AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 2018
REGISTRATION
NO. 333-
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
NeuroOne
Medical Technologies Corporation
(Exact
name of registrant as specified in its charter)
Delaware
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3841
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27-0863354
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(State
or other jurisdiction of
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(Primary
Standard Industrial
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(I.R.S.
Employer
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incorporation
or organization)
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Classification
Code Number)
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Identification
No.)
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10006
Liatris Lane
Eden
Prairie, MN 55347
952-237-7412
(Address,
including zip code, and telephone number, including area code, of registrant’s principal executive offices)
David
Rosa
10006
Liatris Lane
Eden
Prairie, MN 55347
952-237-7412
(Name,
address, including zip code, and telephone number, including area code, of agent for service)
Copies
to:
Gregory
Sichenzia, Esq.
Jeff
Cahlon, Esq.
Sichenzia
Ross Ference LLP
1185
Avenue of the Americas, 37
th
Floor
New
York, New York 10036
Phone:
(212) 930-9700
Fax:
(212) 930-9725
Approximate
date of commencement of proposed sale to the public:
From time to time after the effective date of this registration statement.
If
any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933 check the following box. ☒
If
this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration statement number of the earlier effective registration statement
for the same offering. ☐
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering.
☐
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering.
☐
(COVER
CONTINUES ON FOLLOWING PAGE)
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer ”,
“smaller reporting company ” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
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Accelerated
filer ☐
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Non-accelerated
filer ☐
(do
not check if smaller
reporting
company)
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Smaller reporting company ☒
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Emerging growth company ☐
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If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Title of Class of Securities to be
Registered
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Amount To be
Registered
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Proposed
Maximum
Aggregate
Price
Per Share
(1)
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Proposed
Maximum
Aggregate
Offering
Price
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Amount of
Registration
Fee
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Common Stock, $0.001 par value per share (2)
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1,146,311 shares
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$
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5.55
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$
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6,362,026
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$
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792.07
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Common Stock, $0.001 par value per share (3)
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2,482,372 shares
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5.55
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13,777,165
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1715.26
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Total number of securities to be registered
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3,628,683 shares
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5.55
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$
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20,139,191
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$
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2,507.33
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(1)
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Estimated
solely for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended,
using the average of the high and low prices as reported on the OTCQB on September 4, 2018.
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(2)
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Represents
outstanding shares of common stock offered by the selling stockholders.
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(3)
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Represents
shares of common stock issuable upon exercise of outstanding warrants, offered by the selling stockholders.
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The
registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until
the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities
under this prospectus until the registration statement of which it is a part and filed with the Securities and Exchange Commission
is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
PRELIMINARY
PROSPECTUS, SUBJECT TO COMPLETION, DATED SEPTEMBER 10, 2018
NeuroOne
Medical Technologies Corporation
3,628,683 Shares
of Common Stock Offered by Selling Stockholders
This
prospectus relates to the public offering of up to 3,628,683 shares of common stock of NeuroOne Medical Technologies Corporation
by the selling stockholders, including 1,146,311 outstanding shares and 2,482,372 shares issuable upon exercise of outstanding
warrants.
The
selling stockholders may sell common stock from time to time in the principal market on which the stock is traded at the prevailing
market price or in negotiated transactions.
We
will not receive any of the proceeds from the sale of common stock by the selling stockholders. We will pay the expenses of registering
these shares.
Investing
in our common stock involves a high degree of risk. You should consider carefully the risk factors beginning on page 2
of this prospectus before purchasing any of the shares offered by this prospectus.
Our
common stock is quoted on the OTCQB and trades under the symbol “NMTC.” The last reported sale price of our common
stock on the OTCQB on September 6, 2018, was $5.00 per share.
We
may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read the
entire prospectus and any amendments or supplements carefully before you make your investment decision.
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The
date of this prospectus is_________, 2018.
NEUROONE
MEDICAL TECHNOLOGIES CORPORATION
TABLE
OF CONTENTS
You
may only rely on the information contained in this prospectus or that we have referred you to. We have not authorized anyone to
provide you with different information. This prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities other than the common stock offered by this prospectus. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any common stock in any circumstances in which such offer or solicitation is unlawful. Neither
the delivery of this prospectus nor any sale made in connection with this prospectus shall, under any circumstances, create any
implication that there has been no change in our affairs since the date of this prospectus or that the information contained by
reference to this prospectus is correct as of any time after its date.
Prospectus
Summary
This
summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including
the section entitled “Risk Factors,” before deciding to invest in our common stock.
About
Us
We
are a development stage medical technology company focused on the development and commercialization of thin film electrode technology
for cEEG and sEEG recording, brain stimulation and ablation solutions for patients suffering from epilepsy, Parkinson’s
disease, dystonia, essential tremors and other related brain related disorders. Members of our management team have held senior
leadership positions at a number of medical technology and biopharmaceutical companies, including Boston Scientific, St. Jude
Medical, Stryker Instruments, C.R. Bard, A-Med Systems, Sunshine Heart, Empi, Don-Joy and PMT Corporation.
References
in this prospectus to “we,” “us,” “the Company” and “our” refer to NeuroOne Medical
Technologies Corporation, together with its subsidiary, NeuroOne, Inc. (“NeuroOne”).
About
this Offering
From
November 2016 through June 2017, NeuroOne, Inc. entered into subscription agreements with the subscribers (the “Series 1
Subscribers”) identified therein (the “Series 1 Subscription Agreements”). Pursuant to the terms of the Series
1 Subscription Agreements, NeuroOne, Inc. issued to the Series 1 Subscribers convertible promissory notes, which were amended
in December 2016 and November 2017 (as amended, the “Series 1 Notes”), and warrants to purchase shares of the Company’s
capital stock, which were amended in June 2017 and November 2017 (as amended, the “Series 1 Warrants”). The Company
and NeuroOne, Inc. consummated the transactions contemplated by the Agreement and Plan of Merger and Reorganization on July 20,
2017 and the Company assumed the Series 1 Notes and the Series 1 Warrants on such date.
On
August 18, 2017, the Company entered into subscription agreements with the subscribers (the “Series 2 Subscribers”,
and together with the Series 1 Subscribers, the “Subscribers”) identified therein (the “Series 2 Subscription
Agreements”). Pursuant to the terms of the Series 2 Subscription Agreements, the Company issued to the Series 2 Subscribers
promissory notes, which were amended in November 2017 and March 2018 (as amended, the “Series 2 Notes”, and together
with the Series 1 Notes, the “Notes”), and warrants to purchase shares of the Company’s capital stock, which
were amended in March 2018 (as amended, the “Series 2 Warrants”, and together with the Series 1 Warrants, the “Original
Warrants”). In addition to the Series 2 Warrants, in March 2018 the Company issued to the Series 2 Subscribers additional
warrants to purchase shares of the Company’s capital stock (the “Additional Warrants”, and together with the
Original Warrants, the “Warrants”).
Effective
as of July 2, 2018, the Company entered into the Series 1 Notes Debt Conversion Agreement with each Series 1 Subscriber and the
Series 2 Notes Debt Conversion Agreement with each Series 2 Subscriber (the “Conversion Agreements”) to (i) convert
the outstanding principal and accrued and unpaid interest (the “Outstanding Balance”) under the Notes into shares
of the Company’s common stock based on the Outstanding Balance divided by $1.80 per share (the “Conversion Shares”);
(ii) cancel and extinguish the Notes; and (iii) amend and restate the Warrants to make them immediately exercisable upon conversion,
at a per share exercise price equal to $1.80 per share. As consideration for the early conversion of the Notes, the Company issued
each Subscriber a new warrant (the “Payment Warrants”), exercisable for up to the number of shares of common stock
equal to the number of Conversion Shares received by such Subscriber; at a per share exercise price of $1.80 per share. The Payment
Warrants are exercisable commencing on July 2, 2018, and expire on November 21, 2021.
Pursuant
to the Conversion Agreements, $1,804,064 of the outstanding principal and interest of the Series 1 Notes was converted into 1,002,258
shares of common stock and $259,297 of the outstanding principal and interest of the Series 2 Notes was converted into 144,053
shares of common stock. As of the date hereof, 2,482,372 shares of common stock are issuable upon exercise of the Warrants and
Payment Warrants.
This
prospectus includes the resale of (i) 1,146,311 shares of common stock issued pursuant to the Conversion Agreements, and (ii)
2,482,372 shares of common stock issuable upon exercise of the Warrants and Payment Warrants.
RISK
FACTORS
An
investment in the Company’s common stock involves a high degree of risk. Before you invest you should carefully consider
the risks and uncertainties described below and the other information in this prospectus. Our business, operating results and
financial condition could be harmed and the value of our stock could go down as a result of these risk factors. This means you
could lose all or a part of your investment.
Risks
Related to Our Business
We
have incurred significant operating losses since inception and cannot assure you that we will ever achieve or sustain profitability.
We
have incurred losses since inception and as of June 30, 2018 and December 31, 2017, we had an accumulated deficit of $7.9 million
and $5.3 million, respectively, primarily as a result of expenses incurred in connection with our general and administrative expenses
associated with our operations and from our research and development programs. We expect to continue to incur significant expenses
and increasing operating and net losses for the foreseeable future. To date, we have financed our operations primarily through
debt and equity financings, and 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.
To
implement our business strategy we need to, among other things, successfully complete the development, testing and 510(k) device
submission to the FDA for our cortical and strip electrodes for the diagnosis of epilepsy, successfully complete the development,
testing and all required steps for regulatory approval of our depth electrodes for sEEG recording in the U.S., develop and introduce
a minimally invasive delivery system for our cortical electrodes, develop an all-in-one diagnostic and therapeutic solution, successfully
complete the necessary testing and clinical trials required for regulatory approval of our technology for ablation and stimulation
therapies, gain approval for other brain or motor related disorders such as Parkinson’s with the therapeutic technologies
developed for epilepsy, convince physicians and patients that our technology, if approved, represents an improvement over existing
diagnostic or treatment options, hire direct experienced sales representatives to market our technology, if approved, in the United
States, evaluate international opportunities and initiate and successfully complete the approval processes in targeted geographies
and engage in beneficial partnerships that can leverage our core technology. We have never been profitable and do not expect to
be profitable in the foreseeable future. We expect our expenses to increase significantly as we pursue our objectives. The extent
of our future operating losses and the timing of profitability are highly uncertain, and we expect to continue incurring significant
expenses and operating losses over the next several years. Our prior losses have had, and will continue to have, an adverse effect
on our stockholders’ equity and working capital. Any additional operating losses may have an adverse effect on our stockholders’
equity, and we may never generate revenues or achieve profitability.
We
are a development stage company with a limited operating history, making it difficult for you to evaluate our business and your
investment.
Our
operating subsidiary, NeuroOne was incorporated on October 7, 2016, and our predecessor, NeuroOne LLC, had very limited operations.
We are 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. 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. Our operations are subject to all of the risks inherent in the
establishment of a new business enterprise, including but not limited to the absence of an operating history, lack of fully-developed
or commercialized products, insufficient capital, expected substantial and continual losses for the foreseeable future, limited
experience in dealing with regulatory issues, lack of manufacturing and marketing experience, need to rely on third parties for
the development and commercialization of our proposed products, a competitive environment characterized by well-established and
well-capitalized competitors and reliance on key personnel.
Since
inception, we have not established any revenues or operations that will provide financial stability in the long term, and there
can be no assurance that we will realize our plans on our projected timetable (or at all) in order to reach sustainable or profitable
operations.
Investors
are subject to all the risks incident to the creation and development of a new business and each investor should be prepared to
withstand a complete loss of his, her or its investment. Furthermore, the accompanying financial statements have been prepared
assuming that we will continue as a going concern. We have not emerged from the development stage, and may be unable to raise
further equity. These factors raise substantial doubt about our ability to continue as a going concern. Our financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Our
ability to continue our operations requires that we raise additional capital and our operations could be curtailed if we are unable
to obtain the additional funding as or when needed.
Upon
the completion of the audit of our financial statements for the year ended December 31, 2017, and management’s assessment
of our ability to continue as a going concern, we concluded there was substantial doubt about our ability to continue as a going
concern. At June 30, 2018 and December 31, 2017, we had $22,608 and $26,467, respectively, in cash deposits. Our existing
cash and cash equivalents will not be sufficient to fund our operating expenses through December 31, 2018. To continue to fund
operations, we will need to secure additional funding. 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, and we may be forced to liquidate our assets. In such a scenario,
the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our
financial statements.
Our
outstanding notes require that we complete qualified financings by certain dates. If we are unable to, such notes become immediately
due and payable and we may not have sufficient cash to pay the principal and accrued and unpaid interest thereon.
The
notes issued by us and our wholly-owned subsidiary, NeuroOne, provide that if we are unable to complete qualified financings by
certain dates such notes will become immediately due and payable.
For a description of our outstanding notes, see “Management’s Discussion And Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources—Historical Capital Resources.” If we fail
to complete a qualified financing pursuant to the terms of the Series 3 Notes by December 31, 2018, the Series 3 Notes totaling
$1,596,228 as of June 30, 2018 will be immediately due and payable on such date. We may not have sufficient cash to pay the principal
and accrued and unpaid interest thereon on such dates.
If
our outstanding notes become due and payable and we are unable to pay the principal and accrued and unpaid interest thereon, we
may be unable to execute our business plan and may be forced to liquidate our assets. In such a scenario, the values we receive
for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.
We
will need to raise substantial additional funds in the future, and these funds may not be available on acceptable terms or at
all. A failure to obtain this necessary capital when needed could force us to delay, limit, scale back or cease some or all operations.
The
continued growth of our business, including the development, regulatory approval and commercialization of our cortical strip,
grid electrode and depth electrode technology, will significantly increase our expenses going forward. As a result, we will be
required to seek substantial additional funds in the future. Our future capital requirements will depend on many factors, including:
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the
cost of developing our cortical strip, grid electrode and depth electrode technology;
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obtaining
and maintaining regulatory clearance or approval for our cortical strip, grid electrode
and depth electrode technology;
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the
costs associated with commercializing our cortical strip, grid electrode and depth electrode technology;
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any
change in our development priorities;
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the
revenue generated by sales of our cortical strip, grid electrode and depth electrode technology, if approved;
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the
costs associated with expanding our sales and marketing infrastructure for commercialization
of our cortical strip grid electrode and depth electrode technology, if approved;
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any
change in our plans regarding the manner in which we choose to commercialize any approved
product in the United States or internationally;
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the
cost of ongoing compliance with regulatory requirements;
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expenses
we incur in connection with potential litigation or governmental investigations;
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the
costs to develop additional intellectual property;
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anticipated
or unanticipated capital expenditures; and
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unanticipated
general and administrative expenses.
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As
a result of these and other factors, we do not know whether and the extent to which we may be required to raise additional capital.
We may in the future seek additional capital from public or private offerings of our capital stock, borrowings under credit lines
or other sources.
We
may not be able to raise additional capital on terms acceptable to us, or at all. Any failure to raise additional capital could
compromise our ability to execute on our business plan, and we may be forced to liquidate our assets. In such a scenario, the
values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial
statements.
If
we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity
or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we
raise additional funds through collaborations, licensing, joint ventures, strategic alliances, partnership arrangements or other
similar arrangements, it may be necessary to relinquish valuable rights to our potential future products or proprietary technologies,
or grant licenses on terms that are not favorable to us.
Medical
device development involves a lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience
delays in completing, or ultimately be unable to complete, the development and commercialization of any product.
Before
obtaining marketing approval from regulatory authorities for the sale of our cortical strip, grid electrode and depth electrode
technology under development in the United States or elsewhere, we must complete all pre-clinical testing, clinical trials and
other regulatory requirements necessitated by the FDA and foreign regulatory bodies and demonstrate the performance and safety
of our technology. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently
uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. Further, the outcomes of
completed clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial
do not necessarily predict final results. Clinical data is often susceptible to varying interpretations and analyses, and many
companies that have believed their products performed satisfactorily in clinical trials have nonetheless failed to obtain marketing
approval. We have limited resources to complete the expensive process of medical device development, pre-clinical testing and
clinical trials, putting us at a disadvantage, particularly compared to some of our larger and established competitors, and we
may not have sufficient resources to commercialize our products under development in a timely fashion, if ever.
We
may experience numerous unforeseen events during or as a result of clinical trials that could delay or prevent our ability to
receive marketing approval or commercialize our products, including:
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regulators
may not authorize us or our investigators to commence a clinical trial or conduct a clinical
trial at a prospective trial site;
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the
failure to successfully complete pre-clinical testing requirements required by the FDA and international organizations;
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we
may experience delays in reaching, or fail to reach, agreement on acceptable clinical
trial contracts with third parties or clinical trial protocols with prospective trial
sites, the terms of which can be subject to extensive negotiation and may vary significantly
among different trial sites;
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clinical
trials of our cortical strip, grid electrode and depth electrode technology may produce
negative or inconclusive results, including failure to demonstrate statistical significance,
and we may decide, or regulators may require us, to conduct additional clinical trials
or abandon our development programs;
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the
number of people with brain related disorders required for clinical trials may be larger
than we anticipate, enrollment in these clinical trials may be slower than we anticipate
or people may drop out of these clinical trials or fail to return for post-treatment
follow-up at a higher rate than we anticipate;
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our
products may have undesirable side effects or other unexpected characteristics, causing
us or our investigators, regulators or institutional review boards to suspend or terminate
the trials;
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our
third-party contractors conducting the clinical trials may fail to comply with regulatory
requirements or meet their contractual obligations to us in a timely manner, or at all;
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regulators
may require that we or our investigators suspend or terminate clinical development for
various reasons, including noncompliance with regulatory requirements or a finding that
the participants are being exposed to unacceptable health risks;
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the
cost of clinical trials of our products may be greater than we anticipate;
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the
supply or quality of our products or other materials necessary to conduct clinical trials
of our products may be insufficient or inadequate; and
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delays
from our suppliers and manufacturers could impact clinical trial completion and impact revenue.
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If
we are required to conduct additional clinical trials or other testing of our cortical strip, grid electrode and depth electrode
technology under development beyond those that we contemplate, if we are unable to successfully complete clinical trials of our
cortical strip, grid electrode and depth electrode technology under development or other testing, if the results of these trials
or tests are not favorable or if there are safety concerns, we may:
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not
obtain marketing approval at all;
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be
delayed in obtaining marketing approval for our cortical strip, grid electrode and depth
electrode technology under development in a jurisdiction;
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be
subject to additional post-marketing testing requirements; or
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have
our cortical strip, grid electrode and depth electrode technology removed from the market
after obtaining marketing approval.
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Our
development costs will also increase if we experience delays in testing or marketing approvals. We do not know whether any of
our clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant
clinical trial delays also could allow our competitors to bring innovative products to market before we do and impair our ability
to successfully commercialize our products.
Changes
in the configuration of our cortical strip, grid electrode and depth electrode technology under development may result in additional
costs or delay.
As
products are developed through pre-clinical testing and clinical trials towards approval and commercialization, it is common that
various aspects of the development program, such as manufacturing methods and configuration, are altered along the way in an effort
to optimize processes and results. Any changes we make carry the risk that they will not achieve the intended objectives. Any
of these changes could cause our products to perform differently and affect the results of planned clinical trials or other future
clinical trials conducted with the altered device. Such changes may also require additional testing, regulatory notification or
regulatory approval. This could delay completion of pre-clinical testing or clinical trials, increase costs, delay approval of
our future products and jeopardize our ability to commence sales and generate revenue.
We
have no products that are approved for commercial sale. If we are unable to successfully develop, receive regulatory approval
for and commercialize our cortical strip, grid electrode and depth electrode technology under development, or if we experience
significant delays in doing so, our business will be harmed.
We
have no products that are approved for commercial sale. We initially plan to seek regulatory approval to commercialize our cortical
strip, grid electrode and depth electrode technology under development in the United States and we may seek approval to commercialize
in select international geographies. Our ability to generate revenue from our developed products, if any, will depend heavily
on their successful development, regulatory approval and eventual commercialization. The success of any products that we develop
will depend on several factors, including:
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FDA
approval of our planned regulatory pathway (or approval of foreign regulatory body if
we seek approval in any jurisdiction outside the United States);
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successful
completion of all necessary pre-clinical testing and clinical trials;
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receipt
of timely commercialization approvals from applicable regulatory authorities;
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our
ability to procure and maintain suppliers and manufacturers of the components of our
current cortical strip, grid electrode and depth electrode technology and future versions;
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launching
commercial sales of our cortical strip, grid electrode and depth electrode technology, if approved for marketing;
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market
acceptance of our cortical strip, grid electrode and depth electrode technology, if approved,
by people with epilepsy, Parkinson’s disease, essential tremors and other brain
related disorders, the medical community and third-party payors;
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our
ability to obtain extensive coverage and reimbursement for our cortical strip, grid electrode
and depth electrode technology and implantation procedures;
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our
success in educating healthcare providers and people with epilepsy, Parkinson’s
disease, essential tremors and other brain related disorders about the benefits, administration
and use of our cortical strip, grid electrode and depth electrode technology and future
versions;
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the
prevalence and severity of adverse events;
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the
perceived advantages, cost, safety, convenience and accuracy of alternative therapies;
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obtaining
and maintaining patent, trademark and trade secret protection and regulatory exclusivity
for our cortical strip, grid electrode and depth electrode technology and otherwise protecting
our rights in our intellectual property portfolio;
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maintaining
compliance with regulatory requirements, including current good manufacturing practices; and
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maintaining
a continued acceptable performance and safety profile of our cortical strip, grid electrode
and depth electrode technology following approval.
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Whether
regulatory approval will be granted is unpredictable and depends upon numerous factors, including the substantial discretion of
the regulatory authorities. Our success in clinical trials will not guarantee regulatory approval. The FDA and, if we seek to
commercialize in select international geographies, other comparable foreign regulatory authorities may require that we conduct
additional pre-clinical testing or clinical trials, provide additional data, take additional manufacturing steps, or require other
conditions before they will grant us approval. If the FDA or other comparable foreign regulatory authorities require additional
clinical trials or data, we would incur increased costs and delays in the marketing approval process, which may require us to
expend more resources than we have available. In addition, the FDA or other comparable foreign regulatory authorities may not
consider sufficient any additional required clinical trials, data or information that we perform and complete or generate.
In
cases where we are successful in obtaining regulatory approval to market one or more of our products, our revenue will be dependent,
in part, upon the size of the markets in the territories for which we gain regulatory approval, the accepted price for the product,
the ability to obtain coverage and reimbursement, and whether we own the commercial rights for that territory. If the number of
people we target is not as significant as we estimate or the treatment population is narrowed by competition, physician choice
or treatment guidelines, we may not generate significant revenue from sales of such products, even if approved.
Approval
or clearance in the United States by the FDA or by a regulatory agency in another country does not guarantee approval by the regulatory
authorities in other countries or jurisdictions or ensure approval for the same conditions of use. In addition, clinical trials
conducted in one country may not be accepted by regulatory authorities in other countries. Approval processes vary among countries
and can involve additional product testing and validation and additional administrative review periods. It is possible that no
product we develop will ever obtain regulatory approval in the United States or any other jurisdiction, even if we expend substantial
time and resources seeking such approval. If we do not achieve one or more of these approvals in a timely manner or at all, we
could experience significant delays or an inability to fully commercialize any product and achieve profitability.
Both
before and after a product is commercially released, we will have ongoing responsibilities under U.S. and foreign regulations.
We will also be subject to periodic inspections by the FDA and comparable foreign authorities to determine compliance with regulatory
requirements, such as the Quality System Regulation, or QSR, of the FDA, medical device reporting regulations, vigilance in reporting
of adverse events and regulations regarding notification, corrections, and recalls. These inspections can result in observations
or reports, warning letters or other similar notices or forms of enforcement action. If the FDA or any comparable foreign authority
concludes that we are not in compliance with applicable laws or regulations, or that any of our products are ineffective or pose
an unreasonable health risk, such authority could ban these products, suspend or cancel our marketing authorizations, impose “stop-sale”
and “stop-import” orders, refuse to issue export certificates, detain or seize adulterated or misbranded products,
order a recall, repair, replacement, correction or refund of such products, or require us to notify health providers and others
that the products present unreasonable risks of substantial harm to the public health. Discovery of previously unknown problems
with our product’s design or manufacture may result in restrictions on use, restrictions placed on us or our suppliers,
or withdrawal of an existing regulatory clearance. The FDA or comparable foreign authorities may also impose operating restrictions,
enjoin and restrain certain violations of applicable law pertaining to medical devices, assess civil or criminal penalties against
our officers, employees or us, or recommend criminal prosecution of our Company. Adverse regulatory action may restrict us from
effectively marketing and selling our products. In addition, negative publicity and product liability claims resulting from any
adverse regulatory action could have a material adverse effect on our business, financial condition, and operating results.
Foreign
governmental regulations have become increasingly stringent and more extensive, and we may become subject to even more rigorous
regulation by foreign governmental authorities in the future. Penalties for a company’s noncompliance with foreign governmental
regulation could be severe, including revocation or suspension of a company’s business license and civil or criminal sanctions.
In some jurisdictions, such as Germany, a violation of law related to medical devices may also be considered to be a violation
of unfair competition law. In such cases, governmental authorities, our competitors and business or consumer associations may
file lawsuits to prohibit us from commercializing a product in such jurisdictions. Our competitors may also sue us for damages.
Any domestic or foreign governmental law or regulation imposed in the future may have a material adverse effect on our business,
financial condition and operating results.
Depending
on the cost and market opportunity, we may never seek approval to commercialize our cortical strip, grid electrode and depth electrode
technology in the European Union. We anticipate the cost to seek approval to commercialize in the European Union will be significantly
greater than the cost to seek approval to commercialize in the United States. This is because we believe commercial approval by
the corresponding Notified Body in the European Union and the European Economic Area, or EEA, even for diagnostic purposes, will
require human clinical trials, which we do not believe will be required for regulatory approval by the FDA in the United States
in order to seek approval of the use of our technology for diagnostic purposes.
Our
success depends on our ability to continue to develop, commercialize and gain market acceptance for our product under development,
our cortical strip, grid electrode and depth electrode technology.
Our
current business strategy is highly dependent on developing and commercially launching one product, our cortical strip, grid electrode
and depth electrode technology, and achieving and maintaining market acceptance. In order for us to sell cortical strip, grid
electrode and depth electrode technology to people with epilepsy, Parkinson’s disease, essential tremors and other brain
related disorders, we must convince them, their caregivers and healthcare providers that cortical strip, grid electrode and depth
electrode technology is an attractive alternative to competitive products for neuromodulation cEEG and sEEG recording, ablation,
and brain stimulation. Market acceptance and adoption of our cortical strip, grid electrode and depth electrode technology depends
on educating people with epilepsy, Parkinson’s disease, essential tremors and other brain related disorders, as well as
their caregivers and healthcare providers, and other perceived benefits of our cortical strip, grid electrode and depth electrode
technology as compared to competitive products. We may face challenges convincing physicians, many of whom have extensive experience
with competitors’ products and established relationships with other companies, to appreciate the benefits of our cortical
strip, grid electrode and depth electrode technology and, in particular, its ability to successfully diagnose and treat epilepsy,
Parkinson’s disease, and other brain related disorders in a way that is superior to and differentiated from currently available
technology, and adopt it for treatment of their patients.
Achieving
and maintaining market acceptance of cortical strip, grid electrode and depth electrode technology could be negatively impacted
by many factors, including:
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the
failure of our cortical strip, grid electrode and depth electrode technology to achieve
wide acceptance among people with epilepsy, Parkinson’s disease, essential tremors
and other brain related disorders, their caregivers, healthcare providers, third-party
payors and key opinion leaders in the community;
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lack
of evidence supporting the performance criteria or other perceived benefits of our cortical
strip, grid electrode and depth electrode technology over competitive products or other
currently available technology;
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perceived
risks associated with the use of our cortical strip, grid electrode and depth electrode
technology or similar products or technologies generally;
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the
introduction of competitive products and the rate of acceptance of those products as
compared to our cortical strip, grid electrode and depth electrode technology;
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adverse
results of clinical trials relating to our cortical strip, grid electrode and depth electrode
technology or similar competitive products; and
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loss
of regulatory approval for our cortical strip, grid electrode and depth electrode technology,
adverse publicity or other adverse events including any product liability lawsuits.
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In
addition, our cortical strip, grid electrode and depth electrode technology may be perceived by people with epilepsy, Parkinson’s
disease, essential tremors and other brain related disorders, their caregivers or healthcare providers to be more complicated
or less effective than current technology, and people may be unwilling to change their current regimens.
Moreover,
we believe that healthcare providers tend to be slow to change their medical treatment practices because of perceived liability
risks arising from the use of new products and the uncertainty of third-party reimbursement. Accordingly, healthcare providers
may not recommend our cortical strip, grid electrode and depth electrode technology until, if ever, there is sufficient evidence
to convince them to alter the treatment methods they typically recommend, such as receiving recommendations from prominent healthcare
providers or other key opinion leaders in the community.
If
we are not successful in convincing people with epilepsy, Parkinson’s disease, essential tremors and other brain related
disorders of the benefits of our cortical strip, grid electrode and depth electrode technology, or if we are unable to achieve
the support of caregivers and healthcare providers or widespread market acceptance for our cortical strip, grid electrode and
depth electrode technology, then our sales potential, strategic objectives and profitability could be negatively impacted, which
would adversely affect our business, financial condition and operating results.
We
may fail to obtain regulatory approvals to market our products in the United States or in other countries.
Before
we can market or sell a new regulated product in the United States, we must obtain either clearance under Section 510(k) of the
FDCA or approval of a pre-market approval (“PMA”) application from the FDA, unless an exemption from pre-market review
applies. In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent”
to a device legally on the market, known as a “predicate” device, with respect to intended use, technology and safety
and effectiveness, in order to clear the proposed device for marketing. Clinical data is sometimes required to support substantial
equivalence. The PMA pathway requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on
extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data. The PMA
process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting
or implantable devices. Both the 510(k) and PMA processes can be expensive and lengthy and require the payment of significant
fees, unless exempt. The FDA’s 510(k) clearance process usually takes from three to 12 months, but may last longer. The
process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one to
three years, or even longer, from the time the application is submitted to the FDA until an approval is obtained. The process
of obtaining regulatory clearances or approvals to market a medical device can be costly and time-consuming, and we may not be
able to obtain these clearances or approvals on a timely basis, if at all.
Even
if we obtain clearance or approval by the FDA, said clearance or approval by the FDA does not ensure approval or certification
by regulatory authorities in other countries or jurisdictions, and approval or certification by one foreign regulatory authority
does not ensure approval or certification by regulatory authorities in other foreign countries or by the FDA. The foreign regulatory
approval or certification process may include all of the risks associated with obtaining FDA clearance or approval. We may not
obtain foreign regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals or certifications
and may not receive necessary approvals to commercialize our products in any market. If we fail to receive necessary approvals
or certifications to commercialize our products in foreign jurisdictions on a timely basis, or at all, our business, results of
operations and financial condition could be adversely affected.
Failure
to secure or retain coverage or adequate reimbursement for our cortical strip, grid electrode and depth electrode technology or
future versions thereof, including the implantation procedures, by third-party payors could adversely affect our business, financial
condition and operating results.
We
plan to derive nearly all of our revenue from sales of our cortical strip, grid electrode and depth electrode technology under
development, if approved, in the United States and potentially select international geographies and expect to do so for the next
several years. We anticipate a substantial portion of the purchase price of our cortical strip, grid electrode and depth electrode
technology will be paid for by third-party payors, including private insurance companies, preferred provider organizations and
other managed care providers. Patients who receive treatment for their medical conditions and their healthcare providers generally
rely on third-party payors to reimburse all or part of the costs associated with their medical treatment, including healthcare
providers’ services. Coverage and adequate reimbursement from third-party payors, including governmental healthcare programs,
such as Medicare and Medicaid, and commercial payors, is critical to new product acceptance. Future sales of our cortical strip,
grid electrode and depth electrode technology will be limited unless people with epilepsy, Parkinson’s disease, essential
tremors and other brain related disorders can rely on third-party payors to pay for all or part of the cost to purchase our cortical
strip, grid electrode and depth electrode technology. Access to adequate coverage and reimbursement for our cortical strip, grid
electrode and depth electrode technology by third-party payors is essential to the acceptance of our products by people with epilepsy,
Parkinson’s disease, essential tremors and other brain related disorders.
In
the United States, a third-party payor’s decision to provide coverage for our products does not imply that an adequate reimbursement
rate will be obtained. Further, one third-party payor’s decision to cover our products does not assure that other payors
will also provide coverage for the products or will provide coverage at an adequate reimbursement rate. Healthcare providers may
choose not to order a product unless third-party payors pay a substantial portion of the product. Within and outside the United
States, reimbursement is obtained from a variety of sources, including government-sponsored and private health insurance plans.
These third-party payors determine whether to provide coverage and reimbursement for specific products and procedures. Coverage
determinations and reimbursement levels of both our products and the healthcare provider’s performance of the insertion
and removal procedures are critical to the commercial success of our product, and if we are not able to secure positive coverage
determinations and reimbursement levels for our products or the insertion and removal procedures, our business would be materially
adversely affected.
In
addition, there may be significant delays in obtaining reimbursement, and coverage may be more limited than the purposes for which
the product is cleared by the FDA or other foreign regulatory authorities. Moreover, eligibility for reimbursement does not imply
that any product will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture,
sale and distribution. Payment rates may vary according to the use of the product and the clinical setting in which it is used,
may be based on payments allowed for lower cost products that are already reimbursed, and may be incorporated into existing payments
for other services. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare
programs or third-party payors and by any future relaxation of laws that presently restrict imports of products from countries
where they may be sold at lower prices than in the United States.
Because
there is generally no separate reimbursement for medical devices and other supplies used in such procedures, including our cortical
strip, grid electrode and depth electrode technology, and because we believe that our cortical strip, grid electrode and depth
electrode technology, if approved, would be adequately described by existing DRG and ICD-9 codes for epilepsy surgery, some of
our target customers may be unwilling to adopt our cortical strip, grid electrode and depth electrode technology over more established
or lower cost therapeutic alternatives already available or subsequently become available. Further, any decline in the amount
payors are willing to reimburse our customers for procedures using our cortical strip, grid electrode and depth electrode technology
could make it difficult for new customers to adopt our cortical strip, grid electrode and depth electrode technology and could
create additional pricing pressure for us, which could adversely affect our ability to invest in and grow our business.
Third-party
payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling
healthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for medical device products
and services exists among third-party payors. Therefore, coverage and reimbursement for medical device products and services can
differ significantly from payor to payor. In addition, payors continually review new technologies for possible coverage and can,
without notice, deny coverage for these new products and procedures. As a result, the coverage determination process is often
a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products
to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained, or maintained if obtained.
Reimbursement
systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals
must be obtained on a country-by-country basis. In many international markets, a product must be approved for reimbursement before
it can be approved for sale in that country. Further, many international markets have government-managed healthcare systems that
control reimbursement for new devices and procedures. In most markets there are private insurance systems as well as government-managed
systems. If sufficient coverage and reimbursement is not available for our any product we develop, in either the United States
or internationally, the demand for our products and our revenues will be adversely affected.
Reimbursement
by Medicare is highly regulated and subject to change.
The
Medicare program is administered by the Centers for Medicare and Medicaid Services, or CMS, which imposes extensive and detailed
requirements on medical services providers, including, but not limited to, rules that govern how we structure our relationships
with physicians, and how and where we provide our solutions. Our failure to comply with applicable Medicare rules could result
in discontinuing the ability for physicians to receive reimbursement as they will likely utilize our cortical strip, grid electrode
and depth electrode technology under the Medicare payment program, civil monetary penalties, and/or criminal penalties, any of
which could have a material adverse effect on our business and revenues.
The
impact of the Patient Protection and Affordable Care Act remains uncertain.
In
2010, significant reforms to the health care system were adopted as law in the United States. The law includes provisions that,
among other things, reduce or limit Medicare reimbursement, require all individuals to have health insurance (with limited exceptions)
and impose increased taxes. These factors, in turn, could result in reduced demand for our products, if approved, and increased
downward pricing pressure. Because other parts of the 2010 health care law remain subject to implementation, the long-term impact
on us is uncertain. The new law or any future legislation could reduce medical procedure volumes, lower reimbursement for our
products, and impact the demand for our products or the prices at which we sell our products.
In
addition, some of the provisions of the ACA have yet to be implemented, and there have been legal and political challenges to
certain aspects of the ACA. Since January 2017, President Trump has signed executive orders and other directives designed to delay,
circumvent, or loosen certain requirements mandated by the ACA. Concurrently, Congress has considered legislation that would repeal
or repeal and replace all or part of the ACA. While Congress has not passed repeal legislation, the Tax Cuts and Jobs Act of 2017
includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain
individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual
mandate.” Congress may consider other legislation to repeal or replace elements of the ACA. We continue to evaluate the
effect that the ACA and its possible repeal and replacement has on our business but expect that the ACA, as currently enacted
or as it may be amended in the future, and other healthcare reform measures that may be adopted in the future could have a material
adverse effect on our industry generally and on our ability to successfully commercialize our cortical strip, grid electrode and
depth electrode technology, if approved. In addition to the ACA, there will continue to be proposals by legislators at both the
federal and state levels, regulators and third party payors to keep healthcare costs down while expanding individual healthcare
benefits.
Accordingly,
while it is too early to understand and predict the ultimate impact of the ACA on our business, the legislation and resulting
regulations could have a material adverse effect on our business, cash flows, financial condition and results of operations.
If
our competitors are better able to develop and market products for the diagnosis and treatment of epilepsy, Parkinson’s
disease, essential tremors and other brain related disorders that are safer, more effective, less costly, easier to use or otherwise
more attractive than our cortical strip, grid electrode and depth electrode technology, our business will be adversely impacted.
The
medical device industry is highly competitive and subject to technological change. Our success depends, in part, upon our ability
to establish a competitive position in the market for the diagnosis and treatment of epilepsy, Parkinson’s disease, essential
tremors and other brain related disorders by securing broad market acceptance of our cortical strip, grid electrode and depth
electrode technology under development. Any product we develop that achieves regulatory clearance or approval will have to compete
for market acceptance and market share. If developed as anticipated, we believe that the primary competitive factors of our cortical
strip, grid electrode and depth electrode technology under development will be: product efficacy, reduced infections, ability
to record additional brain activity, minimally invasive surgical procedure, ease of use and cost effectiveness. We face significant
competition in the United States and internationally, which we believe will intensify. For example, our major competitors (i)
in the market for diagnosis are PMT Corporation, Ad-Tec Medical and Integra Lifesciences, (ii) in the market for neuro-ablation
are Medtronic and Monteris Medical and (iii) in the market for neurostimulation are Medtronic, Boston Scientific, NeuroPace Biotronik
and Abbott. Each of the foregoing competitors has systems approved in the United States and certain foreign jurisdictions and
has been established for several years. We face a particular challenge overcoming the long-standing practices by some physicians
of using the existing technology of our larger, more established competitors. Physicians may be reluctant to try new products
from a source with which they are less familiar. If these physicians do not try and subsequently adopt our product, then our revenue
growth will slow or decline.
In
addition to these major competitors, we may also face competition from other emerging competitors or smaller companies with active
development programs that may emerge in the future.
Many
of the companies developing or marketing competing products enjoy several advantages over us, including:
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more
experienced sales forces;
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greater
name recognition;
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more
established sales and marketing programs and distribution networks;
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earlier
regulatory approval in the United States or foreign jurisdictions;
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long
established relationships with physicians and hospitals;
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significant
patent portfolios, including issued U.S. and foreign patents and pending patent applications,
as well as the resources to enforce patents against us or any of our third-party suppliers
and distributors;
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the
ability to acquire and integrate our competitors and/or their technology;
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demonstrated
ability to develop product enhancements and new product offerings;
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established
history of product reliability, safety and durability;
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the
ability to offer rebates or bundle multiple product offerings to offer greater discounts or incentives;
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greater
financial and human resources for product development, sales, and marketing; and
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greater
experience in and resources for conducting research and development, clinical studies,
manufacturing, preparing regulatory submissions, obtaining regulatory clearance or approval
for products and marketing approved products.
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Our
competitors may develop and patent processes or products earlier than us, obtain patents that may apply to us at any time, obtain
regulatory clearance or approvals for competing products more rapidly than us or develop more effective or less expensive products
or technologies that render our technology or products obsolete or less competitive. Furthermore, the frequent introduction by
competitors of products that are, or claim to be, superior to our products may create market confusion that may make it difficult
to differentiate the benefits of our products over competitive products. In addition, the entry of multiple new products may lead
some of our competitors to employ pricing strategies that could adversely affect the pricing of any product we may develop and
commercialize. We also face fierce competition in recruiting and retaining qualified sales, scientific, and management personnel,
establishing clinical trial sites and enrolling patients in clinical studies. If our competitors are more successful than us in
these matters, our business may be harmed.
The
size and future growth in the market for our cortical strip, grid electrode and depth electrode technology under development has
not been established with precision and may be smaller than we estimate, possibly materially. If our estimates and projections
overestimate the size of this market, our sales growth may be adversely affected.
Our
estimates of the size and future growth in the market for our cortical strip, grid electrode and depth electrode technology under
development, including the number of people with epilepsy, Parkinson’s disease, essential tremors and other brain related
disorders who may benefit from and be amenable to using cortical strip, grid electrode and depth electrode technology for diagnosis
and treatment, is based on a number of internal and third-party studies, reports and estimates. In addition, our internal estimates
are based in large part on current treatment patterns by healthcare providers using current generation technology and our belief
is that the incidence of epilepsy, Parkinson’s disease, essential tremors and other brain related disorders in the United
States and worldwide is increasing. While we believe these factors have historically provided and may continue to provide us with
effective tools in estimating the total market for cortical strip, grid electrode and depth electrode technology, these estimates
may not be correct and the conditions supporting our estimates may change at any time, thereby reducing the predictive accuracy
of these underlying factors. The actual incidence of brain related disorders, and the actual demand for our products or competitive
products, could differ materially from our projections if our assumptions are incorrect. As a result, our estimates of the size
and future growth in the market for cortical strip, grid electrode and depth electrode technology may prove to be incorrect. If
the actual number of people with brain related disorders who would benefit from cortical strip, grid electrode and depth electrode
technology and the size and future growth in the market for cortical strip, grid electrode and depth electrode technology is smaller
than we have estimated, it may impair our projected sales growth and have an adverse impact on our business.
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.
Wisconsin
Alumni Research Foundation, or WARF, has granted us 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. See “Business
— WARF License” for additional information regarding our license agreement with WARF.
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 would submit a business plan to WARF by February 1, 2018, which we submitted
on January 18, 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.
Disputes
may arise between us and WARF regarding intellectual property subject to this agreement, including with respect to: the scope
of rights granted under the WARF License and other interpretation-related issues; whether and the extent to which our technology
and processes infringe on intellectual property of WARF that is not subject to the WARF License; the amount and timing of milestones
and royalty payments; the rights of WARF under the license; our right to sublicense; and the ownership of inventions and know-how
resulting from the WARF License. For example, if we or any of our sublicenses for any reason contest the validity of any patent
licensed under the WARF License, 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.
Any
disputes with WARF may prevent or impair our ability to maintain our current licensing arrangement. We depend on the intellectual
property licensed from WARF to develop our cortical strip, grid electrode and depth electrode technology. We cannot assure you
that we will be able to meet the milestones or commercialize a product under the WARF License by the dates required. In fact,
the original license agreement entered into with WARF in 2014 required that we meet certain earlier milestones than set forth
above and make certain payments to WARF. We failed to do so and were in default under the original license agreement. Furthermore,
the LLC was not able to transfer the rights and obligations under the 2014 WARF Agreement to us at the time of the Merger without
the consent of WARF. As a result, in February 2017, we signed an amendment to the WARF License which, among other things, modified
and removed certain previous milestones and provided WARF’s consent to such transfer. Because of this past breach, WARF
may be less likely to waive future defaults or breaches or further amend the WARF License in the future, to the extent we request
any waiver or amendment. See “Note 4—Commitments and Contingencies” to the financial statements included in
this prospectus.
Termination
of our license could result in the loss of significant rights and would harm our ability to further develop our cortical strip,
grid electrode and depth electrode technology. 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. Such rights, if exercised by WARF, could harm our ability to develop and commercialize
our cortical strip, grid electrode and depth electrode technology.
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.
We
have entered into the Mayo Development Agreement to (i) exclusively license worldwide certain Mayo improvements for the development
and commercialization of products, methods and processes related to flexible circuit technology for the recording and stimulation
of tissue and (ii) license, on a non-exclusive basis, worldwide Mayo thin film electrode technology know-how for the development
and commercialization of products, methods and processes related to flexible circuit technology for the recording and stimulation
of tissue. Mayo has agreed to assist the Company by providing access to the Mayo Principal Investigators in developing a minimally
invasive device/delivery system and procedure for a minimally invasive approach for the implantation of any flexible circuit technology
developed by the Company, 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. See “Business—Mayo Foundation for Medical Education and Research License and Development
Agreement” for additional information regarding our agreement with Mayo.
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.
Mayo and the Company may not be successful in their efforts to develop any product, method, process, device, delivery system or
minimally invasive approach by such expiration date or termination, if at all. If no such minimally invasive device or delivery
system and procedure for minimally invasive approach is developed, the Company may never receive regulatory approval of its cortical
strip, grid electrode and depth electrode technology under development or the market may never accept such technology, if approved.
Disputes
may arise between us and Mayo regarding intellectual property subject to the Mayo Development Agreement or other matters, including
with respect to: the scope of rights granted under the agreement and other interpretation-related issues; the amount and timing
of payments; the rights and obligations of Mayo under the license agreement; and the ownership of inventions and know-how resulting
from the joint creation or use of intellectual property by Mayo and us.
Any
disputes with Mayo may prevent or impair our ability to maintain our current arrangement. We depend on the intellectual property
licensed from and development assistance from Mayo to develop our cortical strip, grid electrode and depth electrode technology.
We cannot assure you that we will be able to continue to comply with the Mayo Development Agreement. In fact, the original license
and development agreement entered into with Mayo in 2014 required that, upon the Merger with the LLC, we make certain payments
and issue shares of common stock to Mayo, which we failed to do at such time. We signed the Mayo Development Agreement in May
2017, which, among other things, modified or removed certain provisions of the original agreement, including those we breached.
In addition, pursuant to the Mayo Development Agreement signed in May 2017, we agreed to pay Mayo a cash payment of approximately
$92,000 on the earlier of September 30, 2017 or the date we raise a minimum amount of financing. We did not make this payment
by September 30, 2017 and breached this provision of the Mayo Development Agreement. Mayo granted us an extension of this deadline
to December 31, 2017, and we made this payment within such extended deadline. Because of our past breach, Mayo may be less likely
to waive future defaults or breaches or further amend the Mayo Development Agreement in the future, to the extent we request any
waiver or amendment. Termination of the Mayo Development Agreement could result in the loss of significant rights and would harm
our ability to further develop our technology.
We
do not have the sales and marketing personnel necessary to sell any products we may develop, if approved for commercialization.
