal and accrued interest on the Convertible Notes
divided by $1.80, or the outstanding principal and accrued interest on the Convertible Notes multiplied by 1.25, divided by the
price paid per security in the Qualified Financing. If the Company fails to complete a Qualified Financing by November 21, 2017,
the Convertible Notes will be immediately due and payable on such date.
NeuroOne
Medical Technologies Corporation
Notes
to Condensed Consolidated Financial Statements, continued
(unaudited)
If
a change of control transaction or initial public offering occurs prior to a Qualified Financing, the Convertible Notes would,
at the election of the holders of a majority of the outstanding principal of the 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 the per share value as determined by the Company’s Board of Directors 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 at the per share consideration to be paid in such transaction. Change of control means a merger or consolidation with another
entity in which the Company’s stockholders do not own more than 50 percent of the outstanding voting power of the surviving
entity or the disposition of all or substantially all of the assets of the Company.
The
warrants granted holders the option to purchase either (i) if exercised after conversion of the Convertible Notes, the number
of shares issuable upon the conversion of the Convertible Notes, or (ii) if exercised prior to conversion of the Convertible Notes,
the number of shares of common stock equal to the outstanding principal and accrued interest on the Convertible Note held by such
warrant holder divided by $1.80. The warrants were immediately exercisable on the date of issuance and expire on November 21,
2021. In June 2017, however, the Company amended the terms of the common stock purchase warrants under the Convertible Notes to
be exercisable only in the event of conversion of the outstanding principal and accrued interest on the related Convertible Notes.
The amount of warrant shares to be issued are now fixed to the number of shares of common stock received by the holder of the
Convertible Notes upon conversion of such holder’s Convertible Notes, and to an exercise price equal to the price at which
the Convertible Notes convert into common shares.
The
warrants were accounted for as a liability because there is no set exercise price. A Monte Carlo simulation model was used to
estimate the aggregate fair value of the warrants as of September 30, 2017. Input assumptions used were as follows: risk-free
interest rate 1.79 percent; expected volatility 50 percent; expected life 4.14 years; and expected dividend yield 0 percent. The
underlying stock price used in the analysis is on a non-marketable basis and is according to a separate 409A valuation analysis. The
convertible promissory note proceeds assigned to the warrants were $440,919 and $345,640 during the nine months ended September
30, 2017 and for the period from October 7, 2016 to December 31, 2016, respectively, which represented their fair value at issuance,
and were discounted from the Convertible Notes and reflected as a warrant liability. The discount is being amortized to interest
expense over the term of the Convertible Notes using the straight-line method which approximates the effective interest method.
The amortization expense was $284,637 and $601,794 for the three and nine months ended September 30, 2017, respectively. The Company
recorded the fair value changes of the warrant liability associated with the Convertible Notes to interest expense which amounted
to $6,546 and $(12,707) for the three and nine months ended September 30, 2017, respectively.
At
the time of their issuance, the Convertible Notes contained a 125% conversion premium in the event that a Qualified Financing
occurs at a price under $2.25 per common share. The Company determined that the redemption feature under the Convertible Notes
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 Convertible Notes in the amount of $213,961 and $137,564 during the nine months ended
September 30, 2017 and during the period from October 7, 2016 to December 31, 2016, respectively. The discount is being amortized
to interest expense over the term of the Convertible Notes using the straight-line method which approximates the effective interest
method. The amortization expense was $133,367 and $266,848 for the three and nine month period ended September 30, 2017, 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 the Convertible Notes to interest expense which amounted to $15,406
and $90,212 for the three and nine months ended September 30, 2017, respectively.
NeuroOne
Medical Technologies Corporation
Notes
to Condensed Consolidated Financial Statements, continued
(unaudited)
In
connection with the Convertible Notes, the Company incurred issuance costs in the amount of $151,915, which included (i) a placement
agent cash fee, which was $113,610 for the Convertible Notes issued through June 19, 2017 (ii) the obligation to issue a warrant
to the placement agent (the “placement agent warrant”) which will have an exercise price of $2.00 per share of common
stock and had a total fair value of $4,855 at September 30, 2017 and (iii) legal expenses of $33,450. The placement agent warrant
is issuable at the time the private placement transaction closes. The placement agent warrant will be immediately exercisable
on the date of issuance and will expire five years following the date of issuance. The placement agent is to receive a placement
agent warrant to purchase shares of common stock in an amount equal to 8 percent of the common stock (or common stock equivalents)
purchased by investors in the private placement transaction. As of September 30, 2017 and December 31, 2016, the Company has an
obligation to issue a placement agent warrant for the purchase of approximately 63,000 and 29,000 shares of common stock, respectively.
The Company recorded an issuance cost discount to the Convertible Notes in the amount of $39,781 and $37,469 for the nine months
ended September 30, 2017 and for the period from October 7, 2016 to December 31, 2016, respectively, of which $27,317 and $59,184
was amortized to interest expense during the three and nine months ended September 30, 2017, respectively. The balance of the
issuance costs in the amount of zero and $38,119 was attributed to the common stock purchase warrants and was immediately recorded
as interest expense upon issuance during the three and nine months ended September 30, 2017, respectively.
The
placement agent is also entitled to receive warrants to purchase common stock in an amount equal to 10 percent of the common stock
(common stock equivalents) purchased by certain investors in subsequent equity financing rounds (see Note 13 – Subsequent
Events). Such warrants if issued will have an exercise price determined in relation to the pricing of the subsequent financing
rounds and will be immediately exercisable once issued.
NOTE
9 – Investment Banker Fee
Investment
Banker Fee
NeuroOne
paid a $50,000 non-refundable fee to an investment banker in December 2016 to raise equity financing. This fee is reflected in
NeuroOne’s December 31, 2016 balance sheet as a prepaid expense. NeuroOne subsequently concluded that the investment banker
was not expected to raise any equity and therefore expensed the fee in March 2017.
NOTE
10 – Stock-Based Compensation
NeuroOne formally adopted an equity incentive
plan (“the 2016 Plan”) on October 27, 2016 which was subsequently adopted by the Company upon completion of the Acquisition.
