Notes to Condensed Consolidated Financial
Statements
(unaudited)
NOTE
1 – Organization and Basis of Presentation
NeuroOne Medical Technologies Corporation
(the “Company”), a Delaware Corporation, was originally incorporated as Original Source Entertainment, Inc. under the
laws of the State of Nevada on August 20, 2009. Prior to the closing of the Acquisition (as defined below), the Company completed
a series of steps contemplated by a Plan of Conversion pursuant to which the Company, among other things, changed its name to NeuroOne
Medical Technologies Corporation, increased its authorized number of shares of common stock from 45,000,000 to 100,000,000, increased
its authorized number of shares of preferred stock from 5,000,000 to 10,000,000 and reincorporated in Delaware. On July 20, 2017,
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 reflect operations of the Company for all periods presented
prior to the date of the Acquisition. 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 became the same as those of NeuroOne, an early-stage medical technology company developing comprehensive
neuromodulation cEEG and sEEG monitoring, ablation, and brain stimulation solutions to diagnose and treat patients with epilepsy,
Parkinson’s disease, essential tremors, and other brain related disorders.
To date, the Company has recorded no product
sales and has a limited expense history. The Company is a development stage company and its activities to date have included raising
capital to fund the development of its proprietary technology and seek regulatory clearances required to initiate commercial activities.
The Company is based in Eden Prairie,
Minnesota.
Acquisition of NeuroOne, Inc.
The Acquisition was consummated on July
20, 2017 (the “Closing”) and, pursuant to the terms of the merger 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 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 merger agreement, the Company assumed the NeuroOne 2016 Equity Incentive Plan upon the Closing.
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.
All issued and outstanding common stock
share amounts, options for common stock and per share amounts contained in the consolidated financial statements were retroactively
adjusted to reflect the Exchange Ratio for all periods presented.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
Basis of presentation
The accompanying condensed
consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been
condensed or omitted pursuant to such rules and regulations. The condensed consolidated financial statements may not include
all disclosures required by U.S. GAAP; however, the Company believes that the disclosures are adequate to make the
information presented not misleading. These unaudited condensed consolidated financial statements should be read in
conjunction with the audited financial statements and the notes thereto for the fiscal year ended December 31, 2017 included
in the Annual Report on Form 10-K for the year ended December 31, 2017. The condensed balance sheet at December 31, 2017 was
derived from the audited financial statements of the Company.
In the opinion of management, all adjustments,
consisting of only normal recurring adjustments that are necessary to present fairly the financial position, results of operations,
and cash flows for the interim periods, have been made. The results of operations for the interim periods are not necessarily
indicative of the operating results for the full fiscal year or any future periods.
Certain prior period balances have been reclassified to conform
to the current period presentation. Specifically, the Company reclassified all fair market valuation adjustments related to the
warrant liability and to the premium conversion derivative from interest expense to a separate line item on the condensed consolidated
statements of operations.
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 $6,681,570 as of March 31, 2018. 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 continue to seek additional financing to fund operations. If the
Company is not able to raise additional working capital, it will have a material adverse effect on the operations of the Company
and the development of its technology.
Through March 31, 2018, the Company has
completed a $115,000 unsecured loan financing, a $253,000 short-term promissory note financing (which notes were amended and restated
to become convertible promissory notes as described below), a $1,625,120 convertible promissory note financing of a planned $2.5
million subscription and a second $1,140,000 convertible promissory note financing of a planned $2 million subscription. See Note
13 – Subsequent Events for financings that have closed after March 31, 2018. The Company does not have adequate liquidity
to fund its operations throughout fiscal 2018 without raising additional funds. Management intends to continue to seek additional
debt and/or equity financing to fund operations. However, if the Company is unable to raise additional funds, or the Company’s
anticipated operating results are not achieved, management believes planned expenditures may need to be reduced in order to extend
the time period that existing resources can fund the Company’s operations. If management is unable to obtain the necessary
capital, it may have to cease operations.
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
March 31, 2018, the Company did not have any deposits in excess of federally insured amounts.
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 March 31, 2018 and December 31,
2017, 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 and convertible promissory
notes of the Company was based on amortized cost which was deemed to approximate fair value. The fair value of the warrant liability
and the premium conversion derivatives associated with the short-term and convertible promissory notes of the Company were 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 and are based on Level 3 inputs. There were no transfers between fair
value hierarchy levels during the three months ended March 31, 2018 and 2017.