Even if we have our cortical strip, grid electrode and depth electrode technology approved for commercial sale, if we are unable
to establish a sales and marketing infrastructure, we may not be successful in commercializing our cortical strip, grid electrode
and depth electrode technology in the United States.
We
are an early stage development company with limited resources. Even if we had products available for sale, which we currently
do not, we have not secured sales and marketing staff at this early stage of operations to sell products. To achieve commercial
success in the United States for our cortical strip, grid electrode and depth electrode technology, we will need to establish
and expand our sales and marketing infrastructure to drive adoption of our products, which will include a team of educators that
will train healthcare providers and people with brain related disorders on the benefits and use of our cortical strip, grid electrode
and depth electrode technology. There is significant competition for sales personnel experienced in relevant medical device sales.
We expect that we will face significant challenges as we recruit and subsequently grow our sales and marketing infrastructure.
If we are unable to attract and retain sufficient, and skilled, sales and marketing representatives, our sales could be adversely
affected. If one of our sales or marketing representatives were to depart and be retained by one of our competitors, they could
help competitors solicit business from customers, which could further harm our sales. In addition, if our sales and marketing
representatives or educators fail to achieve their objectives or if we are not able to recruit and retain a network of educators,
we may not be able to successfully train healthcare providers on the use of our cortical strip, grid electrode and depth electrode
technology, which could delay new sales and harm our reputation.
As
we increase our sales and marketing expenditures with respect to our cortical strip, grid electrode and depth electrode technology
under development, if approved, or future versions thereof, we will need to hire, train, retain and motivate skilled sales and
marketing representatives with significant industry-specific knowledge in various areas. Our success will depend largely on the
competitive landscape for our products and the ability of our sales personnel to obtain access to healthcare providers and persuade
those healthcare providers to recommend our cortical strip, grid electrode and depth electrode technology. Recently hired sales
representatives require training and take time to achieve full productivity. If we fail to train new hires adequately, or if we
experience high turnover in our sales force in the future, we cannot be certain that new hires will become as productive as may
be necessary to maintain or increase our sales. In addition, the expansion of our sales and marketing personnel will place significant
burdens on our management team.
If
approved for sale, we anticipate that we will derive nearly all of our U.S. revenue from the sales of our cortical strip, grid
electrode and depth electrode technology or future versions thereof. As a result, our financial condition and operating results
will be highly dependent on the ability of our sales representatives to adequately promote, market and sell our cortical strip,
grid electrode and depth electrode technology and the ability of our educators to train healthcare providers on the use of our
cortical strip, grid electrode and depth electrode technology. If we are unable to establish and expand our sales and marketing
capabilities, we may not be able to effectively commercialize our existing or planned products, or enhance the strength of our
brand, either of which could impair our projected sales growth and have an adverse impact on our business.
We
will depend on a limited number of third-party suppliers for the components of our cortical strip, grid electrode and depth electrode
technology under development and the loss of any of these suppliers, or their inability to provide us with an adequate supply
of materials, could harm our business.
We
will rely on third-party suppliers to supply and manufacture the components of our cortical strip, grid electrode and depth electrode
technology. For our business strategy to be successful, our suppliers must be able to provide us with components in sufficient
quantities, in compliance with regulatory requirements and quality control standards, in accordance with agreed upon specifications,
at acceptable costs and on a timely basis. Future increases in sales of our cortical strip and sheet electrode technology, if
approved, whether expected or unanticipated, could strain the ability of our suppliers to deliver an increasingly large supply
of components and our cortical strip, grid electrode and depth electrode technology in a manner that meets these various requirements.
We
will likely use a small number of suppliers of components for our products. Depending on a limited number of suppliers exposes
us to risks, including limited control over pricing, availability, quality and delivery schedules. We may not have long-term supply
agreements with our suppliers and, in many cases, we may make our purchases on a purchase order basis. Our ability to purchase
adequate quantities of components or our products may be limited and we may not be able to convince suppliers to make components
and products available to us. Additionally, our suppliers may encounter problems that limit their ability to supply components
or manufacture products for us, including financial difficulties, damage to their manufacturing equipment or facilities, or product
discontinuations. As a result, there is a risk that certain components could be discontinued and no longer available to us. We
may be required to make significant “last time” purchases of component inventory that is being discontinued by the
supplier to ensure supply continuity. If we fail to obtain sufficient quantities of high quality components to meet demand for
our products in a timely manner or on terms acceptable to us, we would have to seek alternative sources of supply. Because of
factors such as the proprietary nature of our products, our quality control standards and regulatory requirements, we may not
be able to quickly engage additional or replacement suppliers for some of our critical components. Failure of any supplier to
deliver components at the level our business requires could disrupt the manufacturing of our products and, if approved, limit
our ability to meet our sales commitments, which could harm our reputation and adversely affect our business.
Furthermore,
vandalism, terrorism or a natural or other disaster, such as an earthquake, fire or flood, could damage or destroy equipment or
our inventory of component supplies or finished products, cause substantial delays in development or our operations, result in
the loss of key information, and cause us to incur additional expenses. We do not currently have insurance to cover such losses
or expenses and, once we obtain such insurance, it may not cover our losses in any particular case. In addition, regardless of
the level of insurance coverage, damage to our or our suppliers’ facilities could harm our business, financial condition
and operating results.
We
may also have difficulty obtaining similar components from other suppliers that are acceptable to the FDA or other regulatory
agencies, and the failure of any supplier to comply with strictly enforced regulatory requirements could expose us to regulatory
action including warning letters, product recalls, and termination of distribution, product seizures or civil penalties. It could
also require us to cease using the components, seek alternative components or technologies and modify our products to incorporate
alternative components or technologies, which could result in a requirement to seek additional regulatory approvals. Any disruption
of this nature or increased expenses could harm our development, approval or commercialization efforts and adversely affect our
operating results.
We
plan to contract with third parties for the manufacture of our cortical strip, grid electrode and depth electrode technology under
development and expect to continue to do so for clinical trials and commercialization. Risks associated with the manufacturing
of our products could reduce our gross margins and negatively affect our operating results.
We
currently rely, and expect to continue to rely, on third parties for the manufacture of our cortical strip, grid electrode and
depth electrode technology during development, for clinical testing, as well as for commercial manufacture if our cortical strip,
grid electrode and depth electrode technology receives regulatory approval. Therefore, our business strategy depends on our third-party
manufacturers’ ability to manufacture our cortical strip, grid electrode and depth electrode technology and future generations
thereof in sufficient quantities and on a timely basis so as to meet consumer demand, while adhering to product quality standards,
complying with regulatory requirements and managing manufacturing costs. To date, we have only had an initial supply of our product
manufactured. As a result, we currently have limited data and experience regarding the quality, reliability and timeliness of
our third-party manufacturers.
We
are subject to numerous risks relating to the manufacturing capabilities of our third-party manufacturers, including:
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quality
or reliability defects;
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inability
to secure product components in a timely manner, in sufficient quantities or on commercially reasonable terms;
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failure
to increase production to meet demand;
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inability
to modify production lines to enable us to efficiently produce future products or implement
changes in current products in response to regulatory requirements;
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difficulty
identifying and qualifying alternative manufacturers in a timely manner;
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inability
to manufacture product components cost-effectively;
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inability
to establish agreements with future third-party manufacturers or to do so on acceptable terms; or
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potential
damage to or destruction of our manufacturers’ equipment or facilities.
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These
risks are likely to be exacerbated by our limited experience with our cortical strip, grid electrode and depth electrode technology
and its manufacturing process. As demand for our products increases, our third-party suppliers will need to invest additional
resources to purchase components, hire and train employees, and enhance their manufacturing processes. If our manufacturers fail
to increase production capacity efficiently, our sales may not increase in line with our expectations and our operating margins
could fluctuate or decline. In addition, manufacturing any future versions of our cortical strip, grid electrode and depth electrode
technology may require the modification of production lines, the identification of new manufacturers for specific components,
or the development of new manufacturing technologies. It may not be possible for us to manufacture these products at a cost or
in quantities sufficient to make any future versions of our cortical strip, grid electrode and depth electrode technology commercially
viable.
If
we or our third-party suppliers or manufacturers fail to comply with the FDA’s good manufacturing practice regulations,
this could impair our ability to market our products in a cost-effective and timely manner.
We
and our third-party suppliers are required to comply with the FDA’s QSR, which covers the methods and documentation of the
design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products.
The FDA audits compliance with the QSR through periodic announced and unannounced inspections of manufacturing and other facilities.
The FDA may impose inspections or audits at any time. If we or our suppliers or manufacturers have significant non-compliance
issues or if any corrective action plan that we or our suppliers propose in response to observed deficiencies is not sufficient,
the FDA could take enforcement action against us. Any of the foregoing actions could impair our reputation, business, financial
condition and operating results.
Various
factors outside our direct control may adversely affect manufacturing, sterilization and distribution of our products.
The
manufacture, sterilization and distribution of our products is challenging. Changes that our suppliers may make outside the purview
of our direct control can have an impact on our processes, quality of our products and the successful delivery of products to
our customers. Necessary materials for our product under development may not be available from our third-party suppliers in a
timely fashion or at all. Mistakes and mishandling are not uncommon and can affect supply and delivery. Some of these risks include:
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failure
to complete sterilization on time or in compliance with the required regulatory standards;
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transportation
and import and export risk;
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delays
in analytical results or failure of analytical techniques that we will depend on for
quality control and release of products;
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natural
disasters, labor disputes, financial distress, raw material availability, issues with
facilities and equipment or other forms of disruption to business operations affecting
our manufacturers or suppliers; and
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latent
defects that may become apparent after products have been released and that may result in a recall of such products.
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If
any of these risks were to materialize, our ability to develop products, conduct clinical trials or provide our products to customers
on a timely basis, if approved, would be adversely impacted.
Potential
complications from our cortical strip, grid electrode and depth electrode technology may come to light or may not be revealed
by our clinical experience.
Based
on our industry experience and the experience of the physicians that use products similar to our cortical strip, grid electrode
and depth electrode technology, complications from use of our cortical strip, grid electrode and depth electrode technology may
include post-operative hemorrhage, infection, brain inflammation, brain tissue necrosis, inability to accurately localize the
epileptogenic focus (the area of the cerebral cortex responsible for causing epileptic seizures), neurologic deficit (abnormal
function of a body area due to weaker function of the brain, spinal cord, muscles or nerves, such as abnormal reflexes, inability
to speak and decreased sensation) and extra axial fluid collections (fluid that occurs in the brain after surgery). If these or
unanticipated complications or side-effects result from the use of our cortical strip, grid electrode and depth electrode technology,
our product development may be delayed, we may not be able to obtain regulatory approval for any product, we could be subject
to liability and, even if approved, our technology would not be widely adopted. Additionally, we have no clinical experience with
use of our cortical strip, grid electrode and depth electrode technology. We cannot assure you that use, even for a limited time,
would not result in unanticipated complications, even after the device is removed.
Undetected
errors or defects in our cortical strip, grid electrode and depth electrode technology under development or future versions thereof
could harm our reputation, decrease the market acceptance of our cortical strip, grid electrode and depth electrode technology
or expose us to product liability claims.
Our
cortical strip, grid electrode and depth electrode technology may contain undetected errors or defects. Disruptions or other performance
problems with our cortical strip, grid electrode and depth electrode technology may delay development, prevent regulatory approval
or harm our reputation. If that occurs, we may incur significant costs, the attention of our key personnel could be diverted or
other significant customer relations problems may arise. We may also be subject to warranty and liability claims for damages related
to errors or defects in our cortical strip and sheet electrode technology or future versions thereof. A material liability claim
or other occurrence that harms our reputation or decreases market acceptance of our cortical strip, grid electrode and depth electrode
technology could harm our business and operating results. This risk exists even if a device is cleared or approved for commercial
sale and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority. Our products
are designed to affect, and any future products will be designed to affect, important bodily functions and processes. Any side
effects, manufacturing defects, misuse or abuse associated with our cortical strip, grid electrode and depth electrode technology
or future versions thereof could result in patient injury or death. The medical device industry has historically been subject
to extensive litigation over product liability claims, and we cannot offer any assurance that we will not face product liability
lawsuits.
The
sale and use of our cortical strip, grid electrode and depth electrode technology or future versions thereof could lead to the
filing of product liability claims if someone were to allege that our cortical strip, grid electrode and depth electrode technology
or one of our products contained a design or manufacturing defect. A product liability claim could result in substantial damages
and be costly and time consuming to defend, either of which could materially harm our business or financial condition. Product
liability claims may be brought against us by patients, healthcare providers or others selling or otherwise coming into contact
with our products, among others. If we cannot successfully defend ourselves against product liability claims, we will incur substantial
liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:
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distraction
of management’s attention from our primary business;
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the
inability to commercialize our cortical strip, grid electrode and depth electrode technology;
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damage
to our business reputation;
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product
recalls or withdrawals from the market;
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withdrawal
of clinical trial participants;
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substantial
monetary awards to patients or other claimants; or
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Product
liability lawsuits and claims, safety alerts or product recalls, with or without merit, could cause us to incur substantial costs,
delay our product development efforts, place a significant strain on our financial resources, divert the attention of management
from our core business, harm our reputation, increase our product liability insurance rates, once we obtain such insurance, or
prevent us from securing such insurance coverage in the future and adversely affect our ability to attract and retain customers,
if approved, any of which could harm our business, financial condition and operating results.
We
do not currently maintain any product liability insurance and do not anticipate obtaining product liability insurance until we
commence clinical trials. Once we obtain such insurance, we cannot assure you that such insurance would adequately protect our
assets from the financial impact of defending a product liability claim. Even if any product liability loss is covered by an insurance
policy, these policies typically have substantial deductibles for which we are responsible. Product liability claims in excess
of applicable insurance coverage would negatively impact our business, financial condition and operating results. Insurance coverage
varies in cost and can be difficult to obtain, and we cannot guarantee that we will be able to obtain insurance coverage in the
future on terms acceptable to us or at all.
If
there are significant disruptions in our information technology systems, our business, financial condition and operating results
could be adversely affected.
The
efficient operation of our business depends on our information technology systems. We rely on our information technology systems
to effectively manage product development tasks, research and development data and accounting and financial functions. We expect
in the future we will rely on our information technology systems for inventory management and technical support functions, if
and once implemented. Our information technology systems are vulnerable to damage or interruption from earthquakes, fires, floods
and other natural disasters, terrorist attacks, attacks by computer viruses or hackers, power losses, and computer system or data
network failures. In addition, our data management application and a variety of our software systems are hosted by third-party
service providers whose security and information technology systems are subject to similar risks, which could be subject to computer
viruses or hacker attacks or other failures. If our or our third-party service provider’s security systems are breached
or fail, unauthorized persons may be able to obtain access to sensitive data.
To
the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate
disclosure of confidential or proprietary information, we could incur liability, and the failure of our or our service providers’
information technology systems or our transmitter’s software to perform as we anticipate or our failure to effectively implement
new information technology systems could disrupt our entire operation or adversely affect our products and could delay our product
development, clinical trial or commercialization efforts, result in increased overhead costs and damage our reputation, all of
which could negatively affect our business, financial condition and operating results.
We
may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships with third-parties
that may not result in the development of commercially viable products or the generation of significant future revenues.
In
the ordinary course of our business, we may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances,
partnerships or other arrangements to develop products and to pursue new markets. Proposing, negotiating and implementing collaborations,
in-licensing arrangements, joint ventures, strategic alliances or partnerships may be a lengthy and complex process. Other companies,
including those with substantially greater financial, marketing, sales, technology or other business resources, may compete with
us for these opportunities or arrangements. We may not identify, secure, or complete any such transactions or arrangements in
a timely manner, on a cost-effective basis, on acceptable terms or at all. We have limited institutional knowledge and experience
with respect to these business development activities, and we may also not realize the anticipated benefits of any such transaction
or arrangement. In particular, these collaborations may not result in the development of products that achieve commercial success
or result in significant revenues and could be terminated prior to developing any products.
Additionally,
we may not be in a position to exercise sole decision making authority regarding the transaction or arrangement, which could create
the potential risk of creating impasses on decisions, and our future collaborators may have economic or business interests or
goals that are, or that may become, inconsistent with our business interests or goals. It is possible that conflicts may arise
with our collaborators, such as conflicts concerning the achievement of performance milestones, or the interpretation of significant
terms under any agreement, such as those related to financial obligations or the ownership or control of intellectual property
developed during the collaboration. If any conflicts arise with any future collaborators, they may act in their self-interest,
which may be adverse to our best interest, and they may breach their obligations to us. In addition, we may have limited control
over the amount and timing of resources that any future collaborators devote to our or their future products. Disputes between
us and our collaborators may result in litigation or arbitration which would increase our expenses and divert the attention of
our management. Further, these transactions and arrangements will be contractual in nature and will generally be terminable under
the terms of the applicable agreements and, in such event, we may not continue to have rights to the products relating to such
transaction or arrangement or may need to purchase such rights at a premium.
If
we enter into in-bound intellectual property license agreements, we may not be able to fully protect the licensed intellectual
property rights or maintain those licenses. Future licensors could retain the right to prosecute and defend the intellectual property
rights licensed to us, in which case we would depend on the ability of our licensors to obtain, maintain and enforce intellectual
property protection for the licensed intellectual property. These licensors may determine not to pursue litigation against other
companies or may pursue such litigation less aggressively than we would. Further, entering into such license agreements could
impose various diligence, commercialization, royalty or other obligations on us. Future licensors may allege that we have breached
our license agreement with them, and accordingly seek to terminate our license, which could adversely affect our competitive business
position and harm our business prospects.
We
may seek to grow our business through acquisitions of complementary products or technologies, and the failure to manage acquisitions,
or the failure to integrate them with our existing business, could harm our business, financial condition and operating results.
From
time to time, we may consider opportunities to acquire other companies, products or technologies that may enhance our product
platform or technology, expand the breadth of our markets or customer base, or advance our business strategies. Potential acquisitions
involve numerous risks, including:
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problems
assimilating the acquired products or technologies;
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issues
maintaining uniform standards, procedures, controls and policies;
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unanticipated
costs associated with acquisitions;
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diversion
of management’s attention from our existing business;
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risks
associated with entering new markets in which we have limited or no experience;
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increased
legal and accounting costs relating to the acquisitions or compliance with regulatory matters; and
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unanticipated
or undisclosed liabilities of any target.
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We
have no current commitments with respect to any acquisition. We do not know if we will be able to identify acquisitions we deem
suitable, whether we will be able to successfully complete any such acquisitions on favorable terms or at all, or whether we will
be able to successfully integrate any acquired products or technologies. Our potential inability to integrate any acquired products
or technologies effectively may adversely affect our business, operating results and financial condition.
Our
future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.
We
are highly dependent on the management, research and development, clinical, financial and business development expertise of David
Rosa, Mark Christianson and Thomas Bachinski, as well as our scientific and physician advisory board members. Although we have
an employment agreement with David Rosa, he (and each of our other key employees) may terminate his employment with us at any
time and will continue to be able to do so. We do not maintain “key person” insurance for any of our executives or
employees.
Recruiting
and retaining qualified scientific and clinical personnel will also be critical to our success. The loss of the services of our
executive officers or other key employees could impede the achievement of our research, development and commercialization objectives
and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and
key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry
with the breadth of skills and experience required to successfully develop, gain regulatory approval of and commercialize our
products. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these
key personnel on acceptable terms given the competition among numerous medical device companies for similar personnel, many of
which have greater financial and other resources dedicated to attracting and retaining personnel. We also experience competition
for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants
and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization
strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or
advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain
high quality personnel, our ability to pursue our growth strategy will be limited.
Prolonged
negative economic conditions could adversely affect us, our customers and third-party partners, manufactures or suppliers, if
any, which could harm our financial condition.
We
are subject to the risks arising from adverse changes in general economic and market conditions. Uncertainty about future economic
conditions could negatively impact our existing and potential customers, adversely affect the financial ability of health insurers
to pay claims, adversely impact our expenses and ability to obtain financing of our operations, and cause delays or other problems
with key suppliers.
Healthcare
spending in Europe and the United States has been, and is expected to continue to be, under significant pressure and there are
many initiatives to reduce healthcare costs. As a result, we believe that some insurers are scrutinizing insurance claims more
rigorously and delaying or denying coverage and reimbursement more often. Because the sale, if approved, of our cortical strip,
grid electrode and depth electrode technology under development will generally depend on the availability of third-party coverage
and reimbursement, any delay or decline in coverage and reimbursement will adversely affect our sales.
Risks
Related to our Intellectual Property
Our
ability to protect our intellectual property and proprietary technology is uncertain.
We
rely primarily on patent, trademark and trade secret laws, as well as confidentiality and non-disclosure agreements, to protect
our proprietary technologies. Our patent estate consists of three issued United States patents licensed from WARF relating to
a neural probe array and thin-film micro electrode array and method, and two pending U.S. provisional patent applications filed
by us relating to a wide variety of concepts, ranging from accessories for brain surgery to ablation and stimulation concepts
for both cortical and depth electrodes. The licensed issued patents expire between 2025 and 2030, subject to any patent extensions
that may be available for such patents. If a patent is issued on our pending patent application, the resulting patent is projected
to expire in 2038. We continue to review new technological developments in order to make decisions about what additional filings
would be the most appropriate for us. We also plan to seek patent protection for our proprietary technology in select countries
internationally. We also have one pending U.S. trademark application and one pending foreign trademark application, as well as
one foreign trademark registration. We have applied for patent protection relating to certain existing and proposed products and
processes. Currently, several of our issued U.S. patents licensed from WARF as well as our pending U.S. patent application relate
to our cortical and depth electrode technologies and are therefore important to the functionality of our products. If we fail
to timely file a patent application in any jurisdiction, we may be precluded from doing so at a later date. Furthermore,
we cannot assure you that any patent application will be approved in a timely manner or at all. The rights granted to us under
our patents, and the rights we are seeking to have granted in our pending patent applications, may not be meaningful or provide
us with any commercial advantage. In addition, those rights could be opposed, contested or circumvented by our competitors, or
be declared invalid or unenforceable in judicial or administrative proceedings. The failure of our patents to adequately protect
our technology might make it easier for our competitors to offer the same or similar products or technologies. Even if we are
successful in receiving patent protection for certain products and processes, our competitors may be able to design around our
patents or develop products that provide outcomes which are comparable to ours without infringing on our intellectual property
rights. Due to differences between foreign and U.S. patent laws, our patented intellectual property rights may not receive the
same degree of protection in foreign countries as they would in the United States. Even if patents are granted outside the United
States, effective enforcement in those countries may not be available.
We
rely on our trademarks and trade names to distinguish our products from the products of our competitors, and have registered or
applied to register many of these trademarks. For example, we have one pending application in the United States for the “NeuroOne”
trademark. We cannot assure you that our trademark applications will be approved in a timely manner or at all. Third parties also
may oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are
successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could
require us to devote additional resources to marketing new brands. Further, we cannot assure you that competitors will not infringe
upon our trademarks, or that we will have adequate resources to enforce our trademarks.
We
also rely on trade secrets, know-how and technology, which are not protectable by patents, to maintain our competitive position.
We try to protect this information by entering into confidentiality agreements and intellectual property assignment agreements
with our officers, employees, temporary employees and consultants regarding our intellectual property and proprietary technology.
In the event of unauthorized use or disclosure or other breaches of those agreements, we may not be provided with meaningful protection
for our trade secrets or other proprietary information. In addition, our trade secrets may otherwise become known or be independently
discovered by competitors. To the extent that our commercial partners, collaborators, employees and consultants use intellectual
property owned by others in their work for us, disputes may arise as to the rights in the related or resulting know-how and inventions.
If any of our trade secrets, know-how or other technologies not protected by a patent were to be disclosed to or independently
developed by a competitor, our business, financial condition and results of operations could be materially adversely affected.
If
a competitor infringes upon one of our patents, trademarks or other intellectual property rights, enforcing those patents, trademarks
and other rights may be difficult and time-consuming. Patent law relating to the scope of claims in the industry in which we operate
is subject to rapid change and constant evolution and, consequently, patent positions in our industry can be uncertain. Even if
successful, litigation to defend our patents and trademarks against challenges or to enforce our intellectual property rights
could be expensive and time consuming and could divert management’s attention from managing our business. Moreover, we may
not have sufficient resources or desire to defend our patents or trademarks against challenges or to enforce our intellectual
property rights. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications
at risk of not issuing. Additionally, we may provoke third-parties to assert claims against us. We may not prevail in any lawsuits
that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of
these events may harm our business, financial condition and operating results.
We
may not be able to establish or strengthen our brand.
We
believe that establishing and strengthening our brand is critical to achieving widespread acceptance of our cortical strip, grid
electrode and depth electrode technology. Promoting and positioning our brand will depend largely on the success of our marketing
efforts and our ability to provide physicians with a reliable product for successful treatment of brain-related disorders. Additionally,
we believe the quality and reliability of our product is critical to building physician support in the United States, and any
negative publicity regarding the quality or reliability of our cortical strip, grid electrode and depth electrode technology could
significantly damage our reputation in the market. Further, given the established nature of our competitors, it is likely that
our future marketing efforts will require us to incur significant additional expenses. These brand promotion activities may not
yield increased sales and, even if they do, any sales increases may not offset the expenses we incur to promote our brand. If
we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote
and maintain our brand, our cortical strip, grid electrode and depth electrode technology may not be accepted by physicians, which
would adversely affect our business, results of operations and financial condition.
The
medical device industry is characterized by patent litigation, and we could become subject to litigation that could be costly,
result in the diversion of management’s time and efforts, stop our development and commercialization measures or require
us to pay damages.
Our
success will depend in part on not infringing the patents or violating the other proprietary rights of third-parties. Significant
litigation regarding patent rights exists in our industry. Our competitors in both the United States and abroad, many of which
have substantially greater resources and have made substantial investments in competing technologies, may have applied for or
obtained or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to
make and sell our products. The large number of patents, the rapid rate of new patent issuances, and the complexities of the technology
involved increase the risk of patent litigation.
In
the future, we could receive communications from various industry participants alleging our infringement of their intellectual
property rights. Any potential intellectual property litigation could force us to do one or more of the following:
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stop
selling our products or using technology that contains the allegedly infringing intellectual property;
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incur
significant legal expenses;
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pay
substantial damages to the party whose intellectual property rights we are allegedly infringing;
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redesign
those products that contain the allegedly infringing intellectual property; or
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attempt
to obtain a license to the relevant intellectual property from third-parties, which may
not be available on reasonable terms or at all, and if available, may be non-exclusive,
thereby giving our competitors access to the same technology.
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Patent
litigation can involve complex factual and legal questions, and its outcome is uncertain. Any litigation or claim against us,
even those without merit, may cause us to incur substantial costs, and could place a significant strain on our financial resources,
divert the attention of management from our core business and harm our reputation. Further, as the number of participants in the
neurostimulation market increases, the possibility of intellectual property infringement claims against us increases.
We
may be subject to damages resulting from claims that we, or our employees, have wrongfully used or disclosed alleged trade secrets
of our competitors or are in breach of non-competition or non-solicitation agreements with our competitors.
Some
of our current or future employees may have previously been employed at other medical device companies, including those that are
our direct competitors or could potentially be our direct competitors. We may be subject to claims that we, or our employees,
have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of these former employers or
competitors. In addition, we may in the future be subject to allegations that we caused an employee to breach the terms of his
or her non-competition or non-solicitation agreement. Litigation may be necessary to defend against these claims.
In
May 2017, NeuroOne, Inc. received a letter from PMT Corp. (“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 NeuroOne is responsible for tortious interference with the contracts. The letter demanded that
Mr. Fredrickson (who is no longer with NeuroOne), 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 NMTC, 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 NMTC and NeuroOne, PMT alleges that
NMTC 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. NMTC, NeuroOne and Mr. Christianson (who has not worked for PMT since 2012)
intend to defend themselves vigorously. Furthermore, Mr. Christianson is a key officer and the loss of him would be detrimental
to our operations and prospects.
Even
if we successfully defend against these claims, litigation could cause us to incur substantial costs, and could place a significant
strain on our financial resources, divert the attention of management from our core business and harm our reputation. If our defense
to those claims fails, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.
There can be no assurance that this type of litigation will not occur, and any future litigation or the threat thereof may adversely
affect our ability to hire additional employees. A loss of key personnel or their work product could hamper or prevent our ability
to develop or commercialize our cortical strip, grid electrode and depth electrode technology or future versions thereof, which
could have an adverse effect on our business, financial condition and operating results.
We
are subject to the patent laws of countries other than the United States, which may not offer the same level of patent protection
and whose rules could seriously affect how we draft, file, prosecute and maintain patents, trademarks and patent and trademark
applications.
Many
countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to
grant licenses to third parties (for example, the patent owner has failed to “work” the invention in that country,
or the third party has patented improvements). In addition, many countries limit the enforceability of patents against government
agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish
the value of the patent. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor
the aggressive enforcement of patent and other intellectual property protection which makes it difficult to stop infringement.
We
cannot be certain that the patent or trademark offices of countries outside the United States will not implement new rules that
increase costs for drafting, filing, prosecuting and maintaining patents, trademarks and patent and trademark applications or
that any such new rules will not restrict our ability to file for patent protection. For example, we may elect not to seek patent
protection in some jurisdictions in order to save costs. We may be forced to abandon or return the rights to specific patents
due to a lack of financial resources.
Intellectual
property rights do not necessarily address all potential threats to our competitive advantage.
The
degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have
limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples
are illustrative:
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others
may be able to make devices that are the same as or similar to our cortical strip, grid
electrode and depth electrode technology but that are not covered by the claims of the
patents that we own;
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we
or any collaborators might not have been the first to make the inventions covered by
the issued patents or pending patent applications that we own;
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we
might not have been the first to file patent applications covering certain of our inventions;
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others
may independently develop similar or alternative technologies or duplicate any of our
technologies without infringing our intellectual property rights;
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it
is possible that our pending patent applications will not lead to issued patents;
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issued
patents that we own may not provide us with any competitive advantages, or may be held
invalid or unenforceable as a result of legal challenges;
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we
might enforce our patent rights or defend a challenge to our issued patents or pending
application, putting the patents and patent applications at risk of being invalidated
or interpreted narrowly;
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our
competitors might conduct research and development activities in the United States and
other countries that provide a safe harbor from patent infringement claims for certain
research and development activities, as well as in countries where we do not have patent
rights, and then use the information learned from such activities to develop competitive
products for sale in our major commercial markets; and
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we
may not develop additional proprietary technologies that are patentable.
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Risks
Related to our Legal and Regulatory Environment
Our
products and operations are subject to extensive governmental regulation, and failure to comply with applicable requirements could
cause our business to suffer.
The
medical device industry is regulated extensively by governmental authorities, principally the FDA and corresponding state regulatory
agencies in the United States and the European Commission and corresponding Notified Body in the European Union and the EEA. The
regulations are very complex and are subject to rapid change and varying interpretations. Regulatory restrictions or changes could
limit our ability to carry on or expand our operations or result in higher than anticipated costs or lower than anticipated sales.
These governmental authorities enforce laws and regulations that are meant to assure product safety and effectiveness, including
the regulation of, among other things:
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product
design and development;
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pre-clinical
studies and clinical trials;
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establishment
registration and product listing;
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labeling,
content and language of instructions for use and storage;
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marketing,
manufacturing, sales and distribution;
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pre-market
clearance or approval;
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servicing
and post-market surveillance;
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record-keeping
procedures;
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product
import and export;
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advertising
and promotion; and
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recalls
and field safety corrective actions.
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The
regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result
in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated revenues.
Failure
to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such
as fines, civil penalties, injunctions, warning letters, recalls of products, delays in the introduction of products into the
market, refusal of the regulatory agency or other regulators to grant future clearances or approvals, and the suspension or withdrawal
of existing approvals by such regulatory agencies. Any of these sanctions could result in higher than anticipated costs or lower
than anticipated sales and harm our reputation, business, financial condition and operating results.
The
FDA regulatory clearance process is expensive, time-consuming and uncertain, and the failure to obtain and maintain required regulatory
clearances and approvals could prevent us from commercializing our cortical strip, grid electrode and depth electrode technology
under development and future versions thereof.
Our
products and operations are subject to extensive and rigorous regulation by the FDA under the Federal Food, Drug, and Cosmetic
Act, or FFDCA, and its implementing regulations, guidances, and standards. The FDA regulates the research, testing, manufacturing,
safety, labeling, storage, recordkeeping, promotion, distribution, and production of medical devices in the United States to ensure
that medical products distributed domestically are safe and effective for their intended uses. The FDA also regulates the export
of medical devices manufactured in the United States to international markets. Any violations of these laws and regulations could
result in a material adverse effect on our business, financial condition and results of operations. In addition, if there is a
change in law, regulation or judicial interpretation, we may be required to change our business practices, which could have a
material adverse effect on our business, financial condition and results of operations.
Under
the FFDCA, medical devices are classified into one of three classes—Class I, Class II or Class III—depending
on the degree of risk associated with each medical device and the extent of control needed to ensure safety and effectiveness.
Class I
devices are those for which safety and effectiveness can be assured by adherence to FDA’s “general controls”
for medical devices, which include compliance with the applicable portions of the QSR facility registration and product listing,
reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials.
Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described
below.
Class II
devices are subject to FDA’s general controls, and any other “special controls” deemed necessary by FDA to ensure
the safety and effectiveness of the device. Premarket review and clearance by the FDA for Class II devices is accomplished
through the 510(k) premarket notification procedure, though certain Class II devices are exempt from this premarket review
process. When a 510(k) is required, the manufacturer must submit to the FDA a premarket notification submission demonstrating
that the device is “substantially equivalent” to a legally marketed device, which in some cases may require submission
of clinical data. A legally marketed device is defined by statute to mean a device that was legally marketed prior to May 28,
1976, the date upon which the Medical Device Amendments of 1976 were enacted, or another commercially available, similar device
that was cleared through the 510(k) process. Unless a specific exemption applies, 510(k) premarket notification submissions
are subject to user fees. If the FDA determines that the device, or its intended use, is not substantially equivalent to a legally
marketed device, the FDA will place the device, or the particular use of the device, into Class III, and the device sponsor
must then fulfill much more rigorous premarketing requirements in the form of a premarket approval, or PMA.
A
Class III device includes devices deemed by the FDA to pose the greatest risk such as life-supporting or life-sustaining
devices, or implantable devices, in addition to a device that has a new intended use or utilizes advanced technology that is not
substantially equivalent to that of a legally marketed device. The safety and effectiveness of Class III devices cannot be
assured solely by general and special controls. These devices almost always require formal clinical studies to demonstrate safety
and effectiveness. Submission and FDA approval of a PMA application is required before marketing of a Class III device can
proceed.
We
believe our cortical strip, grid electrode and depth electrode technology under development will be a Class II medical device.
The FDA has not made any determination about whether our specific technology is a Class II medical device. While such a determination
is not necessary in order for us to list a device with the FDA and bring that device to the U.S. market, we may decide to get
clarification from the FDA prior to introducing a product into the market. From time to time, the FDA may disagree with the classification
and require us to apply for approval as a Class III medical device. In the event that the FDA determines that our technology should
be classified as Class III, we could be precluded from marketing the devices for clinical use within the United States for months,
years or longer, depending on the specific change in the classification. Reclassification of our technology as Class III could
significantly increase our regulatory costs, including the timing and expense associated with required clinical trials and other
costs.
If
the FDA requires us to go through more costly, lengthy and uncertain PMA process for our cortical strip, grid electrode and depth
electrode technology, future products or modifications to existing products than we had expected, we may be less likely to receive
approval for our cortical strip, grid electrode and depth electrode technology or such approval may take longer and be more costly.
The
FDA can delay, limit or deny clearance or approval of a device for many reasons, including:
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we
may not be able to demonstrate that our products are safe and effective for their intended users;
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the
data from our clinical trials may be insufficient to support clearance or approval; and
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the
manufacturing process or facilities we use may not meet applicable requirements.
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When
FDA approval of a device requires human clinical trials, and if the device presents a “significant risk” to human
health, the device sponsor is required to file an investigational device exemption, or IDE, application with the FDA and obtain
IDE approval prior to commencing the human clinical trial. If the device is considered a “non-significant risk,” IDE
submission to FDA is not required. Instead, only approval from the Institutional Review Board, or IRB, overseeing the investigation
at each clinical trial site is required. Human clinical studies are generally required in connection with approval of Class III
devices and may be required for Class I and II devices. The FDA or the IRB at each institution at which a clinical trial
is being performed may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being
exposed to an unacceptable health risk. We believe that we will need to complete human clinical trials and submit an application
for an IDE in order to seek approval to use of our cortical strip, grid electrode and depth electrode technology for stimulation
and ablation but not for diagnostic purposes. Because any IDE, if required, must be cleared by the FDA prior to the start of a
clinical investigation, this requirement may delay our product development or clinical trial efforts. Any delay in, or failure
to receive or maintain, clearance or approval for our products under development could prevent us from generating revenue from
these products or achieving profitability.
In
addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations,
or take other actions which may prevent or delay approval or clearance of our products under development or impact our ability
to modify our currently cleared or approved products on a timely basis.
After
the FDA permits a device to enter commercial distribution, numerous regulatory requirements apply. These include: compliance with
the QSR, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance
procedures during the manufacturing process; labeling regulations; the FDA’s general prohibition against promoting products
for unapproved or “off-label” uses; the reports of Corrections and Removals regulation, which requires manufacturers
to report recalls and field actions to the FDA if initiated to reduce a risk of health posed by the device or to remedy a violation
of the Federal Food, Drug and Cosmetic Act; and the Medical Device Reporting regulation, which requires that manufacturers report
to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely
cause or contribute to a death or serious injury if it were to reoccur. Manufacturers are also required to register and list their
devices with the FDA, based on which the FDA will conduct inspections to ensure continued compliance with applicable regulatory
requirements.
The
FDA has broad post-market and regulatory and enforcement powers. Failure to comply with the applicable U.S. medical device regulatory
requirements could result in, among other things, warning letters; fines; injunctions; consent decrees; civil penalties; repairs,
replacements or refunds; recalls, corrections or seizures of products; total or partial suspension of production; the FDA’s
refusal to grant future premarket clearances or approvals; withdrawals or suspensions of current product applications; and criminal
prosecution. Regulatory enforcement or inquiries, or other increased scrutiny on us, could dissuade some people with brain related
disorders from using our products and adversely affect our reputation and the perceived accuracy and safety of our products. If
any of these events were to occur, they could have a material adverse effect on our business, financial condition and results
of operations.
International
sales are subject to regulatory requirements in the countries in which our products are sold. The regulatory review process varies
from country to country and may in some cases require the submission of clinical data. In addition, the FDA must be notified of,
or approve the export to certain countries of devices that require a PMA, and are not yet approved in the United States.
A
recall of our products, or the discovery of serious safety issues with our products, could have a significant negative impact
on us.
The
FDA has the authority to require the recall of commercialized products in the event of material deficiencies or defects in design
or manufacture or in the event that a product poses an unacceptable risk to health. Our third-party suppliers may, under their
own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by
us or one of our third-party distributors, if any, could occur as a result of an unacceptable risk to health, component failures,
manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert
managerial and financial resources and have an adverse effect on our reputation, financial condition and operating results, which
could impair our ability to produce our products in a cost-effective and timely manner.
Further,
under the FDA’s medical device reporting regulations, we are required to report to the FDA any incident in which our product
may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were
to recur, would likely cause or contribute to death or serious injury. Repeated product malfunctions may result in a voluntary
or involuntary product recall, which could divert managerial and financial resources, impair our ability to manufacture our products
in a cost-effective and timely manner and have an adverse effect on our reputation, financial condition and operating results.
Any
adverse event involving our products could result in future voluntary corrective actions, such as recalls or customer notifications,
or regulatory agency action, which could include inspection, mandatory recall or other enforcement action. Any corrective action,
whether voluntary or involuntary, will require the dedication of our time and capital, distract management from operating our
business and may harm our reputation and financial results.
We
will be subject to the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-corruption and anti-money-laundering
laws, as well as export control laws, customs laws, sanctions laws and other laws governing our future global operations. If we
fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures and legal expenses,
which could adversely affect our business, results of operations and financial condition.
Our
future global operations will expose us to trade and economic sanctions and other restrictions imposed by the United States, the
European Union and other governments and organizations. The U.S. Departments of Justice, Commerce, State and Treasury and other
federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations
and individuals for violations of economic sanctions laws, export control laws, the U.S. Foreign Corrupt Practices Act, or the
FCPA, and other federal statutes and regulations, including those established by the Office of Foreign Assets Control, or OFAC.
In addition, the U.K. Bribery Act of 2010, or the Bribery Act, prohibits both domestic and international bribery, as well as bribery
across both private and public sectors. An organization that “fails to prevent bribery” by anyone associated with
the organization can be charged under the Bribery Act unless the organization can establish the defense of having implemented
“adequate procedures” to prevent bribery. Under these laws and regulations, as well as other anti-corruption laws,
anti-money-laundering laws, export control laws, customs laws, sanctions laws and other laws governing our operations, various
government agencies may require export licenses, may seek to impose modifications to business practices, including cessation of
business activities in sanctioned countries or with sanctioned persons or entities and modifications to compliance programs, which
may increase compliance costs, and may subject us to fines, penalties and other sanctions. A violation of these laws or regulations
could adversely impact our business, results of operations and financial condition.
We
will implement and maintain policies and procedures designed to ensure compliance by us, and our directors, officers, employees,
representatives, third-party distributors, if any, consultants and agents with the FCPA, OFAC restrictions, the Bribery Act and
other export control, anticorruption, anti-money-laundering and anti-terrorism laws and regulations. We cannot assure you, however,
that our policies and procedures will be sufficient or that directors, officers, employees, representatives, third-party distributors,
if any, consultants and agents have not engaged and will not engage in conduct for which we may be held responsible, nor can we
assure you that our business partners have not engaged and will not engage in conduct that could materially affect their ability
to perform their contractual obligations to us or even result in our being held liable for such conduct. Violations of the FCPA,
OFAC restrictions, the Bribery Act or other export control, anti-corruption, anti-money-laundering and anti-terrorism laws or
regulations may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could have a material
adverse effect on our business, financial condition, cash flows and results of operations.
We
are subject to additional federal, state and foreign laws and regulations relating to our healthcare business; our failure to
comply with those laws could have an adverse impact on our business.
Although
we will not provide healthcare services, submit claims for third-party reimbursement, or receive payments directly from government
health insurance programs or other third-party payors for our cortical strip, grid electrode and depth electrode technology, we
are subject to healthcare fraud and abuse regulation and enforcement by federal, state and foreign governments, which could adversely
impact our business. Healthcare fraud and abuse and health information privacy and security laws potentially applicable to our
operations include, but are not limited to:
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the
federal Anti-Kickback Statute, which will apply to our marketing practices, educational
programs, pricing policies and relationships with healthcare providers, by prohibiting,
among other things, soliciting, receiving, offering or providing remuneration intended
to induce the purchase or recommendation of an item or service reimbursable under a federal
healthcare program, such as the Medicare or Medicaid programs. A person or entity does
not need to have actual knowledge of this statute or specific intent to violate it to
have committed a violation;
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federal
civil and criminal false claims laws and civil monetary penalty laws, including civil
whistleblower or qui tam actions that prohibit, among other things, knowingly presenting,
or causing to be presented, claims for payment or approval to the federal government
that are false or fraudulent, knowingly making a false statement material to an obligation
to pay or transmit money or property to the federal government or knowingly concealing
or knowingly and improperly avoiding or decreasing an obligation to pay or transmit money
or property to the federal government. The government may assert that a claim including
items or services resulting from a violation of the federal Anti-Kickback Statute constitutes
a false or fraudulent claim for purposes of the false claims statutes;
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HIPAA,
and its implementing regulations, which created federal criminal laws that prohibit,
among other things, executing a scheme to defraud any healthcare benefit program or making
false statements relating to healthcare matters. A person or entity does not need to
have actual knowledge of these statutes or specific intent to violate them;
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HIPAA,
as amended by the Health Information Technology for Economic and Clinical Health Act
of 2009, and their implementing regulations, also imposes certain regulatory and contractual
requirements regarding the privacy, security and transmission of individually identifiable
health information;
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federal
“sunshine” requirements imposed by the ACA on device manufacturers regarding
any “transfer of value” made or distributed to physicians and teaching hospitals.
Failure to submit required information may result in civil monetary penalties of up to
an aggregate of $150,000 per year (or up to an aggregate of $1 million per year
for “knowing failures”), for all payments, transfers of value or ownership
or investment interests that are not timely, accurately, and completely reported in an
annual submission. Manufacturers must submit reports by the 90th day of each subsequent
calendar year;
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federal
consumer protection and unfair competition laws, which broadly regulate marketplace activities
and activities that potentially harm consumers;
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state
law equivalents of each of the above federal laws, such as anti-kickback and false claims
laws that may apply to items or services reimbursed by any third-party payor, including
commercial insurers; state laws that require device companies to comply with the industry’s
voluntary compliance guidelines and the relevant compliance guidance promulgated by the
federal government or otherwise restrict payments that may be made to healthcare providers;
state laws that require device manufacturers to report information related to payments
and other transfers of value to physicians and other healthcare providers or marketing
expenditures; and state laws governing the privacy and security of certain health information,
many of which differ from each other in significant ways and often are not preempted
by HIPAA; and
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foreign
data privacy regulations, such as the EU Data Protection Directive (Directive 95/46/EC),
and the country-specific regulations that implement Directive 95/46/EC, which impose
strict obligations and restrictions on the ability to collect, analyze and transfer personal
data, including health data from clinical trials and adverse event reporting, and may
be stricter than U.S. laws.
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The
risk of our being found in violation of these laws and regulations is increased by the fact that the scope and enforcement of
these laws is uncertain, many of them have not been fully interpreted by the regulatory authorities or the courts, their provisions
are open to a variety of interpretations, or they vary country by country. We are unable to predict what additional federal, state
or foreign legislation or regulatory initiatives may be enacted in the future regarding our business or the healthcare industry
in general, or what effect such legislation or regulations may have on us. Federal, state or foreign governments may (i) impose
additional restrictions or adopt interpretations of existing laws that could have a material adverse effect on us or (ii) challenge
our current or future activities under these laws. Any of these challenges could impact our reputation, business, financial condition
and operating results.
If
our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply
to us now or in the future, we may be subject to penalties, including civil and criminal penalties, damages, fines, disgorgement
of profits, exclusion from governmental health care programs, and the curtailment or restructuring of our operations, any of which
could adversely affect our ability to operate our business and our financial results. Any federal, state or foreign regulatory
review to which we may become subject, regardless of the outcome, would be costly and time-consuming.
For
example, to enforce compliance with the federal laws, the U.S. Department of Justice, or DOJ, has recently increased its scrutiny
of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions,
convictions and settlements in the healthcare industry. Dealing with investigations can be time and resource consuming and can
divert management’s attention from our core business. Additionally, if we settle an investigation with law enforcement or
other regulatory agencies, we may be forced to agree to additional onerous compliance and reporting requirements as part of a
consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have
an adverse effect on our business.