In addition, the Company adopted a 2017 Equity Incentive Plan (the “2017 Plan”) on April 17, 2017. The 2016 and 2017
Plans provide for the issuance of restricted shares and stock options to employees, directors, and consultants of the Company.
The Company reserved 2,292,265 shares of common stock (as adjusted for the exchange ratio in connection with the Acquisition) for
issuance under the 2016 and 2017 Plans on a combined basis. The Company began granting stock options and restricted stock awards
in the second quarter of 2017. During the three and nine-month period ended September 30, 2017, zero and 365,716 stock options
for shares of common stock were granted, respectively, to directors and consultants at a weighted average exercise price of $0.035
per share. The stock options granted during the nine month period ended September 30, 2017 had a weighted average grant date fair
value of $0.014 per share with various vesting periods and expire in ten years. In addition, the Company issued zero and 215,453
shares of restricted common stock with performance vesting conditions from the 2016 Plan during the three and nine month period
ended September 30, 2017, respectively. All performance vesting conditions for the restricted common stock were met as of September
30, 2017. Compensation expense associated with restricted common stock shares was $7,220.
NeuroOne
Medical Technologies Corporation
Notes
to Condensed Consolidated Financial Statements, continued
(unaudited)
Stock-based
compensation expense was included in general and administrative and research and development costs as follows in the accompanying
condensed statements of operations:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
General and administrative
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,065
|
|
|
$
|
—
|
|
Research and development
|
|
|
64,945
|
|
|
|
—
|
|
|
|
74,729
|
|
|
|
—
|
|
Total stock-based compensation
|
|
$
|
64,945
|
|
|
$
|
—
|
|
|
$
|
76,794
|
|
|
$
|
—
|
|
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 September 30, 2017:
|
|
Three Months
Ended
|
|
|
Nine Months
Ended
|
|
|
|
|
|
|
|
|
Expected stock price volatility
|
|
|
—
|
%
|
|
|
47.8
|
%
|
Expected life of options (years)
|
|
|
—
|
|
|
|
5.0
|
|
Expected dividend yield
|
|
|
—
|
%
|
|
|
0
|
%
|
Risk free interest rate
|
|
|
—
|
%
|
|
|
1.9
|
%
|
During
the three and nine months ended September 30, 2017, 42,525 and 365,716 stock options vested, respectively, and zero and 215,453
restricted stock awards vested, respectively. The weighted average fair value per share of options vesting during the three and
nine months ended September 30, 2017 was $0.014. No stock options were forfeited during the three and nine months ended September
30, 2017. As of September 30, 2017, 1,711,096 shares were available for future issuance on a combined basis under the 2016 and
2017 Plans.
There
was no unrecognized stock-based compensation cost for stock options and restricted common stock as of September 30, 2017.
NOTE
11 – Income Taxes
The
effective tax rate for the three and nine months ended September 30, 2017 was zero percent. As a result of the analysis of all
available evidence as of September 30, 2017 and December 31, 2016, 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
month periods ended September 30, 2017. 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.
The
LLC operated as a single-member LLC from formation on December 12, 2013 until it was merged into NeuroOne on October 27, 2016.
As such, the LLC was a disregarded legal entity for income tax purposes. Accordingly, no provision for income taxes was included
in the financial statements for the three or nine month periods ended September 30, 2016.
NOTE
12 – Stockholders’/Member Deficit
In
June 2017, the purchase price owed by the seven individuals for the founders’ shares of NeuroOne under their respective
subscription agreements totaling $9,051 was forgiven by NeuroOne prior to the Acquisition.
NeuroOne
Medical Technologies Corporation
Notes
to Condensed Consolidated Financial Statements, continued
(unaudited)
NOTE
13 – Subsequent Events
On
October 4, 2017, the Company entered into a Subscription Agreement (the “Subscription Agreement”) with certain accredited
investors (the “Subscribers”), pursuant to which the Company, in a private placement (the “Private Placement”),
agreed to issue and sell to the Subscribers 8% convertible promissory notes (each, a “Note” and collectively, the
“2017 Convertible Notes”) and warrants (the “New Warrants”) to purchase shares of the Company’s
capital stock.
The initial closing of the Private Placement
was consummated on October 4, 2017, and, on that date, the Company issued Notes in an aggregate principal amount of $150,000 to
the Subscribers. Between November 2, 2017 and November 7, 2017, the Company entered into Subscription Agreements with additional
Subscribers, and issued Notes in a principal amount of $215,000 to those Subscribers. The Company may conduct any number of additional
closings so long as the final closing occurs on or before the five-month anniversary of the initial closing date and the amount
does not exceed $1,000,000 or a higher amount determined by the Board of Directors.
The
2017 Convertible Notes bear interest at a fixed rate of 8% per annum and require the Company to repay the principal and accrued
and unpaid interest thereon on October 4, 2022 (the “Maturity Date”). If the Company raises more than $3,000,000 in
an equity financing before the Maturity Date (the “Qualified Financing”), the outstanding principal and accrued and
unpaid interest on the 2017 Convertible Notes shall automatically convert 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 Notes multiplied by 1.25,
divided by the price paid per security in such financing. If a change of control transaction occurs prior to the earlier of a
Qualified Financing or the Maturity Date, the 2017 Convertible Notes would, 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 our Board of Directors 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 (the date of any such conversion of the 2017 Convertible Notes pursuant to this paragraph, is referred
to herein as the “Conversion Date”). Change of control means a merger or consolidation with another entity in which
our stockholders do not own more than 50% of the outstanding voting power of the surviving entity or the disposition of all or
substantially all of the Company’s assets.
Each
New Warrant grants the holder the option to purchase the number of shares of capital stock of the Company issuable upon the conversion
of the 2017 Convertible Notes held by such holder at a per share exercise price equal to the price at which the 2017 Convertible
Notes converted. The New Warrants are exercisable commencing on the Conversion Date and expire on the five year anniversary of
the Conversion Date. The exercise price and number of the shares of our common stock issuable upon exercising the New Warrants
will be subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization
or similar transaction, as described therein.
The
placement agent is also entitled to receive a warrant to purchase common stock in an amount equal to 10 percent of the common
stock (common stock equivalents) purchased by certain investors in subsequent equity financing rounds. Such warrant, if issued
will have an exercise price determined in relation to the pricing of the subsequent financing and will be immediately exercisable
once issued.