The fair value of financial instruments measured on a recurring
basis is as follows:
|
|
As of March 31, 2018
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
1,634,059
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,634,059
|
|
Premium conversion derivatives
|
|
|
607,173
|
|
|
|
—
|
|
|
|
—
|
|
|
|
607,173
|
|
Total liabilities at fair value
|
|
$
|
2,241,232
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,241,232
|
|
|
|
As of December 31, 2017
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
1,381,465
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,381,465
|
|
Premium conversion derivatives
|
|
|
462,174
|
|
|
|
—
|
|
|
|
—
|
|
|
|
462,174
|
|
Total liabilities at fair value
|
|
$
|
1,843,639
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,843,639
|
|
The following table provides a roll-forward
of the warrant liability and premium debt conversion derivatives measured at fair value on a recurring basis using unobservable
level 3 inputs for the three month periods ended March 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Warrant liability
|
|
|
|
|
|
|
Balance as of beginning of period
|
|
$
|
1,381,465
|
|
|
$
|
345,960
|
|
Value assigned to warrants in connection with convertible promissory and short-term notes
|
|
|
376,586
|
|
|
|
182,693
|
|
Change in fair value of warrant liability
|
|
|
(123,992
|
)
|
|
|
(215
|
)
|
Balance as of end of period
|
|
$
|
1,634,059
|
|
|
$
|
528,438
|
|
|
|
2018
|
|
|
2017
|
|
Premium debt conversion derivatives
|
|
|
|
|
|
|
Balance as of beginning of period
|
|
$
|
462,174
|
|
|
$
|
137,650
|
|
Value assigned to the underlying derivatives in connection with convertible promissory and short-term
notes
|
|
|
140,967
|
|
|
|
72,732
|
|
Change in fair value of premium debt conversion derivatives
|
|
|
4,032
|
|
|
|
183
|
|
Balance as of end of period
|
|
$
|
607,173
|
|
|
$
|
210,565
|
|
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
Intellectual Property
The Company has entered into
two licensing agreements with major research institutions, which allows for access to certain patented technology and know-how.
Payments under those agreements are capitalized and amortized to general and administrative expense over the expected useful life
of the acquired technology.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets,
which consists 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 March 31, 2018, the Company has not impaired any long-lived assets.
Debt Issuance Costs
Debt issuance costs are recorded as a
reduction of the convertible promissory notes and short-term notes when applicable. Amortization of debt issuance costs is calculated
using the straight-line method over the term of the short term notes and convertible promissory notes, which approximates the
effective interest method, and is recorded in interest expense in the accompanying consolidated statements of operations.
Research and Development Costs
Research and development costs are charged
to expense as incurred. Research and development expenses may comprise of 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 or amendment of short-term and convertible promissory notes. The
Company accounts for these warrants as a liability at fair value when the number of shares is not fixed and determinable in
cases where warrant pricing protections in future equity financings are not available to other common stockholders.
Additionally, issuance costs associated with the warrant liability are expensed as incurred and reflected as interest expense
in the accompanying condensed consolidated statements of operations. The Company adjusts the liability for changes in fair
value until the earlier of the exercise or expiration of the warrants for any period when pricing protections in future
equity financings remain in place, 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, when outstanding, is
recognized in the consolidated statements of operations.
Premium Debt Conversion Derivatives
The Company evaluates all conversion and
redemption features contained in a debt instrument to determine if there are any embedded derivatives that require separation from
the host debt instrument. An embedded derivative that requires separation is bifurcated from its host debt instrument and a corresponding
discount to the host debt instrument is recorded. The discount is amortized and recorded to interest expense over the term of the
host debt instrument using the straight-line method which approximates the effective interest method. The separated embedded
derivative is accounted for separately on a fair market value basis. The Company records the fair value changes of a separated
embedded derivative at each reporting period in the condensed consolidated statements of operations. The Company determined that
the redemption features under the amended short-term promissory notes and convertible promissory notes qualified as embedded derivatives
and were separated from their debt hosts.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
Income Taxes
For the Company, income taxes are accounted
for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base
and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred
tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset
will not be realized.
Net Loss Per Share
For the Company, basic loss per share
of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the
period.
Diluted earnings or loss per share of
common stock is computed similarly to basic earnings or loss per share except the weighted average shares outstanding are increased
to include additional shares from the assumed exercise of any common stock equivalents, if dilutive. The Company’s short-term
notes, convertible promissory notes, warrants and stock options are considered common stock equivalents for this purpose. Diluted
earnings is computed utilizing the treasury method for the warrants and stock options. Diluted earnings with respect to the short-term
notes and convertible promissory notes utilizing the if-converted method was not applicable during the three month periods ended
March 31, 2018 and 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 month periods ended March 31, 2018 and 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
month periods ended March 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Warrants
|
|
|
189,750
|
(1)
|
|
|
597,283
|
|
Stock options
|
|
|
365,716
|
|
|
|
—
|
|
(1)
|
There are additional potential warrants to be included which
will be known, if and when a qualified financing event greater than $3 million or a change of control transaction occurs in
the future.