We
may be liable if the FDA or another regulatory agency concludes that we have engaged in the off-label promotion of our products.
Our
promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition
of the promotion of the off-label use of our products. Healthcare providers may use our products, if approved, off-label, as the
FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. However, if the FDA
determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify
our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled
letter, a warning letter, injunction, seizure, civil fine and criminal penalties. It is also possible that other federal, state
or foreign enforcement authorities might take action if they consider our promotional or training materials to constitute promotion
of an unapproved use, which could result in significant fines or penalties. Although we intend to train our marketing and direct
sales force to not promote our products for uses outside of their cleared uses and our policy will be to refrain from statements
that could be considered off-label promotion of our products, the FDA or another regulatory agency could disagree and conclude
that we have engaged in off-label promotion. In addition, the off-label use of our products may increase the risk of product liability
claims. Product liability claims are expensive to defend and could result in substantial damage awards against us and harm our
reputation.
Further,
if we seek commercial approval in Europe, the advertising and promotion of our products is subject to the laws of EEA Member States
implementing Directive 93/42/EEC concerning medical devices, Directive 2006/114/EC concerning misleading and comparative
advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other EEA Member State legislation governing
the advertising and promotion of medical devices. A new Medical Device Regulation (2017/745) that replaced Directive 93/42/EEC
was published in 2017, with a three year implementation period, which will impose significant additional premarket and post-market
certification requirements on medical devices marketed in the EU. EEA Member State legislation may also restrict or impose limitations
on our ability to advertise our products directly to the general public. In addition, voluntary EU and national codes of conduct
provide guidelines on the advertising and promotion of our products to the general public and may impose limitations on our promotional
activities with healthcare providers harming our business, operating results and financial condition.
Legislative
or regulatory healthcare reforms may make it more difficult and costly for us to obtain regulatory clearance or approval of our
products.
Recent
political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. The sales of our
products depend in part on the availability of coverage and reimbursement from third-party payors such as government health administration
authorities, private health insurers, health maintenance organizations and other healthcare-related organizations. Both the federal
and state governments in the United States continue to propose and pass new legislation and regulations designed to contain or
reduce the cost of healthcare. This legislation and regulation may result in decreased reimbursement for medical devices, which
may further exacerbate industry-wide pressure to reduce the prices charged for medical devices. This could harm our ability to
market our products and generate sales.
In
addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our
business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional
costs or lengthen review times of our products. Delays in receipt of or failure to receive regulatory clearances or approvals
for our products would harm our business, financial condition and operating results.
While
one often stated goal of healthcare reform is to expand coverage to more individuals, it also involves increased government price
controls, additional regulatory mandates and other measures designed to constrain medical costs. For example, the ACA was enacted
in March 2010. The ACA substantially changes the way healthcare is financed by both governmental and private insurers, encourages
improvements in the quality of healthcare items and services and significantly impacts the medical device industries. Among other
things, the ACA:
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establishes
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in
and conduct comparative clinical effectiveness research; and
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implements
payment system reforms including value-based payment programs, increased funding for
comparative effectiveness research, reduced hospital payments for avoidable readmissions
and hospital acquired conditions, and pilot programs to evaluate alternative payment
methodologies that promote care coordination (such as bundled physician and hospital
payments); and
|
At
this time, we cannot predict which, if any, additional healthcare reform proposals will be adopted, when they may be adopted or
what impact they, or the ACA, may have on our business and operations, and any of these impacts may be adverse on our operating
results and financial condition. Our financial performance may be adversely affected by medical device tax provisions in the healthcare
reform laws.
The
ACA imposes, among other things, an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered
for sale in the United States beginning in 2013. Due to subsequent legislative amendments, the excise tax has been suspended from
January 1, 2016 to December 31, 2019, and, absent further legislative action, will be reinstated starting January 1, 2020. We
do not believe that our cortical strip, grid electrode and depth electrode technology under development is currently subject to
this tax based on the retail exemption under applicable Treasury Regulations. However, the availability of this exemption is subject
to interpretation by the Internal Revenue Service, or IRS, and the IRS may disagree with our analysis. In addition, future products
that we manufacture, produce or import may be subject to this tax. The financial impact this tax may have on our business is unclear
and there can be no assurance that our business will not be materially adversely affected by it.
Tax
matters, including the changes in corporate tax rates, disagreements with taxing authorities and imposition of new taxes could
impact our results of operations and financial condition.
We
are subject to income and other taxes in the U.S. and our operations, plans and results are affected by tax and other initiatives.
On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”) was signed into law by President Trump. The
Tax Act contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal
rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of earnings (except for certain
small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination
of net operating loss carrybacks, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated,
elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments
instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding
the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain and our business and
financial condition could be adversely affected. While the new federal tax law did not extend the moratorium on the medical
device excise tax, the reinstatement of which could negatively impact our operating results as we begin full commercialization
of our platforms in the United States, the moratorium was subsequently extended until 2020. It is also unknown if and to what
extent various states will conform to the newly enacted federal tax law. The impact of this tax reform on holders of our common
stock is likewise uncertain and could be adverse. The decrease in the corporate tax rate will result in changes in the valuation
of our deferred tax assets and liabilities. Any such change in valuation could have a material impact on our income tax expense
and deferred tax balances.
We
are also subject to regular reviews, examinations, and audits by the Internal Revenue Service and other taxing authorities with
respect to our taxes. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions
we have taken, we could face additional tax liability, including interest and penalties. There can be no assurance that payment
of such additional amounts upon final adjudication of any disputes will not have a material impact on our results of operations
and financial position.
We
also need to comply with new, evolving or revised tax laws and regulations. The enactment of or increases in tariffs, or other
changes in the application or interpretation of the Tax Act, or on specific products that we sell or with which our products compete,
may have an adverse effect on our business or on our results of operations.
Risks
Related to Our Common Stock
Because
our common stock is not listed on any national securities exchange, investors may find it difficult to buy and sell our shares.
Our
common stock is not listed on any national securities exchange. Accordingly, investors may find it more difficult to buy and sell
our shares than if our common stock was traded on an exchange. Although our common stock is traded on the OTCQB it is an unorganized,
inter-dealer, over-the-counter market which provides significantly less liquidity than the NASDAQ Capital Market or other national
securities exchange. There has been limited trading to date in our common stock. These factors may have an adverse impact on the
trading and price of our common stock.
The
market price of our common stock is, and is likely to continue to be, highly volatile and subject to wide fluctuations
.
The
market price of our common stock is highly volatile and could be subject to wide fluctuations in response to a number of factors
that are beyond our control, including:
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variations
in our quarterly operating results;
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announcements
that our revenue or income are below analysts’ expectations;
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general
economic slowdowns;
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sales
of large blocks of our common stock; and
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announcements
by us or our competitors of significant contracts, acquisitions, strategic partnerships,
joint ventures or capital commitments.
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Our
common stock has in the past been, and may in the future be, considered a “penny stock” and thus may be subject to
additional sale and trading regulations that may make it more difficult to buy or sell.
Our
common stock, which is traded on the OTCQB, has in the past been, and may in the future be, considered a “penny stock”
and securities broker-dealers participating in sales of common stock may be subject to the “penny stock” regulations
set forth in Rules 15g-2 through 15g-9 promulgated under the Exchange Act. Generally, brokers may be less willing to execute transactions
in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our
common stock and cause a decline in the market value of our stock.
We
do not intend to pay dividends on our common stock for the foreseeable future.
We
have paid no dividends on our common stock to date and we do not anticipate paying any dividends to holders of our common stock
in the foreseeable future. While our future dividend policy will be based on the operating results and capital needs of the business,
we currently anticipate that any earnings will be retained to finance our future expansion and for the implementation of our business
plan. Investors should take note of the fact that a lack of a dividend can further affect the market value of our common stock,
and could significantly affect the value of any investment in the Company.
Our
certificate of incorporation allow for our board to create new series of preferred stock without further approval by our stockholders,
which could adversely affect the rights of the holders of our common stock.
Our
Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of
Directors has the authority to issue up to 10,000,000 shares of our preferred stock without further stockholder approval. As a
result, our Board of Directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred
right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of
common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.
In addition, our Board of Directors could authorize the issuance of a series of preferred stock that has greater voting power
than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common
stock or result in dilution to our existing stockholders. Although we have no present intention to issue any shares of preferred
stock or to create any series of preferred stock, we may create such series and issue such shares in the future.
Additional
stock offerings in the future may dilute then-existing shareholders’ percentage ownership of the Company.
Given
our plans and expectations that we may need additional capital and personnel, we may need to issue additional shares of common
stock or securities convertible or exercisable for shares of common stock, including convertible preferred stock, convertible
notes, stock options or warrants. The issuance of additional securities in the future will dilute the percentage ownership of
then current stockholders.
FORWARD-LOOKING
STATEMENTS
Certain
statements contained in this prospectus are not statements of historical fact and are forward-looking statements. 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 prospectus and are subject to risks and uncertainties, many of which are beyond our control,
that could cause our actual results to differ materially from those in these forward-looking statements. We discuss many of these
risks in greater detail in this prospectus under “Risk Factors.” 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.
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.
USE
OF PROCEEDS
We
will receive no proceeds from the sale of shares of common stock offered by the selling stockholders. However, we will generate
proceeds from the cash exercise of the warrants, if any. We intend to use those proceeds for general corporate purposes.
SELLING
STOCKHOLDERS
This
prospectus relates to the offering by the selling stockholders of up to 3,628,683 shares of common stock by the selling stockholders,
including 1,146,311 outstanding shares and 2,482,372 shares issuable upon exercise of warrants.
The
following table sets forth, based on information provided to us by the selling stockholders or known to us, the name of each
selling stockholder, the nature of any position, office or other material relationship, if any, which the selling stockholder
has had, within the past three years, with us or with any of our predecessors or affiliates, and the number of shares of our
common stock beneficially owned by the stockholder before this offering (as of August 8, 2018). The number of
shares owned are those beneficially owned, as determined under the rules of the Securities and Exchange Commission (the
“SEC”), and the information is not necessarily indicative of beneficial ownership for any other
purpose. Under these rules, beneficial ownership includes any shares of common stock as to which a person has sole or
shared voting power or investment power and any shares of common stock which the person has the right to acquire within 60
days through the exercise of any option, warrant or right, through conversion of any security or pursuant to the automatic
termination of a power of attorney or revocation of a trust, discretionary account or similar arrangement. Except as set forth below, none of the
selling stockholders is a broker-dealer or an affiliate of a broker-dealer.
We
have assumed all shares of common stock reflected on the table will be sold from time to time in the offering covered by this
prospectus. Because the selling stockholders may offer all or any portions of the shares of common stock listed in the table
below, no estimate can be given as to the amount of those shares of common stock covered by this prospectus that will be held
by the selling stockholders upon the termination of the offering.
Name of Selling Stockholder
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Number of
Shares Beneficially
Owned Before the
Offering
|
|
|
Shares Being Offered
|
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|
Number of Shares
Beneficially Owned
After Offering
|
|
|
Percentage of Shares
Beneficially Owned
After Offering
|
|
Barry Pressman Family Trust
|
|
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188,223
|
|
|
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188,223
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(1)
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|
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0
|
|
|
|
--
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Steven Pressman
|
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376,443
|
|
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|
376,443
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(2)
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0
|
|
|
|
--
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Leonard L. Mazur
|
|
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187,851
|
|
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187,851
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(3)
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0
|
|
|
|
--
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Faisal Siddiqui
|
|
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468,333
|
|
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468,333
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(4)
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0
|
|
|
|
--
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|
Four M Holdings LLC
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93,594
|
|
|
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93,594
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(5)
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|
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0
|
|
|
|
--
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|
FundRx NeuroOne Fund
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683,850
|
|
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683,850
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(6)
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0
|
|
|
|
--
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Mark Robert Barrett
|
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95,488
|
|
|
|
55,488
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(7)
|
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40,000
|
|
|
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*
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DWL Investments LLC
|
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86,083
|
|
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46,083
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(8)
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40,000
|
|
|
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*
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Ben B. Merriman
|
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132,130
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|
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92,130
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(9)
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40,000
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|
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*
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Mohammed R. Samie and Shohreh Samie
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91,221
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|
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91,221
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(10)
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0
|
|
|
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--
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Haider Akmal
|
|
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90,723
|
|
|
|
90,723
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(11)
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0
|
|
|
|
--
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Sean Wambold
|
|
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193,694
|
|
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90,462
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(12)
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103,232
|
|
|
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*
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John P. Silvestri
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180,927
|
|
|
|
180,927
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(13)
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|
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0
|
|
|
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--
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Ann F. Silvestri, TTE, Ann F. Silvestri GS Irrevocable Trust
|
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180,927
|
|
|
|
180,927
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(13)
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|
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0
|
|
|
|
--
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Hang Bae Lee
|
|
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180,159
|
|
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180,519
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(14)
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|
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0
|
|
|
|
--
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Vaal LLC Savings Plan f/b/o Haider Akmal
|
|
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368,721
|
|
|
|
368,721
|
(15)
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|
|
0
|
|
|
|
--
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Mohammed Jainal Bhuiyan
|
|
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722,291
|
(16)
|
|
|
253,188
|
(17)
|
|
|
469,103
|
|
|
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3.9
|
%
|
* Less than 1%.
|
(1)
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Includes
62,741 outstanding shares and 125,482 shares issuable upon exercise of warrants.
|
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(2)
|
Includes
125,481 outstanding shares and 250,962 shares issuable upon exercise of warrants.
|
|
(3)
|
Includes
62,617 outstanding shares and 125,234 shares issuable upon exercise of warrants.
|
|
(4)
|
Includes
156,111 outstanding shares and 312,222 shares issuable upon exercise of warrants.
|
|
(5)
|
Includes
31,198 outstanding shares and 62,396 shares issuable upon exercise of warrants.
|
|
(6)
|
Includes
227,950 outstanding shares and 455,900 shares issuable upon exercise of warrants.
|
|
(7)
|
Includes
18,496 outstanding shares and 36,992 shares issuable upon exercise of warrants.
|
|
(8)
|
Includes
15,361 outstanding shares and 30,722 shares issuable upon exercise of warrants.
|
|
(9)
|
Includes
30,710 outstanding shares and 61,420 shares issuable upon exercise of warrants.
|
|
(10)
|
Includes
30,407 outstanding shares and 60,814 shares issuable upon exercise of warrants.
|
|
(11)
|
Includes
30,241 outstanding shares and 60,482 shares issuable upon exercise of warrants.
|
|
(12)
|
Includes
30,154 outstanding shares and 60,308 shares issuable upon exercise of warrants.
|
|
(13)
|
Includes
60,309 outstanding shares and 120,618 shares issuable upon exercise of warrants.
|
|
(14)
|
Includes
60,173 outstanding shares and 120,346 shares issuable upon exercise of warrants.
|
|
(15)
|
Includes
85,407 outstanding shares and 283,314 shares issuable upon exercise of warrants.
|
|
(16)
|
Includes
447,624 outstanding shares, 232,142 shares issuable upon exercise of warrants, and 42,525 shares issuable upon exercise of options.
|
|
(17)
|
Includes
58,646 outstanding shares and 194,542 shares issuable upon exercise of warrants. The selling stockholder is an affiliate of a broker-dealer, The selling stockholder purchased his
securities in the ordinary course of business, and at the time of the purchase of such securities, had no agreements or understandings,
directly or indirectly, with any person to distribute such securities. The selling stockholder is a partner at HRA Capital, which
has acted as a placement agent for the Company.
|
PLAN
OF DISTRIBUTION
This
prospectus includes 3,628,683 shares of common stock offered by the selling stockholders.
Each
selling stockholder and any of its pledgees, assignees and successors-in-interest may, from time to time, sell any or all of its
shares of common stock on the OTCQB or any other stock exchange, market or trading facility on which our shares are traded or
in private transactions. These sales may be at fixed or negotiated prices. A selling stockholder may use any one or more of the
following methods when selling shares:
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ordinary
brokerage transactions and transactions in which the broker-dealer solicits purchasers;
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●
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block
trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
|
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|
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●
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purchases
by a broker-dealer as principal and resale by the broker-dealer for its account;
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●
|
an
exchange distribution in accordance with the rules of the applicable exchange;
|
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●
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privately
negotiated transactions;
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●
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settlement
of short sales entered into after the effective date of the registration statement of which this prospectus is a part;
|
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|
|
●
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broker-dealers
may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;
|
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●
|
through
the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
|
|
|
|
|
●
|
a
combination of any such methods of sale; or
|
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|
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●
|
any
other method permitted pursuant to applicable law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
In
addition, the selling stockholders may transfer the shares of common stock by other means not described in this prospectus. If
the selling stockholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers
or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions
from the selling stockholders or commissions from purchasers of the shares of common stock for whom they may act as agent or to
whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or
agents may be in excess of those customary in the types of transactions involved). In connection with sales of the shares of common
stock or otherwise, the selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage
in short sales of the shares of common stock in the course of hedging in positions they assume. The selling stockholders may also
sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions and
to return borrowed shares in connection with such short sales. The selling stockholders may also loan or pledge shares of common
stock to broker-dealers that in turn may sell such shares.
The
selling stockholders may pledge or grant a security interest in some or all of the shares of common stock owned by them and, if
they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of
common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable
provision of the Securities Act amending, if necessary, the list of selling stockholders to include the pledgee, transferee or
other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer and donate
the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest
will be the selling beneficial owners for purposes of this prospectus.
To
the extent required by the Securities Act and the rules and regulations thereunder, the selling stockholders and any broker-dealer
participating in the distribution of the shares of common stock may be deemed to be “underwriters” within the meaning
of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed
to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the shares of common
stock is made, a prospectus supplement, if required, will be distributed, which will set forth the aggregate amount of shares
of common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any
discounts, commissions and other terms constituting compensation from the selling stockholders and any discounts, commissions
or concessions allowed or re-allowed or paid to broker-dealers.
There
can be no assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the
registration statement, of which this prospectus forms a part.
The
selling stockholders and any other person participating in such distribution will be subject to applicable provisions of the Exchange
Act, and the rules and regulations thereunder, including, without limitation, to the extent applicable, Regulation M of the Exchange
Act, which may limit the timing of purchases and sales of any of the shares of common stock by the selling stockholders and any
other participating person. To the extent applicable, Regulation M may also restrict the ability of any person engaged in the
distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock. All
of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage
in market-making activities with respect to the shares of common stock.
We
will pay all expenses of the registration of the shares of common stock.
Once
sold under the registration statement, of which this prospectus forms a part, the shares of common stock will be freely tradable
in the hands of persons other than our affiliates.
DESCRIPTION
OF SECURITIES TO BE REGISTERED
The
Company’s authorized capital stock consists of 100,000,000 shares of common stock, par value of $0.001 per share, and 10,000,000
shares of preferred stock, par value $0.001 per share.
Holders
of the Company’s common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders
of common stock do not have cumulative voting rights. Therefore, holders of a majority of the shares of common stock voting
for the election of directors can elect all of the directors. Holders of the Company’s common stock representing a
majority of the voting power of the Company’s capital stock issued, outstanding and entitled to vote, represented in person
or by proxy, are necessary to constitute a quorum at any meeting of stockholders. A vote by the holders of a majority of
the Company’s outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation, merger
or an amendment to the Company’s certificate of incorporation.
Holders
of the Company’s common stock are entitled to share in all dividends that the board of directors, in its discretion, declares
from legally available funds. In the event of a liquidation, dissolution or winding up, each outstanding share entitles its
holder to participate pro rata in all assets that remain after payment of liabilities and after providing for each class of stock,
if any, having preference over the common stock. The Company’s common stock has no pre-emptive rights, no conversion rights
and there are no redemption provisions applicable to the Company’s common stock.
The
Company’s certificate of incorporation authorize the issuance of 10,000,000 shares of “blank check” preferred
stock, par value $0.001 per share, in one or more series, subject to any limitations prescribed by law, without further vote or
action by the stockholders. Each such series of preferred stock shall have such number of shares, designations, preferences,
voting powers, qualifications, and special or relative rights or privileges as shall be determined by our board of directors,
which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.
DESCRIPTION
OF BUSINESS
Overview
Corporate
Overview of NeuroOne Medical Technologies Corporation
We were 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), we completed a series of steps contemplated by a Plan of Conversion pursuant to which we, among other things,
changed our name to NeuroOne Medical Technologies Corporation, increased our authorized number of shares of common stock from
45,000,000 to 100,000,000, increased our authorized number of shares of preferred stock from 5,000,000 to 10,000,000 and reincorporated
in Delaware. On July 20, 2017, we acquired NeuroOne (the “Acquisition”). Immediately following the closing of the
Acquisition, the business of NeuroOne became our sole focus. Unless otherwise stated or unless the context otherwise requires,
the description of our business set forth below is provided on a combined basis, taking into account our wholly-owned subsidiary,
NeuroOne.
Corporate
Overview and History of NeuroOne
NeuroOne
was incorporated under the laws of the State of Delaware on October 7, 2016. Its predecessor entity, NeuroOne LLC (the “LLC”),
was formed on December 13, 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 (the “Merger”). As a result of the Merger, all of the properties, rights,
privileges and powers of the LLC vested in NeuroOne, and all debts, liabilities and duties of the LLC became the debts, liabilities
and duties of NeuroOne, except for the license agreement (the “WARF License”) with the Wisconsin Alumni Research Foundation
(“WARF”) which was not legally transferred until May 2017. The purposes of the Merger were to: change the jurisdiction
of incorporation from Minnesota to Delaware; change the ownership of the LLC’s underlying assets; and convert from a limited
liability company to a corporation.
We
are a medical technology company focused on the development and commercialization of thin film electrode technology for cEEG and
sEEG recording, brain stimulation and ablation solutions for patients suffering from epilepsy, Parkinson’s disease, dystonia,
essential tremors and other related brain related disorders. Members of our management team have held senior leadership positions
at a number of medical technology and biopharmaceutical companies, including Boston Scientific, St. Jude Medical, Stryker Instruments,
C.R. Bard, A-Med Systems, Sunshine Heart, Empi, Don-Joy and PMT Corporation.
We
are developing our cortical and sheet and depth electrode technology to provide solutions for diagnosis through continuous electroencephalogram
(cEEG) recording and stereoelectroencephalography (sEEG) recording and treatment through brain stimulation and ablation, all in
one product. A cEEG is a continuous recording of the electrical activity of the brain that identifies the location of irregular
brain activity, which information is required for proper treatment. cEEG recording involves an invasive surgical procedure, referred
to as a craniotomy. sEEG involves a less invasive procedure whereby doctors place electrodes in targeted brain areas by drilling
small holes through the skull. Both methods of seizure diagnosis are used to identify areas of the brain where epileptic seizures
originate in order to precisely locate the seizure source for therapeutic treatment if possible.
Deep
brain stimulation, or DBS, therapies involve activating or inhibiting the brain with electricity that can be given directly by
electrodes on the surface or implanted deeper in the brain via depth electrodes. Introduced in 1987, this procedure involves implanting
a power source referred to as a neurostimulator, which sends electrical impulses through implanted depth electrodes, to specific
targets in the brain for the treatment of disorders such as Parkinson’s disease, essential tremor, dystonia, and chronic
pain. Alzheimer’s is another indication evaluating the effects of DBS. Unlike ablative technologies, the effects of DBS
are reversible.
RF
ablation is a procedure that uses radiofrequency under the electrode contacts that is directed to the site of the brain tissue
that is targeted for removal. The process involves delivering energy to the contacts, thereby heating them and destroying the
brain tissue. The ablation does not remove the tissue. Rather, it is left in place and typically scar tissue forms in the place
where the ablation occurs. This procedure is also known as brain lesioning as it causes irreversible lesions.
Our
cortical sheet electrode and depth electrode technology has been tested over the years by both WARF, the owners of our licensed
patents, and Mayo Clinic located in Rochester Minnesota, in both pre-clinical models as well as through an IRB approval at Mayo
Clinic for clinical research. These pre-clinical tests have demonstrated that the technology is capable of recording, ablation
and acute stimulation, although our technology remains in product development for all of the therapeutic modalities. In addition,
a great deal of bench top, pre-clinical and clinical testing remains for all therapeutic modalities as well as for the diagnostic
technologies for our technology. Once the research and development has been completed, these devices will have to undergo both
acute and long term testing to ensure the product’s long term viability. Bench top, electrical, sterility, aging and biocompatibility
testing are some of the tests that will have to be conducted. After that, we expect that we will have to conduct a clinical trial
for long term stimulation to achieve regulatory approval in any jurisdiction. The size and endpoints of these trials will require
additional dialogue with the FDA and other regulatory bodies in any foreign jurisdiction in which we seek to commercialize our
technology.
Our
Market Opportunity
Epilepsy
Market
We
expect to initially target the diagnosis and treatment of epilepsy. Epilepsy can be caused by a variety of conditions that affect
a person’s brain, some of which are: stroke, brain tumor, traumatic brain injury and central nervous system infections.
According to the Centers for Disease Control and Prevention (the “CDC”) and Citizens United for Research in Epilepsy
(“CURE”), there are approximately 3,000,000 patients annually suffering with epilepsy in the United States, with an
additional 200,000 diagnosed every year. They also estimate that epilepsy costs the United States $15.5 billion per year. We believe
the European market is similar. Approximately 720,000 of these patients are not receptive to pharmaceutical treatment and therefore
are appropriate for surgical treatment of this disorder. In addition to poor quality of life, epilepsy also is associated with
fairly high mortality rates, especially in children. CURE reported that Sudden Unexpected Death in Epilepsy (“SUDEP”)
accounts for 34% of all deaths in children. Such deaths have increased by close to 100% from 2005 to 2015 according to the CDC.
Despite the large market opportunity, it is estimated that there are only 16,000 craniotomies performed for epilepsy cases each
year in the United States with 18,000 performed in Europe.
1
These numbers represent an underpenetrated market
due to the invasiveness of a full craniotomy required just to perform the diagnostic procedure. After the diagnostic procedure,
a second therapeutic procedure is required and at times even a third surgery if the seizures persist. We believe patients are
unwilling to proceed due to the long diagnostic times (one-four weeks in the hospital with a craniotomy), infection rates and
50% rate of success in the diagnosis and treatment of the disorder. As detailed above, after the diagnosis is completed, if successful,
the patient must undergo an additional procedure to have the affected area of brain tissue removed. The average cost for the diagnostic
technology per procedure is $10,000, with ablation devices costing $15,000 and brain stimulation devices costing $25,000 to $30,000.
We believe our technology, once developed, will offer an all in one solution with diagnostic and therapeutic capabilities.
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1
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American
Association of Neurological Surgeons (AANS) National Neurosurgical Procedural Statistics
2012.
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We
believe that many leading neurologists believe that the limits of today’s current technologies are the reason the exact
affected area of the brain causing epileptic seizures is not well-determined. We expect our technology under development, which
has been developed to date by physicians at WARF and Mayo Clinic, will provide a number of significant advantages over the current
technologies, including the following:
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Our
proprietary thin film technology under development has a smaller footprint with many more electrodes.
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We
expect our technology eventually will be able to be implanted using a minimally invasive
procedure utilizing a dime sized burr hole versus a full craniotomy required to implant
the current technology. Our physician advisors are providing critical support in this
endeavor.
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Limited
clinical testing to date by Mayo Clinic suggests that our proprietary thin film technology
under development can detect single neuron brain activity. This could allow for more
rapid detection of irregular brain activity versus an average of two and a half weeks
with the currently available technology, during which time the patient remains hospitalized.
In limited clinical testing, doctors at Mayo Clinic have documented pre-seizure activity
(micro-seizures) during their clinical research with their patients using this technology.
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We
expect our technology can ablate through the electrodes as well as perform brain stimulation, allowing for diagnosis and treatment
through the same product and in the same procedure.
Parkinson’s
Disease
The
Parkinson’s Disease Foundation estimates that as many as 1,000,000 patients in the United States live with Parkinson’s
disease with an additional 60,000 patients diagnosed per year. Over 10,000,000 patients worldwide are living with Parkinson’s
disease. There have not been any drugs introduced that have been effective at treating Parkinson’s disease. The average
onset is over 60 years old but some people have been diagnosed as young as 40 years old. Parkinson’s is a disorder of the
central nervous system caused by loss of brain cells throughout various regions of the brain. It is attributed to the loss of
dopamine production in the brain, a messenger in the brain that allows for movement and coordination. There are no objective tests
to diagnose Parkinson’s disease, and misdiagnosis rates are still very high. Doctors look to find two or more signs to make
a diagnosis, including balance problems, rigidity and tremors that occur during rest. In 2011, the FDA approved the first imaging
device called a DaTscan that can capture images of the dopamine system in the brain. By itself, these scans cannot diagnose Parkinson’s
but can help confirm a doctor’s diagnosis. Parkinson’s disease is typically not fatal; however, complications caused
by the symptoms of Parkinson’s, such as difficulty swallowing causing food to travel to the lungs resulting in pulmonary
issues or falls related to loss of balance, can be fatal.
Today’s
primary treatment for Parkinson’s disease involves medications that have not proven to resolve symptoms but rather ease
symptoms. Years ago, surgical procedures such as thalamotomy and pallidotomy targeted certain parts of the brain and involved
destroying the tissue. More recently, these procedures have been replaced with DBS. A doctor evaluates the patient by reviewing
the patient’s symptoms and medications taken and administering detailed memory, thinking and imaging tests to determine
if they are appropriate for DBS. According to the Michael J. Fox Parkinson’s Disease Research Foundation website, patients
that seem to do best with DBS are those that have had the disease for at least four years and have benefited from taking medications
prescribed to control the disease. In addition, DBS seems to help with reducing the issues with motor functions such as tremors,
stiffness and slowness but not for balance issues. Doctors are evaluating treatment to other parts of the brain in an effort to
address more symptoms to treat walking or balance issues. In addition, research is being conducted to provide stimulation when
the symptoms return as opposed to all of the time. We expect our technology under development will improve doctors’ ability
to diagnose and treat Parkinson’s assuming our technology has the ability to detect single neuron activity. According to
Mayo Clinic, detecting brain activity down to a sub-millimeter scale and detecting “microseizure activity” may allow
for detection and thus prevention of a seizure before it occurs.
Essential
Tremors
Essential
tremors are thought to be due to electrical irregularities in the brain that send abnormal signals to the muscles. It is a progressive
condition that worsens over time and is linked to genetic disorders that typically appear in people who are over 40. Essential
tremors usually occur alone and without any other neurological symptoms or signs. The tremors usually occur when the hands are
raised and primarily affect the hands. Muscles in the trunk, face and neck may also experience symptoms. Sometimes misdiagnosed
as Parkinson’s disease, essential tremors are an involuntary rhythmic shaking of the hands that is not present at rest.
It is apparent during activities such as drinking, writing and eating. Symptoms can worsen due to stress, anxiety, smoking, caffeine,
fatigue, etc. Genetics Home Reference estimates that as many as 10,000,000 people in the United States are affected by the disease.
Treatments for the disease include medical therapy, weighting the limbs and DBS. Patients need to eliminate any medications they
are taking that cause tremors as this can exacerbate the symptoms. For some patients, using wrist weights may ease symptoms allowing
the patient to function. Other patients may also use relaxation techniques as stress can increase symptoms. Medical therapy is
also used to treat patients’ symptoms. Primidone is typically the first drug prescribed as it has had success in some situations
for epilepsy. Botox is also used at times to control head tremors. When these fail, surgery is the next alternative. A surgical
procedure used years ago created lesions in the ventral intermediate thalamus and was highly successful with treating essential
tremors but is no longer commonly used due to increased risk of developing speech problems. The latest therapy is DBS, which,
unlike other therapies, is reversible and programmable, helping to adjust the settings to maximize patient benefit. Similar to
Parkinson’s disease, the ability to detect this irregular brain activity before it causes a tremor is highly desirable.
We expect our technology will detect brain activity to a single neuron, which we believe would be highly desirable by both physicians
diagnosing and treating patients with essential tremors.
Dystonia
Dystonia
is a neurological condition recognized as a motion disorder that involves over activity of a variety of different muscles simultaneously
that work against each other. It presents itself in a variety of symptoms but typically involves repetitive, patterned and often
twisting involuntary muscle contractions resembling tremors. According to the Dystonia Medical Research Foundation, over 300,000
people are affected in the United States and Canada alone. Dystonia is the third most common problem seen in movement disorder
clinics. Because it has many different manifestations, it is often misdiagnosed. In addition, similar to Parkinson’s disease,
there are no specific tests that can positively diagnose dystonia. A doctor typically will evaluate patient and family history,
potentially do genetic testing, EEG testing, blood and urine tests. There are also many treatment options for patients but depend
on the type of dystonia. Botox and certain medications may be helpful or DBS may be used. As was described in previous sections,
if our technology under development is able to detect single neuron activity as we expect it will be, our technology could be
helpful in preventing or even minimizing these involuntary muscle contractions.
Limitations
of Currently Available Therapies
There
are a limited number of currently available products for diagnosis and treatment for people with neurological disorders such as
epilepsy. Although the currently available systems provide diagnosis and treatment for patients, they have certain inherent limitations
and shortcomings that we believe limit their use and validate the need for improved technology in the market. These limitations
include:
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Lengthy
diagnostic times:
Patients spend one to four weeks in the hospital waiting to
have seizures that will allow doctors to determine where the seizures are occurring.
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Inability
of diagnostic technologies to identify seizure location or micro seizures:
Current
technology does not have the ability to detect brain activity down to a single neuron,
or what has been referred to as micro seizure activity. In addition, the spacing requirements
between electrodes increase the potential for missing data that may be critical in the
removal of brain tissue causing the irregular activity. Micro seizure activity could
be a major predictor of where a future seizure will occur.
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Need
to perform a full craniotomy (invasiveness):
Currently available cortical electrode
technology is placed through a craniotomy, which requires removing the top part of the
cranium and is a very painful and invasive procedure. Procedural times for a craniotomy
range from a minimum of four to eight hours. A variety of complications can occur when
a full craniotomy is performed, including but not limited to: stroke, bleeding, infection,
seizures, swelling of the brain (which may require a second craniotomy), nerve damage,
which may cause muscle paralysis or weakness, cerebrospinal fluid (CSF) leak, which may
require repair, loss of mental functions and permanent brain damage with associated disabilities.
The invasiveness, procedural times and possible surgical complications have limited the
growth of surgical treatment of epilepsy.
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Multiple
technologies required for diagnosis and treatment:
Currently, a patient undergoes
a craniotomy for
implantation
of diagnostic film technologies. The patient then waits in the hospital for one to four weeks waiting to have seizures
that will allow doctors to pinpoint where the seizures are occurring in the brain. After this is complete, a patient has
to undergo another lengthy procedure to have the brain tissue removed or undergo permanent implantation of depth electrodes
for chronic stimulation. There is a need for an all in one technology that can potentially allow for diagnosis and treatment
concurrently and potentially offer real time treatment without the need for surgery.
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Our
Solution
As
a result of the inherent limitations and inconvenience of existing systems, we believe that there is a significant unmet need
among people with neurological disorders for cortical strip, grid and depth electrodes that provide diagnostic capabilities through
cEEG and sEEG recording in addition to therapeutic modalities, such as brain stimulation and ablation, offered as an all in one
product. In comparison to currently available technologies, we are currently developing our strip, grid and depth electrodes with
the goal of providing the following expected advantages:
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Reduced
time for diagnosis:
If we are successful in identifying brain activity more
quickly, in offering a minimally invasive procedure and developing an all in one solution,
we expect our technology will reduce overall procedural times. While our pre-clinical
and clinical experience to date is very limited, our cortical grid technology under development
has, in some cases, demonstrated the ability to provide hi fidelity recordings that have
allowed physicians to identify the affected brain tissue causing seizures in hours versus
weeks. This represents the potential for meaningful cost savings for hospitals and patients
and improved quality of life for patients.
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Improved
accuracy of diagnostic technologies:
Because we believe our thin film technology
will be capable of recording at higher fidelity than current technologies, we believe
our technology may be able to more precisely determine the brain tissue causing seizures.
In the limited clinical tests performed by Mayo Clinic with five patients to date, our
technology under development has identified what clinicians refer to as pre-seizure activity
(made possible by the ability to detect brain activity down to a single neuron and populations
of neurons). We believe our technology under development may be able to improve outcomes
compared to using other therapeutic technologies regardless of whether we are able to
offer an all in one diagnostic and therapeutic solution.
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Possibility
to implant via minimally invasive procedure with fewer post-procedure complications:
We
are currently developing an approach to deliver the cortical electrodes, including minimizing
the invasiveness of the procedure. We expect that patients who have qualified for this
therapy will be more accepting of a minimally-invasive procedure. Such a procedure would
potentially reduce the patient’s pain, bleeding and other adverse events associated
with a full craniotomy. Our technology is expected to also have fewer wires, also referred
to as tails, exiting the patient’s head, which can also reduce the potential for
infections. Furthermore, the material we currently use in our cortical electrodes has
shown in pre-clinical evaluations to cause less inflammation than current electrode substrates
as it appears more compatible with brain tissue. As discussed under “Our Strategy”
below, our technology under development, if approved, will be implanted via a full craniotomy
until such time, if ever, as we are able to develop our minimally invasive procedure.
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All-in-one
diagnostic and therapeutic technology solution:
Due to the expected high fidelity
recording capabilities of our technology under development, we have received feedback
from physicians that they will attempt to perform the diagnosis and treatment in a single
procedure, thereby eliminating the need for a second surgical procedure, reducing the
likelihood of patient infection and minimizing the diagnostic, procedural and hospital
costs. As discussed in under “Our Strategy” below, our initial product offering
will offer diagnostic-only capabilities while we advance the development of our all in
one approach.
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Our
Strategy
Our
goal is to be the global leader in cEEG and sEEG recording, deep brain stimulation and ablation, owning the procedure from diagnosis
through treatment. The key elements of our strategy include:
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Introduce
cortical strip and grid electrodes for the diagnosis of epilepsy in U.S.:
In
the fourth quarter of 2018, we intend to complete the development, testing and 510(k)
device submission to the FDA for our cortical and strip electrodes for temporary (less
than 30 day) use with recording, monitoring, and acute stimulation equipment for the
recording, monitoring and stimulation of electrical signals on the surface of the brain.
Our initial product offering will be placed through traditional surgical means involving
a craniotomy until such time, if any, that we launch our minimally invasive procedure.
We believe, due to physician feedback, that our technology under development would represent
a major improvement over existing devices for the diagnosis of epilepsy. We are initially
targeting epilepsy as we believe this is a clinical area of great need and a market that
is underpenetrated with the fastest path to commercialization. We believe the largest
and quickest-to-market geography for our cortical strip and grid technology under development
is in the United States for a number of reasons, including the following: (i) many industry
sources believe there is a large underserved U.S. market, (ii) healthy procedural reimbursement
for centers and physicians, (iii) robust average selling prices, (iv) physician enthusiasm
for our technology under development and (v) that we may seek additional intellectual
property protection and will be required to seek additional regulatory approvals to commercialize
outside the U.S. We expect to hire direct experienced sales representatives to market
our technology, if approved, in the U.S.
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Launch
depth electrodes for sEEG recording:
Given the reluctance of patients to undergo
epilepsy surgery due to its invasiveness, a number of epilepsy centers have adopted the
use of depth electrodes, which are placed by drilling small holes into the patient’s
cranium, thereby avoiding a craniotomy. We believe our technology will offer advantages
to current depth electrode technology and will enable us to offer a therapeutic solution
using this technology in the future. As we develop our technology, we plan to release
further information about the expected advantages of our technology over currently available
therapies.
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Introduce
minimally invasive delivery system for cortical electrodes:
Cortical electrodes
generally require a craniotomy, which is a very invasive procedure that can cause patient
complications. Because of this, many patients have opted to not have epilepsy surgery,
instead accepting the consequences and risks associated with epilepsy. We intend to develop
a procedure that may include a delivery system placed through a small circular incision
in the skull for implantation of the cortical grid and strip electrodes. We believe this
will increase patient willingness to accept the surgery and increase market penetration.
Until we are able to develop this procedure, if at all, our initial product offering
will be placed through traditional surgical means involving a craniotomy and may be less
likely to be adopted by physicians and patients due to unwillingness of patients to undergo
epilepsy surgery.
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Utilize
these core technologies to develop all in one diagnostic and therapeutic solutions:
Patients
currently undergo one surgical procedure for diagnosis (either to have a cortical electrode
placed via a craniotomy or depth electrodes placed via holes drilled into the skull)
and, hopefully after the brain recordings successfully indicate where the affected brain
tissue is located, a second procedure or surgery is then required to treat the patient.
There is strong physician interest in being able to perform both the diagnostic and therapeutic
procedure concurrently. We are developing our technology with the goal of being able
to offer this benefit although there can be no assurance that we will be able to do so.
We are pursuing cortical grid, strip and depth electrode technology that can record brain
activity (diagnose), ablate brain tissue and also provide both acute and long term stimulation.
The technology has demonstrated these functions in acute and short term animal models;
however, additional development is required to offer a device that has long term therapeutic
application. These therapeutic technologies are expected to require more robust regulatory
approvals for the United States, ranging from a 510(k) with human clinical data to PMAs.
We will engage the FDA at the proper time to determine the most efficient clinical path.
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Gain
approval for other brain or motor related disorders such as Parkinson’s with the
therapeutic technologies developed for epilepsy:
While we are developing our
technology for the diagnosis and treatment of epilepsy, we believe that our technology
has strong application and utilization for other brain or motor related disorders such
as Parkinson’s disease, dystonia, essential tremors and facial pain as these diseases
are currently treated with DBS if medications are not effective. As previously mentioned,
we are planning to offer electrodes that can be implanted for long term stimulation applications,
but such use will require that we pursue additional approvals from the FDA and any international
regulatory bodies where we seek to commercialize our technology.
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Explore
partnerships with other companies that leverage our core technology:
Given that
our technology enables, complements and/or competes with a number of companies that are
in the market or attempting to enter the market with diagnostic or therapeutic technologies
to treat brain related disorders, we believe there may be opportunities to establish
mutually beneficial relationships. In addition, our technology may have application in
cardiovascular, orthopedic and pain related indications that could benefit from a hi-fidelity
thin film electrode product that can provide stimulation and/or ablation therapies.
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Investigate
the potential applications associated with Artificial Intelligence:
Given the scaleability
of our thin film electrode technology, we have been informed by some of our corporate
advisors that the ability to offer electrode technology that can include thousands of
electrodes in the brain may be of benefit in treating medical conditions that require
artificial intelligence. The Company plans to form an advisory board that will provide
guidance to the company as we continue to explore the opportunities in this exciting
field.
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Our
Technology
Epilepsy
Mapping and Monitoring
Epileptic
seizures occur when the neurons in the brain miscommunicate. This miscommunication typically results in involuntary muscle seizure
activities and/or periods of perceptual disconnect where the individual appears frozen. Modern medical science has advanced the
treatment of epileptic seizures by mapping the electrical communication activity of neurons and understanding their special orientation
in the brain. This mapping is accomplished by access to the cranium (through a craniotomy) and placing conductive contacts on
the brain directly. The craniotomy procedure is very invasive, traumatic to the surrounding tissue, results in high patient down
time, and increases the risk of infection.
Our
Technology
We
seek to leverage scale-able technology and produce ultra-thin electrodes that allow for higher density contacts thus increasing
the mapping resolution and signal acquisition. We also believe that the electrodes’ unique thinness and flexibility will
afford a non-invasive approach to electrode placement to replace a craniotomy with placement and removal utilizing access via
a small burr hole in the skull.
Our
technology consists of three primary types of cortical electrodes: grid electrodes, strip electrodes and dual-sided electrodes.
These electrodes have a patented design that utilizes proprietary processing and materials technology, which we believe will allow
the electrodes to have improved features over the current industry standard recording electrodes.
What
sets our technology apart from others is the integration of state of the art design leveraging the latest in flexible printed
circuit technology. We believe our patented designs will provide the surgeon a higher tactile perspective on electrode placement
allowing for ultra-precise neuron recording. We expect the benefits of our electrode designs to include the ability to detect
better defined margins between healthy tissue and resect-able tissue, less immune-response from the brain and surrounding tissue,
better signal acquisition due to superior conformability of the electrode over the brain, improved flexibility that physicians
have requested, which we expect will enable a minimally invasive approach and the electrodes unique thinness that is unmatched
by current products being used.
The
Future of Epilepsy Mapping with NeuroOne
We
seek to develop superior “scale-able” technology for future product system iterations in higher density contact placement.
This will open the doors to other brain related disease recording procedures by providing hi-fidelity, more accurate diagnostic
capabilities and also the ability to provide an all in one therapy capable of diagnosis, ablation and/or stimulation. Beyond the
brain, we believe our technology under development has applications in other neurological signal recording disease states related
to voluntary or involuntary motor neuron abnormalities, understanding sensory neuro behavior (pain), limb prosthetics and degenerative
muscle disease.
Clinical
Development and Regulatory Pathway
Clinical
Experience, Future Development and Clinical Trial Plans
Our
technology under development has not been approved for commercialization by any U.S. or foreign regulatory body, and, prior to
receiving such approval, our technology will need to undergo extensive pre-clinical testing and clinical trials. As disclosed
in more detail below, our technology has been tested in very limited trials to date, and we have very limited clinical data to
support our expectations regarding the performance of our technology, its safety, efficacy and anticipated benefits compared to
currently available technology.
In
parallel with the development and testing needed to launch our cortical strip and grid electrodes, we intend to expand our product
offerings to include less invasive means and all in one solutions, thus providing both patients and physicians better options
to treat epilepsy and other brain related disorders. While we expect to make modifications to this initial system, we believe
that most of our future product development initiatives will involve unique and transformational next generation technology that
should drive further appeal of our products with both physicians and patients.
We
are utilizing a number of resources to develop these technologies. We license three critical patents from WARF that are the foundation
of the technology we are developing and intend to commercialize and benefit from the thin film technology know-how of Mayo Clinic
doctors through our license and development agreement. WARF, Mayo Clinic and Cleveland Clinic have been responsible for all pre-clinical
studies of our technology under development to date. See “—WARF License” and “—The Mayo Foundation
for Medical Education and Research License and Development Agreement” below.