In such subsequent equity financing rounds,
the placement agent is also entitled to receive a cash fee equal to 10 percent of the total amount of capital received by the Company,
as well as a cash amount representing a non-accountable expense allowance equal to 3% of the aggregate gross proceeds raised in
such financing.
Subscription Agreements
Pursuant to the Subscription Agreements,
the Company is entitled to receive notice in the event a holder elects to sell or receives a bona fide offer for any portion of
the 2017 Convertible Notes or New Warrants, and the right to purchase the 2017 Convertible Notes or New Warrants on the same terms
as the proposed sale or bona fide offer, as applicable, as long as the Company exercises that right within 15 days of receiving
written notice. The Company has granted the Subscribers indemnification rights with respect to its representations, warranties,
covenants and agreements under the Subscription Agreements.
NeuroOne
Medical Technologies Corporation
Form
10-Q
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion of our financial condition and results of operations should be read in conjunction with the financial statements
and notes included in Part I “Financial Information”, Item I “Financial Statements” of this Quarterly
Report on Form 10-Q and the audited financial statements and related footnotes included in our Current Report on Form 8-K, filed
on July 20, 2017 and our Current Report on Form 8-K/A, filed on August 14, 2017.
Forward-Looking
Statements
Certain
statements contained in this Quarterly Report on Form 10-Q 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. 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.
You
should read the following discussion and analysis of financial condition and results of operations of NeuroOne Medical Technologies
Corporation together with our financial statements and the related notes included elsewhere in this Report. Some of the information
contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans
and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the
“Risk Factors” section of this Report for a discussion of important factors that could cause actual results to differ
materially from the results described in or implied by the forward-looking statements contained in the following discussion and
analysis.
Any
forward-looking statement made by us in this report speaks only as of the date hereof or as of the date specified herein. We undertake
no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or
otherwise, except as may be required by applicable laws or regulations.
Overview
We
were originally incorporated in the State of Nevada on August 20, 2009 as Original Source Entertainment, Inc. (“OSE”).
OSE was originally formed to license songs to the television and movie industry. From our inception and prior to the acquisition
of NeuroOne, Inc. on July 20, 2017 (the “Acquisition”), as described more fully below, our operations have been primarily
limited to organizational, start-up, and capital formation activities. Upon completion of the Acquisition, more fully described
below, our operations consist of the development of comprehensive neuromodulation cEEG and sEEG monitoring, ablation, and brain
stimulation solutions to diagnose and treat patients with epilepsy, Parkinson’s disease, dystonia, essential tremors, and
other brain related disorders. Our cortical strip technology under development has only been used by Mayo in five patients for
research purposes and has not been tested in any clinical trials. We are based in Eden Prairie, Minnesota.
NeuroOne
Medical Technologies Corporation
Form
10-Q
The
Acquisition was accounted for as a capital transaction, or reverse recapitalization. As a result, the financial information contained
in the Report reflect solely the operations of NeuroOne, Inc. (“NeuroOne”) and its predecessor NeuroOne LLC (the “LLC”).
We
had very limited resources prior to our convertible promissory note (the “Convertible Notes”) and warrant financings
commencing in November 2016. 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 development activities. Our cortical strip, grid electrode and depth
electrode technology is still under development, we do not yet have regulatory approval in any jurisdiction to sell any products
and, to date, we have not generated any revenue.
We have incurred losses since inception.
As of September 30 2017, we had an accumulated deficit of $3,699,438, primarily as a result of expenses incurred in connection
with our research and development programs and from general and administrative expenses associated with our operations. The LLC,
prior to the merger with NeuroOne, also incurred losses since its inception and had cumulative losses of $49,930 as of the date
of the October 26, 2016 merger. We expect to continue to incur significant expenses and increasing operating and net losses for
the foreseeable future.
We
do not expect to generate revenue from product sales unless and until we obtain marketing authorization to sell our cortical strip,
grid electrode and depth electrode technology from applicable regulatory authorities.
Our
primary source of cash has been proceeds from the issuances of short-term promissory notes (the “Short-Term Notes”),
Convertible Notes and common stock purchase warrants (the “Warrants”). From November 2016 to September 2017, we issued
Short-Term Notes (in aggregate principal amount of $253,000) and Warrants resulting in net proceeds of $249,970, and Convertible
Notes (in aggregate principal amount of $1,625,120) and Warrants, for aggregate net proceeds of $1,511,510 to fund our operations.
On
October 4, 2017, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain accredited investors
(the “Subscribers”), pursuant to which we, in a private placement (the “Private Placement”), agreed to
issue and sell to the Subscribers 8% convertible promissory notes (each, a “Note” and collectively, (the “2017
Convertible Notes”) and warrants (the “New Warrants”) to purchase shares of our common stock.
The initial closing of the Private Placement
was consummated on October 4, 2017, and, on that date, we issued Notes (in an aggregate principal amount of $150,000) to the Subscribers.
Between November 2, 2017 and November 7, 2017, the Company entered into Subscription Agreements under the Private Placement with
additional Subscribers, and issued Notes (in an aggregate principal amount of $215,000) to those Subscribers. We may conduct any
number of additional closings so long as the final closing occurs on or before the five-month anniversary of the initial closing
date and the amount does not exceed $1,000,000 or a higher amount determined by our Board of Directors.
We
need to obtain substantial additional funding in connection with our continuing operations through public or private equity or
debt financings or other sources, which may include collaborations with third parties. However, we may be unable to raise additional
funds when needed on favorable terms or at all. Our failure to raise such capital as and when needed would have a negative impact
on our financial condition and our ability to develop and commercialize our cortical strip, grid electrode and depth electrode
technology and future products and our ability to pursue our business strategy. See “–Liquidity and Capital Requirements”
below.