|
Recent Accounting Pronouncements
In May 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. The Company has adopted this standard for the three months ended March 31, 2018. The
adoption of this standard did not have any impact on the Company’s consolidated 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, including interim periods within
those fiscal years. Early adoption is permitted. The Company is currently evaluating the requirements of this new guidance and
has not yet determined its impact on the Company’s consolidated financial statements.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
NOTE
4 – Commitments and Contingencies
Legal
From time to time, the Company is subject
to litigation and claims arising in the ordinary course of business. In May 2017, NeuroOne received a letter from PMT, the
former employer of Mark Christianson and Wade Fredrickson. PMT claimed that these officers had breached their restrictive
covenant obligations with PMT by virtue of their work for NeuroOne and such officer’s prior work during employment with
the prior employer, that these officers had breached their confidentiality and non-disclosure obligations to PMT and federal and
state law by misappropriating confidential and trade secret information, and that the Company is responsible for tortious interference
with the contracts. The letter demanded that Mr. Fredrickson (who is no longer with the Company), Mr. Christianson and NeuroOne
cease and desist all competitive activities, that Mr. Fredrickson step down from his position and that Mr. Christianson and NeuroOne
provide the former employer access to NeuroOne’s systems to demonstrate that it is not using trade secrets or proprietary
information nor competing with the former employer.
On March 29, 2018, we were served with
a complaint filed by PMT adding the Company, NeuroOne and Mr. Christianson to its existing lawsuit against Mr. Fredrickson.
In the lawsuit, PMT claims that Mr. Fredrickson and Mr. Christianson breached their non-competition, non-solicitation and non-disclosure
obligations, breached their fiduciary duty obligations, were unjustly enriched, engaged in unfair competition, engaged in a civil
conspiracy, tortiously interfered with PMT’s contracts and prospective economic advantage, and breached a covenant of good
faith and fair dealing. Against Mr. Fredrickson, PMT also alleges that he intentionally or negligently spoliated evidence,
made negligent or fraudulent misrepresentations, misappropriated trade secrets in violation of Minnesota law, and committed the
tort of conversion and statutory civil theft. Against the Company and NeuroOne, PMT alleges that the Company and NeuroOne
were unjustly enriched and engaged in unfair competition. PMT asks the Court to impose a constructive trust over the shares
held by Mr. Fredrickson and Mr. Christianson and to award compensatory damages, equitable relief, punitive damages, attorneys’
fees, costs and interest. The Company, NeuroOne and Mr. Christianson (who has not worked for PMT since 2012) intend to defend
themselves vigorously. The outcome and potential loss related to this matter is unknown as of March 31, 2018.
The Company has no insurance coverage
to protect against any losses that the Company may experience due to this claim. Furthermore, Mr. Christianson is a key officer
and the loss of his services would be detrimental to the Company’s operations and prospects.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
NOTE
5 – Intangibles
Intangible assets consisted of the following
at March 31, 2018:
|
|
Useful Life
|
|
|
|
Net Intangibles, December 31, 2017
|
|
12-13 Years
|
|
$
|
216,372
|
|
Less: amortization
|
|
|
|
|
(4,952
|
)
|
Net Intangibles, March 31, 2018
|
|
|
|
$
|
211,420
|
|
Amortization expense was $4,952 and $5,007
for the three months ended March 31, 2018 and 2017, respectively.
NOTE
6 – Accrued Expenses
Accrued expenses consisted of the following
at March 31, 2018 and December 31, 2017:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Accrued license fees
|
|
$
|
120,000
|
|
|
$
|
120,000
|
|
Accrued services
|
|
|
868,811
|
|
|
|
600,339
|
|
Accrued issuance costs
|
|
|
28,083
|
|
|
|
28,083
|
|
Accrued payroll
|
|
|
251,543
|
|
|
|
223,195
|
|
Advances
|
|
|
—
|
|
|
|
50,000
|
|
Other (1)
|
|
|
254,437
|
|
|
|
—
|
|
|
|
$
|
1,522,874
|
|
|
$
|
1,021,617
|
|
|
(1)
|
Accrued expenses include an obligation to issue stock awards and stock options to consultants
that have met vesting requirements as of March 31, 2018 in the amount of $254,437. See Note 10 – Stock-Based Compensation
for further detail.
|
NOTE
7 – Short-Term Promissory Notes and Unsecured Loan
Short-Term Promissory Notes
In August 2017, the Company’s
Board of Directors (the “Board”) authorized, and the Company issued short-term unsecured and interest-free
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 were amortized ratably to interest expense over the original term
of the Short-Term Notes up though November 2017. On November 30, 2017, the Short-Term Notes were amended to extend the
maturity date from February 18, 2018 to July 31, 2018 and to increase warrant coverage to 189,750 common stock purchase
warrants (“Original Warrants”). The Original Warrants had a term of 5 years and an exercise price of $1.80 and
would have been immediately exercisable upon maturity of the Short-Term Notes prior to the amendment described below. The
November 30, 2017 amendment resulted in a substantial modification to the Short-Term Notes and was accounted for under the
provisions of extinguishment accounting.
The Short-Term Notes
were subsequently amended and restated on March 12, 2018 (the “Amended and Restated Short-Term Notes”). The Amended and Restated Short-Term Notes became convertible
promissory notes that 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 the maturity date of July 31, 2018 (the “Short-Term Note Maturity Date”).