Below
we have summarized, for each component of our technology under development, the current stage of development, the pre-clinical
testing done to date by WARF or Mayo Clinic on such component, if any, our plans for further testing or clinical trials and our
expectations regarding the requirements for regulatory approval and timing of regulatory submissions:
Technology
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Stage
of Development and Pre-Clinical Testing to Date
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Expected
Requirements for Regulatory Approval
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Cortical
strip and grid electrodes for the diagnosis of epilepsy
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Design
freeze complete
Pre-clinical
testing has been conducted on the versions used for clinical research by Mayo Clinic and WARF (described below)
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In
vitro bench top and pre-clinical (bio compatibility and sterilization) testing expected
to be required prior to human use and scheduled to be completed by the end of the third
quarter of 2018
There
may be continued clinical evaluation of the technology under a pre-existing IRB research protocol approved by Mayo’s
institutional review board, which will provide us with additional clinical evidence that may assist with product acceptance
and launch
Expect
to file for FDA 510(k) clearance in the fourth quarter of 2018
Planned
U.S. commercial launch in late 2018 upon FDA clearance, if received
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Depth
electrodes for diagnostic purposes
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In
development
Have
not been tested in clinical or pre-clinical studies to date, although made of the same material and electrical contacts
as our cortical grid and strip electrodes
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In
vitro bench top, biocompatibility and sterilization tests expected to be required
Design
testing determined in the second half of 2017 and expected to be complete in the fourth quarter of 2018
Expect
to file for FDA 510(k) clearance in the first quarter of 2019
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Minimally
invasive cortical electrode delivery system
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In
development
No
clinical testing to date
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Future
clinical testing requirements for regulatory clearance currently unknown
Currently
researching predicate devices and procedures to support position to file with the FDA as a 510(k) submission and to determine
required testing
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Depth
electrode diagnostic and ablation devices
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In
development
No
clinical testing to date
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Future
clinical testing requirements for regulatory clearance/approval currently unknown
The
Company is in negotiations with a large medical institution (Cleveland Clinic) to co-develop the project which would help
limit the costs
Expect
to perform pre-clinical study in 2018 and then confirm 510(k) regulatory pathway with FDA.
No
FDA feedback has been sought or received by us to date on the clinical process that may be required for an ablation indication,
but we expect regulatory clearance/approval will require a more robust clinical process, which could range from 510(k)
clearance with human clinical data to a PMA, depending on proposed indications for use
In-vitro
bench top, pre-clinical and safety (animal) studies and FDA-approved human clinical studies will most likely be required
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Depth
electrode chronic stimulation devices
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In
development
No
clinical testing to date
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Future
clinical testing requirements for regulatory clearance/approval currently unknown
Expect
to conduct pre-clinical testing in 2019
No
FDA feedback has been sought or received by us to date on the clinical process that will be required for chronic stimulation,
but we expect regulatory clearance/approval for chronic stimulation may require a more robust clinical process, which
could range from 510(k) clearance with human clinical data to a PMA
In-vitro
bench-top, pre-clinical and safety (animal) studies and FDA-approved human clinical studies will most likely be required
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Our
cortical technology for the diagnosis of epilepsy has been tested by doctors at Mayo Clinic in multiple pre-clinical tests conducted
from 2012 to 2017. In pre-clinical models, doctors examined the biological impact on mammalian brains. Polyimide substrate electrodes
(NeuroOne technology) were implanted on the pig’s brain for one week alongside standard competitive electrodes. The tissue
underneath the two types of electrodes was removed, fixed, stained, and examined for immunological responses. Electrophysiological
(brain neuron activity) properties were examined by recordings in pigs and from tissue to be removed in five patients undergoing
surgery. Doctors examined the changes in local field potential activity of the brain with thin film electrodes (NeuroOne technology)
and then compared to competitive electrodes. Intra-operative brain activity recordings were obtained and evaluated in a pig seizure
model and in five human subjects undergoing surgery for drug resistant epilepsy.
The
results of a histological (evaluation of brain tissue under a microscope) analysis showed reduced immunological reaction to prolonged
polyimide substrate implants (NeuroOne technology) compared to standard silicone substrate competitive clinical electrodes. Electrophysiological
recordings showed data obtained from polyimide electrodes showed feasibility of high fidelity multi-scale electrophysiology while
also displaying easier deployment of polyimide electrodes (NeuroOne technology) through burr holes utilizing a minimally invasive
approach.
Conclusions
reached by the physicians at Mayo Clinic are that thin, flexible polyimide electrodes (NeuroOne technology) provide recordings
similar to standard clinical electrodes with markedly reduced immunological response. In addition, the flexibility and reduced
volume of polyimide electrodes should reduce pain and swelling associated with implantation of the device, and the single wire
exiting the skull should reduce infection risk. Combined, these properties suggest that the replacement of current competitive
silicone electrodes with polyimide substrate electrodes (NeuroOne technology) for recording brain activity for epilepsy could
provide enhanced clinical value with reduced cost, reduced infection risk, and improved patient comfort.
In
addition, our cortical implant technology has been tested by researchers at the University of Wisconsin-Madison in multiple pre-clinical
studies conducted from 2006 to 2016. These studies, illustrated in a variety of pre-clinical animal models that included mice,
rats and primates, have shown that thin film cortical implant technology can reliably record brain activity from different areas
of the brain, can be implanted successfully in a minimally invasive fashion, can be safely implanted over long-time periods of
up to five years, can electrically provide brain stimulation and tissue ablation, and has increased flexibility versus existing
commercially available technology that allows the grids to conform to the brain surface.
Sales
and Marketing
Based
on the size and maturity of the U.S. market, our initial commercial focus, if our technology is approved for commercialization
for the diagnosis of epilepsy in the United States, will be to invest in developing a direct sales force and infrastructure to
support the launch of the product in the United States and target what we estimate to be approximately 188 Level 4 epilepsy centers
along with their respective epilepsy teams comprised of neurologists, neurosurgeons and technicians in the United States who are
clinically active.
In
parallel, we have evaluated the opportunity to commercialize our products in select European markets and have concluded that while
there is a market for our technology in Europe, the regulatory changes in the European Union will require a lengthy and costly
approval pathway. At this time, we will utilize our resources to remain focused on the opportunity in the United States but will
reexamine international opportunities at a later time. If our technology is approved for commercialization for the diagnosis of
epilepsy in the United States, we will look to educate neurologists, neurosurgeons and primary care physicians on the advantages
to existing epilepsy approaches through a variety of targeted marketing tools and social media.
Reimbursement
Coverage
in the United States
Reimbursement
from private third-party healthcare payors and, to a lesser extent, Medicare will be an important element of our success. Although
CMS and third-party payors have adopted coverage policies for our targeted indications, there is no guarantee this will continue
at the same levels or at all in the future. Current Procedural Terminology, or CPT, is a medical code set that is used to report
medical, surgical and diagnostic procedures and services to entities such as physicians, health insurance companies and accreditation
organizations.
Applicable
diagnostic CPT codes for mapping (diagnosing) the brain for diagnostic procedures are as follows:
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61531
Subdural implantation of strip electrodes through one or more burr or trephine (saw)
hole(s) for long-term seizure monitoring;
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61533
Craniotomy with elevation of bone flap: for subdural implantation of an electrode array,
for long term seizure monitoring;
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61535
Craniotomy with elevation of bone flap; for removal of epidural or subdural electrode
array, without excision of cerebral tissue (separate procedure); and
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61760
Stereotactic implantation of depth electrodes into the cerebrum for long term seizure monitoring.
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Regarding
ICD-10 codes, the International Classification of Diseases, Tenth Edition (ICD-10) is a clinical cataloging system that went into
effect for the U.S. healthcare industry on Oct. 1, 2015, after a series of lengthy delays. Accounting for modern advances in clinical
treatment and medical devices, ICD-10 codes offer many more classification options compared to those found in its predecessor,
ICD-9. Within the healthcare industry, providers, coders, IT professionals, insurance carriers, government agencies and others
use ICD codes to properly note diseases on health records, to track epidemiological trends and to assist in medical reimbursement
decisions.
ICD-10
codes for epilepsy are as follows:
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G40.0
Localization-related (focal) (partial) idiopathic epilepsy and epileptic syndromes with seizures of localized onset;
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G40.1
Localization-related (focal) (partial) symptomatic epilepsy and epileptic syndromes with simple partial seizures;
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G40.2
Localization-related (focal) (partial) symptomatic epilepsy and epileptic syndromes with complex partial seizures;
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G40.3
Generalized idiopathic epilepsy and epileptic syndromes;
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G40.A
Absence epileptic syndrome;
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G40.4
Other generalized epilepsy and epileptic syndromes;
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G40.50
Epileptic seizures related to external causes, not intractable;
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G40.80
Other epilepsy; and
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G40.82
Epileptic spasms.
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We
believe that many of the indications we are pursuing with our technologies are currently reimbursed on a widespread basis by Medicare,
Medicaid and private insurance companies.
Medicare,
Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to contain healthcare costs
by limiting both coverage and the level of reimbursement of new medical devices, and, as a result, their coverage policies may
be restrictive, or they may not cover or provide adequate payment for our products. In order to obtain reimbursement arrangements,
we may have to agree to a net sales price lower than the net sales price we might charge in other sales channels. Our revenue
may be limited by the continuing efforts of government and third-party payors to contain or reduce the costs of healthcare through
various increasingly sophisticated means, such as requiring prospective reimbursement and second opinions, purchasing in groups,
or redesigning benefits. Our future dependence on the commercial success of our technologies makes us particularly susceptible
to any cost containment or reduction efforts. Accordingly, unless government and other third-party payors provide adequate coverage
and reimbursement for our products and the related insertion and removal procedures, our financial performance may be limited.
Coverage
Outside the United States
If
we seek to commercialize in countries outside the United States, coverage for epilepsy surgical procedures are available from
certain governmental authorities, private health insurance plans, and labor unions. Coverage systems in international markets
vary significantly by country and, within some countries, by region. If we seek to commercialize our technology, if approved,
outside the United States, coverage approvals must be obtained on a country-by-country, region-by-region or, in some instances,
a case-by case basis. Based on our ongoing evaluation, certain countries reimburse more highly than others.
We
evaluated international opportunities to market our technology under development. While we believe there is a market for our technology
in Europe and other foreign jurisdictions, we have determined not to seek to commercialize in any foreign jurisdictions due to
time intensive approval processes, the lack of certainty regarding approval, significant cost and the stringency of the regulatory
approval process in Europe in particular, among other factors.
Manufacturing,
Supply and Quality Assurance
We
currently outsource the supply and manufacture of all components of our prototypes of our technology under development. We plan
to continue with an outsourced manufacturing arrangement for the foreseeable future. Our third-party manufacturers are recognized
in their field for their competency to manufacture the respective portions of our system and have quality systems established
that meet FDA requirements. We believe the manufacturers we currently utilize have sufficient capacity to meet our launch requirements
if our technology under development is approved in the future and are able to scale up their capacity relatively quickly with
minimal capital investment. We believe that, as we increase our demand in the future, our per-unit costs will decrease materially.
We have also identified capable second source manufacturers and suppliers in the event of disruption from any of our primary vendors.
Our
suppliers meet the latest ISO 13485 certification, which includes design control requirements. As a medical device developer,
the facilities of our sterilization and other critical suppliers are subject to periodic inspection by the FDA and corresponding
state and foreign agencies. We believe that our quality systems and those of our suppliers are robust and achieve high product
quality. We plan to audit our suppliers periodically to ensure conformity with the specifications, policies and procedures for
our devices.
Research
and Development
Our
research and development team includes 10 employees and consultants who specialize in thin film technology, many of whom have
considerable experience in brain related neurovascular technologies and related conditions. Our research and development team
is focused on the development of thin film cortical grid and strip electrodes and depth electrodes for recording, ablation and
chronic stimulation for brain related disorders. Our research and development expenses were $0.7 million and zero for the years
ended December 31, 2017 and 2016, respectively, and $225,529 for the six months ended June 30, 2018.
Competition
In
the market for Epilepsy diagnosis, our cortical strip, sheet and depth electrode technology will likely compete with Integra Life
Science’s Integra Epilepsy Strip, Grid and depth electrodes, which provide a similar function to our diagnostic technologies
under development. These products are well established in the marketplace and Integra has greater resources than us, which could
allow them to innovate faster. Ad-Tech Medical Instrument Corporation’s Epilepsy/LTM (subdural grid, strip and depth) electrodes,
which have become the market leaders for diagnostic mapping in epilepsy, and PMT Corporation’s Cortac Strips and grid electrodes
and Depthalon depth electrodes are used for recording brain activity similar to other competitive technologies. These technologies
are very different from our thin film strip technology under development, which, if developed as expected and approved, would
represent next generation recording technology that can be placed minimally invasively, allow for smaller footprints with increased
number of electrodes, different shaped electrodes and much higher fidelity that may be able to detect microseizure activity, which
would be helpful in improving clinical rates of eliminating seizure activity in patients. Today’s success rates for seizure
free post-operative conditions remain at 50%, which has limited patients’ willingness to undergo the currently highly invasive
surgical procedure. We will also compete against other companies in early stages of development of thin film technologies.
In
the neuro-ablation market, we expect to compete with Medtronic’s Visualase guided-laser ablation technology and Monteris
Medical’s NeuroBlate technology, which use MRI guided laser surgical ablation for use to ablate, necrotize or coagulate
soft tissue through interstitial irradiation or thermal therapy in medicine and surgery in the discipline of neurosurgery with
1064 nm lasers. Their website claims it is used for ablation in the brain for soft tissue and tumors. We believe there are other
laser-based systems in development that will compete with these technologies.
In
the neurostimulation market, we expect to compete with NeuroPace’s RNS system approved for epilepsy, Medtronic’s Activa
system approved for Parkinson’s disease, Boston Scientific Vercise (indicated for Parkinson’s, dystonia and essential
tremors), Abbott/St. Jude Medical’s Infinity DBS system (approved for Parkinson’s disease and essential tremors),
Liva Nova/Cyberonic’s VNS therapy intended for patients suffering with epilepsy. We believe there are additional companies
pursuing this high growth space although none are expected to be commercially available in 2018 based on current reports. Although
we will face potential competition from many different sources, we believe that our technology, knowledge, experience and scientific
resources will provide us with competitive advantages. We expect the key competitive factors affecting the success of our cortical
strip and sheet electrodes under development, if successfully developed and approved, are likely to be: hi-fidelity recording
that allows for detection of pre-seizure activity, ability to place the devices minimally invasively, deliverability of cortical
grid, strip and depth electrode technology, ability to offer grid, strip and depth electrodes in various electrode shapes and
sizes, potential reduction in infections and ability to record brain activity both on the surface using cortical grid and strip
technology and deeper into the brain using depth electrodes concurrently.
Many
of the companies against which we may compete in the future have significantly greater financial resources and expertise in research
and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing
approved products than we do. Mergers and acquisitions in the pharmaceutical, biotechnology and diagnostic industries may result
in even more resources being concentrated among a smaller number of our competitors. Smaller or early stage companies may also
prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These
competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical
trial sites and subject registration for clinical trials, as well as in acquiring technologies complementary to, or necessary
for, our development.
WARF
License
We
have an Exclusive Start-Up Company License Agreement with WARF, pursuant to which WARF has granted us 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 WARF License, we have agreed to pay WARF $55,000 (representing a license fee)
upon the earliest to occur of the date we cumulatively raise at least $3 million in financing, which threshold was recently met,
the date of a change of control, or our revenue reaching a specified threshold amount, and to pay $65,000 (representing reimbursement
for costs incurred by WARF in maintaining the licensed patents) upon the earliest to occur of the date that we cumulatively raise
at least $5 million in financing, the date of a change of control, or our revenue reaching a specified threshold amount.
The
initial $55,000 payment was due on May 3, 2018 and was paid April 22, 2018. 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 would submit a business plan to WARF by February 1, 2018, which we submitted
on January 18, 2018, and would 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 the WARF 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.
See
“Risk Factors”— 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” for additional information regarding
the WARF License and our past breach thereof.
Mayo
Foundation for Medical Education and Research License and Development Agreement
We
have entered into the Mayo Development Agreement with Mayo Foundation for Medical Education and Research (“Mayo”)
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.
On
May 25, 2017, prior to the closing of the Acquisition, NeuroOne issued Mayo 50,556 shares of common stock of NeuroOne the “NeuroOne
Shares”), pursuant to a subscription agreement, which shares were converted into 859,976 shares of the Company’s common
stock at the closing of the Acquisition.
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, to pay Mayo a cash payment of approximately $92,000 on the earlier
of September 30, 2017 or the date we raise a minimum amount of financing. We did not make this payment by September 30, 2017 and
breached this provision of the Mayo Development Agreement. Mayo granted us an extension of this deadline to December 31, 2017,
and we made this payment within such extended deadline.
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.
For
additional information regarding the Mayo Development Agreement and our past breach thereof, see “Risk Factors—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.”
Intellectual
Property
Protection
of our intellectual property is a strategic priority for our business. We rely on a combination of patents, trademarks, copyrights,
trade secrets as well as nondisclosure and assignment of invention agreements, material transfer agreements, confidentiality agreements
and other measures to protect our intellectual property and other proprietary rights.
Patents
As of August 8, 2018,
our patent estate consists of three issued United States patents licensed from WARF covering a neural probe array and thin-film
micro electrode array and method and two pending United States provisional patent applications filed by us on March 31, 2017 and
October 26, 2017 covering our applications and additional devices used during the diagnostic and therapeutic ablation and stimulation
procedures. We also filed a patent application on April 2, 2018 and are awaiting a response from the US and International Patent
Offices. The licensed issued patents expire between 2025 and 2030, subject to any patent extensions that may be available for such
patents. If a patent or patents are issued on our pending patent application, the resulting patent is projected to expire in 2038.
Our
patent application may not result in an issued patent, and any patents that have been issued or may be issued in the future may
not protect the commercially important aspects of our technology. Furthermore, the validity and enforceability of our issued patents
may be challenged by third parties and our patents could be invalidated or modified by the issuing governmental authority. Third
parties may independently develop technology that is not covered by our patents that is similar to, or competes with, our technology.
In addition, our intellectual property may be infringed or misappropriated by third parties, particularly in foreign countries
where the laws and governmental authorities may not protect our proprietary rights as effectively as those in the United States.
The
medical device industry in general, and the recording, ablation and neurostimulation sector of this industry in particular, are
characterized by the existence of a large number of patents and frequent litigation based on assertions of patent infringement.
We are aware of numerous patents issued to third parties that may relate to the technology used in our business, including the
design and manufacture of electrodes and pulse generators, as well as methods for device placement. Each of these patents contains
multiple claims, any one of which may be independently asserted against us. The owners of these patents may assert that the manufacture,
use, sale or offer for sale of our cortical strip and sheet electrodes infringe one or more claims of their patents. Furthermore,
there may be additional patents issued to third parties of which we are presently unaware that may relate to aspects of our technology
that such third parties could assert against us and materially and adversely affect our business. In addition, because patent
applications can take many years to issue, there may be patent applications that are currently pending and unknown to us, which
may later result in issued patents that third parties could assert against us and materially and adversely affect our business.
Any
adverse determination in litigations, post grant trial proceedings, including interference proceedings, at the Patent Office relating
to intellectual property to which we are or may become a party could subject us to significant liabilities to third parties or
require us to seek licenses from third parties, and result in the cancellation and/or invalidation of our intellectual property.
Furthermore, if a court finds that we have willfully infringed a third party’s intellectual property, we could be required
to pay treble damages and/or attorney fees for the prevailing party, in addition to other penalties. Although intellectual property
disputes in the medical device area are often settled through licensing or similar arrangements, costs associated with such arrangements
can be substantial and often require ongoing royalty payments. We may be unable to obtain necessary licenses on satisfactory terms,
if at all. If we do not obtain necessary licenses, we may not be able to redesign our products to avoid infringement; if we are
able to redesign our products to avoid infringement, we may not receive FDA approval in a timely manner. Adverse determinations
in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling
our products, which could have a significant adverse impact on our business.
Trademarks
We
have one pending U.S. trademark application for the “NeuroOne
TM
” trademark. We were issued a notice of
allowance from the U.S. Trademark and Patent Office in December 2017 and will provide proof of use to the U.S. Trademark and Patent
Office in the near future in order to establish registration of the trademark. The trademark is subject to a 30 day period in
which it can be contested by the public. If not contested, the U.S. Trademark and Patent Office will issue the registered trademark
for the “NeuroOne” name.
Trade
Secrets
We
also rely on trade secrets, technical know-how and continuing innovation to develop and maintain our competitive position. We
seek to protect such intellectual property and proprietary information by generally requiring our employees, consultants, contractors,
scientific collaborators and other advisors to execute non-disclosure and assignment of invention agreements upon the commencement
of their employment or engagement as the case may be. Our agreements with our employees prohibit them from providing us with any
intellectual property or proprietary information of third parties. We also generally require confidentiality agreements or material
transfer agreements with third parties that receive or have access to our confidential information, data or other materials. Notwithstanding
the foregoing, there can be no assurance that our employees and third parties that have access to our confidential proprietary
information will abide by the terms of their agreements. Despite the measures that we take to protect our intellectual property
and confidential information, unauthorized third parties may copy aspects of our products or obtain and use our proprietary information.
Government
Regulation
Our
cortical strip, grid and depth electrodes are a medical device subject to extensive and ongoing regulation by the FDA, the U.S.
CMS, the European Commission, and regulatory bodies in other countries. Regulations cover virtually every critical aspect of a
medical device company’s business operations, including research activities, product development, quality and risk management,
contracting, reimbursement, medical communications, and sales and marketing. In the United States, the Federal Food, Drug and
Cosmetic Act, or FDCA, and the implementing regulations of the FDA govern product design and development, pre-clinical and clinical
testing, premarket clearance or approval, product manufacturing, quality systems, import and export, product labeling, product
storage, recalls and field safety corrective actions, advertising and promotion, product sales and distribution, and post-market
clinical surveillance. Our business is subject to federal, state, local, and foreign regulations, such as ISO 13485, ISO 14971,
FDA’s Quality System Regulation, or QSR, contained in 21 CFR Part 820, and the European Commission’s Directive
93/42/EEC concerning medical devices and its amendments.
The
FDA characterizes medical devices into one of three classes. Devices that are considered by the FDA to pose lower risk are classified
as Class I or II. Class I devices are subject to controls for labeling, pre-market notification and adherence to the
FDA’s QSR. This pertains to manufacturers’ methods and documentation of the design, testing, production, control quality
assurance, labeling, packaging, sterilization, storage and shipping of products, but are usually exempt from premarket notification
requirements. Class II devices are subject to the same general controls but may be subject to special controls such as performance
standards, post-market surveillance, FDA guidelines, or particularized labeling, and may also require clinical testing prior to
clearance or approval. Class III devices are those for which insufficient information exists to assure safety and effectiveness
solely through general or special controls, including devices that support or sustain human life, are of substantial importance
in preventing impairment of human health, or which present a potential, unreasonable risk of illness or injury.
Some
Class I and Class II devices are exempted by regulation from the pre-market notification requirement under Section 510(k)
of the FDCA, also referred to as a 510(k) clearance, and the requirement of compliance with substantially all of the QSR. However,
a pre-market approval, or PMA application, is required for devices deemed by the FDA to pose the greatest risk, such as life-sustaining,
life-supporting or certain implantable devices, or those that are “not substantially equivalent” either to a device
previously cleared through the 510(k) process or to a “preamendment” Class III device in commercial distribution
before May 28, 1976 when PMA applications were not required. The PMA approval process is more comprehensive than the 510(k)
clearance process and typically takes several years to complete. Based on FDA definitions, we believe our diagnostic strip, grid
and depth electrode technology will be categorized by the FDA as a Class II device that does not require clinical testing and
can be filed as a 510(k), similar to existing competitive technology. The Company expects that indications for treating epilepsy,
Parkinson’s and other patients suffering from motor related neurological deficiencies via a permanent implant for chronic
treatment will require a PMA process to commercially distribute in the United States. While the 510(k) process is typically shorter
than a PMA process, both the 510(k) clearance and PMA processes can be expensive and lengthy.
FDA
review of a PMA application generally takes between one and three years, but may take significantly longer. The FDA can delay,
limit or deny approval of a PMA application for many reasons, including:
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the
device may not be safe, effective, reliable or accurate to the FDA’s satisfaction;
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the
data from pre-clinical studies and clinical trials may be insufficient to support approval;
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the
manufacturing process or facilities may not meet applicable requirements; and
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changes
in FDA approval policies or adoption of new regulations may require additional data.
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If
an FDA evaluation of a PMA application is favorable, the FDA will either issue an approval letter, or approvable letter, which
usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing
of a device, subject to the conditions of approval and the limitations established in the approval letter. If the FDA’s
evaluation of a PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a
not approvable letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA
approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the
PMA. The PMA process can be expensive, uncertain and lengthy and a number of devices for which FDA approval has been sought by
other companies have never been approved by the FDA for marketing.
New
PMA applications or PMA supplements may be required for modifications to the manufacturing process, labeling, device specifications,
materials or design of a device that has been approved through the PMA process. PMA supplements often require submission of the
same type of information as an initial PMA application, except that the supplement is limited to information needed to support
any changes from the device covered by the approved PMA application and may or may not require as extensive technical or clinical
data or the convening of an advisory panel.
Clinical
trials are typically required to support a PMA application and are sometimes required for a 510(k) clearance. These trials generally
require submission of an application for an IDE, to the FDA. The IDE application must be supported by appropriate data, such as
animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically
sound. The IDE application must be approved in advance by the FDA for a specified number of patients, unless the product is deemed
a non-significant risk device and eligible for abbreviated IDE requirements. Generally, clinical trials for a significant risk
device may begin once the IDE application is approved by the FDA and the study protocol and informed consent are approved by appropriate
institutional review boards at the clinical trial sites. The FDA’s approval of an IDE allows clinical testing to go forward,
but it does not bind the FDA to accept the results of the trial as sufficient to prove the product’s safety and efficacy,
even if the trial meets its intended success criteria. All clinical trials must be conducted in accordance with the FDA’s
IDE regulations that govern investigational device labeling, prohibit promotion, and specify an array of recordkeeping, reporting
and monitoring responsibilities of study sponsors and study investigators. Clinical trials must further comply with the FDA’s
regulations for institutional review board approval and for informed consent and other human subject protections. Required records
and reports are subject to inspection by the FDA. The results of clinical testing may be unfavorable or, even if the intended
safety and efficacy success criteria are achieved, may not be considered sufficient for the FDA to grant approval or clearance
of a product. Clinical trials must be entered into the clinical trials registry at clinicaltrials.gov.
The
commencement or completion of any clinical trial may be delayed or halted, or be inadequate to support approval of a PMA application,
for numerous reasons, including, but not limited to, the following:
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the
FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical
trial, or place a clinical trial on hold;
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patients
do not enroll in clinical trials at the rate expected;
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patients,
sponsor (NeuroOne) or study sites do not comply with trial protocols;
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patient
follow-up is not at the rate expected;
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patients
experience adverse side effects;
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patients
die during a clinical trial, even though their death may not be related to the products that are part of our trial;
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institutional
review boards and third-party clinical investigators may delay or reject the trial protocol;
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third-party
clinical investigators decline to participate in a trial or do not perform a trial on
the anticipated schedule or consistent with the clinical trial protocol, good clinical
practices or other FDA requirements;
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the
sponsor (NeuroOne) or third-party organizations do not perform data collection, monitoring
and analysis in a timely or accurate manner or consistent with the clinical trial protocol
or investigational or statistical plans;
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third-party
clinical investigators have significant financial interests related to the sponsor (NeuroOne)
or the study that the FDA deems to make the study results unreliable, or the company
or investigators fail to disclose such interests;
|
|
●
|
regulatory
inspections of our clinical trials or manufacturing facilities, which may, among other
things, require us to undertake corrective action or suspend or terminate our clinical
trials;
|
|
●
|
changes
in governmental regulations or administrative actions;
|
|
●
|
the
interim or final results of the clinical trial are inconclusive or unfavorable as to safety or efficacy; and
|
|
●
|
the
FDA concludes that our trial design is inadequate to demonstrate safety and efficacy.
|
International
Regulation
International
sales of medical devices are subject to local government regulations, which may vary substantially from country to country. The
time required to obtain approval in another country may be longer or shorter than that required for FDA approval, and the requirements
may differ. There is a trend towards harmonization of quality system standards among the European Union, United States, Canada
and various other industrialized countries.
The
primary regulatory body in Europe is that of the European Union, the European Commission, which includes most of the major countries
in Europe. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European
Union with respect to medical devices. The European Union has adopted numerous directives and standards regulating the design,
manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements
of these relevant directives will be entitled to bear the CE conformity marking, indicating that the device conforms to the essential
requirements of the applicable directives and, accordingly, can be commercially distributed throughout Europe. The method of assessing
conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer
and a third party assessment by a “Notified Body.” This third-party assessment may consist of an audit of the manufacturer’s
quality system and specific testing of the manufacturer’s product. An assessment by a Notified Body of one country within
the European Union is required in order for a manufacturer to commercially distribute the product throughout the European Union.
Additional local requirements may apply on a country-by-country basis. Outside of the European Union, regulatory approval would
need to be sought on a country-by-country basis in order for us to market our products.
Medical
devices in Europe are classified into four primary categories. They are as follows:
|
●
|
Invasive
medical devices;
|
|
●
|
Active
medical devices; and
|
|
●
|
Special
Rules (including contraceptive, disinfectant, and radiological diagnostic medical devices).
|
Devices
are further segmented into the classes noted below. In Vitro Diagnostic devices have their own classification scheme and while
active implantable devices do not follow the same classification system as provided by the Medical Device Directive, they are
subject to similar requirements as Class III devices:
|
●
|
Class
I – Provided non-sterile or do not have a measuring function (low risk);
|
|
●
|
Class
I – Provided sterile and/or have a measuring function (low/medium risk);
|
|
●
|
Class
IIa (medium risk);
|
|
●
|
Class
IIb (medium/high risk); and
|
After
a review of our technology, an international regulatory consultant advised us that our strip, grid and depth electrode diagnostic
technology is likely a Class III device (since it comes into contact with the central nervous system) which will require a lengthy
approval process as a design dossier including clinical data will be required for approval.
Other
Regulatory Requirements
Even
after a device receives clearance or approval and is placed in commercial distribution, numerous regulatory requirements apply.
These include:
|
●
|
establishment
registration and device listing;
|
|
●
|
QSR,
which requires manufacturers, including third party manufacturers, to follow stringent
design, testing, risk management, production, control, supplier/contractor selection,
complaint handling, documentation and other quality assurance procedures during all aspects
of the manufacturing process;
|
|
●
|
labeling
regulations that prohibit the promotion of products for uncleared, unapproved or “off-label”
uses, and impose other restrictions on labeling, advertising and promotion;
|
|
●
|
MDR
regulations, which require that manufacturers report to the FDA if their device may have
caused or contributed to a death or serious injury or malfunctioned in a way that would
likely cause or contribute to a death or serious injury if the malfunction were to recur;
|
|
●
|
voluntary
and mandatory device recalls to address problems when a device is defective and could be a risk to health; and
|
|
●
|
corrections
and removals reporting regulations, which require that manufacturers report to the FDA
field corrections and product recalls or removals if undertaken to reduce a risk to health
posed by the device or to remedy a violation of the FDCA that may present a risk to health.
|
Also,
the FDA may require us to conduct post-market surveillance studies or establish and maintain a system for tracking our products
through the chain of distribution to the patient level. The FDA enforces regulatory requirements by conducting periodic, unannounced
inspections and market surveillance. Inspections may include the manufacturing facilities of our subcontractors.
Failure
to comply with applicable regulatory requirements can result in enforcement actions by the FDA and other regulatory agencies.
These may include any of the following sanctions or consequences:
|
●
|
warning
letters or untitled letters that require corrective action;
|
|
●
|
fines
and civil penalties;
|
|
●
|
unanticipated
expenditures;
|
|
●
|
delays
in approving or refusal to approve future products;
|
|
●
|
FDA
refusal to issue certificates to foreign governments needed to export products for sale in other countries;
|
|
●
|
suspension
or withdrawal of FDA clearance or approval;
|
|
●
|
product
recall or seizure; interruption of production;
|
|
●
|
operating
restrictions;
|
Our
contract manufacturers, specification developers and some suppliers of components or device accessories, also are required to
manufacture our products in compliance with current good manufacturing practice requirements set forth in the QSR. The QSR requires
a quality system for the design, manufacture, packaging, labeling, storage, installation and servicing of marketed devices, and
it includes extensive requirements with respect to quality management and organization, device design, buildings, equipment, purchase
and handling of components or services, production and process controls, packaging and labeling controls, device evaluation, distribution,
installation, complaint handling, servicing, and record keeping. The FDA evaluates compliance with the QSR through periodic unannounced
inspections that may include the manufacturing facilities of our subcontractors. If the FDA believes that any of our contract
manufacturers or regulated suppliers are not in compliance with these requirements, it can shut down such manufacturing operations,
require recall of our products, refuse to approve new marketing applications, institute legal proceedings to detain or seize products,
enjoin future violations or assess civil and criminal penalties against us or our officers or other employees.
Health
Insurance Portability and Accountability Act of 1996 (“HIPAA”) and Similar Foreign and State Laws and Regulations
Affecting the Transmission, Security and Privacy of Health Information
We
may also be subject to data privacy and security regulation by both the federal government and the states in which we conduct
our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their
respective implementing regulations, imposes specified requirements relating to the privacy, security and transmission of individually
identifiable health information. Among other things, HITECH makes HIPAA’s security standards directly applicable to business
associates, defined as service providers of covered entities that create, receive, maintain or transmit protected health information
in connection with providing a service for or on behalf of a covered entity. HITECH also created four new tiers of civil monetary
penalties and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to
enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition,
many state laws govern the privacy and security of health information in certain circumstances, many of which differ from HIPAA
and each other in significant ways and may not have the same effect.
Foreign
data privacy regulations, such as the EU Data Protection Directive (Directive 95/46/EC), the country-specific regulations that
implement Directive 95/46/EC, and the EU General Data Protection Regulation also govern the processing of personally identifiable
data, and may be stricter than U.S. laws.
Fraud
and Abuse Laws
In
addition to FDA restrictions, there are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including
anti-kickback laws and physician self-referral laws. Our relationships with healthcare providers and other third parties are subject
to scrutiny under these laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances,
imprisonment and exclusion from participation in federal and state healthcare programs, including the Medicare, Medicaid and Veterans
Administration health programs.
Federal
Anti-Kickback and Self-Referral Laws
The
federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration
(including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, to induce either the referral of an individual,
or the furnishing, recommending, or arranging of a good or service, for which payment may be made under a federal healthcare program
such as Medicare and Medicaid or other federal healthcare programs. The term “remuneration” has been broadly interpreted
to include anything of value, including such items as gifts, discounts, the furnishing of supplies or equipment, credit arrangements,
waiver of payments and providing anything at less than its fair market value. Although there are a number of statutory exceptions
and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly.
Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may
be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular
applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute.
Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a review of all its relevant facts
and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an
arrangement involving remuneration is to induce referrals of (or purchases, or recommendations related to) federal healthcare
covered business, the Anti-Kickback Statute has been implicated and potentially violated.
The
penalties for violating the federal Anti-Kickback Statute include imprisonment for up to five years, fines of up to $25,000 per
violation and possible exclusion from federal healthcare programs such as Medicare and Medicaid. Many states have adopted prohibitions
similar to the federal Anti-Kickback Statute, some of which do not have the same exceptions and apply to the referral of patients
for healthcare services reimbursed by any source, not only by the Medicare and Medicaid programs. Further, the Anti-Kickback Statute
was amended by the Patient Protection and Affordable Care Act (“ACA”). Specifically, as noted above, under the Anti-Kickback
Statute, the government must prove the defendant acted “knowingly” to prove a violation occurred. The ACA added a
provision to clarify that with respect to violations of the Anti-Kickback Statute, “a person need not have actual knowledge”
of the statute or specific intent to commit a violation of the statute. This change effectively overturns case law interpretations
that set a higher standard under which prosecutors had to prove the specific intent to violate the law. In addition, the ACA codified
case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes
a false or fraudulent claim for purposes of the federal civil False Claims Act.
We
plan to provide the initial training to providers and patients necessary for appropriate use of our technology either through
our own educators or by contracting with outside educators that have completed an appropriate training course. Outside educators
are reimbursed for their services at fair market value.
Noncompliance
with the federal Anti-Kickback Statute could result in our exclusion from Medicare, Medicaid or other governmental programs, restrictions
on our ability to operate in certain jurisdictions, and civil and criminal penalties.
The
federal Physician Self-Referral Prohibition, commonly known as the “Stark Law,” prohibits a physician from ordering
“designated health services,” including durable medical equipment, for Medicare and Medicaid patients from entities
with which the physician (or an immediate family member) has a “financial relationship.” Financial relationships include
both compensation arrangements and investment and ownership interests. Violation of the Stark Law could result in denial of payment,
disgorgement of reimbursements received under a noncompliant arrangement, civil penalties, and exclusion from Medicare, Medicaid
or other governmental programs. We believe that we have structured our provider arrangements to comply with current Stark Law
requirements.
Nevertheless,
a determination of liability under such laws could result in fines and penalties and restrictions on our ability to operate in
these jurisdictions.
Additionally,
as some of these laws are still evolving, we lack definitive guidance as to the application of certain key aspects of these laws
as they relate to our arrangements with providers with respect to patient training. We cannot predict the final form that these
regulations will take or the effect that the final regulations will have on us. As a result, our provider and training arrangements
may ultimately be found to be not in compliance with applicable federal law.
Federal
False Claims Act
The
Federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person whom it believes
has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or
who has made a false statement or used a false record to get a claim approved. In addition, amendments in 1986 to the Federal
False Claims Act have made it easier for private parties to bring “qui tam” whistleblower lawsuits against companies
under the Federal False Claims Act. Penalties include fines ranging from $5,500 to $11,000 for each false claim, plus three times
the amount of damages that the federal government sustained because of the act of that person. Qui tam actions have increased
significantly in recent years, causing greater numbers of healthcare companies to have to defend a false claim action, pay fines
or be excluded from Medicare, Medicaid or other federal or state healthcare programs as a result of an investigation arising out
of such action.
There
are other federal anti-fraud laws that prohibit, among other actions, knowingly and willfully executing, or attempting to execute,
a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or
stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly
and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement
in connection with the delivery of or payment for healthcare benefits, items or services.
Additionally,
HIPAA established two federal crimes related to making false statements in relation to healthcare matters. The healthcare fraud
statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors.
A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs.
The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making
any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits,
items or services. A violation of this statute is a felony and may result in fines or imprisonment.
Civil
Monetary Penalties Law
In
addition to the Anti-Kickback Statute and the False Claims Act, the federal government has the authority to seek civil monetary
penalties, or CMPs, assessments, and exclusion against an individual or entity based on a wide variety of prohibited conduct.
For example, the Civil Monetary Penalties Law authorizes the imposition of substantial CMPs against an entity that engages in
activities including, but not limited to: (1) knowingly presenting or causing to be presented, a claim for services not provided
as claimed or which is otherwise false or fraudulent in any way; (2) knowingly giving or causing to be given false or misleading
information reasonably expected to influence the decision to discharge a patient; (3) offering or giving remuneration to any beneficiary
of a federal health care program likely to influence the receipt of reimbursable items or services; (4) arranging for reimbursable
services with an entity which is excluded from participation from a federal health care program; (5) knowingly or willfully soliciting
or receiving remuneration for a referral of a federal health care program beneficiary; or (6) using a payment intended for a federal
health care program beneficiary for another use. The government is authorized to seek different amounts of CMPs and assessments
based on underlying violation. For false or fraudulent claims, the government may seek a penalty of up to $10,000 for each item
or service improperly claimed, and an assessment of up to three times the amount improperly claimed. For kickback violations,
the government may seek a penalty of up to $50,000 for each improper act and damages of up to three times the amount of remuneration
at issue.
State
Fraud and Abuse Provisions
Many
states have also adopted some form of anti-kickback and anti-referral laws and a false claims act. We believe that we are in conformance
to such laws. Nevertheless, a determination of liability under such laws could result in fines and penalties and restrictions
on our ability to operate in these jurisdictions.
Physician
Payment Sunshine Act
Transparency
laws regarding payments or other items of value provided to healthcare providers and teaching hospitals may also impact our business
practices. The federal Physician Payment Sunshine Act requires most medical device manufacturers to report annually to the Secretary
of Human Health Services financial arrangements, payments, or other transfers of value made by that entity to physicians and teaching
hospitals. The payment information is made publicly available in a searchable format on a CMS website. Over the next several years,
we will need to dedicate significant resources to establish and maintain systems and processes in order to comply with these regulations.
Failure to comply with the reporting requirements can result in significant civil monetary penalties. Similar laws have been enacted
or are under consideration in foreign jurisdictions.
U.S.
Foreign Corrupt Practices Act
The
FCPA prohibits U.S. corporations and their representatives from offering, promising, authorizing or making corrupt payments, gifts
or transfers to any foreign government official, government staff member, political party or political candidate in an attempt
to obtain or retain business abroad. The FCPA also obligates companies whose securities are listed in the United States to comply
with accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions
of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting
controls for international operations. Activities that violate the FCPA, even if they occur wholly outside the United States,
can result in criminal and civil fines, imprisonment, disgorgement, oversight, and debarment from government contracts.
Employees
As
of August 8, 2018, we have three employees, all of whom are full-time, and all of whom are located in the United States. None
of our employees are represented by a labor union or covered by a collective bargaining agreement. We consider our relationship
with our employees to be good.
Corporate
Information
Our
principal executive offices are located at c/o David Rosa, 10006 Liatris Lane, Eden Prairie, Minnesota, 55347, and our telephone
number is 952-237-7412. Our website address is
www.neurooneinc.com
. Information on our website is not part of this prospectus.
DESCRIPTION
OF PROPERTY
We
currently have no leased or owned properties, including office space. To meet our current needs, we intend to lease office space
near Eden Prairie, Minnesota.
LEGAL
PROCEEDINGS
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 NeuroOne
is responsible for tortious interference with the contracts. The letter demanded that Mr. Fredrickson (who is no longer with NeuroOne),
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 Mark Christianson to its existing
lawsuit against Wade 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.
On
April 18, 2018, Mr. Christianson, the Company and NeuroOne filed a motion for dismissal, which has not yet been heard by the Court.
They argue that: the contract claims against Mr. Christianson fail because his agreement was not supported by consideration; the
Minnesota Uniform Trade Secrets Act preempts plaintiff’s claims for unfair competition, civil conspiracy and unjust enrichment;
plaintiff fails to state a claim regarding alleged breach of the duties of loyalty and good faith/fair dealing; plaintiff cannot
legally obtain a constructive trust; plaintiff has insufficiently pled its tortious interference claims; and Plaintiff has not
stated a claim for unfair competition.
The
outcome and potential loss related to this matter is unknown as of the date of this prospectus.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the
consolidated financial statements and the notes thereto appearing in this prospectus.
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. (“NeuroOne”) 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 the Mayo clinic
in five patients for research purposes and has not been tested in any clinical trials. We are based in Eden Prairie, Minnesota.
The
Acquisition was accounted for as a capital transaction, or reverse recapitalization. As a result, the financial information contained
in this prospectus reflect solely the operations of our wholly-owned subsidiary, NeuroOne, and its predecessor NeuroOne LLC (the
“LLC”).
To
date, our primary activities have been limited to, and our limited resources have been dedicated to, performing business and financial
planning, raising capital, recruiting personnel, negotiating with business partners and the licensors of our intellectual property
and conducting research and development activities. Our 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 we have not generated any
revenue.
We
have incurred losses since inception. As of June 30, 2018, we had an accumulated deficit of $7.9 million, 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. We expect to continue to incur significant operating expenses 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
source of cash to date has been proceeds from the issuances of notes and warrants and unsecured loans. See “—Liquidity
and Capital Resources—Historical Capital Resources” below.
At
June 30, 2018, we had $22,608 in cash deposits. Our existing cash and cash equivalents will not be sufficient to fund our operating
expenses for the remainder of 2018. 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 Resources—Funding Requirements and Outlook” below.
Acquisition
On
July 20, 2017, we entered into a Merger Agreement with NeuroOne and OSOK Acquisition Company to acquire NeuroOne (the “Merger
Agreement”). 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 shares of common stock of NeuroOne (“NeuroOne Shares”) were
exchanged for shares of the Company’s common stock, based on the exchange ratio of 17.0103706 shares of common stock, for
every one NeuroOne Share, which totaled 6,291,994 shares of common stock, for all of the then-outstanding NeuroOne Shares, (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 warrants to purchase common stock of the Company
(“Company Warrants”) and (iv) we assumed the outstanding convertible promissory notes of NeuroOne. Accordingly, we
acquired 100% of NeuroOne 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 shares of Company common stock, 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 (the “Merger”) 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 and powers
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 WARF License which required WARF’s approval for transfer. The approval for the WARF License transfer
was finalized in February 2017. 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.
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,
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.
Interest
Expense
Interest
expense primarily consists of amortized discount costs and interest costs related to our Series 1 Notes (as defined below), Series
2 Notes (as defined below) and Series 3 Notes (as defined below). The Series 1 Notes, Series 2 Notes, and Series 3 Notes bear
interest at a fixed rate of 8% per year, compounding annually.
Net
change in fair value for the warrant liability and premium conversion derivatives
The
net change in fair value for the warrant liability and premium conversion derivatives includes the change in the fair value of
the warrant liability and the premium conversion derivatives during the particular period while the warrant liability and the
premium conversion derivatives are outstanding.
Results
of Operations
Comparison
of the Three Months Ended June 30, 2018 and 2017
The
following table sets forth the results of operations for the three months ended June 30, 2018 and 2017, respectively.
|
|
For the three months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
Period
to
Period
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
946,685
|
|
|
$
|
731,973
|
|
|
$
|
214,712
|
|
Research and development
|
|
|
225,529
|
|
|
|
156,716
|
|
|
|
68,813
|
|
Total operating expenses
|
|
|
1,172,214
|
|
|
|
888,689
|
|
|
|
283,525
|
|
Loss from operations
|
|
|
(1,172,214
|
)
|
|
|
(888,689
|
)
|
|
|
(283,525
|
)
|
Interest expense
|
|
|
(304,403
|
)
|
|
|
(350,049
|
)
|
|
|
45,646
|
|
Net change in fair value for the
warrant liability and premium conversion derivatives
|
|
|
215,631
|
|
|
|
(55,585
|
)
|
|
|
271,216
|
|
Net loss
|
|
$
|
(1,260,986
|
)
|
|
$
|
(1,294,323
|
)
|
|
$
|
33,337
|
|
General
and administrative expenses
General
and administrative expenses were $0.9 million for the three months ended June 30, 2018, compared to $0.7 million for the three
months ended June 30, 2017. The increase was primarily due to an increase in stock-based compensation expense associated with
a consulting contract of $0.1 million related to fund raising, and legal and accounting expenses of $0.1 million primarily related
to public company related costs.
Research
and development expenses
Research
and development expenses were $226,000 for the three months ended June 30, 2018, compared to $157,000 for the comparable prior
year quarter. The increase was primarily due to an increase in salary-related expenses and development materials and supplies
to support the increased level of development activities during the second quarter of 2018.
Interest
expense
Interest
expense for the three months ended June 30, 2018 was $0.3 million consisting of interest on principal and amortization of debt
discount costs of $0.3 million related to the Series 1 Notes, Series 2 Notes and Series 3 Notes described further below. Interest
expense for the three months ended June 30, 2017 was $0.4 million consisting of interest on principal and amortization of debt
issuance costs related to the Series 1 Notes. We expect that interest expense will significantly increase in the third quarter
of 2018 in connection with the conversion of the Series 1 Notes and Series 2 Notes into Common Stock on July 2, 2018.