Acquisition
On
July 20, 2017, we entered into a merger agreement with NeuroOne and OSOK Acquisition Company to acquire NeuroOne. The transactions
contemplated by the merger agreement were consummated on July 20, 2017 and, pursuant to the terms of the merger agreement, (i) all
outstanding NeuroOne Shares were exchanged for Company Shares based on the Exchange Ratio of 17.0103706 Company Shares for every
one NeuroOne Share, (ii) all NeuroOne Options were replaced with options (“Company Options”) based on the Exchange
Ratio, with corresponding adjustments to their respective exercise prices, (iii) all NeuroOne Warrants were replaced with Company
Warrants and (iv) we assumed the outstanding Convertible Notes of NeuroOne. Accordingly, we acquired 100% of NeuroOne, Inc. in
exchange for the issuance of shares of our common stock and NeuroOne became our wholly-owned subsidiary. Our sole business is
the business of NeuroOne. Our management’s discussion and analysis below is based on the financial results of NeuroOne. Except
as otherwise indicated herein, all share and per share information in this “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” section gives retroactive effect to the exchange of NeuroOne Shares, NeuroOne Options
and NeuroOne Warrants for Company Shares, Company Options and Company Warrants, respectively, in the Acquisition, as well as the
corresponding exercise price adjustments for such Company Options.
Predecessor
NeuroOne, Inc. and NeuroOne LLC
The
LLC was formed on December 12, 2013 and operated as a limited liability company until it was merged with and into NeuroOne on
October 27, 2016 with NeuroOne as the surviving entity of the merger. NeuroOne was formed on October 7, 2016 under different ownership
than the LLC. As a result of the merger, all of the properties, rights, privileges, powers and franchises of the LLC vested in
NeuroOne, and all debts, liabilities and duties of the LLC became the debts, liabilities and duties of NeuroOne with the exception
of the Company’s license agreement with Wisconsin Alumni Research Foundation (“WARF”) which required WARF’s
approval for transfer. The purpose of the merger was to change the jurisdiction of NeuroOne’s incorporation from Minnesota
to Delaware, change the ownership of the LLC’s underlying assets, and to convert from a limited liability company to a corporation.
NeuroOne
Medical Technologies Corporation
Form
10-Q
NeuroOne
and the LLC were not entities under common control. As the LLC did not have an integrated set of activities that contained the
required complement of inputs, processes and outputs to be considered a business, the Merger was accounted for as an asset acquisition
as prescribed under ASC 805 –
Business Combinations
. As such, the activities of NeuroOne and the LLC were not combined
and are shown separately in the accompanying financial statements included in this Report.
Financial
Overview
Revenue
To
date, we have not generated any revenue. We do not expect to generate revenue unless or until we develop, obtain regulatory approval
for and commercialize our cortical strip, grid electrode and depth electrode technology. If we fail to complete the development
of our cortical strip, grid electrode and depth electrode technology, or any other product candidate we may pursue in the future,
in a timely manner, or fail to obtain regulatory approval, we may never be able to generate any revenue.
General
and Administrative
General
and administrative expenses consist primarily of personnel-related costs including stock-based compensation for personnel in functions
not directly associated with research and development activities. Other significant costs include legal fees relating to corporate
matters, intellectual property costs, professional fees for consultants assisting with regulatory, clinical, product development
and financial matters, and product costs. We anticipate that our general and administrative expenses will significantly increase
in the future to support our continued research and development activities, potential commercialization of our cortical strip,
grid electrode and depth electrode technology, 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.
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.
NeuroOne
Medical Technologies Corporation
Form
10-Q
Interest
Expense
Interest
expense primarily consists of amortized discount costs related to our Short-Term Notes and Convertible Notes and interest costs
related to the Convertible Notes we issued between November 2016 and September 2017. The Convertible Notes bear interest at a
fixed rate of 8% per annum, compounding annually.
Interest
expense also includes the change in the fair value of warrant liability and the premium conversion derivative during the particular
period. The change in fair value of the warrant liability and premium conversion derivative results from the marking to market
at the end of every reporting period of the fair value related to the warrants and premium conversion derivative to purchase shares
of common stock issued in connection with the issuance of the Convertible Notes. The fair value of the warrant liability will
fluctuate based on the change in the price of our common stock in the public markets until these warrants are exercised or expire.
Results
of Operations
For
comparison purposes, the results of operations for NeuroOne for the three and nine month periods ended September 30, 2017 is compared
to the operating results for the LLC for the three and nine month periods ended September 30, 2016
Comparison
of the Three Months Ended September 30, 2017 and 2016
The
following table sets forth the results of operations of NeuroOne and the LLC for the three-months ended September 30, 2017 and
2016, respectively.
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
NeuroOne
2017
|
|
|
LLC
2016
|
|
|
Period-to- Period
Change
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
622,141
|
|
|
$
|
1,941
|
|
|
$
|
620,200
|
|
Research and development
|
|
|
271,651
|
|
|
|
—
|
|
|
|
271,651
|
|
Operating Loss
|
|
|
(893,792
|
)
|
|
|
(1,941
|
)
|
|
|
(891,851
|
)
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(515,377
|
)
|
|
|
(3,635
|
)
|
|
|
(511,742
|
)
|
Net loss and comprehensive loss
|
|
$
|
(1,409,169
|
)
|
|
$
|
(5,576
|
)
|
|
$
|
(1,403,593
|
)
|
General
and administrative expenses
General and administrative expenses were
$622,141 for the three months ended September 30, 2017, compared to $1,941 for the three months ended September 30, 2016. The increase
was primarily due to an increase in salary-related expenses of $331,539 for additional staffing to support the increased level
of commercialization and development activities and legal and accounting expenses of $290,602 primarily related to the Acquisition.
NeuroOne
Medical Technologies Corporation
Form
10-Q
Research
and development expenses
Research
and development expenses were $271,651 for the three months ended September 30, 2017, compared to $0 for the three months ended
September 30, 2016. The increase was primarily due to an increase in salary-related expenses, inclusive of stock-based compensation
expense of $ 64,945, and development materials and supplies to support the increased level of development activities.
Interest
expense
Interest
expense, for the three months ended September 30, 2017 was $515,377 consisting of interest expense of $32,503, fair market value
adjustments of the warrant and derivative liabilities of $21,953, and amortization of debt discount costs of $460,921 related
to the Short-Term Notes and Convertible Notes. There were no outstanding Short-Term Notes and Convertible Notes in the prior year.
The interest expense in the comparable prior year period related to interest on the Mayo intellectual milestone payments owed.