Pursuant to the terms of each Amended and Restated Short-Term Note and a consent signed by the Company and each holder, the
Original Warrants under the Short-Term Notes were modified whereby each subscriber received a replacement warrant
(the “Replacement Warrant”) upon the issuance of the Amended and Restated Short-Term Note, in lieu of the
Original Warrant. In addition, each holder was issued an additional warrant (the “Additional Warrant”).
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
If the Company raises more than
$3,000,000 in an equity or equity-linked financing before July 31, 2018 (the “Short-Term Note Qualified
Financing”), the outstanding principal and accrued interest (the “Outstanding Balance”) on the Amended and
Restated Short-Term Notes shall automatically convert into the securities issued by the Company in the Short-Term Note
Qualified Financing (the “New Round Stock”) based on the greater number of such securities resulting from either
(i) the Outstanding Balance divided by $1.80 or (ii) the Outstanding Balance multiplied by 1.25, divided by the price paid
per security in the Short-Term Note Qualified Financing. If a change of control transaction occurs prior to the earlier of a
Short-Term Note Qualified Financing or the Short-Term Note Maturity Date, the Amended and Restated Short-Term Notes
would, at the election of the holders of a majority of the outstanding principal of the Amended and Restated Short-Term
Notes, either become payable on demand as of the closing date of such transaction or become convertible into shares of common
stock immediately prior to such transaction at a price per share equal to the lesser of (i) the per share value of the common
stock as determined by the Board as if in connection with the granting of
stock-based compensation or in a private sale to a third party in an arms’ length transaction or (ii) at the per share
consideration to be paid in such transaction. The date of a conversion under a Short-Term Note Qualified Financing or a
change of control transaction under the terms of the Amended and Restated Short-Term Notes is referred to herein as the
“Conversion Date”.
Replacement Warrants
Each Replacement Warrant grants the
holder the option to purchase up to the number of shares of capital stock of the Company equal to the New Round Stock issued
or issuable upon the conversion of the Amended and Restated Short-Term Note held by such holder at a per share exercise price
equal to either (i) the actual per share price of New Round Stock if the Amended and Restated Short-Term Notes converted in
connection with a Short-Term Note Qualified Financing or (ii) the price at which the Amended and Restated Short-Term Notes
converted in connection with a change of control transaction. The Replacement Warrants are exercisable commencing on the
Conversion Date and expire on November 21, 2021. The exercise price and number of the shares issuable upon exercising the
Replacement Warrants are subject to adjustment in the event of any stock dividends and splits, reverse stock split,
recapitalization, reorganization or similar transaction, as described therein.
The Replacement Warrants were deemed
to be a free-standing instrument and were accounted for as a liability given the variable number of shares issuable in
connection with a possible change of control conversion event. The Company recorded an initial liability of $137,722 upon
issuance with an offset to extinguishment loss described further below. The fair value changes of the warrant liability
associated with the Short-Term Notes are recorded at each reporting date in the condensed consolidated statements of
operations which amounted to a benefit of $(2,371) for the three months ended March 31, 2018. A Monte Carlo simulation model
was used to estimate the aggregate fair value of the Replacement Warrants as of March 31, 2018. Input assumptions used were
as follows: risk-free interest rate of 2.45 percent; expected volatility of 50 percent; expected life of 3.64 years; and
expected dividend yield of 0 percent. The underlying stock price used in the analysis was on a non-marketable basis and was
according to a separate independent third-party valuation analysis since there was no active trading market for the
Company’s common stock
Additional Warrants
Each Additional Warrant grants the holder
the option to purchase up to the number of shares of capital stock of the Company equal to the product obtained by multiplying
(i) the outstanding principal amount of the Amended and Restated Short-Term Note held by such holder and (ii) 0.75; at a per share
exercise price of $1.80. The Additional Warrants are exercisable commencing on the Conversion Date and expire on November 21,
2021. The exercise price and number of the shares issuable upon exercising the Additional Warrants are subject to adjustment in
the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as
described therein.
The Additional Warrants were deemed
to be a free-standing instrument and were accounted for as equity as there were no variable terms. The Additional Warrants
amounted to 189,750 shares as of both the March 12, 2018 amendment date and as of March 31, 2018 with terms that largely
parallel the provisions of the Original Warrants except that the Additional Warrants are exercisable on the Conversion Date
as opposed to the Short-Term Note Maturity Date and the expiration date was moved up to November 21, 2021 from July 31, 2023.
The fair value differential between the Original Warrants and the Additional Warrants was a reduction of $22,624. The fair
value change was recorded as a reduction to additional paid-in capital in the accompanying condensed balance sheets and was
included as part of the extinguishment loss discussed further below.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
Premium Conversion Derivative
Upon the March 2018 amendment, the Short-Term
Notes contained a 125% conversion premium in the event that a Short Term Note Qualified Financing occurs at a price under $2.25
per common share. The Company determined that the redemption feature under the Short-Term Notes qualified as an embedded derivative
and was reflected as a liability in the amount of $49,668 at the time of the March 12, 2018 amendment with a corresponding offset
to extinguishment loss which is described further below. Subsequent to the amendment, the embedded derivative is accounted for
separately on a fair market value basis. The Company recorded the fair value changes of the premium debt conversion derivative
associated with the Short-Term Notes in the condensed consolidated statements of operations for an expense of $43 for the three
months ended March 31, 2018.