Net
change in fair value for the warrant liability and premium conversion derivatives
The
net change in fair value for the warrant liability and premium conversion derivatives for the three months ended June 30, 2018
and 2017 was a benefit of $(0.2) million and expense of $56,000, respectively. The change is due primarily to fluctuations in
our Common Stock fair value and the number of potential shares of Common Stock issuable upon conversion of the underlying Series
1 Notes, Series 2 Notes and Series 3 Notes as of June 30, 2018 as well as due to changes in the probability assessment of a conversion
event occurring.
Comparison
of the Six Months Ended June 30, 2018 and 2017
|
|
For the six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
Period
to
Period
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
1,939,120
|
|
|
$
|
1,175,990
|
|
|
$
|
763,130
|
|
Research and development
|
|
|
330,574
|
|
|
|
228,757
|
|
|
|
101,817
|
|
Total operating expenses
|
|
|
2,269,694
|
|
|
|
1,404,747
|
|
|
|
864,947
|
|
Loss from operations
|
|
|
(2,269,694
|
)
|
|
|
(1,404,747
|
)
|
|
|
(864,947
|
)
|
Interest expense
|
|
|
(497,437
|
)
|
|
|
(563,599
|
)
|
|
|
66,162
|
|
Net change in fair value for the warrant liability and
premium conversion derivatives
|
|
|
335,591
|
|
|
|
(55,553
|
)
|
|
|
391,144
|
|
Loss on notes extinguishment
|
|
|
(186,220
|
)
|
|
|
—
|
|
|
|
(186,220
|
)
|
Net loss
|
|
$
|
(2,617,760
|
)
|
|
$
|
(2,023,899
|
)
|
|
$
|
(593,861
|
)
|
General
and administrative expenses
General
and administrative expenses were $1.9 million for the six months ended June 30, 2018, compared to $1.2 million for the six months
ended June 30, 2017. The increase was primarily due to an increase in stock-based compensation associated with a consulting contract
of $0.4 million related to fund raising, and legal and accounting expenses of $0.3 million primarily related to public company
related costs.
Research
and development expenses
Research
and development expenses were $0.3 million for the six months ended June 30, 2018, compared to $0.2 million for the six months
ended June 30, 2017. The increase was primarily due to an increase in salary-related expenses, development materials and supplies
to support the increased level of development activities during the current year period.
Interest
expense
Interest
expense for the six months ended June 30, 2018 was $0.5 million consisting of interest on principal and amortization of debt discount
costs of $0.5 million related to the Series 1 Notes, Series 2 Notes and Series 3 Notes described further below. Interest expense
for the six months ended June 30, 2017 was $0.6 million consisting largely of interest on principal and amortization of debt issuance
costs related to the Series 1 Notes. We expect that interest expense will significantly increase in the third quarter of 2018
in connection with the conversion of the Series 1 Notes and Series 2 Notes into Common Stock on July 2, 2018.
Net
change in fair value for the warrant liability and premium conversion derivatives
The
net change in fair value for the warrant liability and premium conversion derivatives for the six months ended June 30, 2018 and
2017 was a benefit of $(0.3) million and expense of $56,000, respectively. The change is due primarily to fluctuations in our
Common Stock fair value and the number of potential shares of Common Stock issuable upon conversion of the underlying Series 1
Notes, Series 2 Notes and Series 3 Notes as of June 30, 2018.
Loss
on notes extinguishment
Non-cash
loss on notes extinguishment for the six months ended June 30, 2018 was $0.2 million. There were no note extinguishments in the
comparable prior year period. The Series 2 Notes were amended in March 2018. The amendment for the Series 2 Notes added additional
embedded conversion features and warrant coverage. As a result of the modifications made to the Series 2 Notes, we accounted for
the amendment as a note extinguishment. We expect that the loss on notes extinguishments will increase in the third quarter of
2018 given the extinguishment of the Series 1 Notes and Series 2 Notes on July 2, 2018.
Comparison
of the Years Ended December 31, 2017 and 2016
For
comparison purposes, the results of the Company for the year ended December 31, 2017 were compared to the combined operating results
for the LLC from January 1, 2016 to October 26, 2016 and for NeuroOne from October 7, 2016 to December 31, 2016.
The
following table sets forth our results of operations for the years ended December 31, 2017 and 2016.
|
|
|
|
|
NeuroOne LLC
|
|
|
NeuroOne, Inc.
|
|
|
NeuroOne,
Inc.
and
NeuroOne
LLC
2016
Combined
|
|
|
|
|
|
|
For
the year
ended
December 31,
2017
|
|
|
For
the period
January 1,
2016
to
October 26,
2016
|
|
|
For
the period
October 7,
2016
to
December 31,
2016
|
|
|
For
the period
January 1,
2016
to
December 31,
2016
|
|
|
Fiscal
Year
Period
to
Period
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
2,336,988
|
|
|
$
|
6,657
|
|
|
$
|
182,667
|
|
|
$
|
189,324
|
|
|
$
|
2,147,664
|
|
Research and development
|
|
|
735,333
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
735,333
|
|
Total operating expenses
|
|
|
3,072,321
|
|
|
|
6,657
|
|
|
|
182,667
|
|
|
|
189,324
|
|
|
|
2,882,997
|
|
Loss from operations
|
|
|
(3,072,321
|
)
|
|
|
(6,657
|
)
|
|
|
(182,667
|
)
|
|
|
(189,324
|
)
|
|
|
(2,882,997
|
)
|
Interest expense
|
|
|
(1,395,138
|
)
|
|
|
(11,947
|
)
|
|
|
(83,297
|
)
|
|
|
(95,244
|
)
|
|
|
(1,299,894
|
)
|
Net change in fair value for the warrant liability and
premium conversion derivative
|
|
|
(240,053
|
)
|
|
|
—
|
|
|
|
(406
|
)
|
|
|
(406
|
)
|
|
|
(239,647
|
)
|
Loss on convertible notes and
short-term notes extinguishment, net
|
|
|
(350,914
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(350,914
|
)
|
Net loss
|
|
$
|
(5,058,426
|
)
|
|
$
|
(18,604
|
)
|
|
$
|
(266,370
|
)
|
|
$
|
(284,974
|
)
|
|
$
|
(4,773,452
|
)
|
General
and administrative expenses
General
and administrative expenses were $2.3 million for the year ended December 31, 2017, compared to $0.2 million for the year ended
December 31, 2016. The $2.1 million increase was primarily due to an increase in salary related expenses to support the increased
level of commercialization and development activities. The increase in spending was primarily attributable to salary and related
expenses for additional staffing of $1.2 million, legal and accounting expenses of $1.0 million, and investment banker fees of
$50,000.
Research
and development expenses
Research
and development expenses were $0.7 million for the year ended December 31, 2017, compared to $0 for the year ended December 31,
2016. The increase was primarily due to an increase in salary-related expenses and development materials and supplies to support
the increased level of development activities.
Interest
expense
Interest
expense for the year ended December 31, 2017 and 2016 was $1.4 million and $0.1 million, respectively. Interest expense primarily
consists of non-cash interest expense, inclusive of the amortization of debt discounts. The $1.3 million increase in interest
expense was primarily due to the additional issuances of convertible notes in 2017 as well as due to the increase in duration
that the instruments were outstanding in the current year. The Company had no interest-bearing debt prior to November 2016.
Net
change in fair value for the warrant liability and premium conversion derivative
The
net change in fair value for the warrant liability and premium conversion derivative for the year ended December 31, 2017 and
2016 was $0.2 million and $406, respectively. The increase is due primarily due to an increase in our common stock price.
Loss
on convertible notes and short-term notes extinguishment, net
Non-cash
loss on convertible notes and short-term notes extinguishment, net for the years ended December 31, 2017 and 2016 was $0.4 million
and zero, respectively. The Series 1 Notes and Series 2 Notes were amended in November 2017 and the Series 3 Notes were amended
in December 2017. The amendment for the Series 1 Notes extended the maturity date by approximately eight months and revised certain
warrant and other provisions. The amendment for the Series 2 Notes added additional warrant coverage and extended the maturity
date by approximately five months. The amendment for the Series 3 Notes accelerated the maturity date from October 2022 to December
2018 and revised certain formulaic provisions contained in the underlying embedded conversion features. As a result of the modifications
made to the Series 1 Notes, Series 2 Notes and Series 3 Notes, we accounted for the amendments as a note extinguishment which
gave rise to the $0.4 million non-cash loss in 2017.
Liquidity
and Capital Resources
Historical
Capital Resources
As
of June 30, 2018, our principal source of liquidity consisted of cash deposits of $22,608. 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
source of cash to date has been proceeds from the issuances of notes, warrants and unsecured loans, the terms of which are further
described below. See “—Funding Requirements and Outlook” below for the outstanding balances on our convertible
notes.
2018
Private Placement
From
July 9, 2018 through August 3, 2018, the Company entered into subscription agreements with certain accredited investors, pursuant
to which the Company, in a private placement (the “2018 Private Placement”), agreed to issue and sell to the purchasers
Units, each consisting of (i) 1 share of our common stock and (ii) a warrant to purchase 1 share of common stock at an initial
exercise price of $3.00 per share (the “2018 Warrants”). The initial closing of the 2018 Private Placement was consummated
on July 9, 2018, and to date, we have issued and sold an aggregate of 295,200 Units to the purchasers, for total gross proceeds
to us of approximately $738,000, inclusive of the advances received in June 2018 in the amount of $188,000, before deducting offering
expenses.
In
connection with the 2018 Private Placement, the Company has agreed to issue and sell to accredited investors up to a maximum of
4,000,000 Units (the “Maximum Offering”) at a price of $2.50 per Unit for total gross proceeds of up to $10,000,000.
If the 2018 Private Placement is over-subscribed, the Company may, in its discretion sell up to an additional 600,000 Units (the
“Over-Allotment”) to cover such over subscriptions. If the Company issues the Maximum Offering amount, 4,000,000 shares
of common stock (4,600,000 shares of common stock if the Over-Allotment is exercised) would be issuable upon exercise of the 2018
Warrants. The Company may conduct any number of additional closings so long as the final closing occurs on or before October 4,
2018, which period may be extended by the Company for up to 90 days as long as the amount of Units sold does not exceed the Maximum
Offering and, if applicable, the Over-Allotment. Under the purchase agreement, the Company has agreed to use the net proceeds
from the 2018 Private Placement to pay the outstanding principal and accrued interest on our Series 3 Notes if such notes do not
convert prior to maturity, to pay the principal on its unsecured term loans, for research and development, clinical studies, legal
fees and sales and marketing expenses, as well as working capital and general corporate purposes. The Company has granted the
purchasers indemnification rights with respect to its representations, warranties and agreements under the purchase agreement.
In
connection with the 2018 Private Placement, the Company entered into registration rights agreements with each of the purchasers
pursuant to which the Company agreed to file a registration statement with the SEC covering the resale of the shares of common
stock sold in the 2018 Private Placement and the shares of common stock issuable upon exercise of the 2018 Warrants. The Company
has agreed to file such registration statement within 75 days of the final closing of the 2018 Private Placement. Each registration
rights agreement includes customary indemnification rights in connection with the registration statement.
The
2018 Warrants are exercisable beginning on the date of issuance and will expire on July 9, 2023, five years from the date of the
first closing. Prior to expiration, subject to the terms and conditions set forth in the 2018 Warrants, the holders of such 2018
Warrants may exercise the 2018 Warrants for shares of common stock by providing notice to the Company and paying the exercise
price per share for each share so exercised.
In
connection with the 2018 Private Placement, the brokers will receive a cash commission equal to 10% of the gross proceeds from
the sale of the Units. In addition to the brokers’ commission, we will issue 5-year warrants to the brokers to purchase
an amount of common stock equal to 10% of the total amount of shares sold in the 2018 Private Placement at an exercise price of
$3.45 per share.
Series
3 Notes and Warrants
From
October 2017 to May 2018, the Company issued convertible notes (the “Series 3 Notes”) in an aggregate principal amount
of $1.5 million that bear interest at a fixed rate of 8% per annum and warrants to purchase shares of the Company’s capital
stock (the “Series 3 Warrants”). The Company initially entered into a subscription agreement with certain accredited
investors and closed an initial private placement of the Series 3 Notes in October 2017. In December 2017, the Company and holders
of a majority in aggregate principal amount of the Series 3 Notes entered into an amended and restated subscription agreement
to amend the terms of the Series 3 Notes and Series 3 Warrants (the “Series 3 Amendment”). The Series 3 Notes require
us to repay the principal and accrued and unpaid interest thereon at December 31, 2018. If the Company consummates an equity round
of financing resulting in more than $3 million in gross proceeds before December 31, 2018 (the “Series 3 Qualified Financing”),
the outstanding principal and accrued and unpaid interest on the Series 3 Notes shall automatically convert into the securities
issued by us in the Series 3 Qualified Financing equal to the outstanding principal and accrued interest on the Series 3 Notes
divided by 80% of the price per share of the securities issued by us in the Series 3 Qualified Financing. If a Change of Control
(as defined below) occurs prior to the earlier of a Series 3 Qualified Financing or December 31, 2018, the Series 3 Notes would,
at the election of the holders of a majority of the outstanding principal amount of the Series 3 Notes, either become payable
on demand as of the closing date of the Change of Control or become convertible into shares of Common Stock immediately prior
to the Change of Control 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 (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 the Change of
Control (the date of any such conversion of the Series 3 Notes in connection with a Change of Control or Series 3 Qualified Financing,
is referred to herein as the “Series 3 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 our assets.
Prior to the Series
3 Amendment, if the Company raised more than $3,000,000 in an equity financing before October 4, 2022, the outstanding principal
and accrued and unpaid interest on the Series 3 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 Series 3 Notes divided by $2.25 or (ii) the outstanding principal and accrued interest on the Series 3 Notes multiplied
by 1.25, divided by the price paid per security in such financing.
The Series 3 Notes
are unsecured. If we fail to complete a Series 3 Qualified Financing by December 31, 2018, the Series 3 Notes will be immediately
due and payable on such date.
Each Series 3 Warrant
grants the holder the option to purchase shares of our capital stock equal to the number of shares of capital stock of the Company
received by the holder upon conversion of the Series 3 Notes at a per share exercise price equal to (i) the actual per share price
of the securities issued in the Series 3 Qualified Financing if the Series 3 Notes convert in connection with such a qualified
financing or (ii) the price at which the Series 3 Noted converted if they converted in connection with a Change of Control. The
Series 3 Warrants are exercisable commencing on the Series 3 Conversion Date and expiring on the five year anniversary of that
date. The exercise price and number of the shares of our capital stock issuable upon exercising the Series 3 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.
Series 2 Notes and Warrants
In August 2017, the
Company entered into a subscription agreement and issued interest free promissory notes in an aggregate principal amount of $253,000
to certain accredited investors. In November 2017, the Company and each subscriber amended the notes. In March 2018, the Company
and each subscriber entered into a written consent to amend and restate the promissory notes (as amended, the “Series 2
Notes”) and to amend the subscription agreement to replace the form of warrant agreement annexed to the subscription agreement
(the “Replacement Warrant”) and to provide for the issuance of an additional warrant (the “Additional Warrant”).
In March 2018 the Company issued and delivered the Series 2 Notes, the Replacement Warrants and the Additional Warrants to the
subscribers.
Series 1 Notes and Warrants
From November 2016
to June 2017, the Company issued convertible promissory notes in an aggregate principal amount of $1.6 million that bear interest
at a fixed rate of 8% per annum and warrants to purchase shares of the Company’s capital stock. In June 2017 and November
2017, the terms of such notes (as amended, the “Series 1 Notes”) and warrants (as amended, the “Series 1 Warrants”)
were amended.
Effective as of July
2, 2018, the Company entered into the Series 1 Notes Debt Conversion Agreement with each Series 1 Subscriber and the Series 2
Notes Debt Conversion Agreement with each Series 2 Subscriber (the “Conversion Agreements”) to (i) convert the outstanding
principal and accrued and unpaid interest (the “Outstanding Balance”) under the Notes into shares of the Company’s
common stock based on the Outstanding Balance divided by $1.80 per share (the “Conversion Shares”); (ii) cancel and
extinguish the Notes; and (iii) amend and restate the Warrants to make them immediately exercisable upon conversion, at a per
share exercise price equal to $1.80 per share. As consideration for the early conversion of the Notes, the Company issued each
Subscriber a new warrant (the “Payment Warrants”), exercisable for up to the number of shares of common stock equal
to the number of Conversion Shares received by such Subscriber; at a per share exercise price of $1.80 per share. The Payment
Warrants are exercisable commencing on July 2, 2018, and expire on November 21, 2021.
Pursuant to the Conversion
Agreements, $1,804,064 of the outstanding principal and interest of the Series 1 Notes was converted into 1,002,258 shares of
common stock and $259,297 of the outstanding principal and interest of the Series 2 Notes was converted into 114,053 shares of
common stock. As of the date hereof, 2,482,372 shares of common stock were issuable upon exercise of the Warrants and Payment
Warrants.
Unsecured Loans
We received cash gross
proceeds from an unsecured loan from a stockholder owning over 5% of the Company’s Common Stock, represented by a promissory
note for $115,000 in March 2018. The loan is interest free and requires that we repay the principal in full on the earlier of
the closing of an equity round of financing of the Company resulting in more than $3 million in gross proceeds or March 20, 2019.
In May 2018, we received
cash gross proceeds from unsecured loans represented by promissory notes in the amount of $168,000, of which $84,000 was from
a stockholder owning over 5% of the Company’s common stock. The loans are interest free and require that we repay the principal
in full on the earlier of the closing of an equity round of financing of the Company resulting in more than $5 million in gross
proceeds or May 17, 2019.
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.
Upon the completion
of the audit of our financial statements for the year ended December 31, 2017, and management’s assessment of our ability
to continue as a going concern, we concluded there was 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 fund our operating expenses.
As of June 30, 2018,
the outstanding principal and accrued and unpaid interest on the Series 1 Notes, Series 2 Notes and Series 3 Notes was $1,803,341,
$259,184 and $1,596,228, respectively. If we fail to complete the Series 3 Qualified Financing by December 31, 2018, the Series
3 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.
We have agreements
with the Wisconsin Alumni Research Foundation (“WARF”) and the Mayo Foundation for Medical Education and Research
(“Mayo”) that require us to make certain milestone and royalty payments.
Under a License Agreement
with WARF, as amended in February 2017 (the “WARF License”), we agreed to pay WARF $55,000 (representing a license
fee) upon the earliest to occur of the date we cumulatively raise at least $3 million in financing, which threshold was met, the
date of a change of control, or our revenue reaching a specified threshold amount, and to pay $65,000 (representing reimbursement
for costs incurred by WARF in maintaining the licensed patents) upon the earliest to occur of the date we cumulatively raise at
least $5 million in financing, the date of a change of control, or our revenue reaching a specified threshold amount. The initial
$55,000 payment was due on May 3, 2018 and was paid on April 22, 2018. 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.
Under an Amended and
Restated exclusive license and development agreement between Mayo and NeuroOne, dated May 25, 2017 (the “Mayo Development
Agreement”), NeuroOne issued Mayo NeuroOne Shares pursuant to a subscription agreement (which were converted into 859,976
shares of common stock in the Acquisition), and NeuroOne agreed to pay Mayo a cash payment of $92,000. Following the Acquisition,
the rights and obligations under the Mayo Development Agreement transferred to the Company. In November 2017, the Company and
Mayo amended the Mayo Development Agreement to extend the deadline of the cash payment to December 31, 2017, which the Company
paid in December 2017. Additionally, we have agreed to pay Mayo a royalty equal to a single-digit percentage of our product sales
pursuant to the Mayo Development Agreement.
Our existing cash
and cash equivalents will not be sufficient to fund our operating expenses throughout fiscal 2018. To continue to fund operations,
we will need to secure additional funding. 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
FDA approval and then a level of product sales adequate to support our cost structure. We cannot assure you that we will ever
be profitable or generate positive cash flow from operating activities.
Cash Flows
The following is a
summary of cash flows for each of the periods set forth below.
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(1,294,859
|
)
|
|
$
|
(913,166
|
)
|
Net cash used in investing activities
|
|
|
(55,000
|
)
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
1,346,000
|
|
|
|
812,511
|
|
Net decrease in cash
|
|
$
|
(3,859
|
)
|
|
$
|
(100,655
|
)
|
|
|
|
|
|
NeuroOne
LLC
|
|
|
NeuroOne, Inc.
|
|
|
NeuroOne,
LLC and
NeuroOne,
Inc.
2016
Combined
|
|
|
|
For the
year ended
December 31,
2017
|
|
|
For the
period
January 1,
2016
to October 26,
2016
|
|
|
For
the period
October 7,
2016
to
December 31, 2016
|
|
|
For the
period
January 1,
2016
to
December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(2,108,073
|
)
|
|
$
|
—
|
|
|
$
|
(175,783
|
)
|
|
$
|
(175,783
|
)
|
Net cash used by investing activities
|
|
|
(91,709
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
1,704,032
|
|
|
|
—
|
|
|
|
698,000
|
|
|
|
698,000
|
|
Net (decrease) increase in cash
|
|
$
|
(495,750
|
)
|
|
$
|
—
|
|
|
$
|
522,217
|
|
|
$
|
522,217
|
|
Net cash used in operating activities
Net cash used in operating
activities was $1.3 million for the six months ended June 30, 2018, which consisted of a net loss of $2.6 million partially offset
primarily by non-cash interest, stock-based compensation for non-employee services, note discount amortization, revaluation of
premium debt conversion derivative and warrant liabilities and short-term notes extinguishment, totaling $0.7 million in the aggregate,
and an increase in accrued expenses of $0.6 million.
Net cash used in operating
activities was $0.9 million for the six months ended June 30, 2017, which consisted of a net loss of $2.0 million partially offset
primarily by non-cash interest, discount amortization, warrant issuance costs and revaluation of premium debt conversion derivative
on the Series 1 Notes totaling $0.6 million in the aggregate, accrued expenses of $0.4 million, and prepaid expenses of $47,000.
Net cash used in operating
activities was $2.1 million for the year ended December 31, 2017, which consisted primarily of a net loss of $5.1 million partially
adjusted by non-cash interest, non-cash gain on convertible note and short-term note extinguishments, stock-based compensation,
discount amortization, intangible asset amortization and revaluation of premium debt conversion derivative and warrant liability
totaling $2.1 million in the aggregate, accrued expenses of $0.8 million, and prepaid expenses of $46,677.
Net cash used in operating
activities was $0.2 million for the year ended December 31, 2016, which consisted of a net loss of $0.3 million combined with
a decrease in prepaid expenses of $53,823, partially offset by non-cash interest, discount amortization, and warrant issuance
costs of $82,822, intangible asset amortization of $7,740 combined with an increase in accrued expenses and accounts payable of
$72,452.
Net cash used by investing activities
Net cash used by investing
activities was $55,000 for the six months ended June 30, 2018 and consisted of the payment owed under the terms of the 2017 WARF
Agreement for the purchase of a patent license for research and development. There was no cash used for investing activities during
the six months ended June 30, 2017.
Net cash used by investing
activities was $91,709 for the year ended December 31, 2017 and consisted of the payment owed under the terms of the Mayo Agreement
for the purchase of a patent license for research and development. There was no cash used for investing activities during the
year ended December 31, 2016.
Net cash provided by financing activities
Net cash provided
by financing activities was $1.3 million for the six months ended June 30, 2018, which consisted of net proceeds received upon
the issuance of the Series 3 Notes and Warrants of $0.9 million, proceeds from unsecured loans of $0.3 million and advances related
to the 2018 Private Placement in the amount of $0.2 million during the six month period.
Net cash provided
by financing activities was $0.8 million for the six months ended June 30, 2017, which consisted of $0.9 million in net proceeds
received upon the issuance of the Series 1 Notes and Warrants during the six month period partially offset by the $50,000 repayment
of a short-term unsecured loan.
Net cash provided
by financing activities was $1.7 million for the year ended December 31, 2017, which consisted of $1.8 million in net proceeds
received upon the issuance of the notes during the year ended December 31, 2017 partially offset by the $50,000 repayment of a
short-term unsecured loan.
Net cash provided
by financing activities was $0.7 million for the year ended December 31, 2016, which consisted of $0.6 million in net proceeds
received upon the issuance of the Series 1 Notes during the fourth quarter of 2016 and proceeds of $50,000 received from a short-term
unsecured loan.
Critical Accounting Policies and Significant
Judgments and Estimates
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
prospectus, 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.
|
As of June 30,
2018, December 31, 2017 and 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 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 years ended December 31, 2017 or 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 December 31, 2017, we had not impaired any long-lived assets.
Debt Issuance Costs
Debt issuance costs
are recorded as a reduction of the notes. Amortization of debt issuance costs is calculated using the straight-line method over
the term of the 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 be comprised 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
We issued warrants
to purchase equity securities in connection with the issuance of convertible promissory notes. We account for these warrants as
a liability at fair value when the number of shares is not fixed and determinable and when 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 consolidated statements of operations. We adjust
the liability for changes in fair value until the earlier of the exercise or expiration of the warrants, amendment of warrant
terms that no longer require liability treatment, 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 change in fair value of the warrant liability while outstanding is recognized in the consolidated
statements of operations.
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 in the consolidated statements of operations at each reporting period while outstanding.
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
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,
warrants and convertible promissory notes 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 year ended December 31, 2017 and for the period from October
7, 2016 to December 31, 2016 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 year ended December 31, 2017 and for the period from October 7, 2016 to December 31, 2016.
The LLC was a single-member
LLC for which no units were outstanding. Accordingly, earnings per share is not presented for the LLC.
Common Stock Valuation Methodology
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.
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:
|
●
|
our financial condition and operating results, including our projected results;
|
|
|
|
|
●
|
our stage of development and business strategy;
|
|
|
|
|
●
|
the financial condition and operating results of comparable publicly owned companies;
|
|
|
|
|
●
|
worldwide economic conditions;
|
|
|
|
|
●
|
our recent securities transactions; and
|
|
|
|
|
●
|
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.
During the three and six months ended June
30, 2018, there were no material changes to our critical accounting policies or estimates disclosed herein.
Recent Accounting Pronouncements
In May 2017, the FASB
issued Accounting Standards Update (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 and six month period ended June 30, 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 (“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, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating
the requirements of this new guidance and have not yet determined its impact on our consolidated financial statements.
In June 2018, the
FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
(ASU 2018-07), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services
from nonemployees. An entity should generally apply the requirements of Topic 718 to nonemployee awards except in circumstances
where there is specific guidance on inputs to an option pricing model and the attribution of cost. ASU 2018-07 specifies that
Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed
in a grantor’s own operations by issuing share-based payment awards. The guidance also clarifies that Topic 718 does not
apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with
selling goods or services to customers as part of a contract accounted for under ASC 606, Revenue from Contracts with Customers
(ASC 606). This guidance is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted,
but no earlier than an entity’s adoption date of ASC 606. The Company is currently evaluating the impact of the new guidance
on its consolidated financial statements.
Off Balance Sheet Arrangements
None.
MARKET PRICE OF
AND DIVIDENDS ON REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has
been quoted on the OTCQB under the symbol “NMTC” since December 19, 2017. Prior to that date, our common stock had
been quoted on the OTC Pink from November 2012. Trading in stocks quoted on the OTCQB is often thin and is characterized by wide
fluctuations in trading prices due to many factors that may be unrelated or have little to do with a company’s operations or business
prospects. We cannot assure you that there will be a market for our common stock in the future.
The following table
presents the range of high and low closing bid information for our common equity for each full quarterly period from January 2016
to June 2018, as quoted by the OTCQB or OTC Pink Sheets, as applicable.
The over-the-counter
market quotations below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent
actual transactions. Prior to August 1, 2017, only one market maker was quoting the bid price information for our common stock
and only one bid price was available.
Calendar Quarter
|
|
High
|
|
|
Low
|
|
2016 First Quarter
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
2016 Second Quarter
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
2016 Third Quarter
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
2016 Fourth Quarter
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
2017 First Quarter
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
2017 Second Quarter
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
2017 Third Quarter
|
|
$
|
4.15
|
|
|
$
|
1.50
|
|
2017 Fourth Quarter
|
|
$
|
3.50
|
|
|
$
|
2.02
|
|
2018 First Quarter
|
|
$
|
4.22
|
|
|
$
|
3.50
|
|
2018 Second Quarter
|
|
$
|
6.00
|
|
|
$
|
3.55
|
|
Holders
As of August 8, 2018,
there were 68 holders of record of our common stock.
Dividends
We have not declared
or paid any cash dividends on our common stock and presently intend to retain our future earnings, if any, to fund the development
and growth of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table sets forth the aggregate
information of our equity compensation plans in effect as of December 31, 2017:
Plan
|
|
Number
of
securities to
be issued
upon exercise
of outstanding
options
and
rights
|
|
|
Weighted-
average
exercise
price
of
outstanding
options
and
rights
|
|
|
Number of
securities
remaining
available
for future
issuance
under
equity
compensation
plans
(excluding
securities
reflected in
first column
(1)
|
|
Equity compensation plans not approved by security holders
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Equity compensation plans approved by security holders
|
|
|
365,716
|
|
|
$
|
0.035
|
|
|
|
1,711,096
|
(2)
|
Totals
|
|
|
356,716
|
|
|
$
|
0.035
|
|
|
|
1,711,096
|
(2)
|
(1)
|
The number of shares of common
stock reserved for issuance under our 2017 Plan automatically increases on January 1st of each calendar year, starting
on January 1, 2018 through January 1, 2027, to an amount equal to 13% of the total number of fully-diluted shares of our
common stock as of December 31 of the preceding calendar year, or a lesser number of shares determined by our Board.
|
|
|
(2)
|
Consists of 1,300,000 shares reserved
under the 2017 Equity Incentive Plan and 411,096 shares remaining available for issuance under the 2016 Equity Incentive
Plan. Upon the closing of the Acquisition, we no longer granted awards under the 2016 Equity Incentive Plan, and all awards
are granted under the 2017 Equity Incentive Plan.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
DIRECTORS AND EXECUTIVE
OFFICERS
Directors and Executive Officers
Our Board of Directors
is divided into three classes. Members of each class serve staggered three-year terms. The following table provides information
as to each person who is, as of the filing hereof, a director and/or executive officer of the Company:
Name
|
|
Position(s)
|
|
Age
|
David Rosa
|
|
Class II Director, Chief Executive Officer, and President
|
|
54
|
Mark Christianson
|
|
Vice President, Business Development and Marketing
|
|
51
|
Thomas Bachinski
|
|
Chief Development Officer
|
|
57
|
Suraj Kalia
|
|
Class III Director
|
|
46
|
Jeffrey Mathiesen
|
|
Class III Director
|
|
57
|
Paul Buckman
|
|
Class I Director
|
|
62
|
No Family Relationships
There is no family
relationship between any director and executive officer or among any directors or executive officers.
Business Experience and Background of Directors and Executive
Officers
David Rosa
Mr. Rosa has served as the Chief Executive
Officer, President and a director of the Company since July 2017 and as Chief Executive Officer and a director of our wholly-owned
subsidiary, NeuroOne, Inc., since October 2016. From November 2009 to November 2015, Mr. Rosa served as the chief executive officer
and president of Sunshine Heart, Inc., a publicly-held early-stage medical device company. From 2008 to November 2009, Mr. Rosa
served as chief executive officer of Milksmart, Inc., a company that specializes in medical devices for animals. From 2004 to
2008, Mr. Rosa served as the vice president of global marketing for cardiac surgery and cardiology at St. Jude Medical.
Mr. Rosa’s qualifications
to serve on the Board include his senior leadership experience in the medical device industry. In addition, his day-to-day leadership
of the Company gives him critical insights into the Company’s operations, strategy and competition, and he facilitates the
Board’s ability to perform its oversight function. Throughout his career at the Company and his former positions, he has
demonstrated strong technical, strategic, and operational expertise, and he possesses in-depth knowledge of the medical device
industry on a global basis.
Mark Christianson
Mr. Christianson has
served as Vice President of Business Development and Marketing of the Company since July 2017 and of our wholly-owned subsidiary,
NeuroOne, Inc., since December 2016. From May 2013 to December 2016 Mr. Christianson served as North American sales manager for
Cortec Corporation. From February 2012 to May 2013 Mr. Christianson held the position of business development executive for Robert
Half International. From May 2009 to February 2012 Mr. Christianson held the position of regional sales manager for PMT Corporation.
Mr. Christianson studied accounting at Augsburg College in Minneapolis. Mr. Christianson brings 15 years of high performing sales,
sales management, and project management experience to the team. In addition, he also has contributed to the development and corporate
strategy of the Company given his experience in the neurological field and his close relationships with key epilepsy opinion leaders.
Thomas Bachinski
Mr. Bachinski has
served as Chief Development Officer of the Company since July 2017 and of our wholly-owned subsidiary, NeuroOne, Inc., since January
2017. From July 2015 to January 2017, Mr. Bachinski served as the vice president of research and development/engineering at Caerus
Corporation, a privately held medical device company developing products for both the human medical and animal veterinarian industries.
In December 2014, Mr. Bachinski founded FutureWorks Innovative Engineering where technology commercialization strategies are developed
and executed for a variety of clients across the medical device industry. Prior to FutureWorks, Mr. Bachinski was vice president
of research and development and director of the advanced concept development group at Empi, Inc., developing and commercializing
a portfolio of neuro-stimulation devices and technologies. He holds a Master’s degree in Engineering and an MBA. We believe
that Mr. Bachinski’s extensive engineering background and accomplishments in technology commercialization in the neurological
market space will bring key engineering solutions and insight into our future product portfolio under development and future commercialization
efforts, if approved.
Suraj Kalia
Mr. Kalia has served
as a member of our Board since August 2017 and as a director of our wholly-owned subsidiary, NeuroOne, Inc., since March 2017.
He currently serves as a managing director and senior research analyst at Northland Capital Markets, where he covers the medical
technology sector, after rejoining the firm in August 2012. His previous positions include managing director and senior medical
device analyst at Rodman & Renshaw Capital Group, senior vice president at Madison Williams and Company LLC, senior research
analyst at Piper Jaffray Companies, and project manager at Entegris, Inc. as part of the Business Development & Engineering
groups.
Mr. Kalia has served
as a member of the Advisory Board of Levitronix, LLC from 2009 until its acquisition by Thoratec Corporation in 2011. He has more
than 18 years of experience working in the financial and health care industries. Mr. Kalia has also served as an Adjunct Professor
of Finance and taught MBA level courses on Investment Theory and Mergers & Acquisitions at University of St. Thomas.
Mr. Kalia holds the
Chartered Financial Analyst (CFA) designation. He received a Master’s of Business Administration degree in Finance from
the University of St. Thomas in Minneapolis, a Bachelor’s degree in Chemical Engineering from the Indian Institute of Technology
in Bombay, India and a Master’s degree in Chemical Engineering from Stevens Institute of Technology in Hoboken, N.J.
We believe that Mr.
Kalia’s extensive background in the financial and medtech industry bring important practical experience from a financial
and strategic perspective. In addition, his engineering background enables him to provide key insights with respect to the Company’s
product development strategy.
Jeffrey Mathiesen
Mr. Mathiesen has
served as a member of the Board of the Company since August 2017 and as a director of our wholly-owned subsidiary, NeuroOne, Inc.,
since April 2017. He currently serves as the chief financial officer of Gemphire Therapeutics Inc., a publicly-held clinical-stage
biopharmaceutical company developing therapies for patients with cardiometabolic disorders, a position he has held since September
2015. From August 2015 to September 2015 he was a consultant to Gemphire. Prior to joining Gemphire, Mr. Mathiesen served as chief
financial officer of Sunshine Heart, Inc., a publicly-held early-stage medical device company, from March 2011 to January 2015.
From December 2005 to April 2010, Mr. Mathiesen served as vice president and chief financial officer of Zareba Systems, Inc.,
a manufacturer and marketer of medical products, perimeter fencing and security systems, which was purchased by Woodstream Corporation
in April 2010. Mr. Mathiesen has held executive positions with publicly traded companies dating back to 1993, including vice president
and chief financial officer positions. Mr. Mathiesen also serves as a director, audit committee chairman and nominating and governance
committee member of Sun BioPharma, Inc., a publicly traded clinical stage biopharmaceutical company that develops therapies for
pancreatic diseases. Mr. Mathiesen received a B.S. in Accounting from the University of South Dakota and is also a Certified Public
Accountant.
We believe that Mr.
Mathiesen brings financial insight and leadership and a wealth of experience in capital markets to the Board, as well as knowledge
of public company accounting and financial reporting requirements and familiarity with the life sciences industry.
Paul Buckman
Mr. Buckman has served
as Chairman of the Board of the Company since August 2017 and as Chairman of the Board of our wholly-owned subsidiary, NeuroOne,
Inc., since October 2016. He is currently the general manager of TMVR for LivaNova PLC. Prior to joining LivaNova, Mr. Buckman
served as chief executive officer of Conventus Orthopaedics, a Minnesota-based company specializing in peri-articular bone fracture
fixation, from September 2013 until March 2017. Mr. Buckman was chief executive officer of Sentreheart, Inc., a medical technology
company focused on closure of various anatomic structures, from February 2012 to September 2013. Previously, Mr. Buckman served
as chief executive officer and chairman of Pathway Medical Technologies, Inc., a medical device company focused on treatment of
peripheral arterial disease, from September 2008 to February 2012; as chief executive officer of Devax, Inc., a developer and
manufacturer of drug eluting stents, from December 2006 to September 2008; as president of the cardiology division of St. Jude
Medical, Inc., a publicly traded diversified medical products company, from August 2004 to December 2006; and as chairman of the
board of directors and chief executive officer of ev3, LLC, a Minnesota-based medical device company focused on endovascular therapies
that Mr. Buckman founded and developed into an $80 million business, from January 2001 to January 2004. Mr. Buckman has worked
in the medical device industry for over 30 years, including 10 years at Scimed Life Systems, Inc. and Boston Scientific Corporation,
a publicly traded medical device manufacturer, where he held several executive positions before becoming president of the cardiology
division of Boston Scientific in January 2000. Mr. Buckman also currently serves as a business advisory board member for Bio Star
Ventures, and as a director for Ablative Solutions, Inc., Aortica, Inc., Miromatrix, Inc. and Xtent Medical. He previously served
as a director of Conventus Orthopaedics, Caisson Interventional LLC, Velocimed, Inc., where he was a co-founder, EndiCor, Inc.,
Microvena, Inc., Sunshine Heart, Inc, a publicly-held early-stage medical device company, and Micro Therapeutics, Inc. Mr. Buckman
received a Master’s degree in Business Administration and Finance and a B.A. degree in Business Administration from Western
Michigan University.
We believe that Mr.
Buckman’s strong executive experience in medical device companies provides the Company with valuable guidance on product
development and operational matters.
Board and Committee Information
We are committed to
good corporate governance practices. These practices provide an important framework within which our Board and management pursue
our strategic objectives for the benefit of our stockholders.
Board Leadership Structure
Our Board is currently
chaired by Paul Buckman, who has authority, among other things, to call and preside over meetings of our Board, to set meeting
agendas and to determine materials to be distributed to the Board and, accordingly, has substantial ability to shape the work
of the Board. The positions of our chairman of the Board and Chief Executive Officer are presently separated. Separating these
positions allows our Chief Executive Officer, Mr. Rosa, to focus on our day-to-day business, while allowing Mr. Buckman to lead
the Board.
Role of the Board in Risk Oversight
Our Board does not
have a standing risk management committee, but rather administers this oversight function directly through their Board as a whole.
The Board’s risk oversight is administered primarily through the following:
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review and
approval of an annual business plan;
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review of
a summary of risks and opportunities at meetings of the Board;
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review of
business developments, business plan implementation and financial results;
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oversight
of internal controls over financial reporting; and
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review of
employee compensation and its relationship to our business plans.
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Structure and Operation of the Board
Because our common
stock is quoted on the OTCQB, the Company is not subject to the listing requirements of any securities exchange regarding committee
matters. We do not have standing compensation or nominating committees of our Board. However, the full Board performs all of the
functions of a standing compensation committee and nominating committee.
Nomination of Directors
Our Board does not
currently have a standing nominating committee, and thus we do not have a nominating committee charter. Due to our small size
and limited operations to date, the Board determined that it was appropriate for the entire Board to act as the nominating committee.
The full Board currently has the responsibility of selecting individuals to be nominated for election to the Board. Board candidates
are identified by existing directors or members of management. The Board considers the needs for the Board as a whole when identifying
and evaluating nominees and, among other things, considers diversity in background, age, experience, qualifications, attributes
and skills in identifying nominees, although it does not have a formal policy regarding the consideration of diversity. In 2017,
the Board did not employ a search firm or pay fees to other third parties in connection with identifying or evaluating Board nominee
candidates.
Compensation Committee Related Function
Our Board does not
currently have a standing compensation committee, and thus we do not have a compensation committee charter. The Company’s
executive compensation program is administered by the independent directors, who determine the compensation of the Chief Executive
Officer and, considering the recommendations of the Chief Executive Officer, other executive officers of the Company. In reviewing
the compensation of our executive officers, the independent directors consider published compensation surveys and current market
conditions.
Audit Committee Matters
The audit committee
reviews with management and the Company’s independent registered public accounting firm the Company’s financial statements,
the accounting principles applied in their preparation, the scope of the audit, any comments made by the independent accountants
upon the financial condition of the Company and its accounting controls and procedures and such other matters as the audit committee
deems appropriate. The audit committee’s charter is available on our website,
www.neurooneinc.com
, under Investors
— Corporate Governance.
The audit committee
currently consists of three directors: Mr. Buckman (chair), Mr. Kalia and Mr. Mathiesen. The Board has determined that each of
Mr. Buckman, Mr. Kalia and Mr. Mathiesen is “independent” under Nasdaq independence standards. Additionally, the Board
has determined that each of Mr. Mathiesen and Mr. Buckman qualifies as an “audit committee financial expert” as that
term is defined in rules promulgated by the SEC. The designation of an “audit committee financial expert” does not
impose upon such persons any duties, obligations or liabilities that are greater than those generally imposed on each of them
as a member of the audit committee and the Board, and such designation does not affect the duties, obligations or liabilities
of any other member of the audit committee or the Board.
The functions of the
audit committee include:
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Selecting our
independent auditors;
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Reviewing the
results and scope of the audit and other services provided by our independent auditors;
and
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Reviewing and
evaluating our audit and control functions.
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Code of Business Conduct and Ethics
Our Board has adopted
a code of business conduct and ethics that applies to all of our employees, officers and directors, including our Chief Executive
Officer and other executive officers. We intend to disclose future amendments to certain provisions of our code of business conduct
and ethics, or waivers of these provisions in public filings.
Corporate Governance Guidelines
Our Board has adopted
Corporate Governance Guidelines that set forth expectations for directors, director independence standards, Board structure and
functions and other policies for the governance of the Company.
Involvement in Certain Legal Proceedings
To our knowledge,
our directors and executive officers have not been involved in any of the following events during the past ten years:
1.
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any bankruptcy petition filed by or against such person or any business of which such person
was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
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2.
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any conviction in a criminal proceeding or being subject to a pending criminal proceeding
(excluding traffic violations and other minor offenses);
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3.
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being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated,
of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement
in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities
activities;
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4.
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being found by a court of competent jurisdiction in a civil action, the SEC or the Commodity
Futures Trading Commission to have violated a Federal or state securities or commodities law, and the judgment has not been
reversed, suspended, or vacated;
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5.
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being subject of, or a party to, any Federal or state judicial or administrative order, judgment
decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state
securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies,
or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
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6.
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being subject of or party to any sanction or order, not subsequently reversed, suspended,
or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or persons associated with a member.
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EXECUTIVE COMPENSATION
Summary Compensation Table
The following table
shows the compensation earned or received during 2017 and 2016 by each of our named executive officers for the years indicated
(as determined pursuant to the SEC’s disclosure requirements for executive compensation in Item 402 of Regulation S-K),
as well as Mr. Samad, who served as the Chief Executive Officer of Original Source Entertainment from March 6, 2014 until his
resignation from such position upon the closing of the Acquisition. Compensation paid to Messrs. Rosa, Bachinski and Christianson
prior to the consummation of the Acquisition was paid by our accounting predecessor in the Acquisition, NeuroOne.
Name and Principal Position
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Salary
($)
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Bonus
($)
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Stock Awards
($)
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All Other Compensation ($)
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Total
($)
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Dave Rosa,
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2017
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356,667
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131,600
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1,400
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(1)
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6,098
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(2)
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495,765
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Chief Executive Officer and President
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2016
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75,000
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—
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—
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2,898
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(3)
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77,898
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Amer Samad,
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2017
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—
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—
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—
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—
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—
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Former
Chief Executive Officer
(4)
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2016
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—
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—
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—
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—
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—
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Thomas Bachinski,
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2017
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211,750
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56,595
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7,220
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(5)
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798
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(6)
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276,363
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Chief Development Officer
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2016
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—
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—
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—
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—
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—
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Mark Christianson,
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2017
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200,000
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35,000
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2,510
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(1)
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6,498
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(7)
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244,008
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Vice President, Business Development
and Marketing
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2016
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16,667
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—
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—
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830
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(8)
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17,497
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(1)
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In October 2016,
NeuroOne issued founders’ shares to seven individuals, including Mr. Rosa and Mr.
Christianson. Such individuals did not pay the purchase price for the shares. The purchase
price owed by the seven individuals for the founders’ shares under their respective
subscription agreements totaling $9,050 was recorded as share subscription receivable
in 2016. The receivable was forgiven by NeuroOne prior to the Acquisition in June 2017.
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(2)
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Represents an $800
per month car allowance that Mr. Rosa received from January 2017 until August 4, 2017,
the effective date of his amended employment agreement, and a $498 life insurance premium
paid in 2017.
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(3)
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Represents an $800
per month car allowance commencing in October 2016 and a $498 life insurance premium
paid in 2016.
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(4)
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Mr. Samad was Original
Source Entertainment’s sole executive officer and director prior to the Acquisition
and did not receive any compensation for his services rendered to Original Source Entertainment
in 2017 or 2016.
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(5)
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Pursuant to his
offer letter with NeuroOne, Mr. Bachinski was granted a restricted stock award under
the 2016 Plan for 12,666 NeuroOne Shares (215,453 shares, as converted based on the Exchange
Ratio), which was subject to certain performance vesting conditions related to product
development and was fully vested in 2017. The amount reported reflects the grant date
fair value of such restricted stock award.
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(6)
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Represents life
insurance premium paid in 2017.
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(7)
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Represents a $500
per month car allowance and a $498 life insurance premium paid in 2017.
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(8)
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Represents a $500
per month car allowance, which was received for December 2016, and a $330 life insurance
premium paid in 2016.
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Narrative to Summary Compensation Table
Our Board sets the
annual compensation for our named executive officers. As we are a development-stage company with only three employees and commenced
our operational efforts in 2016, we have not hired a compensation consultant and do not currently target a specific competitive
position or a specific mix of compensation among base salary, bonus or long-term incentives. Except for car allowances provided
to Mr. Rosa and Mr. Christianson and payment of a portion of the premiums for life, medical and disability insurance for all employees,
NeuroOne, Inc. did not, and we do not, provide perquisites or personal benefits to our named executive officers.