Comparison
of the Nine Months Ended September 30, 2017 and 2016
The
following table sets forth the results of operations of NeuroOne, and the LLC for the nine months ended September 30, 2017 and
2016, respectively.
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
NeuroOne
2017
|
|
|
LLC
2016
|
|
|
Period-to- Period Change
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
1,798,131
|
|
|
$
|
6,009
|
|
|
$
|
1,792,122
|
|
Research and development
|
|
|
500,408
|
|
|
|
—
|
|
|
|
500,408
|
|
Operating Loss
|
|
|
(2,298,539
|
)
|
|
|
(6,009
|
)
|
|
|
(2,292,530
|
)
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,134,529
|
)
|
|
|
(10,698
|
)
|
|
|
(1,123,831
|
)
|
Net loss and comprehensive loss
|
|
$
|
(3,433,068
|
)
|
|
$
|
(16,707
|
)
|
|
$
|
(3,416,361
|
)
|
General
and administrative expenses
General and administrative expenses were
$1,798,131 for the nine months ended September 30, 2017, compared to $6,009 for the nine months ended September 30, 2016. The increase
was primarily due to an increase in salary-related expenses of $927,587 for additional staffing, inclusive of stock-based compensation
of $2,065, to support the increased level of commercialization and development activities, legal and accounting expenses of $820,544
and investment banker fees of $50,000.
Research
and development expenses
Research
and development expenses were $500,408 for the nine months ended September 30, 2017, compared to $0 for the nine months ended
September 30, 2016. The increase was primarily due to an increase in salary-related expenses, inclusive of stock-based compensation
of $74,729, and development materials and supplies to support the increased level of development activities.
Interest
expense
Interest
expense for the nine months ended September 30, 2017 was $1,134,529, consisting of interest expense of $76,359, fair market value
adjustments of the warrant and derivative liabilities of $77,505, amortization of debt discount costs of $943,427 and warrant
issuance costs of $38,119 related to the Short-Term Notes and Convertible Notes offset by an $881 interest credit adjustment related
to Mayo intellectual milestone payments. There were no outstanding Short-Term Notes and Convertible Notes in the prior year. The
interest expense in the comparable prior year period related to interest on the Mayo intellectual milestone payments owed.
NeuroOne
Medical Technologies Corporation
Form
10-Q
Liquidity
and Capital Resources
Capital
Resources
As
of September 30, 2017, our principal source of liquidity consisted of cash deposits of $70,029. We have not generated any revenue,
and we anticipate that we will continue to incur losses for the foreseeable future. We anticipate that our expenses will increase
substantially as we develop our cortical strip, grid electrode and depth electrode technology and pursue pre-clinical testing
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 operate as a public company.
Our primary sources of cash, since inception,
have been short-term financing instruments and associated warrants in the amount of $303,000, and proceeds from the issuance of
the Convertible Notes and Warrants. From November 2016 to June 2017, we issued Convertible Notes (in aggregate principal amount
of $1,625,120) and warrants for aggregate net proceeds of $1,511,510.
The Convertible Notes bear interest at
a fixed rate of 8% per annum and require us to repay the principal and accrued and unpaid interest thereon at the earlier of November
21, 2017 or the consummation of the next equity or equity-linked round of financing resulting in more than $3 million in gross
proceeds. If such a financing occurs before November 21, 2017, the outstanding principal and accrued and unpaid interest on the
Convertible Notes shall automatically convert into the securities issued by us in such financing based on the greater number of
such securities resulting from either (i) the outstanding principal and accrued interest on the Convertible Notes divided by $1.80
or (ii) the outstanding principal and accrued interest on the Convertible Notes multiplied by 1.25, divided by the price paid per
security in such financing. If a change of control transaction or initial public offering occurs prior to such a financing, the
Convertible Notes would, at the election of the holders of a majority of the outstanding principal of the 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 as determined by our Board of Directors
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 means a merger or consolidation
with another entity in which our 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 our assets. The Convertible Notes are unsecured. If we fail to complete a qualified
equity financing by November 21, 2017, the Convertible Notes will be immediately due and payable on such date. We may seek to amend
the Convertible Notes in order to extend the maturity date of the Convertible Notes, however, we may be unable to enter into such
amendments.
Each
Warrant grants the holder the option to purchase the number of shares issuable upon the conversion of the Note held by such holder.
The terms of the Warrants were amended in June 2017 to be exercisable only in the event of conversion of the outstanding principal
and accrued interest on the related Convertible Notes. Prior to such amendment, the Warrants were immediately exercisable into
common stock and the number of shares were not fixed and determinable at the issuance date. No Warrants were exercised prior to
the amendment. The Warrants have been accounted for as a liability at fair value. Following such amendment, the amount of warrant
shares to be issued are now fixed to the number of shares of common stock to be received by the holder upon conversion of such
holder’s Convertible Note, and to an exercise price equal to the price at which the Convertible Notes convert into common
shares. However, the warrants still have price protections that result in the accounting for these Warrants as a liability at
fair value.
In
connection with the private placement of Convertible Notes and Warrants, we paid the placement agent a cash fee of $113,610 (8%
of the gross proceeds received to date from certain Note and Warrant investors) and are obligated to issue to the placement agent
a Warrant to purchase shares of common stock (or common stock equivalents) in an amount equal to 8% of the common stock purchased
by certain investors in the private placement, which Warrant is expected to have an exercise price of $2.00 per share of Company
common stock.
NeuroOne
Medical Technologies Corporation
Form
10-Q
The
Warrants (other than the placement agent Warrant), after the amendment in June 2017, are exercisable following the conversion
of the Convertible Notes and expire on November 21, 2021. The exercise price and number of the shares of our common stock issuable
upon exercising the Warrants will be subject to adjustment in the event of any stock dividends and splits, reverse stock split,
recapitalization, reorganization, business combination or similar transaction, as described therein. In addition, the exercise
price of the Warrants (but not those issued to the placement agent) is subject to reduction of the exercise price if we subsequently
issue common stock or equivalents at an effective price less than the current exercise price of such Warrants. The placement agent
Warrants will be immediately exercisable and expire five years from the date of issuance. The placement agent Warrant is issuable
upon the closing of the Convertible Note and Warrant financing.