Other
The March 2018 amendment resulted in a
substantial modification to the Short-Term Notes whereby additional conversion features and warrant coverage were added. The Company
recorded the Short-Term Note amendment under the provisions of extinguishment accounting. A loss on Short-Term Notes extinguishment
in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2018 was recorded in
the amount of $186,220, which represented the difference between the carrying value of the Short-Term Notes over the combined
fair values of the Short-Term Notes, premium conversion derivative, Replacement Warrant and Additional Warrants on the date of
the amendment. The fair value decrease of the Short-Term Notes (inclusive of principal and interest, non-bifurcated embedded conversion
feature and the Additional Warrants) relative to its adjusted carrying value at the time of the amendment was $1,170 which was
recorded as a reduction to additional paid-in capital on the accompanying condensed balance sheets.
Pursuant to the Short-Term Note subscription
agreement, 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 Short-Term Notes and associated warrants, and the right to purchase the Short-Term Notes and associated 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 subscribers indemnification rights with respect to its representations,
warranties, covenants and agreements under the Short-Term Note subscription agreement.
Unsecured Loans
On March 20, 2018, the Company received
cash proceeds from an unsecured loan, represented by a promissory note, for $115,000 from an existing stockholder. The loan
is interest free and requires that the Company repay the principal in full on the earlier to occur of (i) March 20, 2019 or (ii)
the closing of an equity round of financing of the Company that raises more than $3 million in gross proceeds. The loan includes
customary events of default.
Additionally, 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.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
NOTE
8 – Convertible Promissory Notes and Warrant Agreements
|
|
As of
March 31,
2018
|
|
|
As of
December 31,
2017
|
|
2016 convertible promissory notes, net of discounts
|
|
$
|
1,578,239
|
|
|
$
|
1,543,652
|
|
2017 convertible promissory notes, net of discounts
|
|
|
753,637
|
|
|
|
504,465
|
|
Accrued interest
|
|
|
173,213
|
|
|
|
120,223
|
|
|
|
$
|
2,505,089
|
|
|
$
|
2,168,340
|
|
2016 Convertible Promissory Notes
In November 2016 and as amended in June
2017, the Board authorized the Company to issue convertible promissory notes (the “Convertible
Notes”) and common stock purchase warrants (the “Warrants”) for aggregate gross proceeds of up to $2.5 million
and entered into subscription agreements with subscribers (the “2016 Private Placement”). The Company amended the
Convertible Notes and Warrants again on November 20, 2017 to extend the maturity date of the Convertible Notes from November 21,
2017 to July 31, 2018 and to change the terms of the underlying Warrants that include the removal of down-round pricing protection
provisions as described more fully below.
As of March 31, 2018, the Company
issued a total of $1,625,120 of Convertible Notes and 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 July 31, 2018 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 July 31, 2018, 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 July 31, 2018, the Convertible
Notes will be immediately due and payable on such date.
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 Board as if in connection with the granting
of stock based compensation, or in a private sale to a third party in an arms-length transaction, or 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.
Prior to the June 2017 amendment, the
Warrants granted holders the option to purchase either (i) if exercised after conversion of the Convertible Notes, the number
of shares equal to the number of shares received by the holders 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 expired on November 21, 2021. In June 2017, however, the Company amended the terms of the 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 contingent and are based on the number of shares
of common stock received by the holder of the Convertible Notes upon conversion of such holder’s Convertible Notes, and
at an exercise price equal to the same price per share of the securities issued in the Qualified Financing. The Warrants expire
on November 21, 2021 in the event of a Qualified Financing or expire unissued if the notes have not been converted.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
The Warrants were deemed to be a free-standing
instrument and were accounted for as a liability given the variable number of shares issuable in connection with a possible change
of control conversion event. A Monte Carlo simulation model was used to estimate the aggregate fair value of the Warrants. Input
assumptions used were as follows: risk-free interest rate of 2.45 and 2.08 percent as of March 31, 2018 and December 31, 2017,
respectively; expected volatility of 50 percent as of March 31, 2018 and December 31, 2017; expected life of 3.64 and 3.89 years
as of March 31, 2018 and December 31, 2017, respectively; and expected dividend yield of 0 percent as of March 31, 2018 and December
31, 2017. The underlying stock price used in the analysis was on a non-marketable basis and was according to a separate independent
third-party valuation analysis since there was no active trading market for the Company’s common stock. The Convertible
Note proceeds assigned to the Warrants were zero and $182,693 during the three months ended March 31, 2018 and 2017, respectively,
which represented their fair value at issuance, and were discounted from the Convertible Notes and reflected as a warrant liability.