In October 2016, NeuroOne
entered into an employment agreement with Mr. Rosa that governed the terms of his employment with us through August 3, 2017. Pursuant
to the agreement, Mr. Rosa was entitled to an annual base salary of $300,000 per year, and was eligible to earn an annual performance
bonus of up to 40% of his base salary as determined by our Board. Mr. Rosa was also entitled to an equity award equal to 14% of
the fully diluted equity of NeuroOne.
Following the Acquisition,
in August 2017, the Company entered into a new employment agreement with Mr. Rosa (the “Amended Employment Agreement”)
that established his base salary of at least $376,000 (which shall be reviewed by the Board at least annually) and an annual performance
bonus of up to 50% of his base salary, as determined by the Board. Mr. Bachinski’s and Mr. Christianson’s 2017 base
salaries of $231,000 and $200,000, respectively, and annual performance bonuses of up to 25% of base salary were established in
offer letters negotiated in connection with their hiring. Taking into account his contributions to the Company, Mr. Bachinski’s
annual performance bonus target was increased from his offer letter to 35% of base salary for 2017.
In connection with
the Acquisition, the named executive officers of NeuroOne were appointed as officers of the Company.
The Board approved
payment of Mr. Rosa’s 2017 bonus at 70% of target and authorized Mr. Rosa, in his discretion, to approve and pay 2017 bonuses
to Mr. Bachinski and Mr. Christianson of up to 70% of target. In approving discretionary bonus payments, the Board considered
the achievement of various corporate objectives related to company financing goals, regulatory submission preparation, research
and development, adhering to budget and establishing an advisory board.
For fiscal 2018, our
Board approved a 2% cost of living increase in the base salaries of our officers and made no adjustment to the officers’
annual performance bonus targets. For 2018, the Board has set various corporate objectives relating to company financing goals,
regulatory submissions, hiring additional staff and certain research and development milestones that it will consider in approving
bonus payments for 2018.
Employment Agreements
We have an employment
agreement with our Chief Executive Officer, Mr. Rosa. We have entered into offer letters with each of our other executive officers,
as described above. Each of our named executive officers has also executed our standard form of proprietary information, inventions
assignment and non-competition agreement.
Mr. Rosa’s Amended
Employment Agreement was effective on August 4, 2017, continues through the third anniversary and automatically renews for an
additional one-year period at the end of the initial term and each anniversary thereafter, provided that Mr. Rosa notifies the
Board of such renewal at least 30 days prior to the expiration of the initial term or any renewal terms and the Board does not
notify Mr. Rosa of its intention not to renew the Amended Employment Agreement. Under the terms of the Amended Employment Agreement,
Mr. Rosa is entitled to an initial annual base salary at least equal to $376,000, reviewed at least annually, and is eligible
to earn an annual performance bonus of up to 50% of his base salary, as determined by our Board.
The Amended Employment
Agreement also entitles Mr. Rosa to, among other benefits, the following compensation: (i) an opportunity to participate in any
stock option, performance share, performance unit or other equity based long-term incentive compensation plan commensurate with
the terms and conditions applicable to other senior executive officers; and (ii) participation in welfare benefit plans, practices,
policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription,
dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent
available generally or to our other senior executive officers. Mr. Rosa is entitled to receive a target award value, determined
in accordance with the policies and practices generally available to other senior executive officers, for an annual cash bonus
and if determined by the Board or a committee of the Board, a long-term incentive bonus. Mr. Rosa is entitled to retain all shares
of Common Stock he held as of the commencement date. Mr. Rosa is also additionally entitled to certain severance benefits.
Pursuant to the Amended
Employment Agreement, regardless of the manner in which Mr. Rosa’s service terminates, Mr. Rosa is entitled to receive amounts
earned during his term of service, including salary and other benefits.
The Company is permitted
to terminate Mr. Rosa’s employment for the following reasons: (i) death or disability, (ii) Termination for Cause (as defined
below) or (iii) for any other reason or no reason.
Mr. Rosa is permitted
Termination for Good Reason (as defined below) of his employment. In addition, he may terminate his employment upon written notice
to the Company 30 days prior to the effective date of such termination.
In the event of Mr.
Rosa’s death during the employment period or a termination due to his disability, his beneficiaries or legal representatives
shall be provided the sum of (i) any annual base salary earned, but unpaid, for services rendered to the Company on or prior to
the date on which the employment period ends and (ii) certain other benefits provided for in the employment agreement (the
“
Unconditional
Entitlements
”
).
In the event of Mr.
Rosa’s Termination for Cause by the Company or the termination of Mr. Rosa’s employment as a result of his resignation
other than a Termination for Good Reason, Mr. Rosa shall be provided the only Unconditional Entitlements.
In the event of a
Termination for Good Reason by Mr. Rosa or the exercise by the Company of its termination rights to terminate Mr. Rosa other than
by Termination for Cause, death or disability, Mr. Rosa shall be provided the Unconditional Entitlements and, subject to such
officer signing and delivering to the Company and not revoking a general release of claims in favor of the Company and certain
related parties, the Company shall provide Mr. Rosa a severance amount equal to the aggregate annual base salary he would have
earned from the day after his termination date through the end of the employment period and a prorated portion of his cash bonus
for the year in which the termination date occurs, provided, however, in no event would the severance amount be less than 12 months
or more than 18 months of his annual base salary, continued health insurance coverage for 12 months following his termination
date, provided that such coverage shall cease if Mr. Rosa becomes eligible to receive health insurance coverage from another employer
group health plan, vesting of all stock options in accordance with the stock option award documents, subject to the same conditions
that would be applicable to Mr. Rosa if he remained employed through the end of the employment period and continued vesting of
equity awards in accordance with the terms of the award agreements, provided, however, Mr. Rosa would have 90 days from the termination
date to exercise any vested options (the “Conditional Benefits”).
In the event of a
change in control during the employment period or within two years after a change in control, if the Company terminates Mr. Rosa
other than due to Mr. Rosa’s death or disability or a Termination for Cause, or Mr. Rosa effects a Termination for Good
Reason, the Company will pay to Mr. Rosa, in a lump sum in cash within 30 days after the termination date, the aggregate of: (i)
the Unconditional Entitlements; and (ii) the amount equal to the product of 1.5 times the sum of (y) Mr. Rosa’s annual base
salary, and (z) the greater of the target bonus for the then current fiscal year under the Plans or any successor annual bonus
plan and the average annual bonus paid to or for the benefit of Mr. Rosa for the prior three full years (or any shorter period
during which Mr. Rosa had been employed by the Company). In addition, the Company shall provide Mr. Rosa the Conditional Benefits
minus Mr. Rosa’s severance amount defined therein.
Under the Amended
Employment Agreement, “Termination for Cause” means a termination of Mr. Rosa’s employment by the
Company due to (A) an act or acts of dishonesty undertaken by Mr. Rosa and intended to result in substantial gain or personal
enrichment to Mr. Rosa at the expense of the Company, (B) unlawful conduct or gross misconduct that is willful and deliberate
on Mr. Rosa’s part and that, in either event, is materially injurious to the Company, (C) the conviction of Mr. Rosa of,
or Mr. Rosa’s entry of a no contest or nolo contendere plea to, a felony, (D) breach by Mr. Rosa of his fiduciary obligations
as an officer or director of the Company, (E) a persistent failure by Mr. Rosa to perform his duties and responsibilities of his
employment under the Amended Employment Agreement, which failure is not remedied by Mr. Rosa within 30 days after his receipt
of written notice from the Company of such failure, provided, however, the Company is not obligated to provide written notice
and opportunity to cure if the action or conduct is not reasonably susceptible to cure; or (F) material breach of any terms and
conditions of the Amended Employment Agreement, any contract or agreement between Mr. Rosa and the Company, or of any Company
policy, or of any statutory duty he owes to the Company, which breach has not been cured by Mr. Rosa within ten days after written
notice thereof to Mr. Rosa from the Company.
Under the Amended
Employment Agreement, “Termination for Good Reason” means a termination of Mr. Rosa’s employment by
Mr. Rosa within 30 days of the Company’s failure to cure, in accordance with the procedures set forth below, any of the
following events: (A) a reduction in his annual base salary as in effect immediately prior to such reduction by more than 10%
without his written consent, unless such reduction is made pursuant to an across the board reduction applicable to all senior
executives of the Company; (B) a material reduction in his duties, position and responsibilities as in effect immediately prior
to such reduction without his written consent; provided, however, that a mere change in title or reporting relationship following
a Change in Control by itself will not constitute “Good Reason” for Executive’s resignation, and further provided
that the acquisition of the Company and subsequent conversion of the Company to a division or unit of the acquiring entity will
not by itself result in a “reduction” of duties, position or responsibility; or (C) a material breach of any material
provision of the Amended Employment Agreement by the Company. A termination by Mr. Rosa shall not be treated as a Termination
for Good Reason if Mr. Rosa consented in writing to the occurrence of the event giving rise to the claim of Termination for Good
Reason or unless Mr. Rosa shall have delivered a written notice to the Board within 45 days of Mr. Rosa’s having actual
knowledge of the occurrence of one of such events stating that Mr. Rosa intends to terminate his employment by Termination for
Good Reason and specifying the factual basis for such termination, and such event, if capable of being cured, shall not have been
cured within 21 days of the receipt of such notice.
Outstanding Equity Awards at Fiscal
Year-End
None of our named
executive officers held any stock that has not vested, unexercised stock options or other equity incentive plan awards as of December
31, 2017.
2016 Equity Incentive Plan
In October 2016 NeuroOne’s
board of directors adopted and its stockholders approved the 2016 Equity Incentive Plan (the “2016 Plan”). In connection
with the Acquisition, we assumed the 2016 Plan. As of December 31, 2017, there were outstanding options to purchase a total of
365,716 shares of common stock issued and outstanding under the 2016 Plan and 215,453 restricted shares of common stock granted
under the 2016 Plan. We anticipate that no additional awards will be granted under the 2016 Plan, and all awards will be granted
under the 2017 Equity Incentive Plan (the “2017 Plan”).
Description of the Plan
The 2016 Plan authorizes
the Board to provide incentive compensation in the form of stock options, stock appreciation rights and restricted stock and stock
units. Under the 2016 Plan, the Board is authorized to issue up to 992,266 shares of common stock.
The Board, or a duly
authorized committee thereof, has the authority to administer the 2016 Plan. The Board may also delegate to one or more of its
officers the authority to (i) designate officers and employees to be recipients of certain stock awards, and (ii) determine the
number of shares of common stock to be subject to such stock awards. Subject to the terms of the 2016 Plan, the Board or the authorized
committee, referred to therein as the plan administrator, determines recipients, dates of grant, the numbers and types or combination
of types of stock awards to be granted and the terms and conditions of the stock awards, including the vesting schedule applicable
to a stock award. Subject to the limitations set forth below, the plan administrator also determines the exercise price, strike
price or purchase price of awards granted and the types of consideration to be paid for the award.
The plan administrator
has the authority to modify outstanding awards under the 2016 Plan. Subject to the terms of the 2016 Plan, the plan administrator
has the authority to reduce the exercise, purchase or strike price of any outstanding stock award, cancel any outstanding stock
award in exchange for new stock awards, cash or other consideration, or take any other action that is treated as a repricing under
generally accepted accounting principles, with the consent of any adversely affected participant.
Stock Options
The plan administrator
determines the term of stock options granted under the 2016 Plan, up to a maximum of 10 years. Unless the terms of an optionholder’s
stock option agreement provides otherwise, if an optionholder’s service relationship with the Company, or any of its affiliates,
ceases for any reason other than disability, death or cause, the optionholder may generally exercise any vested options for a
period of three months following the cessation of service. The option term may be extended in the event that exercise of the option
following such a termination of service is prohibited by applicable securities laws. If an optionholder’s service relationship
with the Company or any of its affiliates ceases due to disability or death, or an optionholder dies within a certain period following
cessation of service, the optionholder or a beneficiary may generally exercise his or her options for a period of 12 months in
the event of disability and 18 months in the event of death. In the event of a termination for cause, options generally terminate
upon the termination date of the individual. In no event may an option be exercised beyond the expiration of its term.
Acceptable consideration
for the purchase of Common Stock issued upon the exercise of a stock option is determined by the plan administrator and may include
(1) cash, check, bank draft or money order, (2) the tender of shares of common stock previously owned by the optionholder, (3)
a net exercise of the option if it is a non-qualified stock option, or NSO, (4) a deferred payment or similar arrangement with
the optionholder, and (5) other legal consideration approved by the plan administrator.
Unless the plan administrator
provides otherwise, options generally are not transferable except by will, the laws of descent and distribution, or pursuant to
a domestic relations order. An optionholder may designate a beneficiary, however, who may exercise the option following the optionholder’s
death. The Board may also permit transfer of options to a trust provided certain conditions are met.
The aggregate fair
market value, determined at the time of grant, of the common stock with respect to Incentive Stock Options, or ISOs, that are
exercisable for the first time by an optionholder during any calendar year under all of the Company’s stock plans may not
exceed $100,000. Options or portions thereof that exceed such limit are generally treated as NSOs. No ISO may be granted to any
person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of the Company’s total combined
voting power or that of any of the Company’s affiliates unless (i) the option exercise price is at least 110% of the fair
market value of the stock subject to the option on the date of grant, and (ii) the term of the ISO does not exceed five years
from the date of grant.
Changes in Capital Structure
In the event that
there is a specified type of change in the Company’s capital structure, such as a stock split or recapitalization, appropriate
adjustments will be made to (1) the class and maximum number of shares reserved for issuance under the 2016 Plan, (2) the class
and maximum number of shares by which the share reserve may increase automatically each year, (3) the class and maximum number
of shares that may be issued upon the exercise of ISOs, (4) the class and number of shares and exercise price, strike price, or
purchase price, if applicable, of all outstanding stock awards.
Other Corporate Transactions
In the event of certain
specified significant corporate transactions, the plan administrator has the discretion to take any of the following actions with
respect to stock awards:
|
●
|
arrange
for the assumption, continuation or substitution of stock awards outstanding under the
2016 Plan by a surviving or acquiring entity or parent company;
|
|
●
|
arrange
for the reacquisition or repurchase rights held by the Company to the surviving or acquiring
entity or parent company;
|
|
●
|
accelerate
the vesting of the stock award and provide for its termination prior to the effective
time of the corporate transaction;
|
|
●
|
terminate
unexercised stock awards held by participants no longer employed by the Company and that
have not been assumed, continued or substituted; or
|
|
●
|
make a payment
equal to the excess of (i) the value of the property the participant would have received
upon exercise of the stock award over (ii) the exercise price applicable to the stock
award.
|
The Company’s
plan administrator is not obligated to treat all stock awards, even those that are of the same type, in the same manner.
Under the 2016 Plan,
a corporate transaction is generally the consummation of (1) a sale or other disposition of all or substantially all of the Company’s
consolidated assets, (2) a sale or other disposition of at least 90% of the Company’s outstanding securities, (3) a merger,
consolidation or similar transaction following which the Company is not the surviving corporation, or (4) a merger, consolidation
or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately
prior to such transaction are converted or exchanged into other property by virtue of the transaction.
The plan administrator
may provide, in an individual award agreement or in any other written agreement between a participant and the Company that the
stock award will be subject to additional acceleration of vesting and exercisability in the event of a change of control transaction.
For example, certain of the Company’s employees may receive an award agreement that provides for vesting acceleration upon
the individual’s termination without cause or resignation for good reason (including a material reduction in the individual’s
base salary, duties, responsibilities or authority, or a material relocation of the individual’s principal place of employment
with the Company) in connection with a change of control. Under the 2016 Plan, a change of control is generally (1) the acquisition
by a person or entity of more than 50% of the Company’s combined voting power other than by merger, consolidation or similar
transaction; (2) a consummated merger, consolidation or similar transaction immediately after which the Company’s stockholders
cease to own more than 50% of the combined voting power of the surviving entity; or (3) a consummated sale, lease or license or
other disposition of all or substantially of the Company’s consolidated assets.
2017 Equity Incentive Plan
In April 2017, the
Board of Directors of Original Source Entertainment adopted and the stockholders approved the 2017 Plan. The 2017 Plan is designed
to provide a vehicle under which a variety of stock-based and other awards can be granted to the Company’s employees, consultants
and directors, which will align the interests of award recipients with those of our stockholders, reinforce key goals and objectives
that help drive stockholder value, and attract, motivate and retain experienced and highly qualified individuals who will contribute
to the Company’s financial success. The Board believes that the 2017 Plan will serve a critical role in attracting and retaining
high caliber employees, consultants and directors essential to our success and in motivating these individuals to strive to meet
our goals.
Shares Available Under the Plan
The 2017 Plan authorizes
the compensation committee or Board to provide incentive compensation in the form of stock options, stock appreciation rights,
restricted stock and stock units, performance shares and units and other stock-based awards. Under the 2017 Plan, the Board is
authorized to issue up to 1,300,000 shares, subject to adjustment as provided below.
Section 162(m) Tax Considerations
Section 162(m) of
the Internal Revenue Code generally denies a corporate tax deduction for annual compensation exceeding $1 million paid to the
principal executive officer, the principal financial officer or to any of the three other most highly compensated officers of
a publicly held corporation. Accordingly, to the extent compensation income recognized by any such individual during a year as
a result of an award made under the 2017 Plan (either alone or when added to other compensation paid to any of such individual
during such year) exceeds $1 million, then the amount in excess of $1 million will not be deductible by us.
Description of the 2017 Plan
Authorized Shares.
The
maximum number of shares of common stock that may be issued under the 2017 Plan is 1,300,000 shares. In addition, the number of
shares of common stock reserved for issuance under our 2017 Plan automatically increases on January 1
st
of each
calendar year, starting on January 1, 2018 through January 1, 2027, to an amount equal to 13% of the total number of fully-diluted
shares of our common stock as of December 31 of the preceding calendar year, or a lesser number of shares determined by our Board.
The maximum number of shares of common stock that may be issued on the exercise of incentive stock options under the 2017 Plan
is 1,300,000.
Shares subject to
awards granted under the 2017 Plan that expire or terminate without being exercised in full, or that are paid out in cash rather
than in shares, do not reduce the number of shares available for issuance under the 2017 Plan. Additionally, shares become available
for future grant under the 2017 Plan if they were issued under stock awards under the 2017 Plan and if we repurchase them or they
are forfeited. This includes shares used to pay the exercise price of a stock award or to satisfy the tax withholding obligations
related to a stock award.
Plan Administration.
Our
Board, or a duly authorized committee of our Board, will administer the 2017 Plan. Our Board may also delegate to one or more
of our officers the authority to (1) designate employees (other than officers) to receive specified stock awards and (2) determine
the number of shares subject to such stock awards. Under the 2017 Plan, our Board has the authority to determine and amend the
terms of awards and underlying agreements, including:
|
●
|
the exercise,
purchase, or strike price of stock awards, if any;
|
|
●
|
the number
of shares subject to each stock award;
|
|
●
|
the vesting
schedule applicable to the awards, together with any vesting acceleration; and
|
|
●
|
the form
of consideration, if any, payable on exercise or settlement of the award.
|
Under the 2017 Plan,
the Board also generally has the authority to effect, with the consent of any adversely affected participant:
|
●
|
the reduction
of the exercise, purchase, or strike price of any outstanding award;
|
|
●
|
the cancellation
of any outstanding award and the grant in substitution therefore of other awards, cash,
or other consideration; or
|
|
●
|
any other
action that is treated as a repricing under generally accepted accounting principles.
|
Section 162(m)
Limits.
At such time as necessary for compliance with Section 162(m) of the Code, no participant may be granted stock
awards covering more than 1,300,000 shares of our common stock under the 2017 Plan during any calendar year pursuant to stock
options, stock appreciation rights, and other stock awards whose value is determined by reference to an increase over an exercise
price or strike price of at least 100% of the fair market value of the common stock on the date of grant. Additionally, under
the 2017 Plan, in a calendar year, no participant may be granted a performance stock award covering more than 1,300,000 shares
of common stock or a performance cash award having a maximum value in excess of $1 million. These limitations are designed to
allow us to grant compensation that will not be subject to the $1,000,000 annual limitation on the income tax deductibility of
compensation paid to a covered executive officer imposed by Section 162(m) of the Code.
Stock Options.
Incentive
stock options and nonstatutory stock options are granted under stock option agreements adopted by the plan administrator. The
plan administrator determines the exercise price for stock options, within the terms and conditions of the 2017 Plan, provided
that the exercise price of a stock option generally cannot be less than 100% of the fair market value of the common stock on the
date of grant. Options granted under the 2017 Plan vest at the rate specified in the stock option agreement as determined by the
plan administrator.
Restricted Stock
Unit Awards.
Restricted Stock Units (“RSUs”) are granted under restricted stock unit award agreements adopted
by the plan administrator. RSUs may be granted in consideration for any form of legal consideration that may be acceptable to
our Board and permissible under applicable law. An RSU may be settled by cash, delivery of stock, a combination of cash and stock
as deemed appropriate by the plan administrator, or in any other form of consideration set forth in the RSU agreement. Additionally,
dividend equivalents may be credited in respect of shares covered by an RSU. Except as otherwise provided in the applicable award
agreement, RSUs that have not vested will be forfeited once the participant’s continuous service ends for any reason.
Restricted Stock
Awards.
Restricted stock awards are granted under restricted stock award agreements adopted by the plan administrator.
A restricted stock award may be awarded in consideration for cash, check, bank draft or money order, past services to us, or any
other form of legal consideration that may be acceptable to our Board and permissible under applicable law. The plan administrator
determines the terms and conditions of restricted stock awards, including vesting and forfeiture terms. If a participant’s
service relationship with us ends for any reason, we may receive any or all of the shares of common stock held by the participant
that have not vested as of the date the participant terminates service with us through a forfeiture condition or a repurchase
right.
Stock Appreciation
Rights.
Stock appreciation rights are granted under stock appreciation grant agreements adopted by the plan administrator.
The plan administrator determines the purchase price or strike price for a stock appreciation right, which generally cannot be
less than 100% of the fair market value of our common stock on the date of grant. A stock appreciation right granted under the
2017 Plan vests at the rate specified in the stock appreciation right agreement as determined by the plan administrator.
Performance Awards.
The
2017 Plan permits the grant of performance-based stock and cash awards that may qualify as performance-based compensation that
is not subject to the $1,000,000 limitation on the income tax deductibility imposed by Section 162(m) of the Code. Our compensation
committee may structure awards so that the stock or cash will be issued or paid only following the achievement of certain pre-established
performance goals during a designated performance period.
The performance goals
that may be selected include one or more of the following: (i) earnings (including earnings per share and net earnings); (ii)
earnings before interest, taxes and depreciation; (iii) earnings before interest, taxes, depreciation and amortization; (iv) earnings
before interest, taxes, depreciation, amortization and legal settlements; (v) earnings before interest, taxes, depreciation, amortization,
legal settlements and other income (expense); (vi) earnings before interest, taxes, depreciation, amortization, legal settlements,
other income (expense) and stock-based compensation; (vii) earnings before interest, taxes, depreciation, amortization, legal
settlements, other income (expense), stock-based compensation and changes in deferred revenue; (viii) earnings before interest,
taxes, depreciation, amortization, legal settlements, other income (expense), stock-based compensation, other non-cash expenses
and changes in deferred revenue; (ix) total stockholder return; (x) return on equity or average stockholder’s equity; (xi)
return on assets, investment, or capital employed; (xii) stock price; (xiii) margin (including gross margin); (xiv) income (before
or after taxes); (xv) operating income; (xvi) operating income after taxes; (xvii) pre-tax profit; (xviii) operating cash flow;
(xix) sales or revenue targets; (xx) increases in revenue or product revenue; (xxi) expenses and cost reduction goals; (xxii)
improvement in or attainment of working capital levels; (xxiii) economic value added (or an equivalent metric); (xxiv) market
share; (xxv) cash flow; (xxvi) cash flow per share; (xxvii) cash balance; (xxviii) cash burn; (xxix) cash collections; (xxx) share
price performance; (xxxi) debt reduction; (xxxii) implementation or completion of projects or processes (including, without limitation,
clinical trial initiation, new and supplemental indications for existing products, and product supply); (xxxiii) stockholders’
equity; (xxxiv) capital expenditures; (xxxv) debt levels; (xxxvi) operating profit or net operating profit; (xxxvii) workforce
diversity; (xxxviii) growth of net income or operating income; (xxxix) billings; (xl) bookings; (xli) employee retention; (xlii)
initiation of phases of clinical trials and/or studies by specific dates; (xliii) acquisition of new customers, including institutional
accounts; (xliv) customer retention and/or repeat order rate; (xlv) number of institutional customer accounts; (xlvi) budget management;
(xlvii) improvements in sample and test processing times; (xlviii) regulatory milestones; (xlix) progress of internal research
or clinical programs; (l) progress of partnered programs; (li) partner satisfaction; (lii) milestones related to samples received
and/or tests run; (liii) expansion of sales in additional geographies or markets; (liv) research progress, including the development
of programs; (lv) patient samples processed and billed; (lvi) sample processing operating metrics (including, without limitation,
failure rate maximums and reduction of repeat rates); (lvii) strategic partnerships or transactions (including in-licensing and
out-licensing of intellectual property); and (lviii) and to the extent that an award is not intended to constitute “qualified
performance-based compensation” under Section 162(m) of the Code, other measures of performance selected by the Board.
The performance goals
may be based on company-wide performance or performance of one or more business units, divisions, affiliates, or business segments,
and may be either absolute or relative to the performance of one or more comparable companies or the performance of one or more
relevant indices. Unless specified otherwise by the Board or committee (as applicable) (i) in the award agreement at the time
the award is granted or (ii) in such other document setting forth the performance goals at the time the performance goals are
established, the Board or committee (as applicable) will appropriately make adjustments in the method of calculating the attainment
of performance goals for a performance period as follows: (1) to exclude restructuring and/or other nonrecurring charges; (2)
to exclude exchange rate effects; (3) to exclude the effects of changes to generally accepted accounting principles; (4) to exclude
the effects of any statutory adjustments to corporate tax rates; (5) to exclude the effects of any “extraordinary items”
as determined under generally accepted accounting principles; (6) to exclude the dilutive effects of acquisitions or joint ventures;
(7) to assume that any business divested by the Company achieved performance objectives at targeted levels during the balance
of a performance period following such divestiture; (8) to exclude the effect of any change in the outstanding shares of common
stock of the Company by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger, consolidation,
spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common stockholders other
than regular cash dividends; (9) to exclude the effects of stock based compensation and the award of bonuses under the Company’s
bonus plans; (10) to exclude costs incurred in connection with potential acquisitions or divestitures that are required to be
expensed under generally accepted accounting principles; (11) to exclude the goodwill and intangible asset impairment charges
that are required to be recorded under generally accepted accounting principles; (12) to exclude the effect of any other unusual,
non-recurring gain or loss or other extraordinary item; and (13) to exclude the effects of the timing of acceptance for review
and/or approval of submissions to any regulatory body. In addition, subject to certain limitations, the Board or committee (as
applicable) retains the discretion to reduce or eliminate the compensation or economic benefit due on attainment of performance
goals and to define the manner of calculating the performance criteria it selects to use for such performance period. Partial
achievement of the specified criteria may result in the payment or vesting corresponding to the degree of achievement as specified
in the award agreement or the written terms of a performance cash award.
Other Stock Awards.
The
plan administrator may grant other awards based in whole or in part by reference to our common stock. The plan administrator will
set the number of shares under the stock award and all other terms and conditions of such awards.
Changes to Capital
Structure.
In the event there is a specified type of change in our capital structure, such as a stock split, reverse
stock split, or recapitalization, appropriate adjustments will be made to (1) the class and maximum number of shares reserved
for issuance under the 2017 Plan, (2) the class and maximum number of shares that may be issued on the exercise of incentive stock
options, (3) the class and maximum number of shares subject to stock awards that can be granted to a person in a calendar year
(as established under the 2017 Plan under Section 162(m) of the Code), and (4) the class and number of shares and exercise price,
strike price, or purchase price, if applicable, of all outstanding stock awards.
Corporate Transactions.
The
2017 Plan provides that in the event of certain specified significant corporate transactions, including: (1) a sale of all or
substantially all of our assets, (2) the sale or disposition of more than 90% of our outstanding securities, (3) the consummation
of a merger or consolidation where we do not survive the transaction, and (4) the consummation of a merger or consolidation where
we do survive the transaction but the shares of our Common Stock outstanding before such transaction are converted or exchanged
into other property by virtue of the transaction, unless otherwise provided in an award agreement or other written agreement between
us and the award holder, the administrator may take one or more of the following actions with respect to such stock awards:
|
●
|
arrange
for the assumption, continuation, or substitution of a stock award by a successor corporation;
|
|
●
|
arrange
for the assignment of any reacquisition or repurchase rights held by us to a successor
corporation;
|
|
●
|
accelerate
the vesting, in whole or in part, of the stock award and provide for its termination
before the transaction;
|
|
●
|
arrange
for the lapse, in whole or in part, of any reacquisition or repurchase rights held by
us;
|
|
●
|
cancel or
arrange for the cancellation of the stock award before the transaction in exchange for
a cash payment, or no payment, as determined by the Board; or
|
|
●
|
make a payment,
in the form determined by our Board, equal to the excess, if any, of the value of the
property the participant would have received on exercise of the awards before the transaction
over any exercise price payable by the participant in connection with the exercise.
|
The plan administrator
is not obligated to treat all stock awards or portions of stock awards, even those that are of the same type, in the same manner
and is not obligated to treat all participants in the same manner.
In the event of a
change in control, awards granted under the 2017 Plan will not receive automatic acceleration of vesting and exercisability, although
this treatment may be provided for in an award agreement. Under the 2017 Plan, a change in control is defined to include (1) the
acquisition by any person or company of more than 50% of the combined voting power of our then outstanding stock, (2) a merger,
consolidation, or similar transaction in which our stockholders immediately before the transaction do not own, directly or indirectly,
more than 50% of the combined voting power of the surviving entity (or the parent of the surviving entity), (3) a sale, lease,
exclusive license, or other disposition of all or substantially all of our assets other than to an entity more than 50% of the
combined voting power of which is owned by our stockholders, and (4) an unapproved change in the majority of the Board.
Transferability.
A
participant may not transfer stock awards under the 2017 Plan other than by will, the laws of descent and distribution, or as
otherwise provided under the 2017 Plan.
Plan Amendment
or Termination.
Our Board has the authority to amend, suspend, or terminate the 2017 Plan, provided that such action
does not materially impair the existing rights of any participant without such participant’s written consent. Certain material
amendments also require the approval of our stockholders. No incentive stock options may be granted after the tenth anniversary
of the date our Board adopted the 2017 Plan. No stock awards may be granted under the 2017 Plan while it is suspended or after
it is terminated.
Non-Employee Director Compensation
We have not historically
paid cash retainers or other cash compensation with respect to service on the Board, except for reimbursement of direct expenses
incurred in connection with the business of the Company. The Company granted stock options to its non-employee directors in connection
with their appointment to the Board under the 2016 Plan. Specifically, in April 2017, NeuroOne, Inc. granted an option to purchase
2,000 NeuroOne Shares (34,020 shares, as converted based on the Exchange Ratio) to each of Mr. Buckman, Mr. Kalia and Mr. Mathiesen,
at an exercise price of $0.59 per NeuroOne Share ($0.035 per share of our common stock). Mr. Rosa’s compensation as an executive
officer is set forth above in the Summary Compensation Table.” Mr. Samad, the sole officer and director of Original Source
Entertainment prior to the Acquisition, did not receive any compensation for services rendered to Original Source Entertainment.
The following table
provides compensation information for the fiscal year ended December 31, 2017 for each non-employee member of our Board.
Name
|
|
Option
Awards
($)
(1)
|
|
|
Total
($)
|
|
Paul Buckman
|
|
$
|
485
|
|
|
$
|
485
|
|
Suraj Kalia
|
|
$
|
485
|
|
|
$
|
485
|
|
Jeff Mathiesen
|
|
$
|
485
|
|
|
$
|
485
|
|
|
(1)
|
These amounts reflect
the aggregate grant date fair value of the options granted to our non-employee directors.
See Note 10 to our audited financial statements included in this prospectus.
|
On March 29, 2018,
our Board approved a Non-Employee Director Compensation Policy effective as of January 1, 2018 whereby our non-employee directors
will receive a mix of cash and share-based compensation intended to encourage non-employee directors to continue to serve on our
Board, further align the interests of the directors and stockholders, and attract new non-employee directors with outstanding
qualifications. Directors who are employees or officers of the Company do not receive any additional compensation for Board service.
Pursuant to this policy,
each of our non-employee directors will receive an annual retainer of $50,000, except that our non-executive chairman will receive
an annual retainer of $100,000. Additionally, the Chairman and members of our Audit Committee will receive an additional annual
payment of $12,500 and $5,000, respectively, and the Chairmen and members of each of our Compensation and Nominating and Corporate
Governance Committees, if any are formed in the future, will receive an additional annual payment of $10,000 and $4,000, respectively.
Such annual cash retainers will be earned beginning on the effective date of the policy but shall not be payable until the last
day of the fiscal quarter in which the Company consummates an equity financing wherein it receives at least $3 million in gross
cash proceeds. On the date of each annual stockholder meeting of the Company commencing with the 2019 annual meeting of stockholders,
each director shall receive an annual equity award with an aggregate value on the date of grant of $50,000, one third of which
will be in the form of an option and two thirds of which will be in the form of a restricted stock unit award, each of which will
vest in a series of 12 equal monthly installments subject to the director’s continued service. Newly appointed directors,
on the date of their appointment, will receive a pro rata equity award, reflecting a reduction for each month prior to the date
of grant that has elapsed since the preceding annual stockholder meeting.
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table
sets forth certain information, as of August 8, 2018, with respect to the beneficial ownership of the outstanding common stock
by (i) any holder of more than five (5%) percent; (ii) each of the Company’s executive officers and directors; and (iii)
the Company’s directors and executive officers as a group.
The table lists applicable
percentage ownership based on 9,456,505 shares of common stock outstanding as of August 8, 2018. In addition, the rules include
shares of our common stock issuable pursuant to the exercise of stock options and warrants that are either immediately exercisable
or exercisable within 60 days of August 8, 2018. These shares are deemed to be outstanding and beneficially owned by the person
holding those options for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding
for the purpose of computing the percentage ownership of any other person.
We have determined
beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities
to persons who possess sole or shared voting power or investment power with respect to those securities. Unless otherwise indicated,
the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially
owned by them, subject to applicable community property laws. Except as otherwise noted below, the address for persons listed
in the table is c/o NeuroOne Medical Technologies Corporation, c/o David Rosa, 10006 Liatris Lane, Eden Prairie, Minnesota 55347.
Name
and address of beneficial owner
|
|
Number of shares of common
stock beneficially owned
|
|
|
Percentage
of common stock beneficially owned
(1)
|
|
Greater than 5% Stockholders:
|
|
|
|
|
|
|
Wade
Fredrickson
(2)
4825 Suburban
Drive
Shorewood, Minnesota 55331
|
|
|
2,613,459
|
|
|
|
27.6
|
%
|
Mayo
Foundation for Medical Education and Research
(3)
200
First Street SW
Rochester, Minnesota 55905
|
|
|
859,
976
|
|
|
|
9.1
|
%
|
Lifestyle
Healthcare LLC
(4)
404 East 79th Street, Apt 28G
New York, New York 10075
|
|
|
865,279
|
(4)
|
|
|
9.1
|
%
|
Mohammed Jainal Buiyan
10605 SW 44
th
CT
Davie, FL 33328
|
|
|
722,291
|
(5)
|
|
|
7.4
|
%
|
FundRx NeuroOne Fund
PO Box 171305
Salt Lake City, UT 84117
|
|
|
683,850
|
(6)
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
Directors and Executive
Officers:
|
|
|
|
|
|
|
|
|
David Rosa
|
|
|
793,822
|
|
|
|
8.4
|
%
|
Paul Buckman
|
|
|
34,020
|
(7)
|
|
|
*
|
|
Suraj Kalia
|
|
|
34,020
|
(7)
|
|
|
*
|
|
Jeffrey Mathiesen
|
|
|
34,020
|
(7)
|
|
|
*
|
|
Thomas Bachinski
|
|
|
215,453
|
|
|
|
2.3
|
%
|
Mark Christianson
|
|
|
1,423,206
|
|
|
|
15.1
|
%
|
All Directors and Officers
as a Group (6 persons)
|
|
|
2,534,541
|
|
|
|
26.5
|
%
|
|
(1)
|
Based on based on
9,456,505 shares of common stock outstanding as of August 8, 2018
|
|
(2)
|
Based on Schedule
13D/A filed by Mr. Fredrickson on March 5, 2018. Mr. Fredrickson is our former Vice President
of Therapy and Product Development.
|
|
(3)
|
Mayo Clinic, a Minnesota
corporation, is the controlling corporation of Mayo Foundation for Medical Education
and Research. Mayo Clinic disclaims beneficial ownership of these shares.
|
|
(4)
|
Includes 37,600 shares issuable upon exercise of warrants.
|
|
(5)
|
Includes 447,624 outstanding shares, 232,142 shares issuable
upon exercise of warrants, and 42,525 shares issuable upon exercise of options.
|
|
(6)
|
Includes 227,950 outstanding shares and 455,900 shares
issuable upon exercise of warrants.
|
|
(7)
|
Consists of shares
issuable upon exercise of options.
|
* Less than 1%
CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
There have been no
transactions since January 1, 2016 to which NeuroOne, Inc. or the Company has been a participant in which the amount involved
exceeded or will exceed the lesser of $120,000 or 1% of the average of the Company’s total assets as of December 31, 2017,
and in which any of our directors, executive officers or holders of more than five percent of our capital stock, or any members
of their immediate family, had or will have a direct or indirect material interest, other than compensation arrangements which
are described under “Executive Compensation” and as described below.
To identify related
person transactions in advance, we rely on information supplied by our executive officers, directors and certain significant stockholders.
We maintain a written policy for the review, approval or ratification of related person transactions, and our Board or audit committee
reviews all related person transactions identified by us. The Board or audit committee approves or ratifies only those related
person transactions that are determined by it to be, under all of the circumstances, in the best interests of the Company and
its stockholders.
In addition, under
the Code of Business Conduct and Ethics, the Company’s employees, officers and directors are discouraged from entering into
any transaction that may cause a conflict of interest for the Company. In addition, they must report any potential conflict of
interest, including related person transactions, to their supervisor or the Chief Executive Officer. The Company adopted a Related
Persons Transactions Policy in January, 2018.
NeuroOne LLC Merger into NeuroOne,
Inc.
The LLC was formed
as a limited liability company in Minnesota on December 13, 2013 and merged with and into NeuroOne on October 27, 2016. The founder
and sole member of the LLC received, upon the effectiveness of the merger, in consideration for the cancellation of his membership
interests in the LLC, 5,000 NeuroOne Shares (85,051 shares, as converted based on the Exchange Ratio). The holders of NeuroOne
Shares, including David Rosa, our Chief Executive Officer and director, Mark Christianson, our Vice President of Marketing and
Sales, and Wade Fredrickson, our former Vice President of Therapy and Product Development, received, upon the effectiveness of
the Merger, one NeuroOne Share for every three NeuroOne Shares held pre-Merger.
NeuroOne, Inc. Founders Shares
In October 2016, prior
to the Merger, NeuroOne issued 301,670 NeuroOne Shares (5,131,514 shares, as converted based on the Exchange Ratio) as founders’
shares in a private placement to seven individuals (who were all accredited investors), including David Rosa, our Chief Executive
Officer and director, Mark Christianson, our Vice President of Marketing and Sales, and Wade Fredrickson, our former Vice President
of Therapy and Product Development. The value applied to the shares issued was $0.03 per NeuroOne Share ($0.00176361 per share,
as converted based on the Exchange Ratio) based on a valuation utilizing a weighted average market value of invested capital methodology.
In June 2017, the purchase price owed by the seven individuals for the founders’ shares under their respective subscription
agreements totaling $9,050 was forgiven by the Company in its entirety.
Stockholders Agreement
In connection with
the issuance of founders’ shares described above, NeuroOne entered into a stockholders agreement with the recipients of
founders’ shares, which was also executed by the recipients of NeuroOne Shares subsequent to the execution of the stockholders
agreement.
The stockholders agreement,
among other things, grants certain of our stockholders drag-along rights and preemptive rights with respect to NeuroOne Shares
issued in subsequent offerings. The parties to the stockholders agreement agreed to vote their NeuroOne Shares to ensure that
the board size and composition is as directed by the then current NeuroOne board of directors and designated David Rosa and Paul
Buckman as the initial directors of NeuroOne, Inc. The stockholders agreement, by its terms, terminated at the closing of the
Acquisition.
Issuance of Notes and Warrants
Between November 2016
and June 2017, NeuroOne issued convertible promissory notes and warrants to investors in a private placement, including, in June
2017, a convertible note for $50,000 and warrants to the founder and sole owner of the LLC. Between September 2017 and February
2018, the Company issued convertible promissory notes and warrants to investors in several private placements, including, in October
2017, a convertible note for $50,000 and warrants to the founder and sole owner of the LLC, and in February 2018, a convertible
note for $125,000 and warrants to Lifestyle Healthcare LLC, a greater than 5% stockholder of the Company. The convertible promissory
notes have an interest rate of 8% per year.
In May 2018, we received cash gross proceeds
from unsecured loans represented by promissory notes in the amount of $168,000, of which $84,000 was from Lifestyle Healthcare LLC, a stockholder
owning over 5% of the Company’s common stock. The loans are interest free and require that we repay the principal in full
on the earlier of the closing of an equity round of financing of the Company resulting in more than $5 million in gross proceeds
or May 17, 2019. In March 2018, we also received cash gross proceeds in the amount of $115,000 represented by a promissory note
from Lifestyle Healthcare LLC. The loan is also interest free and requires that
we repay the principal in full on the earlier of the closing of an equity round of financing of the Company resulting in more
than $3 million in gross proceeds or March 20, 2019.
Mayo Development Agreement
Pursuant to the Mayo
Development Agreement, we have agreed 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 the Mayo Foundation for Medical Education and Research (“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 the Mayo Principal Investigators in developing a minimally invasive device/delivery system and procedure for a minimally
invasive approach for the implantation of our cortical thin film flexible circuit technology developed by the Company, 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, to pay Mayo a cash payment of approximately $92,000 on the earlier of September
30, 2017 or the date we raise a minimum amount of financing. We did not make this payment by September 30, 2017 and breached this
provision of the Mayo Development Agreement. Mayo granted us an extension of this deadline to December 31, 2017, and we made this
payment within such extended deadline.
On May 25, 2017, NeuroOne
issued Mayo 50,556 NeuroOne Shares (859,976 shares, as converted based on the Exchange Ratio) pursuant to a Subscription Agreement,
pursuant to which Mayo is a holder of over 5% of our outstanding common stock. 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 will expire on May 25, 2037 and may be terminated by Mayo for cause or under certain circumstances.
The Placement Agent
HRA Capital has acted
as a placement agent for private placements by us and NeuroOne. HRA Capital is affiliated with two of our greater than 5% stockholders,
Chromium 24 LLC and Lifestyle Healthcare LLC. Pursuant to the engagement letter with such placement agent, to date, NeuroOne paid
the placement agent a cash fee of $113,610, agreed 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 shares purchased by certain investors in the transaction and agreed
to issue to the placement agent warrants to purchase shares of common stock (or common stock equivalents) in an amount equal to
10% of the shares purchased by certain investors in certain subsequent private placement transactions. The placement agent warrants
will be immediately exercisable and expire five years from the date of issuance.
We also received a
short-term unsecured loan for $50,000 in November 2016 from the placement agent. We incurred no fees or interest costs related
to such temporary loan and repaid it in full in February 2017.
Original Source Entertainment Related
Person Transactions
Prior to the Acquisition,
Original Source Entertainment’s administrative functions were operated from the offices of Mr. Samad, and Original Source
Entertainment did not pay Mr. Samad for the use of such space. Also, prior to the Acquisition, for the years ended December 31,
2017 and 2016, Original Source Entertainment received advances of $11,572 and $21,106 from a related party.
The Acquisition
Pursuant to the Merger
Agreement for the Acquisition whereby NeuroOne became a wholly-owned subsidiary of the Company, each holder of NeuroOne Shares
outstanding immediately prior to the closing received shares of common stock in exchange therefore based on the Exchange Ratio,
with all fractional shares rounded down to the nearest whole share. Accordingly, we issued 793,822, 1,423,206 and 2,840,731 shares
of common stock to Messrs. Rosa, Christianson and Fredrickson, respectively, options to purchase 34,020 shares of common stock
to each of Messrs. Buckman, Kalia and Mathiesen, members of our Board, and 859,976 shares of common stock to Mayo, a holder of
over 5% of our outstanding common stock. The Merger Agreement also provides that Mr. Rosa be appointed as a director of the Company
upon the closing of the Acquisition. Further, pursuant to the Merger Agreement, Mr. Samad (the majority owner of Original Source
Entertainment) tendered for cancellation 3,500,000 shares held by him as part of the conditions to closing.
Lock-Up Agreement
On March 1, 2018,
Wade Fredrickson, a greater than 5% stockholder of the Company, entered into a lock-up agreement with the Company in which he
agreed, subject to certain exceptions, not to offer, sell, transfer or otherwise dispose of the Company’s securities for
a period of 18 months following the effective date of the agreement.
Indemnification Agreements
Our certificate of
incorporation contains provisions limiting the liability of directors, and our bylaws provides that we indemnify each of our directors
to the fullest extent permitted under Delaware law. Our certificate of incorporation and bylaws also provide our Board with discretion
to indemnify our officers and employees when determined appropriate by the Board.
In addition, we have
entered into an indemnification agreement with our directors and our executive officers
Director Independence
We are not currently
listed on a national securities exchange that has requirements that a majority of our Board be independent. However, our Board
has undertaken a review of the independence of the directors and considered whether any director has a material relationship with
us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities applying
Nasdaq independence standards. As a result of this review, our Board has determined that, Messrs. Buckman, Kalia and Mathiesen,
representing three of our four directors, are “independent directors.” Mr. Rosa is not considered independent due
to his service as an executive officer of the Company.
ADDITIONAL INFORMATION
Federal securities
laws require us to file information with the SEC concerning our business and operations. Accordingly, we file annual, quarterly,
and special reports, and other information with the Commission. You can inspect and copy this information at the public reference
facility maintained by the SEC at 100 F Street, NE, Washington, D.C. 20549.
You can get additional
information about the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a web site (http://www.sec.gov) at which you can read or download our reports and other information.
We have filed with
the SEC a registration statement on Form S-1 under the Securities Act with respect to the securities being offered hereby. As
permitted by the rules and regulations of the SEC, this prospectus does not contain all the information set forth in the registration
statement and the exhibits and schedules thereto. For further information with respect to the Company and the securities offered
hereby, reference is made to the registration statement, and such exhibits and schedules. A copy of the registration statement,
and the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the SEC
at the addresses set forth above, and copies of all or any part of the registration statement may be obtained from such offices
upon payment of the fees prescribed by the SEC. In addition, the registration statement may be accessed at the SEC’s web
site.