We
also received cash gross proceeds from short-term financings consisting of an unsecured loan for $50,000 in November 2016 and
$253,000 upon issuance of the Short-Term Notes in August 2017. We incurred no fees or interest costs related to the unsecured
loan and repaid it in full in February 2017. With regard to the Short-Term Notes, additional warrants in the amount of 126,500
warrant shares will be issuable upon maturity in February 2018, and no additional interest costs or fees are expected to be incurred
in connection with the Short-Term Notes.
On
October 4, 2017, we entered into the Subscription Agreement and executed a Private Placement agreeing to issue and sell to the
Subscribers, 8% convertible promissory notes and warrants to purchase shares of our common stock (2017 Convertible Notes).
The initial closing of the Private Placement
was consummated on October 4, 2017, and, on that date, we issued Notes in an aggregate principal amount of $150,000 to the Subscribers.
Between November 2, 2017 and November 7, 2017, the Company entered into Subscription Agreements with additional Subscribers, and
issued Notes in a principal amount of $215,000 to those Subscribers. We may conduct any number of additional closings so long as
the final closing occurs on or before the five-month anniversary of the initial closing date and the amount does not exceed $1,000,000
or a higher amount determined by our Board of Directors.
The
placement agent under the Private Placement is also entitled to receive a warrant to purchase common stock in an amount equal
to 10 percent of the common stock (common stock equivalents) purchased by the Subscribers. Such warrant, if issued will have an
exercise price determined in relation to the pricing of the subsequent financing and will be immediately exercisable once issued.
Funding
Requirements and Outlook
We
have no current source of revenue to sustain our present activities, and we do not expect to generate revenue until, and unless,
the FDA or other regulatory authorities approve our cortical strip, grid electrode and depth electrode technology under development
and we successfully commercialize our cortical strip, grid electrode and depth electrode technology. Until such time, if ever,
as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity and debt financings
as well as collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest
of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely
affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting
or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring
dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third-party
partners, we may have to relinquish valuable rights to our technologies, future revenue streams or grant licenses on terms that
may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or through collaborations,
strategic alliances or licensing arrangements when needed, we may be required to delay, limit, reduce or terminate our product
development, future commercialization efforts, or grant rights to develop and market our cortical strip, grid electrode and depth
electrode technology that we would otherwise prefer to develop and market ourselves.
NeuroOne
Medical Technologies Corporation
Form
10-Q
Our
independent registered public accounting firm included an explanatory paragraph in its report on NeuroOne’s financial statements
as of and for the years ended December 31, 2015 and 2016, noting the existence of substantial doubt about our ability to continue
as a going concern. This uncertainty arose from management’s review of our results of operations and financial condition and its
conclusion that, based on our operating plans, we did not have sufficient existing working capital to sustain operations through
December 31, 2017.
As of September 30, 2017, the outstanding
principal and accrued and unpaid interest on the Convertible Notes totaled $1,705,834 and the outstanding principal on the Short-Term
Notes was $253,000. If we fail to complete an equity financing by November 21, 2017, the Convertible Notes will be immediately
due and payable on such date and we will not have sufficient cash to pay the principal and accrued and unpaid interest thereon.
In addition, the Short-Term Notes mature on February 18, 2018 and we may not have sufficient cash to pay the principal thereon.
We
have agreements with WARF and Mayo that require us to make certain milestone and royalty payments.
We
have entered into an Exclusive Start-Up Company License Agreement with WARF (the “WARF License”) pursuant to which
WARF has granted us an exclusive license, or the WARF License, to make, use and sell, in the United States only, products that
employ certain licensed patents for a neural probe array or thin-film micro electrode array and method. In exchange for the license,
we have agreed to pay WARF a one-time fee of $120,000 (representing a license fee and reimbursement for costs incurred by WARF
in maintaining the licensed patents) upon the earliest to occur of certain events related to the Company raising a minimum amount
of financing, a change of control or our revenue reaching a threshold amount. We have also 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 2019, $100,000 for 2020 and $150,000 for 2021 and each calendar year thereafter that the WARF License is in effect. If we
or any of our sublicenses 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.
We
have agreed to diligently develop, manufacture, market and sell products under the WARF License in the United States during the
term of the agreement and, specifically, that we will submit a business plan to WARF by February 1, 2018 and file an application
for 510(k) marketing clearance with the FDA by February 1, 2019. WARF may terminate this license in the event that we fail to
meet these milestones on 30 days’ written notice, if we default on the payments of amounts due to WARF or fail to timely
submit development reports, actively pursue our development plan or breach any other covenant in the WARF License and fail to
remedy such default in 90 days or in the event of certain bankruptcy events involving us. WARF may also terminate this license
(i) on 90 days’ notice if we fail to have commercial sales of one or more FDA-approved products under the WARF License by
March 31, 2019 or (ii) if, after royalties earned on sales begin to be paid, such earned royalties cease for more than four calendar
quarters. The WARF License otherwise expires by its terms on the date that no valid claims on the patents licensed thereunder
remain. We expect the latest expiration of a licensed patent to occur in 2030.
In
addition, WARF reserves the right to grant non-profit research institutions and government agencies non-exclusive licenses to
practice and use the inventions of the licensed patents for non-commercial research purposes, and we grant WARF a non-exclusive,
sub licensable, royalty-free right and license for non-commercial research purposes to use improvements to the licensed patents.
In the event that we discontinue use or commercialization of the licensed patents or improvements thereon, we must grant WARF
an option to obtain a non-exclusive, sub-licensable royalty-bearing license to use the improvements for commercial purposes.
We
have entered into a license and development agreement (the “Mayo Development Agreement”) with the Mayo Foundation
for Medical Education and Research (“Mayo”) with to license worldwide (i) certain know how for the development and
commercialization of products, methods and processes related to flexible circuit thin film technology for the recording of tissue
and (ii) the products developed therefrom, and to partner with Mayo to assist the Company in the investigation, research application,
development and improvement of such technology. Mayo has agreed to assist us by providing access to certain individuals at Mayo,
or the Mayo Principal Investigators, in developing our cortical thin film flexible circuit technology, including prototype development,
animal testing, protocol development for human and animal use, abstract development and presentation and access to and license
of any intellectual property that the Mayo Principal Investigators develop relating to the procedure.