The discount was amortized to interest expense over the original term of the Convertible Notes using the straight-line method
which approximates the effective interest method. The amortization expense was zero and $118,862 for the three months ended March
31, 2018 and 2017, respectively. The Company also recorded the fair value changes of the warrant liability associated with the
Convertible Notes in the condensed consolidated statements of operations which amounted to a benefit of $(130,976) and $(215)
for the three months ended March 31, 2018 and 2017, respectively.
The November 2017 amendment resulted in
a substantial modification to the original Convertible Notes whereby the maturity date was extended, and the terms associated
with the Warrants were revised. The fair value of the underlying convertible notes was $97,223 lower than the carrying value of
the Convertible Notes on the date of the modification. The $97,223 difference was recorded as a discount to the debt and is being
amortized over the amended term of the Convertible Notes. The amortization recorded during the three months ended March 31, 2018
and 2017 was $34,585 and zero, 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 zero and $72,732 during the three months ended March 31, 2018 and 2017, respectively. The discount was being
amortized to interest expense over the original term of the Convertible Notes using the straight-line method which approximates
the effective interest method. The amortization expense was zero and $47,318 for the three months ended March 31, 2018 and 2017,
respectively. The embedded derivative is 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 in the condensed consolidated statements
of operations for an expense of $2,666 and $183 for the three months ended March 31, 2018 and 2017, respectively.
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
on date of Convertible Note issuance, and (iii) legal expenses of $33,450. The placement agent warrant is issuable at the time
the private placement transaction closes which has not occurred as of March 31, 2018. 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% of the common stock (or common stock equivalents)
purchased by investors in the private placement transaction. As of March 31, 2018 and December 31, 2017, the Company has an obligation
to issue a placement agent warrant for the purchase of approximately 63,000 shares of common stock. The Company recorded an issuance
cost discount to the Convertible Notes in the amount of zero and $16,645 during the three months ended March 31, 2018 and 2017,
respectively, of which zero and $12,361 was amortized to interest expense during the three months ended March 31, 2018 and 2017,
respectively. The balance of the issuance costs in the amount of zero and $15,803 was attributed to the Warrants and was immediately
recorded as interest expense upon issuance during the three months ended March 31, 2018 and 2017, respectively.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
2017 Convertible Notes
On October 4, 2017, the Company initially
entered into a subscription agreement (with certain 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 in the event of a conversion event. The number of shares and pricing per
share of the New Warrants are based on the underlying conversion event and are exercisable for five years commencing on the triggering
conversion event. In November 2017, the Board approved an increase in the authorized subscription from $1,000,000 to $1,500,000.
The subscription agreement and the 2017 Convertible Notes were amended on December 14, 2017 to move up the maturity date from
October 4, 2022 to December 31, 2018, remove subordination provisions and simplify the conversion provision in the event of a
qualified financing as described more fully below. In May 2018, the Board approved an increase in the authorized subscription
from $1,500,000 to $2,000,000 and extended the offering period from five months to eight months.
The initial closing of the Private Placement
was consummated on October 4, 2017, and the Company entered into additional subscription agreements and issued 2017 Convertible
Notes in an aggregate principal amount of $1,140,000 to the Subscribers through March 31, 2018. The Company may conduct any number
of additional closings so long as the final closing occurs on or before the eight-month anniversary of the initial closing date
and the amount does not exceed $2,000,000 or a higher amount determined by the Board. See Note 13 – Subsequent
Events for closings that occurred after March 31, 2018.
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 December 31, 2018 (the “2017 Convertible Notes Maturity Date”). If the Company consummates an equity
round of financing resulting in more than $3 million in gross proceeds before December 31, 2018 (the “2017 Convertible
Notes 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 the 2017 Convertible Notes Qualified Financing equal
to the outstanding principal and accrued interest on the 2017 Convertible Notes divided by 80% of the price per share of the
securities issued by the Company in the 2017 Convertible Notes Qualified Financing. The New Warrants also become exercisable
upon a 2017 Convertible Notes Qualified Financing for an amount of shares equal to the number of shares received by the
holder in the 2017 Convertible Notes Qualified Financing at the same price per share of the securities issued in the 2017
Convertible Notes Qualified Financing.
Prior to the December 2017 amendment,
if the Company had raised more than $3,000,000 in an equity financing before October 4, 2022, the outstanding principal and accrued
and unpaid interest on the 2017 Convertible Notes would have automatically converted into the securities issued by the Company
in such financing based on the greater number of such securities resulting from either (i) the outstanding principal and accrued
interest on the 2017 Convertible Notes divided by $2.25 or (ii) the outstanding principal and accrued interest on the 2017 Convertible
Notes multiplied by 1.25, divided by the price paid per security in such financing. The New Warrants would have also become exercisable
in conjunction with the 2017 Convertible Notes Qualified Financing.