DISCLOSURE OF COMMISSION
POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Company is incorporated
under the laws of the State of Delaware. Section 145 of the Delaware General Corporation Law provides that a Delaware corporation
may indemnify any persons who were, are, or are threatened to be made, parties to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person is or was an officer, director, employee or agent of such corporation, or
is or was serving at the request of such corporation as an officer, director, employee or agent of another corporation or enterprise.
The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding, provided that such person acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his or her conduct was illegal. A Delaware corporation
may indemnify any persons who were, are, or are threatened to be made, a party to any threatened, pending or completed action
or suit by or in the right of the corporation by reason of the fact that such person is or was a director, officer, employee or
agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees) actually and reasonably
incurred by such person in connection with the defense or settlement of such action or suit provided such person acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests except that no
indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation
must indemnify him or her against the expenses (including attorneys’ fees) actually and reasonably incurred.
The Company’s
certificate of incorporation provides for the indemnification of its directors to the fullest extent permitted under the Delaware
General Corporation Law. The Company’s bylaws provide for the indemnification of its directors and officers to the fullest
extent permitted under the Delaware General Corporation Law.
Section 102(b)(7)
of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary
duties as a director, except for liability for any:
|
●
|
transaction
from which the director derives an improper personal benefit;
|
|
●
|
act or omission
not in good faith or that involves intentional misconduct or a knowing violation of law;
|
|
●
|
unlawful
payment of dividends or redemption of shares; or
|
|
●
|
breach of
a director’s duty of loyalty to the corporation or its stockholders.
|
The Company’s
certificate of incorporation includes such a provision. Under the Company’s bylaws, expenses incurred by any director or
officers in defending any such action, suit or proceeding in advance of its final disposition shall be paid by the Company upon
delivery to it of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately
be determined that such director or officer is not entitled to be indemnified by the Company, as long as such undertaking remains
required by the Delaware General Corporation Law.
Section 174 of the
Delaware General Corporation Law provides, among other things, that a director who willfully or negligently approves of an unlawful
payment of dividends or an unlawful stock purchase or redemption, may be held liable for such actions. A director who was either
absent when the unlawful actions were approved or dissented at the time may avoid liability by causing his or her dissent to such
actions to be entered in the books containing minutes of the meetings of the board of directors at the time such action occurred
or immediately after such absent director receives notice of the unlawful acts.
As permitted by the
Delaware General Corporation Law, we have entered into indemnity agreements with each of our directors and executive officers,
that require us to indemnify such persons against any and all expenses (including reasonable attorneys’ fees), witness fees,
damages, judgments, fines, settlements and other amounts incurred (including expenses of a derivative action) in connection with
any action, suit or proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact
that such person is or was a director, an officer or an employee of the Company or any of its affiliated enterprises, provided
that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to our best interests
and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder.
There is at present
no pending litigation or proceeding involving any of the Registrant’s directors or executive officers as to which indemnification
is required or permitted, and the Company is not aware of any threatened litigation or proceeding that may result in a claim for
indemnification, other than the letter received by the Company in May 2017 from the former employer of Mark Christianson and Wade
Frederickson claiming, among other things, certain breaches of non-competition obligations and confidentiality and non-disclosure
obligations to such prior employer and federal and state law by virtue of such officers’ work for the Company. See “We
may be subject to damages resulting from claims that we, or our employees, have wrongfully used or disclosed alleged trade secrets
of our competitors or are in breach of non-competition or non-solicitation agreements with our competitors” under the “Risk
Factors” section in this prospectus.
The Company has an
insurance policy that covers its officers and directors with respect to certain liabilities, including liabilities arising under
the Securities Act or otherwise.
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person
of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against
public policy as expressed hereby in the Securities Act and we will be governed by the final adjudication of such issue.
LEGAL MATTERS
The validity of the
securities offered hereby have been passed upon for us by Sichenzia Ross Ference LLP, New York, New York.
EXPERTS
The consolidated financial
statements of NeuroOne Medical Technologies Corporation (“Successor”, formerly NeuroOne LLC (“Predecessor”))
as of December 31, 2017 and 2016 and for the year ended December 31, 2017 and for the periods from October 7, 2016 to December
31, 2016 (Successor) and from January 1, 2016 to October 26, 2016 (Predecessor) included in this Prospectus and in the Registration
Statement have been so included in reliance on the report of BDO USA, LLP, an independent registered public accounting firm (the
report on the consolidated financial statements contains an explanatory paragraph regarding the Company’s ability to continue
as a going concern) appearing elsewhere herein and in the Registration Statement, given on the authority of said firm as experts
in auditing and accounting.
NeuroOne Medical Technologies Corporation
INDEX TO FINANCIAL STATEMENTS
NeuroOne Medical Technologies Corporation
Report
of Independent Registered Public Accounting Firm
Stockholders
and Board of Directors
NeuroOne Medical Technologies Corporation
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of NeuroOne Medical Technologies Corporation (“Successor,”
formerly NeuroOne LLC (“Predecessor”)) as of December 31, 2017 and 2016, the related consolidated statements of operations,
stockholders’ deficit, and cash flows for the year ended December 31, 2017 and for the period from October 7, 2016 to December
31, 2016 (Successor) and from January 1, 2016 to October 26, 2016 (Predecessor), and the related notes (collectively referred
to as the “consolidated financial statements”). The Successor and Predecessor are collectively referred to as the
“Company”. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company at December 31, 2017 and 2016, and the results of their operations and their cash flows for the year ended
December 31, 2017 and for the period from October 7, 2016 to December 31, 2016 (Successor) and from January 1, 2016 to October
26, 2016 (Predecessor), in conformity with accounting principles generally accepted in the United States of America.
Going
Concern Uncertainty
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and
negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 2 to the consolidated financial statements. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We
have served as the Company's auditor since 2016.
Minneapolis,
MN
April
16, 2018
NeuroOne Medical Technologies Corporation
Consolidated Balance Sheets
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
26,467
|
|
|
$
|
522,217
|
|
Prepaid expenses
|
|
|
7,146
|
|
|
|
53,823
|
|
Total current assets
|
|
|
33,613
|
|
|
|
576,040
|
|
Intangible assets, net
|
|
|
216,372
|
|
|
|
180,890
|
|
Total assets
|
|
$
|
249,985
|
|
|
$
|
756,930
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
1,021,617
|
|
|
$
|
264,343
|
|
Short-term promissory notes and unsecured loan, net of discount
|
|
|
253,000
|
|
|
|
50,000
|
|
Convertible promissory notes, net and accrued interest
|
|
|
2,168,340
|
|
|
|
225,197
|
|
Premium conversion derivative
|
|
|
462,174
|
|
|
|
137,650
|
|
Total current liabilities
|
|
|
3,905,131
|
|
|
|
677,190
|
|
Warrant liability
|
|
|
1,381,465
|
|
|
|
345,960
|
|
Total liabilities
|
|
|
5,286,596
|
|
|
|
1,023,150
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 and 5,000,000 shares authorized as of December 31, 2017 and 2016, respectively; no shares issued or outstanding as of December 31, 2017 or 2016.
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.001 par value; 100,000,000 and 45,000,000 shares authorized as of December 31, 2017 and 2016, respectively; and 7,864,994 and 5,216,565 shares issued and outstanding as of December 31, 2017 and 2016, respectively.
|
|
|
7,865
|
|
|
|
31
|
|
Additional paid–in capital
|
|
|
280,320
|
|
|
|
119
|
|
Accumulated deficit
|
|
|
(5,324,796
|
)
|
|
|
(266,370
|
)
|
Total stockholders’ deficit
|
|
|
(5,036,611
|
)
|
|
|
(266,220
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
249,985
|
|
|
$
|
756,930
|
|
See accompanying notes to consolidated financial
statements
NeuroOne Medical Technologies Corporation
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
NeuroOne LLC
|
|
|
|
For the year ended December 31, 2017
|
|
|
For the period October 7, 2016 to December 31, 2016
|
|
|
For the period January 1, 2016 to October 26, 2016
|
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
2,336,988
|
|
|
$
|
182,667
|
|
|
$
|
6,657
|
|
Research and development
|
|
|
735,333
|
|
|
|
—
|
|
|
|
—
|
|
Total operating expenses
|
|
|
3,072,321
|
|
|
|
182,667
|
|
|
|
6,657
|
|
Loss from operations
|
|
|
(3,072,321
|
)
|
|
|
(182,667
|
)
|
|
|
(6,657
|
)
|
Interest expense
|
|
|
(1,395,138
|
)
|
|
|
(83,297
|
)
|
|
|
(11,947
|
)
|
Net change in fair value for the warrant liability and premium conversion derivative
|
|
|
(240,053
|
)
|
|
|
(406
|
)
|
|
|
|
|
Loss on convertible notes and short-term notes extinguishment, net
|
|
|
(350,914
|
)
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(5,058,426
|
)
|
|
$
|
(266,370
|
)
|
|
$
|
(18,604
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.77
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
Number of shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
6,610,072
|
|
|
|
4,421,092
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
NeuroOne Medical Technologies Corporation
Consolidated Statements of Changes in Stockholders’/Member
Deficit
|
|
NeuroOne
LLC
|
|
|
NeuroOne Medical Technologies Corporation (Successor)
|
|
|
|
|
|
|
(Predecessor)
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Member
|
|
|
Common Stock
|
|
|
Paid–In
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance at December 31, 2015
|
|
$
|
(14,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from January 1, 2016 through October 26, 2016
|
|
|
(18,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 26, 2016
|
|
$
|
(32,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 7, 2016
|
|
|
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Issuance of common shares to subscription holders
|
|
|
|
|
|
|
5,131,514
|
|
|
|
30
|
|
|
|
9,020
|
|
|
|
—
|
|
|
|
9,050
|
|
Issuance of common shares in connection with the merger with NeuroOne LLC
|
|
|
|
|
|
|
85,051
|
|
|
|
1
|
|
|
|
149
|
|
|
|
—
|
|
|
|
150
|
|
Subscription receivable
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,050
|
)
|
|
|
—
|
|
|
|
(9,050
|
)
|
Net loss from October 7, 2016 through December 31, 2016
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(266,370
|
)
|
|
|
(266,370
|
)
|
Balance at December 31, 2016
|
|
|
|
|
|
|
5,216,565
|
|
|
|
31
|
|
|
|
119
|
|
|
|
(266,370
|
)
|
|
|
(266,220
|
)
|
Issuance of stock in connection with intellectual license agreement
|
|
|
|
|
|
|
859,976
|
|
|
|
860
|
|
|
|
22,555
|
|
|
|
—
|
|
|
|
23,415
|
|
Issuance of restricted stock award
|
|
|
|
|
|
|
215,453
|
|
|
|
215
|
|
|
|
7,005
|
|
|
|
—
|
|
|
|
7,220
|
|
Transfer of shares in connection with merger
|
|
|
|
|
|
|
1,573,000
|
|
|
|
1,573
|
|
|
|
(1,573
|
)
|
|
|
—
|
|
|
|
—
|
|
Par value change in connection with merger
|
|
|
|
|
|
|
—
|
|
|
|
5,186
|
|
|
|
(5,186
|
)
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
69,574
|
|
|
|
—
|
|
|
|
69,574
|
|
Issuance of warrants
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61,496
|
|
|
|
—
|
|
|
|
61,496
|
|
Issuance of additional warrants in connection with short-term notes modification
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
117,280
|
|
|
|
—
|
|
|
|
117,280
|
|
Forgiveness of subscription receivable
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,050
|
|
|
|
—
|
|
|
|
9,050
|
|
Net loss
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,058,426
|
)
|
|
|
(5,058,426
|
)
|
Balance at December 31, 2017
|
|
|
|
|
|
|
7,864,994
|
|
|
$
|
7,865
|
|
|
$
|
280,320
|
|
|
$
|
(5,324,796
|
)
|
|
$
|
(5,036,611
|
)
|
See accompanying notes to consolidated financial statements
NeuroOne Medical Technologies Corporation
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
NeuroOne LLC
|
|
|
|
Year ended
December 31, 2017
|
|
|
For the period
October 7, 2016 to December 31, 2016
|
|
|
For the
period
January 1, 2016 to October 26,
2016
|
|
|
|
(Successor)
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,058,426
|
)
|
|
$
|
(266,370
|
)
|
|
$
|
(18,604
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
17,633
|
|
|
|
1,269
|
|
|
|
6,471
|
|
Stock-based compensation
|
|
|
76,794
|
|
|
|
—
|
|
|
|
—
|
|
Forgiveness of subscription
|
|
|
9,050
|
|
|
|
—
|
|
|
|
—
|
|
Non-cash interest on convertible promissory notes
|
|
|
115,867
|
|
|
|
4,356
|
|
|
|
—
|
|
Non-cash discount amortization on convertible and short-term promissory notes
|
|
|
1,242,031
|
|
|
|
41,514
|
|
|
|
—
|
|
Note issuance costs attributed to warrant liability and to convertible promissory note modification
|
|
|
38,119
|
|
|
|
36,546
|
|
|
|
—
|
|
Revaluation of premium conversion derivative
|
|
|
(17,962
|
)
|
|
|
86
|
|
|
|
—
|
|
Revaluation of warrant liability
|
|
|
258,015
|
|
|
|
320
|
|
|
|
—
|
|
Loss on convertible notes and short-term notes extinguishment
|
|
|
350,914
|
|
|
|
—
|
|
|
|
—
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
46,677
|
|
|
|
(53,823
|
)
|
|
|
—
|
|
Accounts payable
|
|
|
—
|
|
|
|
—
|
|
|
|
186
|
|
Accrued expenses
|
|
|
813,215
|
|
|
|
60,319
|
|
|
|
11,947
|
|
Net cash used in operating activities
|
|
|
(2,108,073
|
)
|
|
|
(175,783
|
)
|
|
|
—
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of intangible assets
|
|
|
(91,709
|
)
|
|
|
—
|
|
|
|
—
|
|
Net cash used in investing activities
|
|
|
(91,709
|
)
|
|
|
—
|
|
|
|
—
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible promissory notes and short-term notes
|
|
|
1,004,134
|
|
|
|
354,360
|
|
|
|
—
|
|
Proceeds from issuance of warrants associated with convertible promissory notes
|
|
|
777,490
|
|
|
|
345,640
|
|
|
|
—
|
|
Proceeds from issuance of warrants associated with short-term notes
|
|
|
61,496
|
|
|
|
—
|
|
|
|
—
|
|
(Repayment) proceeds from short term unsecured loan
|
|
|
(50,000
|
)
|
|
|
50,000
|
|
|
|
—
|
|
Issuance costs related to short-term note
|
|
|
(3,030
|
)
|
|
|
—
|
|
|
|
—
|
|
Issuance costs related to convertible promissory notes
|
|
|
(45,468
|
)
|
|
|
(26,306
|
)
|
|
|
—
|
|
Issuance costs related to warrants
|
|
|
(40,590
|
)
|
|
|
(25,694
|
)
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
1,704,032
|
|
|
|
698,000
|
|
|
|
—
|
|
Net (decrease) increase in cash
|
|
|
(495,750
|
)
|
|
|
522,217
|
|
|
|
—
|
|
Cash at beginning of period
|
|
|
522,217
|
|
|
|
—
|
|
|
|
—
|
|
Cash at end of period
|
|
$
|
26,467
|
|
|
$
|
522,217
|
|
|
$
|
—
|
|
Supplemental non-cash financing and investing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bifurcation of premium conversion derivative related to convertible promissory notes
|
|
$
|
342,486
|
|
|
$
|
137,564
|
|
|
$
|
—
|
|
Issuance of additional warrants in connection with short-term notes modification
|
|
$
|
117,280
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Issuance of common stock for intangible assets
|
|
$
|
—
|
|
|
$
|
150
|
|
|
$
|
—
|
|
Purchased intangible assets in accrued liabilities
|
|
$
|
30,000
|
|
|
$
|
182,009
|
|
|
$
|
—
|
|
Common stock issued for the purchase of intangible assets
|
|
$
|
23,415
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued issuance costs attributed to convertible promissory notes
|
|
$
|
57,037
|
|
|
$
|
11,163
|
|
|
$
|
—
|
|
Accrued issuance costs attributed to warrant liability
|
|
$
|
38,119
|
|
|
$
|
10,852
|
|
|
$
|
—
|
|
See accompanying notes to consolidated
financial statements
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements
NOTE
1 – Organization and Nature of Operations
NeuroOne Medical Technologies
Corporation (the “Company”, the “Successor” and NeuroOne LLC the “Predecessor”), 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 and its predecessor NeuroOne LLC (the
“LLC”) reflect operations of the Company for all periods presented prior to the date of Acquisition. NeuroOne was
formed on October 7, 2016 and acquired the LLC on October 27, 2016 (the “Merger”) as described more fully below.
The accompanying 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 currently raising capital to fund the development of its proprietary technology
and is seeking 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.
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
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. Par value stated capital amounts have not been retroactively
adjusted, and 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 of 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 and powers 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
. The holders of shares of common stock of NeuroOne exchanged,
upon the effectiveness of the Merger, three (3) shares pre-Merger of common stock of NeuroOne that they subscribed to and held
pre-Merger for one (1) share of common stock in the surviving entity.
NOTE 2 - Going Concern
The accompanying 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 $5,324,796 as December 31, 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 the
Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that
might result from the outcome of this condition. 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 December 31, 2017, the Company
has completed both a $253,000 short-term promissory note financing, a $1,625,120 convertible promissory note financing of a planned
$2.5 million subscription and a second $665,000 convertible note promissory financing of a planned $1.5 million subscription. The
Company does not have adequate liquidity to fund its operations throughout fiscal 2018 without raising additional funds. Management
intends to seek additional debt and/or equity financing to fund operations. However, if the Company is unable to raise additional
funds, or the Company’s anticipated operating results are not achieved, management believes planned expenditures may need
to be reduced in order to extend the time period that existing resources can fund the Company’s operations. If management
is unable to obtain the necessary capital, it may have to cease operations.
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
NOTE
3 – Summary of Significant Accounting Policies
Management’s Use of Estimates
The preparation of 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 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 December 31,
2017, the Company did not have any deposits in excess of federally insured amounts.
Prior to October 27, 2016, the Company did
not maintain a bank account. Any expenses incurred while the Company was organized as an LLC 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 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.
|
As
of December 31, 2017 and 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 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 derivative associated with the 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 years ended December 31, 2017 or 2016.
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
The
fair value of financial instruments measured on a recurring basis is as follows:
|
|
As of December 31, 2017
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
1,381,465
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,381,465
|
|
Premium conversion derivative
|
|
|
462,174
|
|
|
|
—
|
|
|
|
—
|
|
|
|
462,174
|
|
Total liabilities at fair value
|
|
$
|
1,843,639
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,843,639
|
|
|
|
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 debt conversion derivative measured at fair value
on a recurring basis using unobservable level 3 inputs for the year ended December 31, 2017 and period from October 7, 2016
to December 31, 2016:
|
|
2017
|
|
|
2016
|
|
Warrant liability
|
|
|
|
|
|
|
|
|
Balance as of beginning of period
|
|
$
|
345,960
|
|
|
$
|
—
|
|
Issuance of warrants in connection with convertible promissory notes
|
|
|
777,490
|
|
|
|
345,640
|
|
Change in fair value of warrant liability
|
|
|
258,015
|
|
|
|
320
|
|
Balance as of end of period
|
|
$
|
1,381,465
|
|
|
$
|
345,960
|
|
|
|
2017
|
|
|
2016
|
|
Premium debt conversion derivative
|
|
|
|
|
|
|
Balance as of beginning of period
|
|
$
|
137,650
|
|
|
$
|
—
|
|
Value assigned to the underlying derivative in connection with convertible notes
|
|
|
342,486
|
|
|
|
137,564
|
|
Change in fair value of premium debt conversion derivative
|
|
|
(17,962
|
)
|
|
|
86
|
|
Balance as of end of period
|
|
$
|
462,174
|
|
|
$
|
137,650
|
|
Intellectual Property
The
Company and the LLC have 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 and the LLC evaluate 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
and the LLC 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 December 31, 2017,
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 convertible promissory notes, which approximates
the effective interest method, and is recorded in interest expense in the accompanying consolidated statements of operations.
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
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 of convertible promissory notes (see Note 8 – Convertible Promissory Notes
and Warrant Agreements). 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 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 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 at each reporting period in the consolidated statements of operations (see Note 8 – Convertible Promissory
Notes and Warrant Agreements). The Company determined that the redemption feature under the convertible promissory notes qualified
as an embedded derivative and was separated from its debt host with regard to the convertible promissory notes issued in November
2016 through December 2017.
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 of all of the deferred tax asset will not be realized.
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 2017 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.
The LLC operated as a single-member LLC from
formation on December 12, 2013 until it was merged into NeuroOne on October 27, 2016 (see Note 11 – Stockholders’/Member
Deficit). 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
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.
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
Diluted earnings or loss per share of common
stock is computed similarly to basic earnings or loss per share except the weighted average shares outstanding are increased to
include additional shares from the assumed exercise of any common stock equivalents, if dilutive. The Company’s convertible
promissory notes, warrants 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 convertible promissory notes
utilizing the if-converted method was not applicable during the year ended December 31, 2017 and for the period from October 7,
2016 to December 31, 2016 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 year ended December 31, 2017 and for period from October 7, 2016 to December 31, 2016.
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 year ended December 31, 2017 and for the period from October 7, 2016 to December 31, 2016:
|
|
2017
|
|
|
2016
|
|
Warrants
|
|
|
189,750
|
(1)
|
|
|
388,886
|
|
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 occurs in the future.
|
The
LLC was a single-member LLC for which no units were outstanding. Accordingly, earnings per share is not presented for the LLC.
Recent
Accounting Pronouncements
In
November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2015-17,
Income Taxes
(Topic 740): Balance Sheet Classification of Deferred Taxes
(ASU 2015-17). The new guidance simplifies the presentation of
deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement
of financial position. ASU 2015-17 applies to all entities that present a classified statement of financial position. The current
requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single
amount is not affected by this ASU. For public entities, ASU 2015-17 is effective for financial statements issued for annual periods
beginning after December 15, 2016. The Company has adopted this standard for all periods presented. The adoption of this
standard did not have a material impact on the Company’s consolidated 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 new guidance is not expected to have a material impact on the Company’s consolidated financial
statements.
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
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.
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 $120,000
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,
the Company agreed to pay WARF $55,000 (representing a license fee) upon the earliest to occur of the date the Company cumulatively
raises at least $3 million in financing, the date of a change of control, or the Company’s revenue reaching a specified
threshold amount, and to pay $65,000 (representing reimbursement for costs incurred by WARF in maintaining the licensed patents)
upon the earliest to occur of the date the Company cumulatively raises at least $5 million in financing, the date of a change
of control, or the Company’s revenue reaching a specified threshold amount.
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 would submit a business
plan to WARF by February 1, 2018, which we submitted on January 18, 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.
Subsequent to December 31, 2017,
the Company met the milestone payment requirement with regard to the $55,000 license fee which license fee is currently due
on May 3, 2018.
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
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
liabilities of $300 related to shares of common stock expected to be issued to Mayo and $91,709 for the intellectual property.
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 859,976 shares of common
stock (as converted based on the Exchange Ratio) to Mayo to settle the amount of common stock NeuroOne was previously obligated
to issue under the 2014 Mayo Agreement and as provided by the terms of the 2017 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 was paid in December 2017.
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 December 31, 2017.
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 him would be detrimental to the Company’s operations and prospects.
NOTE
5 - Intangibles
Intangible
assets rollforward is as follows:
|
|
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
|
|
|
|
|
53,115
|
|
Less: amortization
|
|
|
|
|
(17,633
|
)
|
Net Intangibles, December 31, 2017
|
|
|
|
$
|
216,372
|
|
Prior
to the Merger, amortization expense for the LLC was $6,471 during the period January 1, 2016 to October 26, 2016. The Company
anticipates amortization expense of approximately $15,000 to $17,000 per year for fiscal year 2018 through 2022 based upon the
two current license agreements.
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
NOTE
6 - Accrued Expenses
Accrued
expenses consisted of the following at December 31:
|
|
2017
|
|
|
2016
|
|
Accrued license fees
|
|
$
|
120,000
|
|
|
$
|
182,009
|
|
Accrued services
|
|
|
600,339
|
|
|
|
31,186
|
|
Accrued issuance costs
|
|
|
28,083
|
|
|
|
22,015
|
|
Accrued payroll
|
|
|
223,195
|
|
|
|
28,252
|
|
Advances
|
|
|
50,000
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
881
|
|
|
|
$
|
1,021,617
|
|
|
$
|
264,343
|
|
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. 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. For the year ended
December 31, 2017, discount amortization charged to interest expense related to the issuance costs was $1,748. The Short-Term Notes
do not bear interest on principal and require the Company to repay the principal upon maturity.
In addition, upon maturity, under the provisions
of the Short-Term Notes as amended, the holders will receive 189,750 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. The November 2017 amendment resulted in
a substantial modification to the original Short-Term Notes whereby additional warrant coverage was added and the maturity date
of the Short-Term Notes was extended. The Company recorded the Short-Term Note amendment under the provisions of extinguishment
accounting. A loss on Short-Term Notes extinguishment in the accompanying statements of operations for the year ended December 31,
2017 was recorded in the amount of $144,577, which represented the difference between the face value of the Short-Term Notes over
the combined carrying values of the Short-Term Notes and warrants on the date of the amendment. The fair value increase of the
Short-Term Notes and the warrants as amended over its adjusted carrying value at the time of the amendment was $117,280 which was
recorded as additional paid-in capital.
Prior to the November 30, 2017 amendment,
the holders were to receive 126,500 common stock purchase warrants upon maturity. A portion of the proceeds from the Short-Term
Notes upon issue was allocated to the original warrants based on their relative fair value to the underlying Short-Term Notes in
the amount of $61,496 and was recorded in additional paid-in capital in the accompanying consolidated balance sheets and was discounted
from the Short-Term Notes and was being amortized to interest expense ratably over the term of the Short-Term Notes which amounted
to $35,479 during the year ended December 31, 2017. The fair value of the warrants was based on the Black-Scholes method with the
following assumptions: risk-free interest rate 2.1 percent; expected volatility 47.8 percent; expected life 5.7 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
third-party valuation analysis. These warrants when issued will be immediately exercisable at $1.80 per share and will expire on
July 31, 2023.
The Short-Term Promissory Notes were amended
again in March 2018 (See Note 13 – Subsequent Events).
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
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
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
|
|
2017
|
|
|
2016
|
|
2016 convertible promissory notes, net of discounts
|
|
$
|
1,543,652
|
|
|
$
|
220,840
|
|
2017 convertible promissory notes, net of discounts
|
|
|
504,465
|
|
|
|
—
|
|
Accrued interest
|
|
|
120,223
|
|
|
|
4,357
|
|
|
|
$
|
2,168,340
|
|
|
$
|
225,197
|
|
2016
Convertible Promissory Notes
In November 2016 and as 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 (the “Warrants”) for aggregate gross proceeds of up to $2.5 million. 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 December 31, 2017, the Company has issued $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.
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
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.
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 to 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.
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 2.08 percent; expected volatility of 50 percent; expected life of
3.89 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. The Convertible Note proceeds assigned to the Warrants were $440,919 and $345,640 during the year ended December
31, 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 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 $759,004 and $27,555 for the year ended December 31, 2017 and for the period from October 7, 2016
to December 31, 2016, respectively. The Company also recorded the fair value changes of the warrant liability associated with the
Convertible Notes in the consolidated statements of operations which amounted to an expense of $259,352 and $320 for the year ended
December 31, 2017 and for the period from October 7, 2016 to December 31, 2016, 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 Company recorded the Convertible Note
amendment under the provisions of extinguishment accounting. The fair value of the underlying Convertible Notes was $97,223 lower
than the carrying value of the Convertible Notes on the date of the modification. The $97,223 difference was recorded as a discount
to the debt with a gain on convertible notes extinguishment in the accompanying statements of operations for the year ended December 31,
2017. The discount of $97,223 was then amortized from November 21, 2017 to December 31, 2017 totaling $15,756.
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
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 year ended December 31, 2017 and during the period from October 7, 2016 to December
31, 2016, 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 $340,551 and $10,974 for
the year ended December 31, 2017 and for the period from October 7, 2016 to December 31, 2016, 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 consolidated statements of operations for a benefit of $(18,428) and expense
of $86 for the year ended December 31, 2017 and for the period from October 7, 2016 to December 31, 2016, 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 December 31, 2017. 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 December 31, 2017 and 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 year ended December 31, 2017 and for the period from October 7,
2016 to December 31, 2016, respectively, of which $74,264 and $2,985 was amortized to interest expense during the year ended December
31, 2017 and for the period from October 7, 2016 to December 31, 2016, respectively. The balance of the issuance costs in the amount
of $38,119 and $36,546 was attributed to the Warrants and was immediately recorded as interest expense upon issuance during the
year ended December 31, 2017 and for the period from October 7, 2016 to December 31, 2016, respectively.
2017
Convertible Notes
On October 4, 2017, the Company entered into
a Subscription Agreement (the “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 is based on the underlying conversion event and are exercisable for
five years commencing on the triggering conversion event. The Subscription Agreement and the 2017 Convertible Notes were amended
on December 14, 2017 to increase the authorized subscription from $1,000,000 to $1,500,000, move up the maturity date from October
4, 2022 to December 31, 2018, to remove subordination provisions and to simplify the conversion provision in the event of a qualified
financing as described more fully below.
The initial closing of the Private Placement
was consummated on October 4, 2017, and the Company issued 2017 Convertible Notes in an aggregate principal amount of $665,000
to the Subscribers through December 31, 2017. 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 $1,500,000 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 December
31, 2018 (the “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 a future 2017 Convertible
Notes Qualified Financing. The New Warrants also become exercisable upon a future 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 Note Qualified Financing.
Prior
to the December amendment, if the Company had raised more than $3,000,000 in an equity financing before the Maturity Date, 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 originally 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 Note Qualified Financing.
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
Lastly,
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. 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.
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 Company recorded the 2017 Convertible
Note amendment under the provisions of extinguishment accounting. The fair value of the underlying Convertible Notes was $294,615
higher than the carrying value of the Convertible Notes net of unamortized debt discount on the date of the modification. The
$294,615 difference as well as legal costs associated with the amendment in the amount of $8,945 were recorded as a loss on convertible
notes extinguishment totaling $303,560 in the accompanying statements of operations for the year ended December 31, 2017.
After the modification, there remained a debt discount of $27,371 of which $1,286 was amortized during the remainder of December
2017.
The 2017 Convertible Notes contain a conversion
discount in the event of a 2017 Convertible Notes 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 $128,525 during the
year ended December 31, 2017. 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 $3,815 for the year ended
December 31, 2017. The unamortized discount in the amount of $87,769 outstanding at the time of the December 2017 amendment was
expensed and included as part of the loss on convertible notes extinguishment. 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 2017 Convertible Notes in the consolidated statements of operations which amounted to an expense of $466 for the year
ended December 31, 2017.
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 2.22 percent; expected volatility of 50 percent; expected life of 5.38 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 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
$336,571 during the year ended December 31, 2017 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 $9,971 for the year ended December 31, 2017. The unamortized discount in the amount of $230,615 outstanding at the time of
the December 2017 amendment was expensed and included as part of the loss on convertible notes extinguishment. The Company also
recorded the fair value changes of the warrant liability associated with the 2017 Convertible Notes in the consolidated statements
of operations which amounted to a benefit of $(1,337) for the year ended December 31, 2017.
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 $157 was amortized to interest expense during the year ended
December 31, 2017.
2016
and 2017 Convertible Note 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 Convertible Notes and associated Warrants or any portion of the 2017 Convertible Notes or New
Warrants, 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.
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.
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
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 year ended December 31, 2017, 365,716 stock
options for shares of common stock were granted to directors and consultants at a weighted average exercise price of $0.035 per
share. The stock options granted during the year ended December 31, 2017 had a weighted average grant date fair value of $0.014
per share with various vesting periods and expire in ten years from the date of grant. In addition, the Company issued 215,453
shares of restricted common stock at a grant date fair value of $0.034 with performance vesting conditions from the 2016 Plan
during the year ended December 31, 2017. All performance vesting conditions for the restricted common stock were met and there
were no unvested shares as of December 31, 2017. Compensation expense associated with restricted common stock shares was $7,220.
The
following table summarizes the Company’s stock option plan activity for the years ended December 31, 2017 as follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term (years)
|
|
|
Value(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
365,716
|
|
|
$
|
0.03
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited/Cancelled
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2017
|
|
|
365,716
|
|
|
$
|
0.03
|
|
|
|
9.3
|
|
|
$
|
908,920
|
|
Vested and exercisable at December 31, 2017
|
|
|
365,716
|
|
|
$
|
0.03
|
|
|
|
9.3
|
|
|
$
|
908,920
|
|
Vested and expected to vest at December 31, 2017
|
|
|
365,716
|
|
|
$
|
0.03
|
|
|
|
9.3
|
|
|
$
|
908,920
|
|
|
(1)
|
The
aggregate intrinsic value is calculated as the difference between the exercise price
of the underlying options and the fair value of our common stock as of December 31, 2017
of $2.52 per share, respectively.
|
Stock-based
compensation expense, including stock options and restricted stock, was included in general and administrative and research and development costs as follows in the accompanying
consolidated statements of operations:
|
|
2017
|
|
General and administrative
|
|
$
|
2,065
|
|
Research and development
|
|
|
74,729
|
|
Total stock-based compensation
|
|
$
|
76,794
|
|
The
weighted-average assumptions used in the Black-Scholes option-pricing model are as follows for the stock options granted during
the year ended December 31, 2017:
|
|
2017
|
|
|
|
|
|
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 year ended December 31, 2017, 365,716 stock options and 215,453 restricted stock awards vested, respectively.
The weighted average grant date fair value per share of options and restricted stock awards vesting during the year ended
December 31, 2017 was $0.014 and $0.034, respectively. No stock options were forfeited during the year ended December 31,
2017. As of December 31, 2017, 1,711,096 shares were available for future issuance on a combined basis under the 2016 and
2017 Plans.
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
NOTE
11 – Stockholders’ /Member 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 December 31, 2017.
Preferred
Stock
The
Company also has 10,000,000 shares of preferred stock authorized, par value $0.001 per share, of which no shares were issued and
outstanding as of December 31, 2017.
Stockholders’
Deficit
Pursuant to the Acquisition of NeuroOne on July 20, 2017, 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 resulting in a net exchange of 1,573,000 shares of common stock (see further details
in Note 1 – Organization and Nature of Operations).
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.
Prior
to the Merger, on October 20, 2016, NeuroOne issued 5,131,514 shares of common stock (as adjusted for the exchange ratio in connection
with the Acquisition) as founders’ shares to seven individuals. Three of those investors were officers of NeuroOne. NeuroOne
recorded $9,050 of share subscription receivable for these stock issuances in 2016, which remained outstanding as of December
31, 2016. The shares were subscribed at value of $0.03 per share based on a valuation prepared by NeuroOne utilizing a weighted
average market value of invested capital methodology. In June 2017, the purchase price owed by the seven individuals for the founders’
shares of NeuroOne under their respective subscription agreements totaling $9,050 was forgiven by NeuroOne prior to the Acquisition.
Merger/Member
Equity
The
sole member of the LLC received, upon the effectiveness of the Merger, in consideration for the cancellation of his membership
interests in the LLC, 85,051 shares of common stock in NeuroOne (as adjusted for the exchange ratio in connection with the Acquisition).
NOTE
12 - Income Taxes
On
December 22, 2017, the Tax Cuts and Jobs Act (the TCJA), which significantly modified U.S. corporate income tax law, was signed
into law by President Trump. The TCJA contains significant changes to corporate income taxation, including, but not limited to,
the reduction of the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction
for interest expense to 30% of earnings (except for certain small businesses), limitation of the deduction for net operating losses
to 80% of current year taxable income and generally eliminating net operating loss carrybacks, allowing net operating losses to
carryforward without expiration, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated,
elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments
instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including
changes to the deductibility of research and experimental expenditures that will be effective in the future). Notwithstanding
the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain, including to what
extent various states will conform to the newly enacted federal tax law.
The Company has recorded the necessary
provisional adjustments in the consolidated financial statements in accordance with its current understanding of the TCJA and guidance
currently available as of this filing and recorded a provisional reduction of $610,000 to its net gross deferred tax assets
in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional reduction was fully offset by an
equal reduction in the Company’s valuation allowance given the Company’s historical net losses, resulting in no net
income tax expense being recorded. The Company may adjust these provisional amounts in future periods if its interpretation of
the TCJA changes or as additional guidance becomes available. Any subsequent adjustment to these amounts is not expected to have
a significant impact due to the valuation allowance.
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
NeuroOne LLC operated as a single-member LLC
from formation on December 12, 2013 until it was merged into NeuroOne on October 27, 2016 (see Note 11 – Stockholders’/Member
Deficit). As such, it was a disregarded legal entity for income tax purposes. Accordingly, no provision for income taxes was included
in the consolidated financial statements for the period from January 1, 2016 through October 26, 2016.
The
effective tax rate for NeuroOne Medical Technologies Corporation for the year ended December 31, 2017 and for period from October
7, 2016 to December 31, 2016 was zero percent. A reconciliation of income tax computed at the statutory federal income tax
rate to the provision (benefit) for income taxes included in the accompanying consolidated statements of operations for NeuroOne
Medical Technologies Corporation is as follows:
|
|
2017
|
|
|
2016
|
|
Income tax benefit at federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State income tax, net of federal benefit
|
|
|
(6.5
|
)
|
|
|
(6.4
|
)
|
Disqualified interest and other
|
|
|
0.9
|
|
|
|
0.6
|
|
Research credits
|
|
|
(1.2
|
)
|
|
|
—
|
|
U.S. tax reform
|
|
|
12.1
|
|
|
|
—
|
|
Valuation allowance
|
|
|
28.7
|
|
|
|
39.8
|
|
Effective tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
Significant
components of the Company’s deferred tax assets and liabilities are summarized in the tables below as of December 31:
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Federal and state operating loss carryforwards
|
|
$
|
871,371
|
|
|
$
|
75,375
|
|
Acquired intangibles
|
|
|
5,433
|
|
|
|
514
|
|
Accruals
|
|
|
64,151
|
|
|
|
1,259
|
|
Convertible notes
|
|
|
534,749
|
|
|
|
28,884
|
|
Research and development credit carryforwards
|
|
|
63,197
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
19,821
|
|
|
|
—
|
|
Total deferred tax assets
|
|
|
1,558,722
|
|
|
|
106,032
|
|
Valuation allowance
|
|
|
(1,558,722
|
)
|
|
|
(106,032
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
As of December 31, 2017 and 2016,
the Company had gross deferred tax assets of approximately $1,559,000 and $106,000, respectively. Realization of the deferred assets
is primarily dependent upon future taxable income, if any, the amount and timing of which are uncertain. The Company has had significant
pre-tax losses since its inception. The Company has not yet generated revenues and faces significant challenges to becoming profitable.
Accordingly, the net deferred tax assets have been fully offset by a valuation allowance of approximately $1,559,000 and $106,000
as of December 31, 2017 and 2016, respectively. U.S. net deferred tax assets will continue to require a valuation allowance
until the Company can demonstrate their realizability through sustained profitability or another source of income.
As of December 31, 2017 and 2016, the Company’s federal net operating loss carryforwards were
approximately $3,032,000 and $186,000, respectively. The Company had federal research credit carryforwards as of December 31,
2017 and 2016 of approximately $36,000 and zero, respectively. The federal net operating loss and tax credit carryforwards will
begin to expire in 2036 if not utilized. As of December 31, 2017 and 2016, the Company had state net operating loss carryforwards
of approximately $3,032,000 and $186,000, respectively. The Company had state research credit carryforwards of approximately $27,000
and zero as of December 31, 2017 and 2016, respectively. The state net operating loss carryforwards will begin to expire in
2031, if not utilized, and the state research credit carryforwards will begin to expire in 2032 if not utilized.
Utilization
of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change
limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. Generally,
in addition to certain entity reorganizations, the limitation applies when one or more “5-percent shareholders” increase
their ownership, in the aggregate, by more than 50 percentage points over a 36-month time period testing period or beginning
the day after the most recent ownership change, if shorter. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
In
accordance with ASC 740,
Income Taxes
(“ASC 740”), specifically related to uncertain tax positions, a Company
is required to use a recognition threshold and a measurement attribute for the financial statement recognition and measurement
of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more
likely than not to be sustained upon examination by taxing authorities. The Company believes its income tax filing positions and
deductions will be sustained upon examination, and accordingly, no reserves or related accruals for interest and penalties have
been recorded at December 31, 2017 and 2016.
In
accordance with this guidance, the Company has adopted a policy under which, if required to be recognized in the future, interest
related to the underpayment of income taxes will be classified as a component of interest expense and any related penalties will
be classified in operating expenses in the statements of operations.
The
Company’s corporate returns are subject to examination for the 2016 tax year for federal and subject to examination for
the 2016 tax year in one state jurisdiction.
NeuroOne Medical Technologies Corporation
Notes to Consolidated Financial Statements,
continued
NOTE
13 - Subsequent Events
Additional 2017 Convertible Notes
The Company issued additional 2017 Convertible
Notes and New Warrants to investors for aggregate gross proceeds of $475,000 from January 2, 2018 to February 13, 2018 of which
$125,000 was received from an existing stockholder. 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.
Amended
and Restated Short-Term Notes
The Short-Term Notes were amended on March
12, 2018. 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 “Maturity Date”). Pursuant to the terms of each Amended and Restated Short-Term Note, each subscriber
received a replacement warrant (the “Replacement Warrant”) that effectively cancelled the original warrant that would
have been issued upon the issuance of such Amended and Restated Short-Term Note. The Amended and Restated Short-Term Note also
provided for the issuance of an additional warrant (the “Additional Warrant”).
If the Company raises more than $3,000,000
in an equity or equity-linked financing before the Maturity Date (the “Short-Term Note Qualified Financing”), the
outstanding principal and accrued interest (the “Outstanding Balance”) on the Amended and Restated Short-Term Note
shall automatically convert into the securities issued by us 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 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 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 (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”. The Amended and Restated Notes are unsecured.
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
Note converted in connection with a Short-Term Qualified Financing or (ii) the price at which the Amended and Restated Short-Term
Note 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.
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.
Unsecured Loan
On March 20, 2018, the Company received cash gross 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.
Consulting Agreement
On February 6, 2018, in consideration for consulting services, the Company agreed
to issue to an investor relations firm
250,000 shares
of common stock on the following schedule: 100,000 shares of common stock within ten days of executing the agreement, 50,000 shares
on the 90th, 180th and 270th day anniversaries of February 6, 2018.
NeuroOne Medical Technologies Corporation
Condensed Consolidated Balance Sheets
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
22,608
|
|
|
$
|
26,467
|
|
Prepaid expenses
|
|
|
619
|
|
|
|
7,146
|
|
Total current assets
|
|
|
23,227
|
|
|
|
33,613
|
|
Intangible assets, net
|
|
|
206,469
|
|
|
|
216,372
|
|
Total assets
|
|
$
|
229,696
|
|
|
$
|
249,985
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
82,193
|
|
|
$
|
—
|
|
Accrued expenses
|
|
|
1,478,678
|
|
|
|
1,021,617
|
|
Unsecured loan
|
|
|
283,000
|
|
|
|
—
|
|
Short-term promissory notes
|
|
|
—
|
|
|
|
253,000
|
|
Convertible promissory notes, net and accrued interest – current portion
|
|
|
1,129,781
|
|
|
|
2,168,340
|
|
Premium conversion derivatives
|
|
|
328,609
|
|
|
|
462,174
|
|
Total current liabilities
|
|
|
3,302,261
|
|
|
|
3,905,131
|
|
Convertible promissory notes, net and accrued interest
|
|
|
2,050,613
|
|
|
|
—
|
|
Warrant liability
|
|
|
1,977,363
|
|
|
|
1,381,465
|
|
Other liabilities
|
|
|
188,000
|
|
|
|
—
|
|
Total liabilities
|
|
|
7,518,237
|
|
|
|
5,286,596
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares authorized as of June
30, 2018 and December 31, 2017; no shares issued or outstanding as of June 30, 2018 and December 31, 2017.