Whether
or not any such technology, product, method, process, device or delivery system is developed, we agreed, in consideration for
Mayo’s efforts under the Mayo Development Agreement, as amended, to pay Mayo a cash payment of approximately $92,000 on
the earlier of December 31, 2017 or the date we raise a minimum amount of financing, and on May 25, 2017, prior to the closing
of the Acquisition, NeuroOne, Inc. issued Mayo 50,556 shares of NeuroOne, Inc. common stock pursuant to a Subscription Agreement.
Finally, we have agreed to pay Mayo a royalty equal to a single-digit percentage of our product sales pursuant to the Mayo Development
Agreement. Mayo may purchase any developed products licensed under the Mayo Development Agreement at the best price offered by
us to the end user in the prior year. The Mayo Development Agreement generally will expire in October 2034, unless the Mayo know-how
and improvements under the Mayo Development Agreement remain in use, and the Mayo Development Agreement may be terminated by Mayo
for cause or under certain circumstances.
NeuroOne
Medical Technologies Corporation
Form
10-Q
Because
of our past breach of each of the WARF License and the Mayo Development Agreement, WARF and Mayo may be less likely to waive future
defaults or breaches or further amend the agreements in the future, to the extent we request any waiver or amendment. For more
information, see “Risk Factors—Risks Relating to our Business”— in Part II, Item 1A in this Report. We
depend on intellectual property licensed from Wisconsin Alumni Research Foundation for our technology under development, and the
termination of this license would harm our business and we depend on our partnership with Mayo Foundation for Medical Education
and Research to license certain know how for the development and commercialization of our technology. Termination of this partnership
would harm our business, and even if this partnership continues, it may not be successful.
Our existing cash and cash equivalents
will not be sufficient to fund our operating expenses throughout fiscal 2017. To continue to fund operations, we will need to
secure additional funding and modify terms of some of our existing debt. We may obtain additional financing in the future through
the issuance of our common stock, through other equity or debt financings or through collaborations or partnerships with other
companies. We may not be able to raise additional capital on terms acceptable to us, or at all. Further, we may not be able to
modify terms of some of our existing debt that may come due, and any failure to raise capital or to amend existing debt that may
be due as and when needed could compromise our ability to execute on our business plan.
The
development of our cortical strip, grid electrode and depth electrode technology is subject to numerous uncertainties, and we
have based these estimates on assumptions that may prove to be substantially different than we currently anticipate and could
use our cash resources sooner than we expect. Additionally, the process of developing medical devices is costly, and the timing
of progress in pre-clinical tests and clinical trials is uncertain. Our ability to successfully transition to profitability will
be dependent upon achieving a level of product sales adequate to support our cost structure. We cannot assure you that we will
ever be profitable or generate positive cash flow from operating activities.
Cash
Flows
The
following is a summary of cash flows for each of the periods set forth below.
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
NeuroOne, Inc.
2017
|
|
|
NeuroOne LLC
2016
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(1,509,669
|
)
|
|
$
|
—
|
|
Net cash provided by financing activities
|
|
|
1,057,481
|
|
|
|
—
|
|
Net decrease in cash
|
|
$
|
(452,188
|
)
|
|
$
|
—
|
|
NeuroOne
Medical Technologies Corporation
Form
10-Q
Net
cash used in operating activities
Net cash used in operating activities was
$1,509,669 for the nine months ended September 30, 2017, which consisted of a net loss of $3,433,068 partially offset primarily
by non-cash interest, stock-based compensation, discount amortization, warrant issuance costs and revaluation of premium debt conversion
derivative on the Convertible Notes totaling $1,234,623 in the aggregate, accrued expenses of $642,099, and prepaid expenses of
$46,677.
Net
cash used in operating activities was $0 for the nine months ended September 30, 2016. There was limited activity during the nine
month period ended September 30, 2016.
Net
cash provided by financing activities
Net
cash provided by financing activities was $1,057,481 for the nine months ended September 30, 2017, which consisted of $1,107,481
in net proceeds received upon the issuance of the Short-Term Notes, Convertible Notes and Warrants during the nine month period
partially offset by the $50,000 repayment of a short-term unsecured loan.
We
had no cash provided by financing activities in the nine months ended September 30, 2016.
Critical
Accounting Policies
Our
management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America,
or GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the
balance sheets and the reported amounts of revenue and expenses during the reporting periods. In accordance with GAAP, we base
our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances
at the time such estimates are made. Actual results may differ materially from our estimates and judgments under different assumptions
or conditions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of
material revisions in estimates are reflected in our consolidated financial statements prospectively from the date of the change
in estimate.
While
our significant accounting policies are more fully described in the notes to our consolidated financial statements appearing elsewhere
in this Report, we believe the following are the critical accounting policies used in the preparation of our consolidated financial
statements that require significant estimates and judgments.
Fair
Value of Financial Instruments
We
account for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the financial
statements on a recurring or nonrecurring basis adhering 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 measurement
date.
|
NeuroOne
Medical Technologies Corporation
Form
10-Q
As
of September 30, 2017 and December 31, 2016, the fair values of cash, other assets, accounts payable, accrued expenses and the
unsecured loan approximated their carrying values because of the short-term nature of these assets or liabilities. The estimated
fair value of the short-term promissory notes and convertible promissory notes was based on amortized cost which was deemed to
approximate fair value. The fair value of the warrant liability and the premium conversion derivative associated with the convertible
promissory notes was based on cash flow models discounted at current implied market rates evidenced in recent arms-length transactions
representing expected returns by market participants for similar instruments which were based on Level 3 inputs. There were
no transfers between fair value hierarchy levels during the nine-month period ended September 30, 2017, or during the year ended
December 31, 2016.
Intellectual
Property
We
entered into two licensing agreements with major research institutions, which allow for access to certain patented technology
and know-how. Milestone 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
We
evaluate long-lived assets, which consists entirely of licensed intellectual property for impairment whenever events or changes
in circumstances indicate that the carrying value of these assets may not be recoverable. We assess 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 September 30, 2017, we had not impaired any long-lived assets.