Lastly, if a change of control
transaction occurs prior to the earlier of a 2017 Convertible Notes Qualified Financing or the 2017 Convertible
Notes 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 the Board as if in connection with the granting
of stock based compensation or in a private sale to a third party in an arms-length transaction or (ii) at the per share
consideration to be paid in such transaction. Change of control means a merger or consolidation with another entity in which
the Company’s stockholders do not own more than 50% of the outstanding voting power of the surviving entity or the
disposition of all or substantially all of the Company’s assets. The New Warrants also become exercisable upon a change
of control transaction for an amount of shares equal to the number of shares received by the holder upon conversion in
connection with such transaction at the same price per share that the 2017 Convertible Notes converted in the change of
control transaction.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
The December 2017 amendment resulted in
a substantial modification to the original 2017 Convertible Notes whereby the maturity date was moved up to December 2018 from
October 2022 and the terms associated with the embedded features were revised as described previously. The fair value of the underlying
Convertible Notes was $27,371 lower than the face amount of the 2017 Convertible Notes. The $27,371 difference was recorded as
a discount to the debt and is being amortized over the amended term of the 2017 Convertible Notes. The amortization recorded during
the three months ended March 31, 2018 was $6,432.
The 2017 Convertible Notes contain a
conversion discount in the event of a 2017 Convertible Notes Qualified Financing to equal the outstanding principal and accrued
interest on the 2017 Convertible Notes divided by 80% of the price per share of the securities issued by the Company in the 2017
Convertible Notes Qualified Financing. The embedded feature qualified as an embedded derivative and was separated from its debt
host. The bifurcation of the embedded derivative from its debt host resulted in a discount to the 2017 Convertible Notes in the
amount of $91,298 for the convertible debt issued during the three months ended March 31, 2018. The discount is being amortized
to interest expense over the term of the 2017 Convertible Notes using the straight-line method which approximates the effective
interest method. The amortization expense was $27,021 for the three months ended March 31, 2018. The embedded derivative is accounted
for separately on a fair market value basis. The Company recorded the fair value changes of the premium debt conversion derivative
associated with all of the 2017 Convertible Notes in the condensed consolidated statements of operations which amounted to an
expense of $1,323 for the three months ended March 31, 2018.
The New Warrants were deemed to be
a free-standing instrument and were accounted for as a liability given the variable number of shares issuable in
connection with a change of control conversion event. A Monte Carlo simulation model was used to estimate the aggregate fair
value of the New Warrants. Input assumptions used were as follows: risk-free interest rate of 2.57 and 2.22 percent as of
March 31, 2018 and December 31, 2017, respectively; expected volatility of 50 percent as of March 31, 2018 and December 31,
2017; expected life of 5.21 and 5.38 years as of March 31, 2018 and December 31, 2017, respectively; and expected dividend
yield of 0 percent as of March 31, 2018 and December 31, 2017. The underlying stock price used in the analysis was on a
non-marketable basis and was according to a separate independent third-party valuation analysis as there has been very
limited trading with the Company’s common stock since the Acquisition on July 20, 2017. The 2017 Convertible Note
proceeds assigned to the New Warrants were $238,864 during the three month period ended March 31, 2018, which represented
their fair value at issuance and were discounted from the 2017 Convertible Notes and reflected as a warrant liability. The
discount is being amortized to interest expense over the term of the 2017 Convertible Notes using the straight-line method
which approximates the effective interest method. The amortization expense was $70,505 for the three month period ended March
31, 2018. The Company also recorded the fair value changes of the warrant liability associated with all of the 2017
Convertible Notes in the condensed consolidated statements of operations which amounted to an expense of $9,355 for the three
months ended March 31, 2018.
In connection with the 2017 Convertible
Notes, the Company incurred original cost of issuance in the amount of $5,283 which consisted of legal costs and was recorded as
an issuance cost discount to the 2017 Convertible Notes, of which $375 was amortized to interest expense during the three months
ended March 31, 2018.
2016 and 2017 Convertible Note Subscription
Agreements
Pursuant to the subscription agreements
entered into in connection with the 2016 Private Placement and the Private Placement, 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 Convertible Notes and associated Warrants
or any portion of the 2017 Convertible Notes or New Warrants, as applicable, and the right to purchase the Convertible Notes and
associated Warrants or the 2017 Convertible Notes and associated 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 respective subscription agreements.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
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. 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, under the 2016 Plan. During the three month periods ended March 31, 2018 and 2017, no stock options
or restricted stock award grants were formally issued. See stock-based award liability section below for stock-based award grants
committed, but not formally issued as of March 31, 2018.
During the three months ended March 31,
2018 and 2017, there was no vesting of formally issued stock options or restricted stock awards. No stock options were forfeited
during the three months ended March 31, 2018 and 2017. As of March 31, 2018, 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 March 31, 2018.