Debt
Issuance Costs
Debt
issuance costs are recorded as a reduction of the short-term promissory notes and convertible promissory notes. Amortization of
debt issuance costs is calculated using the straight-line method over the term of the short-term promissory notes and convertible
promissory notes, which approximates the effective interest method, and is recorded in interest expense in the statement of operations.
Research
and Development Costs
Research
and development costs are charged to expense as incurred. Research and development expenses may comprise 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
.
Warrant
Liability
We
issued warrants to purchase equity securities in connection with the issuance of the convertible promissory notes. We account
for these warrants as a liability at fair value for each reporting period as the number of shares were not fixed and determinable
at the issuance date for the warrants associated with the convertible promissory notes. Additionally, issuance costs associated
with the warrants are expensed as incurred and reflected as interest expense in the accompanying consolidated statement of operations.
We will continue to adjust the warrant liability for changes in fair value until the earlier of the exercise or expiration of
the warrants, or until such time, if any, as the 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 will be recognized as a component of interest expense in the consolidated statement
of operations.
NeuroOne
Medical Technologies Corporation
Form
10-Q
Premium
Debt Conversion Derivative
We
evaluate 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. We record the fair
value changes of a separated embedded derivative to interest expense at each reporting period. We issued Convertible Notes that
contained a 125% conversion premium in the event that a qualified financing occurs at a price under $2.25 per common share. We
also issued 2017 Convertible Notes that contained a 125% conversion premium in the event that a qualified financing occurs at
a price under $2.8125 per common share. We determined that the redemption feature under the respective notes qualified as an embedded
derivative and was separated from its debt host.
Income
Taxes
For NeuroOne, 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 of all of the deferred tax asset
will not be realized.
The
LLC operated as a single-member LLC from formation on December 12, 2013 until it was merged into NeuroOne, Inc. on October 27,
2016. As such, it was a disregarded legal entity for income tax purposes. Accordingly, no provision for income taxes was included
in the financial statements for the period from January 1, 2016 through October 26, 2016.
Net
Loss Per Share
Basic
earnings or 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.
Our stock options, Convertible Notes and warrants are considered common stock equivalents for this purpose. Diluted earnings is
computed utilizing the treasury method for the stock options and warrants. Diluted earnings with respect to the Convertible Notes
utilizing the if-converted method was not applicable during the three and nine month periods ended September 30, 2017 as no conditions
required for conversion had occurred during this period. 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 September 30, 2017.
The
LLC was a single-member LLC for which no units were outstanding. Accordingly, earnings per share is not presented for the LLC.
NeuroOne
Medical Technologies Corporation
Form
10-Q
Fair
Value of Common Stock on Grant Dates
Prior
to the Acquisition, we were a private company with no active public market for our common stock. Therefore, we have historically
periodically determined for financial reporting purposes the estimated per share fair value of our common stock at various dates
using contemporaneous valuations performed in accordance with the guidance outlined in the American Institute of Certified Public
Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, also known as the Practice
Aid. We performed these contemporaneous valuations on an as-needed basis. In conducting the contemporaneous valuations, we considered
all objective and subjective factors that we believed to be relevant for each valuation conducted, including our best estimate
of our business condition, prospects and operating performance at each valuation date.
Common
Stock Valuation Methodology
The
contemporaneous valuations that we conducted were prepared in accordance with the guidelines in the Practice Aid, which prescribes
several valuation approaches for setting the value of an enterprise, such as the asset, market and income approaches, and various
methodologies for allocating the value of an enterprise to its common stock. In determining the fair value of the common stock
underlying the stock options granted, our Board of Directors has historically considered, among other things, the most recent
estimate of fair value provided by an independent third-party valuation specialist and our assessment of additional objective
and subjective factors to determine the common stock fair market value each valuation date. The following factors, among others,
were considered:
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our financial condition and operating results,
including our projected results;
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our stage of development and business strategy;
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the financial condition and operating results
of comparable publicly owned companies;
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●
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worldwide economic conditions;
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●
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our recent securities transactions; and
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●
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the likelihood of a liquidity event such as
an initial public offering, a merger or the sale of our company.
|
There
are significant judgments and estimates inherent in the determination of fair value of our common stock, including the contemporaneous
valuations. These judgments and estimates include assumptions regarding our future operating performance, and the determination
of the appropriate valuation methods. If we had made different assumptions, our stock-based compensation expense, net loss and
net loss per common share could have been significantly different.
In
each of our contemporaneous valuations, we generally used the asset and market approaches to derive an estimated enterprise value.
The asset approach establishes value based on the cost of reproducing or replacing the property, less economic depreciation due
to physical deterioration, and functional or economic obsolescence, if present and measurable. The particular market approach
utilizes the option pricing method, or OPM, backsolve method to determine our enterprise value. Under this method, an implied
equity value of the company is derived from recent transactions involving the Company’s securities in arms-length transactions.
Under the option pricing method, shares are valued by creating a series of hypothetical call options using exercise prices based
on the liquidation preferences and conversion terms of each equity class. The values of the multiple classes of equity are inferred
by analyzing these options and determining the option value attributable to each respective security. We applied a discount to
the valuations due to the lack of marketability of the ordinary shares at the time of issuance. We calculated the discount for
lack of marketability and applied it as appropriate to each allocation.
Recent
Accounting Pronouncements
In
January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments — Overall: Recognition and Measurement
of Financial Assets and Financial Liabilities.
The guidance affects the accounting for equity investments, financial
liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The guidance
is effective in the first quarter of fiscal 2018 for public entities and for all other entities in the first quarter of fiscal
2019. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. We are currently
evaluating the impact of the new guidance on our financial statements.
In
May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
(ASU 2016-09)
, which provides guidance about which changes to the terms or conditions of a share-based payment award
require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods
beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the requirements of this new guidance
and has not yet determined its impact on our financial statements.
NeuroOne
Medical Technologies Corporation
Form
10-Q
In
July 2017, the FASB issued ASU No. 2017-11 (“ASU 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 ASU 2017-11 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 and after December 15, 2019 for all other entities, including interim periods within those fiscal
years. Early adoption is permitted. We are currently evaluating the requirements of this new guidance and has not yet determined
its impact on our financial statements.
Off
Balance Sheet Arrangements
None.