Stock-Based Award Liabilities
As of March 31, 2018, the Company had
a formal obligation to issue future restricted common stock and common stock options relating to two consulting agreements. The
estimated liability associated with the vested portions of these awards was recorded in accrued expenses in the accompanying condensed
consolidated balance sheets as of March 31, 2018. The corresponding stock-based services expense related to the stock-based award
liability was included in general and administrative and research and development costs as follows in the accompanying condensed
statements of operations:
|
|
Three Months
Ended
|
|
|
|
March 31,
2018
|
|
General and administrative
|
|
$
|
252,000
|
|
Research and development
|
|
|
2,437
|
|
Total stock-based compensation
|
|
$
|
254,437
|
|
A total of up to 250,000 shares of
common stock was committed as a result of one consulting agreement for investor relation services executed in February 2018, but
none of the underlying shares of common stock were issued as of March 31, 2018. The portion of the stock award that had met performance
vesting conditions as of March 31, 2018 amounted to 100,000 common shares and were issued on April 26, 2018. The amount of compensation
expense totaling $252,000 related to the vested common shares was based on the fair value of the underlying common stock at point
of vesting which was $2.52 per share on a non-marketable basis. The common stock fair value was according to a separate independent
third-party valuation analysis since there was no active trading market for the Company’s common stock. The remaining 150,000
shares of the stock award will vest and be issued in 50,000 share quarterly tranches beginning in May 2018. The first 50,000 tranche
of shares was issued on May 7, 2018.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
Additionally, the Company recorded stock-based
services expense related to unissued stock options associated with a second consulting agreement whereby the number of option shares
and pricing will not be set until the occurrence of the award date which is defined as the earlier to occur of a public offering,
qualified financing, or June 30, 2018. The number of option shares under the agreement is based on a $3,000 monthly compensation
amount divided by the fair value of the underlying common stock on the award date. The exercise price will also be set at the
fair value of the underlying common stock on the award date. The liability associated with the unissued options was based on an
option share equivalent estimate that reflects the portion of the award where performance vesting conditions have been met as
of March 31, 2018 and was based on the fair value of the Company’s common stock on March 31, 2018 as the award date has
not occurred. The common stock fair value on March 31, 2018 was $2.30 per share and was determined based on a separate independent
third-party valuation analysis since there was no active trading market for the Company’s common stock.
The weighted-average assumptions used
in the Black-Scholes option-pricing model are as follows for the stock- option liability during the three month periods ended
March 31, 2018:
|
|
2018
|
|
|
|
|
|
Expected stock price volatility
|
|
|
47.8
|
%
|
Expected life of options (years)
|
|
|
5
|
|
Expected dividend yield
|
|
|
0
|
%
|
Risk free interest rate
|
|
|
2.6
|
%
|
Upon the issuance of all of the
unissued options associated with the stock-based award liabilities, the estimated number of shares available for future
issuance as of March 31, 2018 would be reduced from 1,711,096 shares to 1,704,574 as a result of the potential stock option
issuance under the second consulting agreement. The 250,000 shares of common stock issuable under the February 2018
consulting agreement were not eligible for issuance under either of the 2016 or 2017 Plans as the consulting contract was not
with an individual. See Note 12 - Stockholders’ Deficit for additional information.
NOTE
11 – Income Taxes
The effective tax rate for the three months
ended March 31, 2018 and 2017 was zero percent. As a result of the analysis of all available evidence as of March 31, 2018 and December 31,
2017, the Company recorded a full valuation allowance on its net deferred tax assets. Consequently, the Company reported no income
tax benefit during the three months ended March 31, 2018 and 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.
On December 22, 2017, the Tax Cuts and
Jobs Act of 2017 was signed into law making significant changes to the U.S. tax code. Changes affecting the Company’s consolidated
financial statements include, but are not limited to, a U.S. federal corporate tax rate decrease from 35% to 21% effective for
tax years beginning after December 31, 2017. The Company has adjusted the disclosure amounts related to deferred tax assets and
the valuation allowance recorded to reflect the new federal corporate tax rates.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
NOTE
12 – Stockholders’ Deficit
Common Stock
The Company has 100,000,000 shares of
common stock authorized, par value $0.001 per share, of which 7,864,994 shares were issued and outstanding at March 31, 2018 and
December 31, 2017. In connection with the February 2018 consulting contract discussed in Note 10 – Stock-based Compensation,
up to 250,000 shares of common stock are issuable under the contract. Upon issuance, these shares are subject to restrictions
pursuant to the provisions of Rule 144. On April 26, 2018 and May 7, 2018, 100,000 and 50,000 shares of common stock were
issued under the contract, respectively, and subject to the restrictions under the provisions of Rule 144.
NOTE
13 – Subsequent Events
2017 Convertible Notes
The Company issued additional 2017 Convertible
Notes and New Warrants to investors for aggregate gross proceeds of $350,000 from April 13, 2018 to May 8, 2018. The additional
convertible notes and warrants issued have identical terms to the 2017 Convertible Notes and New Warrants disclosed in Note 8
- Convertible Promissory Notes and Warrant Agreements.
Additionally, on May 8, 2018, the
Board approved an increase in the maximum amount of aggregate 2017 Convertible Notes offered from $1,500,000 to
$2,000,000.
Issuance of Common Stock
Between April 26, 2018 and May 7, 2018,
the Company issued 150,000 shares of common stock to an investor relations firm in consideration for consulting services.
NeuroOne Medical
Technologies Corporation
Form 10-Q