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.001 par value; 100,000,000 shares authorized as of June
30, 2018 and December 31, 2017; and 8,014,994 and 7,864,994 shares issued and outstanding as of June 30, 2018 and December
31, 2017, respectively.
|
|
|
8,015
|
|
|
|
7,865
|
|
Additional paid–in capital
|
|
|
646,000
|
|
|
|
280,320
|
|
Accumulated deficit
|
|
|
(7,942,556
|
)
|
|
|
(5,324,796
|
)
|
Total stockholders’ deficit
|
|
|
(7,288,541
|
)
|
|
|
(5,036,611
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
229,696
|
|
|
$
|
249,985
|
|
See accompanying notes to condensed consolidated financial
statements
NeuroOne Medical Technologies Corporation
Condensed Consolidated Statements of
Operations
(unaudited)
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
946,685
|
|
|
$
|
731,973
|
|
|
$
|
1,939,120
|
|
|
$
|
1,175,990
|
|
Research and development
|
|
|
225,529
|
|
|
|
156,716
|
|
|
|
330,574
|
|
|
|
228,757
|
|
Total operating expenses
|
|
|
1,172,214
|
|
|
|
888,689
|
|
|
|
2,269,694
|
|
|
|
1,404,747
|
|
Loss from operations
|
|
|
(1,172,214
|
)
|
|
|
(888,689
|
)
|
|
|
(2,269,694
|
)
|
|
|
(1,404,747
|
)
|
Interest expense
|
|
|
(304,403
|
)
|
|
|
(350,049
|
)
|
|
|
(497,437
|
)
|
|
|
(563,599
|
)
|
Net change in fair value for the warrant liability and premium conversion derivatives
|
|
|
215,631
|
|
|
|
(55,585
|
)
|
|
|
335,591
|
|
|
|
(55,553
|
)
|
Loss on notes extinguishment
|
|
|
—
|
|
|
|
—
|
|
|
|
(186,220
|
)
|
|
|
—
|
|
Net loss
|
|
$
|
(1,260,986
|
)
|
|
$
|
(1,294,323
|
)
|
|
$
|
(2,617,760
|
)
|
|
$
|
(2,023,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.37
|
)
|
Number of shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
7,967,741
|
|
|
|
5,868,995
|
|
|
|
7,916,651
|
|
|
|
5,544,582
|
|
See accompanying notes to condensed consolidated financial
statements
NeuroOne Medical Technologies Corporation
Condensed Consolidated Statements of
Cash Flows
(unaudited)
|
|
For the six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,617,760
|
)
|
|
$
|
(2,023,899
|
)
|
Adjustments to reconcile net loss to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
9,903
|
|
|
|
9,104
|
|
Stock-based services expense
|
|
|
373,947
|
|
|
|
11,849
|
|
Forgiveness of share subscription agreement for founders’
shares
|
|
|
—
|
|
|
|
9,051
|
|
Non-cash interest on short-term and convertible promissory
notes
|
|
|
120,411
|
|
|
|
43,856
|
|
Non-cash discount amortization on convertible promissory
notes
|
|
|
377,026
|
|
|
|
482,505
|
|
Note issuance costs attributed to warrant liability
|
|
|
—
|
|
|
|
38,119
|
|
Revaluation of premium conversion derivatives
|
|
|
(351,616
|
)
|
|
|
74,806
|
|
Revaluation of warrant liability
|
|
|
16,025
|
|
|
|
(19,253
|
)
|
Loss on notes extinguishment
|
|
|
186,220
|
|
|
|
—
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
6,527
|
|
|
|
46,677
|
|
Accounts payable and accrued expenses
|
|
|
584,458
|
|
|
|
414,019
|
|
Net cash used in operating activities
|
|
|
(1,294,859
|
)
|
|
|
(913,166
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchase of intangible assets
|
|
|
(55,000
|
)
|
|
|
—
|
|
Net cash used
in investing activities
|
|
|
(55,000
|
)
|
|
|
—
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible promissory notes
|
|
|
432,849
|
|
|
|
484,201
|
|
Proceeds from issuance of warrants associated with short-term
and convertible promissory notes
|
|
|
442,151
|
|
|
|
440,919
|
|
Proceeds (repayment) from short-term unsecured loan
|
|
|
283,000
|
|
|
|
(50,000
|
)
|
Issuance costs related to convertible promissory notes
|
|
|
—
|
|
|
|
(33,039
|
)
|
Advances relating to long-term financing
|
|
|
188,000
|
|
|
|
—
|
|
Issuance costs related to warrants
|
|
|
—
|
|
|
|
(29,570
|
)
|
Net cash provided by financing
activities
|
|
|
1,346,000
|
|
|
|
812,511
|
|
Net decrease in cash
|
|
|
(3,859
|
)
|
|
|
(100,655
|
)
|
Cash at beginning of period
|
|
|
26,467
|
|
|
|
522,217
|
|
Cash at end of period
|
|
$
|
22,608
|
|
|
$
|
421,562
|
|
Supplemental non-cash financing and
investing transactions:
|
|
|
|
|
|
|
|
|
Bifurcation of premium conversion
derivative related to convertible promissory notes
|
|
$
|
168,383
|
|
|
$
|
213,961
|
|
Accrued issuance costs attributed
to convertible promissory notes
|
|
$
|
2,850
|
|
|
$
|
39,781
|
|
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
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 that may benefit from artificial intelligence.
To date, the Company has recorded no product
sales and has a limited expense history. The Company is a development stage company and its activities to date have included raising
capital to fund the development of its proprietary technology and 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.
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 has an accumulated deficit of $7,942,556 as of June 30, 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.
From inception through June 30, 2018,
the Company has completed unsecured loan financings for gross proceeds of $283,000, 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 $1,540,000 convertible promissory note financing of a planned
$2.0 million subscription. See Note 14 – Subsequent Events for financing transactions that have closed after June 30, 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.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
NOTE
3 – Summary of Significant Accounting Policies
Management’s Use of Estimates
The preparation of condensed consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially
subject the Company to a concentration of credit risk consist of cash. The Company’s cash is held by one financial institution
in the United States. Amounts on deposit may at times exceed federally insured limits. Management believes that the financial
institution is financially sound, and accordingly, minimal credit risk exists with respect to the financial institution. As of
June 30, 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.
|
As of June 30, 2018 and December 31, 2017,
the fair values of cash, other assets, accounts payable, accrued expenses and the unsecured loans 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 and six months ended June 30, 2018 and 2017.
The fair value of financial instruments measured on a recurring
basis is as follows:
|
|
As of June 30, 2018
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
1,977,363
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,977,363
|
|
Premium conversion derivatives
|
|
|
328,609
|
|
|
|
—
|
|
|
|
—
|
|
|
|
328,609
|
|
Total liabilities at fair value
|
|
$
|
2,305,972
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,305,972
|
|
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
|
|
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 six month periods ended June 30, 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
|
|
|
579,873
|
|
|
|
440,919
|
|
Change in fair value of warrant liability
|
|
|
16,025
|
|
|
|
(19,253
|
)
|
Balance as of end of period
|
|
$
|
1,977,363
|
|
|
$
|
767,626
|
|
|
|
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
|
|
|
218,051
|
|
|
|
213,961
|
|
Change in fair value of premium debt conversion derivatives
|
|
|
(351,616
|
)
|
|
|
74,806
|
|
Balance as of end of period
|
|
$
|
328,609
|
|
|
$
|
426,417
|
|
Intellectual Property
NeuroOne LLC, the predecessor to NeuroOne,
entered into two licensing agreements with major research institutions, which allows for access to certain patented technology
and know-how. Payments under those agreements, not related to royalties, 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 June 30, 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.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
Research and Development Costs
Research and development costs are charged
to expense as incurred. Research and development expenses are comprised 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 Accounting Standards Codification (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.
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.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
Net Loss Per Share
For the Company, basic loss per share
of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the
period.
Diluted earnings or loss per share of
common stock is computed similarly to basic earnings or loss per share except the weighted average shares outstanding are increased
to include additional shares from the assumed exercise of any common stock equivalents, if dilutive. The Company’s convertible
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 and
six month periods ended June 30, 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 and six month periods ended June 30, 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
and six month periods ended June 30, 2018 and 2017:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
189,750
|
(1)
|
|
|
902,834
|
|
|
|
189,750
|
(1)
|
|
|
902,834
|
|
Stock options
|
|
|
365,716
|
|
|
|
365,716
|
|
|
|
365,716
|
|
|
|
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 Accounting
Standards Update (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 and six month period ended June 30, 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.
In
June 2018, the FASB issued ASU 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting
(ASU 2018-07), which expands the scope of Topic 718 to include share-based payment transactions for
acquiring goods and services from nonemployees. An entity should generally apply the requirements of Topic 718 to nonemployee
awards except in circumstances where there is specific guidance on inputs to an option pricing model and the attribution of cost.
ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services
to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The guidance also clarifies
that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted
in conjunction with selling goods or services to customers as part of a contract accounted for under ASC
606
,
Revenue
from Contracts with Customers
(ASC 606)
.
This guidance
is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted, but no earlier than
an entity’s adoption date of ASC 606. The Company is currently evaluating the impact of the new guidance on its 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 resigned from the Company in June 2017), Mr. Christianson
and NeuroOne cease and desist all competitive activities, that Mr. Fredrickson step down from his position and that Mr. Christianson
and NeuroOne provide the former employer access to NeuroOne’s systems to demonstrate that it is not using trade secrets
or proprietary information nor competing with the former employer.
On March 29, 2018, the Company was served
with a complaint filed by PMT adding the Company, NeuroOne and Mr. Christianson to its existing lawsuit against Mr. Fredrickson.
In the 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.
On April 18, 2018, Mr. Christianson, the Company and NeuroOne filed a motion for dismissal, which has not yet been heard by the Court. They argue that: the contract claims against Mr. Christianson fail because his agreement was not supported by consideration; the Minnesota Uniform Trade Secrets Act preempts plaintiff's claims for unfair competition, civil conspiracy and unjust enrichment; plaintiff fails to state a claim regarding alleged breach of the duties of loyalty and good faith/fair dealing; plaintiff cannot legally obtain a constructive trust; plaintiff has insufficiently pled its tortious interference claims; and Plaintiff has not stated a claim for unfair competition.
The outcome and potential loss related
to this matter is unknown as of June 30, 2018.
NOTE
5 – Intangibles
Intangible assets rollforward is as follows:
|
|
Useful Life
|
|
|
|
License agreements, net at December 31, 2017
|
|
12-13 Years
|
|
$
|
216,372
|
|
Less: amortization
|
|
|
|
|
(9,903
|
)
|
License agreements, net at June 30, 2018
|
|
|
|
$
|
206,469
|
|
Amortization expense was $4,951 and $4,097
for the three months ended June 30, 2018 and 2017, respectively, and $9,903 and $9,104 for the six months ended June 30, 2018
and 2017, respectively.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
NOTE
6 – Accrued Expenses
Accrued expenses consisted of the following
at June 30, 2018 and December 31, 2017:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Accrued licensing agreement fees
|
|
$
|
65,000
|
|
|
$
|
120,000
|
|
Accrued services
|
|
|
1,118,872
|
|
|
|
600,339
|
|
Accrued issuance costs
|
|
|
30,933
|
|
|
|
28,083
|
|
Accrued payroll
|
|
|
256,926
|
|
|
|
223,195
|
|
Advances
|
|
|
—
|
|
|
|
50,000
|
|
Other (1)
|
|
|
6,947
|
|
|
|
—
|
|
|
|
$
|
1,478,678
|
|
|
$
|
1,021,617
|
|
(1)
|
Accrued expenses include an obligation to issue
stock options to a consultant that has met vesting requirements as of June 30, 2018 in the amount of $6,947. See Note 10 –
Stock-Based Compensation for further detail.
|
NOTE
7 – Short-Term Promissory Notes, Unsecured Loans and Advances
|
|
As of
June 30,
2018
|
|
|
As of
December 31,
2017
|
|
Short-term promissory notes, including accrued
interest
|
|
$
|
259,184
|
|
|
$
|
253,000
|
|
Unsecured loans
|
|
$
|
283,000
|
|
|
$
|
—
|
|
Advances
|
|
$
|
188,000
|
|
|
$
|
—
|
|
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 (as amended, the “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.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
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 Warrants”) 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 Warrants”). The Amended and Restated
Short-Term Notes were classified as long-term convertible promissory notes on the accompanying condensed balance sheets at June
30, 2018 given their conversion into shares of common stock on July 2, 2018. See Note 14 – Subsequent Events with regard
to the conversion and extinguishment of the Amended and Restated Short-Term Notes and the issuance of amended and restated Replacement
Warrants and Additional Warrants.
Replacement Warrants
Each Replacement Warrant issued on March
12, 2018 granted 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 were exercisable commencing on the
Conversion Date and would have expired on November 21, 2021. The exercise price and number of the shares issuable upon exercising
the Replacement Warrants were 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 were recorded at each reporting date in the condensed consolidated statements of operations which amounted to an expense
of $12,701 and $10,330 for the three and six months ended June 30, 2018, respectively. A Monte Carlo simulation model was used
to estimate the aggregate fair value of the Replacement Warrants as of June 30, 2018. Input assumptions used were as follows:
risk-free interest rate of 2.65 percent; expected volatility of 50 percent; expected life of 3.39 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 issued on March
12, 2018 granted 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 were exercisable commencing on the Conversion Date
and would have expired on November 21, 2021. The exercise price and number of the shares issuable upon exercising the Additional
Warrants were 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 free-standing instruments 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 June 30, 2018 with terms that largely paralleled the
provisions of the Original Warrants except that the Additional Warrants were 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 was accounted for
separately on a fair market value basis. The Company recorded the fair value changes of the premium debt conversion derivative
associated with the Short-Term Notes in the condensed consolidated statements of operations for a benefit of $46,471 and $46,428
for the three and six months ended June 30, 2018, respectively.
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 notes extinguishment in the
accompanying condensed consolidated statements of operations for the six months ended June 30, 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 was 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 exercised that right within 15
days of receiving written notice. The Company had granted subscribers indemnification rights with respect to its representations,
warranties, covenants and agreements under the Short-Term Note subscription agreement. Effective as of July 2, 2018, the Company
entered into a debt conversion agreement with each of the Short-Term Note subscribers to convert the outstanding principal and
accrued and unpaid interest under the Short-Term Notes into shares of Common Stock, to cancel and extinguish the Short-Term Notes
and to amend and restate the Additional Warrants and the Replacement Warrants. See Note 14 – Subsequent Events for additional
information on the conversion.
Unsecured Loans
In May 17, 2018, the Company received
cash proceeds of $168,000 from unsecured loans, represented by two promissory notes from existing stockholders of the Company.
The loans are interest free and require that the Company repay the principal in full on the earlier to occur of (i) May 17, 2019
or (ii) the closing of an equity round of financing of the Company that raises more than $5 million in gross proceeds. The loans
include customary events of default provisions.
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 provisions.
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)
Advances
In June 2018, the Company received advances from investors
related to a July 2018 private placement financing in the amount of $188,000 (See Note 14 - Subsequent Events). The advances are
reflected in the other liabilities line item on the accompanying condensed balance sheets.
NOTE
8 – Convertible Promissory Notes and Warrant Agreements
|
|
As of
June 30,
2018
|
|
|
As of
December 31,
2017
|
|
2016 convertible promissory notes, net of discounts
|
|
$
|
1,613,207
|
|
|
$
|
1,543,652
|
|
2017 convertible promissory notes, net of discounts
|
|
|
1,073,553
|
|
|
|
504,465
|
|
Accrued interest
|
|
|
234,450
|
|
|
|
120,223
|
|
Total
|
|
|
2,921,210
|
|
|
|
2,168,340
|
|
Current portion
|
|
|
(1,129,781
|
)
|
|
|
(2,168,340
|
)
|
Long-term portion
|
|
$
|
1,791,429
|
|
|
$
|
—
|
|
2016 Convertible Promissory Notes
From November 2016 to June 2017, the Company
issued convertible promissory notes (the “Convertible Notes”) and common stock purchase warrants (the “Warrants”)
in an aggregate principal amount of $1,625,120 and entered into subscription agreements with subscribers (the “2016 Private
Placement”). The Company amended the Convertible Notes in December 2016 and November 2017 and the Warrants in June 2017
and November 2017 to, among other things, change the terms of the underlying Warrants that include the removal of down-round pricing
protection provisions as described more fully below. See Note 14 – Subsequent Events with regard to the conversion of the
Convertible Notes into shares of common stock, the corresponding extinguishment of the Convertible Notes and the issuance of amended
and restated warrants on July 2, 2018.
The Convertible Notes were unsecured.
The Convertible Notes accrued interest at a fixed rate of 8 percent per annum and required 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 had occurred before July 31, 2018, the outstanding principal and accrued and unpaid interest on the Convertible Notes
would have automatically converted 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 failed to complete a Qualified Financing by July 31, 2018, the Convertible Notes would
have been immediately due and payable on such date.
If a change of control transaction or
initial public offering occurred prior to a Qualified Financing, the Convertible Notes would have, at the election of the holders
of a majority of the outstanding principal of the Convertible Notes, either been payable on demand as of the closing date of such
transaction, or been 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.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
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 would have 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 became contingent and were 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 would
have expired on November 21, 2021 in the event of a Qualified Financing or would have expired unissued if the notes were not converted.
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 2.65 and 2.08 percent as of June 30, 2018 and December 31, 2017,
respectively; expected volatility of 50 percent as of June 30, 2018 and December 31, 2017; expected life of 3.39 and 3.89 years
as of June 30, 2018 and December 31, 2017, respectively; and expected dividend yield of 0 percent as of June 30, 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 $440,919 during the six months ended June 30, 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 approximated the effective interest method and was fully amortized by December 31, 2017. The amortization expense was $198,295
and $317,157 for the three and six months ended June 30, 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 an expense of $116,111 and benefit of $(19,038) for the three months ended June 30, 2018 and 2017, respectively, and a benefit
of $(14,865) and $(19,253) for the six months ended June 30, 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 was being
amortized over the amended term of the Convertible Notes. The amortization recorded during the three months ended June 30, 2018
and 2017 was $34,970 and zero, respectively, and $69,555 and zero during the six months ended June 30, 2018 and 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 zero and $213,961 during the six months ended June 30, 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 and was fully amortized by December 31, 2017. The amortization expense was $86,163 and $133,481 for the three
and six months ended June 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
in the condensed consolidated statements of operations for a benefit of $(313,303) and an expense of $74,623 for the three months
ended June 30, 2018 and 2017, respectively, and a benefit of $(310,637) and an expense of $74,806 for the six months ended June
30, 2018 and 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 would have had an exercise price of $2.00 per share of common stock with a total fair value of $4,855
on date of Convertible Note issuance, and (iii) legal expenses of $33,450. The placement agent warrant was issuable at the time
the private placement transaction closed which had not occurred as of June 30, 2018. The placement agent warrant was also immediately
exercisable on the date of issuance and would have expired five years following the date of issuance. The placement agent was
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 event that the 2016 Private Placement transaction was fully subscribed. As of
June 30, 2018 and December 31, 2017, the Company accrued for the estimated obligation to issue a placement agent warrant for the
purchase of approximately 63,000 shares of common stock had the 2016 Private Placement been fully subscribed. The Company recorded
an issuance cost discount to the Convertible Notes in the amount of zero and $39,781 during the six months ended June 30, 2018
and 2017, respectively, and was fully amortized by December 31, 2017. During the three and six months ending June 30, 2017, $19,506
and $31,867 was amortized to interest expense, respectively. The balance of the issuance costs in the amount of $22,316 and $38,119
was attributed to the Warrants and was immediately recorded as interest expense upon issuance during the three and six months
ended June 30, 2017, respectively.
Effective as of July 2, 2018, the Company
entered into a debt conversion agreement with each of the Convertible Note subscribers to convert the outstanding principal and
accrued and unpaid interest under the Convertible Notes into shares of Common Stock, to cancel and extinguish the Convertible
Notes and amend and restate the Warrants. See Note 14 – Subsequent Events for additional information on the conversion.
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. The subscription agreement, the 2017 Convertible Notes and New Warrants were amended on December 14, 2017 to
move up the maturity date of the 2017 Convertible Notes from October 4, 2022 to December 31, 2018, remove subordination provisions
and simplify the conversion provision of the 2017 Convertible Notes in the event of a qualified financing as described more fully
below, to modify the exercise price of the New Warrants and to increase the authorized subscription amount to $1,500,000. 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 the five month anniversary of the initial closing to the eight month anniversary of the initial closing. 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 $1,540,000 to the Subscribers through June 30, 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.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
Prior to the December 2017 amendment,
if the Company had raised more than $3,000,000 in an equity financing before October 4, 2022, the outstanding principal and accrued
and unpaid interest on the 2017 Convertible Notes would have automatically converted into the securities issued by the Company
in such financing based on the greater number of such securities resulting from either (i) the outstanding principal and accrued
interest on the 2017 Convertible Notes divided by $2.25 or (ii) the outstanding principal and accrued interest on the 2017 Convertible
Notes multiplied by 1.25, divided by the price paid per security in such financing. The New Warrants would have also become exercisable
in conjunction with the 2017 Convertible Notes Qualified Financing.
Lastly, if a change of control transaction
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.
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 and six months ended June 30, 2018 was $6,503 and $12,935, respectively.
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
$77,085 and $168,383 for the convertible debt issued during the three and six months ended June 30, 2018, respectively. 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 $53,987 and $81,008 for the three and six months ended June 30, 2018,
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 all of the 2017 Convertible Notes in the condensed consolidated
statements of operations which amounted to an expense of $4,126 and $5,449 for the three and six months ended June 30, 2018, respectively.
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 2.74 and 2.22 percent as of June 30, 2018 and December 31, 2017, respectively;
expected volatility of 50 percent as of June 30, 2018 and December 31, 2017; expected life of 5.21 and 5.38 years as of June 30,
2018 and December 31, 2017, respectively; and expected dividend yield of 0 percent as of June 30, 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 $203,287 and $442,151 during the three and six
month period ended June 30, 2018, respectively, 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 $141,510 and $212,015 for the three and six month period ended June 30, 2018, respectively. The Company also recorded the
fair value changes of the warrant liability associated with all of the 2017 Convertible Notes in the condensed consolidated
statements of operations which amounted to an expense of $11,205 and $20,560 for the three and six months ended June 30, 2018,
respectively.
In connection with the 2017 Convertible
Notes, the Company incurred issuance costs in the amount of $8,133 which consisted of legal costs and was recorded as an issuance
cost discount to the 2017 Convertible Notes, of which $1,138 and $1,513 was amortized to interest expense during the three and
six months ended June 30, 2018, respectively.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
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.
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
During the three and six months ended
June 30, 2018 and 2017, stock-based services expense related to the stock options, restricted stock awards and stock-based award
liabilities was included in general and administrative and research and development costs as follows in the accompanying condensed
statements of operations:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
115,000
|
|
|
$
|
4,628
|
|
|
$
|
367,000
|
|
|
$
|
4,628
|
|
Research and development
|
|
|
4,510
|
|
|
|
7,221
|
|
|
|
6,947
|
|
|
|
7,221
|
|
Total stock-based services expense
|
|
$
|
119,510
|
|
|
$
|
11,849
|
|
|
$
|
373,947
|
|
|
$
|
11,849
|
|
The weighted-average assumptions used
in the Black-Scholes option-pricing model are as follows for the stock options granted during the periods presented:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected stock price volatility
|
|
|
—
|
|
|
|
47.8
|
%
|
|
|
—
|
|
|
|
47.8
|
%
|
Expected life of options (years)
|
|
|
—
|
|
|
|
5.0
|
|
|
|
—
|
|
|
|
5.0
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
—
|
|
|
|
0.0
|
%
|
Risk free interest rate
|
|
|
—
|
|
|
|
1.9
|
%
|
|
|
—
|
|
|
|
1.9
|
%
|
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
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, stock options and other awards 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 and six month period ended June 30, 2018, no
options or restricted stock awards were issued under the 2016 and 2017 Plans. During the three and six month period ended June
30, 2017, 365,716 stock options and 215,453 restricted stock awards were granted with various vesting periods, and had a grant
date fair value of $0.014 and $0.034 per share, respectively. The stock option agreements that were executed as of June 30, 2017
expire in ten years of the grant date.
During the three and six months
ended June 30, 2018, no stock options or restricted stock awards under the 2016 and 2017 Plan vested. During the three and six
months ended June 30, 2017, 323,191 stock option and 215,453 restricted stock awards vested with a grant date fair value of $0.014
and $0.034 per share, respectively. As of June 30, 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 June 30, 2018.
Stock-Based Award Liabilities
A total of up to 250,000 shares of common
stock was committed in February 2018 as a result of a consulting agreement for investor relation services executed in February
2018. 50,000 and 150,000 shares of common stock were awarded under the agreement during the three and six months ended June 30,
2018, respectively. The shares were awarded based on a performance vesting condition that was met in February 2018 and a time-based
vesting condition that was met in May 2018. The compensation expense related to the vested common shares was included in the total
stock-based services expense referenced above. The expense was based on the fair value of the underlying common stock at point
of vesting which was $2.52 per share for 100,000 shares that vested in the first quarter of 2018 and $2.30 per share for the remaining
50,000 shares that vested in the second quarter of 2018 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 100,000 shares of the share commitment under the agreement will vest over a 180 day period in tranches of
50,000 shares every 90 days.
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 December 31, 2018 (as amended from the originally stated June 30, 2018 date). 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 June 30, 2018 and was based on the fair value of the Company’s
common stock on June 30, 2018 as the award date has not occurred. The common stock fair value on June 30, 2018 was $2.05 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.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
The stock-based services expense associated
with the unissued stock options was $4,510 and $6,947 during the three and six months ended June 30, 2018, respectively, and was
based on the following weighted-average assumptions using the Black-Scholes option-pricing model:
|
|
As of June 30,
2018
|
|
|
|
|
|
Expected stock price volatility
|
|
|
50.0
|
%
|
Expected life of options (years)
|
|
|
5
|
|
Expected dividend yield
|
|
|
0
|
%
|
Risk free interest rate
|
|
|
2.73
|
%
|
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
June 30, 2018 would be reduced from 1,711,096 to 1,703,779 shares as a result of the remaining stock options to be issued upon
vesting under the second consulting agreement. The 250,000 shares of common stock issuable under the February 2018 consulting
agreement are not eligible for issuance under either the 2016 Plan or 2017 Plan because the 2016 Plan and 2017 Plan limit plan
participants to individuals. See Note 12 - Stockholders’ Deficit for additional information.
NOTE
11 – Income Taxes
The effective tax rate for the three and
six months ended June 30, 2018 and 2017 was zero percent. As a result of the analysis of all available evidence as of June
30, 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 and six months ended June 30, 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.
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 8,014,994 and 7,864,994 shares were issued and outstanding at June
30, 2018 and December 31, 2017, respectively. In connection with the February 2018 consulting agreement discussed in Note 10 –
Stock-based Compensation, an additional 100,000 shares of common stock out of the total 250,000 shares 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 – Defined Contribution Plan
The Company adopted a 401(k) defined contribution plan (the
“401K Plan”) on January 1, 2017, which was amended and restated on March 1, 2018 (the “Restatement”),
for all employees over age 21. Employees can defer up to 100% of their compensation through payroll withholdings into the
401K Plan subject to federal law limits. The Company began matching in the fourth quarter of 2017 on deferrals at 100% of deferrals
up to 3% of one’s contributions and 50% on deferrals over 3%, but not exceeding 5% of one’s contributions up through
the Restatement. The Company’s matching contributions to employee deferrals became discretionary after the Restatement.
The Company may also make discretionary profit sharing contributions under the 401K Plan in the future, but it has not done so
through June 30, 2018.
Employee contributions and any employer matching contributions
made to satisfy certain non-discrimination tests required by the Internal Revenue Code are 100% vested upon contribution. Discretionary
employer matches to employee deferrals vest over a six year period beginning on the second anniversary of an employee’s
date of hire. Discretionary profit sharing contributions vest over a five year period beginning on the first anniversary of an
employee’s date of hire. The amount of matching contributions made during the three and six month period ended June 30,
2018 was $3,421. There were no matching contributions made during the comparable periods in 2017.
NeuroOne Medical Technologies Corporation
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
NOTE
14 – Subsequent Events
Extinguishment and Conversion of Convertible
Notes and Short-Term Notes
Effective as of July 2, 2018, the Company
entered into debt conversion agreements (the “Conversion Agreements”) with each Convertible Note and Short-Term Note
subscriber to (i) convert the outstanding principal and accrued and unpaid interest under both the Convertible Notes and the Short-Term
Notes into shares of the Company’s common stock based on the Outstanding Balance divided by $1.80 per share (the “Conversion
Shares”); (ii) cancel and extinguish the Convertible Notes and Short-Term Notes; and (iii) amend and restate the Warrants,
Replacement Warrants and Additional Warrants to make them immediately exercisable upon the conversion, at a per share exercise
price equal to $1.80 per share. As consideration for the early conversion of the Convertible Notes and Short-Term Notes, the Company
issued each subscriber a new warrant (the “Payment Warrants”), exercisable for up to the number of shares of common
stock equal to the number of Conversion Shares received by such subscriber; at a per share exercise price of $1.80 per share.
The Payment Warrants are exercisable commencing on July 2, 2018, and expire on November 21, 2021.
Pursuant to the Conversion Agreements,
$1,804,064 of the outstanding principal and interest of the Convertible Notes was converted into 1,002,258 shares of common stock
and $259,297 of the outstanding principal and interest of the Short-Term Notes was converted into 144,053 shares of common stock.
As of July 2, 2018, 2,482,372 shares of common stock were issuable upon exercise of the Warrants, Replacement Warrants, Additional
Warrants and Payment Warrants.
Private Placement and Corresponding
Issuance of Common Stock and Warrants
From July 9, 2018 through August
3, 2018, the Company entered into subscription agreements (each, a “Purchase Agreement”) with certain accredited
investors (the “Purchasers”), pursuant to which the Company, in a private placement (the “2018 Private
Placement”), agreed to issue and sell to the Purchasers units (each, a “Unit”), each consisting of (i) 1
share (each, a “Share”) of the Company’s common stock and (ii) a warrant to purchase 1 share of common
stock at an initial exercise price of $3.00 per share (the “2018 Warrants”). The initial closing of the 2018
Private Placement was consummated on July 9, 2018 (the “First Closing”). As of August 8,
2018, the Company has issued and sold an aggregate of 295,200 Units to the Purchasers, for total gross proceeds to the
Company of approximately $738,000, inclusive of the advances received in June 2018 in the amount of $188,000, before
deducting offering expenses.
In connection with the 2018 Private Placement,
the Company has agreed to issue and sell to accredited investors up to a maximum of 4,000,000 Units (the “Maximum Offering”)
at a price of $2.50 per Unit for total gross proceeds to the Company of up to $10,000,000. If the 2018 Private Placement is over-subscribed,
the Company may, in its discretion sell up to an additional 600,000 Units (the “Over-Allotment”) to cover such over
subscriptions. If the Company issues the Maximum Offering amount, 4,000,000 shares of Common Stock (4,600,000 shares of Common
Stock if the Over-Allotment is exercised) would be issuable upon exercise of the 2018 Warrants. The Company may conduct any number
of additional closings so long as the final closing occurs on or before October 4, 2018, which period may be extended by the Company
in its discretion for up to 90 days as long as the amount of Units sold does not exceed the Maximum Offering and, if applicable,
the Over-Allotment. Under the Purchase Agreement, the Company has agreed to use the net proceeds from the 2018 Private Placement
to pay the outstanding principal and accrued interest on its 2017 Convertible Notes if such notes do not convert prior to maturity,
to pay the principal on its unsecured term loans, for research and development, clinical studies, legal fees and sales and marketing
expenses, as well as working capital and general corporate purposes. The Company has granted the Purchasers indemnification rights
with respect to its representations, warranties and agreements under the Purchase Agreement.
In connection with the 2018 Private Placement,
the Company entered into registration rights agreements with each of the Purchasers pursuant to which the Company has agreed to
file a registration statement with the SEC covering the resale of the shares of common stock sold in the 2018 Private Placement
and the shares of Common Stock issuable upon exercise of the 2018 Warrants. The Company has agreed to file such registration statement
within 75 days of the final closing of the 2018 Private Placement. Each registration rights Agreement includes customary indemnification
rights in connection with the registration statement.
The 2018 Warrants are exercisable beginning
on the date of issuance and will expire on July 9, 2023, five years from the date of the First Closing. Prior to expiration, subject
to the terms and conditions set forth in the 2018 Warrants, the holders of such 2018 Warrants may exercise the 2018 Warrants for
shares of Common Stock by providing notice to the Company and paying the exercise price per share for each share so exercised.
In connection with the 2018 Private Placement,
the brokers will receive a cash commission equal to 10% of the gross proceeds from the sale of the Units. In addition to the brokers’
commission, the Company will issue 5-year warrants to the brokers to purchase an amount of Common Stock equal to 10% of the total
amount of Shares sold in the 2018 Private Placement at an exercise price of $3.45 per share.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table
provides information regarding the various expenses (other than placement agent fees) payable by us in connection with the issuance
and distribution of the securities being registered hereby. All amounts shown are estimates except the Securities and Exchange
Commission registration fee.
Nature of Expense
|
|
Amount
|
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SEC registration fee
|
|
$
|
2,507
|
|
Accounting fees and expenses
|
|
|
20,000
|
|
Legal fees and expenses
|
|
|
150,000
|
|
Transfer agent’s fees and expenses
|
|
|
1,000
|
|
Printing and related fees
|
|
|
2,500
|
|
Miscellaneous
|
|
|
10,000
|
|
Total
|
|
$
|
186,007
|
|
Item 14. Indemnification of Directors and Officers.
The Company is incorporated
under the laws of the State of Delaware. Section 145 of the Delaware General Corporation Law provides that a Delaware corporation
may indemnify any persons who were, are, or are threatened to be made, parties to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person is or was an officer, director, employee or agent of such corporation, or
is or was serving at the request of such corporation as an officer, director, employee or agent of another corporation or enterprise.
The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding, provided that such person acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his or her conduct was illegal. A Delaware corporation
may indemnify any persons who were, are, or are threatened to be made, a party to any threatened, pending or completed action
or suit by or in the right of the corporation by reason of the fact that such person is or was a director, officer, employee or
agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees) actually and reasonably
incurred by such person in connection with the defense or settlement of such action or suit provided such person acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests except that no
indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation
must indemnify him or her against the expenses (including attorneys’ fees) actually and reasonably incurred.
The Company’s
certificate of incorporation provides for the indemnification of its directors to the fullest extent permitted under the Delaware
General Corporation Law. The Company’s bylaws provide for the indemnification of its directors and officers to the fullest
extent permitted under the Delaware General Corporation Law.
Section 102(b)(7)
of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary
duties as a director, except for liability for any:
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●
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transaction
from which the director derives an improper personal benefit;
|
|
●
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act or omission
not in good faith or that involves intentional misconduct or a knowing violation of law;
|
|
●
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unlawful
payment of dividends or redemption of shares; or
|
|
●
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breach of
a director’s duty of loyalty to the corporation or its stockholders.
|
The Company’s
certificate of incorporation includes such a provision. Under the Company’s bylaws, expenses incurred by any director or
officers in defending any such action, suit or proceeding in advance of its final disposition shall be paid by the Company upon
delivery to it of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately
be determined that such director or officer is not entitled to be indemnified by the Company, as long as such undertaking remains
required by the Delaware General Corporation Law.
Section 174 of the
Delaware General Corporation Law provides, among other things, that a director who willfully or negligently approves of an unlawful
payment of dividends or an unlawful stock purchase or redemption, may be held liable for such actions. A director who was either
absent when the unlawful actions were approved or dissented at the time may avoid liability by causing his or her dissent to such
actions to be entered in the books containing minutes of the meetings of the board of directors at the time such action occurred
or immediately after such absent director receives notice of the unlawful acts.
As permitted by the
Delaware General Corporation Law, we have entered into indemnity agreements with each of our directors and executive officers,
that require us to indemnify such persons against any and all expenses (including reasonable attorneys’ fees), witness fees,
damages, judgments, fines, settlements and other amounts incurred (including expenses of a derivative action) in connection with
any action, suit or proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact
that such person is or was a director, an officer or an employee of the Company or any of its affiliated enterprises, provided
that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to our best interests
and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder.
There is at present
no pending litigation or proceeding involving any of the Registrant’s directors or executive officers as to which indemnification
is required or permitted, and the Company is not aware of any threatened litigation or proceeding that may result in a claim for
indemnification, other than the letter received by the Company in May 2017 from the former employer of Mark Christianson and Wade
Frederickson claiming, among other things, certain breaches of non-competition obligations and confidentiality and non-disclosure
obligations to such prior employer and federal and state law by virtue of such officers’ work for the Company. See “We
may be subject to damages resulting from claims that we, or our employees, have wrongfully used or disclosed alleged trade secrets
of our competitors or are in breach of non-competition or non-solicitation agreements with our competitors” under the “Risk
Factors” section in the prospectus that is part of this registration statement.
The Company has an
insurance policy that covers its officers and directors with respect to certain liabilities, including liabilities arising under
the Securities Act or otherwise.
Item 15. Recent Sales of Unregistered Securities.
In August 2018, the
Company issued 50,000 shares of common stock for consulting services.
On July 9, 2018, the
Company entered into subscription agreements with accredited investors, pursuant to which the Company, in a private placement,
agreed to issue and sell to the purchasers units each consisting of (i) 1 share of the Company’s common stock and (ii) a
warrant to purchase 1 share of common stock at an initial exercise price of $3.00 per share. To date, the Company has issued an
aggregate of 295,200 units, for total gross proceeds to the Company of approximately $738,000 in connection with all closings
of this private placement. In connection with the private placement, the brokers will receive a cash commission equal to 10% of
the gross proceeds from the sale of the units. In addition to the brokers’ commission, the Company will issue 5-year warrants
to the brokers to purchase an amount of common stock equal to 10% of the total amount of shares sold in the private placement
at an exercise price of $3.45 per share.
In April 2018 the Company issued 100,000 shares of common stock, and in May 2018, the Company issued 50,000
shares of common stock for investor relations services.
From November 2016
through June 2017, NeuroOne, Inc. entered into subscription agreements with the subscribers (the “Series 1 Subscribers”)
identified therein (the “Series 1 Subscription Agreements”). Pursuant to the terms of the Series 1 Subscription Agreements,
NeuroOne, Inc. issued to the Series 1 Subscribers convertible promissory notes, which were amended in December 2016 and November
2017 (as amended, the “Series 1 Notes”), and warrants to purchase shares of the Company’s capital stock, which
were amended in June 2017 and November 2017 (as amended, the “Series 1 Warrants”). The Company and NeuroOne, Inc.
consummated the transactions contemplated by the Agreement and Plan of Merger and Reorganization on July 20, 2017 and the Company
assumed the Series 1 Notes and the Series 1 Warrants on such date.
On August 18, 2017,
the Company entered into subscription agreements with the subscribers (the “Series 2 Subscribers”, and together with
the Series 1 Subscribers, the “Subscribers”) identified therein (the “Series 2 Subscription Agreements”).
Pursuant to the terms of the Series 2 Subscription Agreements, the Company issued to the Series 2 Subscribers promissory notes,
which were amended in November 2017 and March 2018 (as amended, the “Series 2 Notes”, and together with the Series
1 Notes, the “Notes”), and warrants to purchase shares of the Company’s capital stock, which were amended in
March 2018 (as amended, the “Series 2 Warrants”, and together with the Series 1 Warrants, the “Original Warrants”).
In addition to the Series 2 Warrants, in March 2018 the Company issued to the Series 2 Subscribers additional warrants to purchase
shares of the Company’s capital stock (the “Additional Warrants”, and together with the Original Warrants, the
“Warrants”).
Effective as of July
2, 2018, the Company entered into the Series 1 Notes Debt Conversion Agreement with each Series 1 Subscriber and the Series 2
Notes Debt Conversion Agreement with each Series 2 Subscriber (the “Conversion Agreements”) to (i) convert the outstanding
principal and accrued and unpaid interest (the “Outstanding Balance”) under the Notes into shares of the Company’s
common stock based on the Outstanding Balance divided by $1.80 per share (the “Conversion Shares”); (ii) cancel and
extinguish the Notes; and (iii) amend and restate the Warrants to make them immediately exercisable upon conversion, at a per
share exercise price equal to $1.80 per share. As consideration for the early conversion of the Notes, the Company issued each
Subscriber a new warrant (the “Payment Warrants”), exercisable for up to the number of shares of common stock equal
to the number of Conversion Shares received by such Subscriber; at a per share exercise price of $1.80 per share. The Payment
Warrants are exercisable commencing on July 2, 2018, and expire on November 21, 2021.
Pursuant to the Conversion
Agreements, $1,804,064 of the outstanding principal and interest of the Series 1 Notes was converted into 1,002,258 shares of
common stock and $259,297 of the outstanding principal and interest of the Series 2 Notes was converted into 114,053 shares of
common stock. Additionally, as of July 2, 2018, 2,482,372 shares of common stock were issuable upon exercise of the Warrants and
Payment Warrants.
The Company entered
into a subscription agreement dated October 4, 2017 with institutional and accredited investors (collectively, pursuant to which
the Company, in a private placement, agreed to issue and sell to subscribers 8% convertible promissory notes (each maturing on
October 4, 2022) and warrants to purchase shares of the Company’s capital stock. Capitalized terms not otherwise defined
herein shall have the meanings assigned to such terms in the Initial Form 8-K. On December 14, 2017, the Company and holders of
a majority in aggregate principal amount of the notes entered into the Amended and Restated Subscription Agreement, amending certain
of the terms of the note and the warrant. On May 30, 2018, the Company entered into an amended and restated subscription agreement
with an additional subscriber, and issued a note in an aggregate principal amount of $50,000 and a related warrant to such subscriber.
The Company issued notes in an aggregate principal amount of $1,540,000 in connection with all closings of this private placement.
On August 18, 2017,
the Company entered into a Subscription Agreement with accredited investors pursuant to which the Company, in a private placement,
agreed to issue and sell to the subscribers promissory notes and warrants to purchase shares of the Company’s common stock,
with an initial exercise price of $1.80 per share. The closing of the private placement was consummated on August 18, 2017, and,
on that date, the Company issued notes in an aggregate principal amount of $253,000 to the Subscribers and agreed to issue warrants
to purchase up to an aggregate of 126,500 shares of common stock to the subscribers on the maturity date of the notes.
Prior to the Merger,
between October 16 and October 20, 2016, NeuroOne, Inc. issued 301,670 NeuroOne Shares (5,131,514 Company shares giving effect
to the Acquisition) as founders’ shares in a private placement to seven individuals (who were all accredited investors),
including three officers of the Company. The value applied was $0.03 per NeuroOne Share based on a valuation utilizing a weighted
average market value of invested capital methodology. In June 2017, the purchase price owed by the seven individuals for the founders’
shares under their respective subscription agreements totaling $9,050 was forgiven by the Company in its entirety.
In April 2017, NeuroOne,
Inc. issued 12,666 restricted NeuroOne Shares (215,453 Company shares giving effect to the Acquisition), subject to vesting, to
one of our executive officers under the 2016 Plan. Between January 2017 and June 2017, NeuroOne, Inc. granted NeuroOne Options
under the 2016 Plan to purchase an aggregate of 21,500 NeuroOne Shares (365,716 Company shares giving effect to the Acquisition),
each with an exercise price of $0.59 per NeuroOne Share ($0.035 per Company share giving effect to the Acquisition), to certain
of its consultants and directors.
In May 2017, NeuroOne,
Inc. issued to Mayo 50,556 NeuroOne Shares (859,976 Company shares giving effect to the Acquisition) pursuant to a Subscription
Agreement, as required by the terms of the Mayo Development Agreement.
At the closing of
the Acquisition, pursuant to and in connection with the Acquisition, we issued
|
●
|
6,291,994 Company shares to
the former stockholders of NeuroOne, Inc.;
|
|
●
|
Company Options for the purchase
of an aggregate of 365,716 Company shares; and
|
|
●
|
Company Warrants, which are
exercisable for Company Shares following conversion of the Notes on their terms.
|
On February 16, 2016,
a related party loaned the Company $5,703, convertible into common stock at the par value.
In connection with the foregoing, the
Company relied upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended,
for transactions not involving a public offering.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
A list of exhibits
filed with this registration statement on Form S-1 is set forth on the Exhibit Index and is incorporated herein by reference.
(b) Financial statement schedule.
All schedules have
been omitted because either they are not required, are not applicable or the information is otherwise set forth in the financial
statements and related notes thereto.
Item 17. Undertakings.
(a)
The undersigned registrant hereby undertakes:
(1) To file, during
any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any
prospectus required by section 10(a)(3) of the Securities Act of 1933, as amended (the “Securities Act”);
(ii) To reflect in
the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price
set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) To include any
material information with respect to the plan of distribution not previously disclosed in the registration statement or any material
change to such information in the registration statement.
(2) That, for the
purposes of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from
registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination
of the offering.
(4) That, for the
purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part
of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses
filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is
first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part
of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such date of first use.
(5) For the purpose
of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the
securities in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser
by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered
to offer or sell such securities to such purchaser:
(i) Any preliminary
prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing
prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned
registrant;
(iii) The portion
of any other free writing prospectus relating to the offering containing material information about the undersigned registrant
or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication
that is an offer in the offering made by the undersigned registrant to the purchaser.
(b) Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities, other than the payment by the registrant of expenses incurred
and paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding,
is asserted by such director, officer or controlling person in connection with the securities being registered hereby, the registrant
will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
(c) The undersigned
Registrant hereby undertakes that it will:
(1) for determining
any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant under Rule 424(b)(1), or (4)
or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective.
(2) for determining
any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration
statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
SIGNATURES
Pursuant to the requirements
of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Eden Prairie, State of Minnesota, on September 10, 2018.
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NeuroOne Medical Technologies Corporation
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By:
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/s/ David Rosa
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David Rosa
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Its:
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Chief Executive Officer
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Each person whose
signature appears below constitutes and appoints David Rosa his true and lawful attorney in fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments
(including post effective amendments) to the Registration Statement, and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and all post effective amendments thereto, and to file the same, with all exhibits thereto, and all documents
in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact
and agent, each acting alone, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements
of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the
dates indicated.
/s/ David Rosa
|
|
September 10, 2018
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David Rosa
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Chief Executive Officer and Director
(Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)
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/s/ Paul Buckman
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September 10, 2018
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Paul Buckman
Director
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/s/ Suraj Kalia
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September 10, 2018
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Suraj Kalia
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Director
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/s/ Jeffrey Mathiesen
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September 10, 2018
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Jeffrey Mathiesen
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Director
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EXHIBIT INDEX
Exhibit No.
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Do
cument
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2.1 *
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Agreement
and Plan of Merger and Reorganization by and among NeuroOne Medical Technologies Corporation, OSOK Acquisition Company and
NeuroOne, Inc. dated as of July 20, 2017 (incorporated by reference to Exhibit 2.1 on the Registrant’s Current Report
on Form 8-K filed on July 20, 2017)
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2.2
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Plan
of Conversion of NeuroOne Medical Technologies Corporation dated June 20, 2017 (incorporated by reference to Exhibit 2.1 on
the Registrant’s Current Report on Form 8-K filed on June 29, 2017)
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3.1
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Certificate
of Incorporation of NeuroOne Medical Technologies Corporation (incorporated by reference to Exhibit 3.4 on the Registrant’s
Current Report on Form 8-K filed on June, 29, 2017)
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3.2
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Bylaws
of NeuroOne Medical Technologies Corporation (incorporated by reference to Exhibit 3.5 on the Registrant’s Current Report
on Form 8-K filed on June 29, 2017)
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4.1
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Form
of Common Stock Certificate (incorporated by reference to Exhibit 4.1 on the Registrant’s Current Report on Form 8-K
filed on July 20, 2017)
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5.1
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Opinion of Sichenzia Ross Ference LLP
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10.1 #
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Exclusive
Start-Up Company License Agreement; WARF Agreement No. 14-00333 by and between Wisconsin Alumni Research Foundation and Neuro
One LLC, dated October 1, 2014 (incorporated by reference to Exhibit 10.1 on the Registrant’s Current Report on Form
8-K filed on July 20, 2017)
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10.2 #
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Amendment
to Exclusive Start-Up Company License Agreement by and between Wisconsin Alumni Research Foundation, Neuro One LLC, and NeuroOne,
Inc. dated as of February 22, 2017 (incorporated by reference to Exhibit 10.2 on the Registrant’s Current Report on
Form 8-K filed on July 20, 2017)
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10.3 #
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Mayo
Foundation for Medical Education and Research Amended and Restated License and Development Agreement by and between Mayo Foundation
for Medical Education and Research, and NeuroOne LLC dated as of May 25, 2017 (incorporated by reference to Exhibit 10.3 on
the Registrant’s Current Report on Form 8-K filed on July 20, 2017)
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10.4
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Form
of October 2016 Common Stock Subscription Agreement (incorporated by reference to Exhibit 10.4 on the Registrant’s Current
Report on Form 8-K filed on July 20, 2017)
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10.5
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Form
of November 2016 Promissory Note and Warrant Subscription Agreement (incorporated by reference to Exhibit 10.5 on the Registrant’s
Current Report on Form 8-K filed on July 20, 2017)
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10.6
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Form
of Promissory Note issued pursuant to November 2016 Promissory Note and Warrant Subscription Agreement (incorporated by reference
to Exhibit 10.6 on the Registrant’s Current Report on Form 8-K filed on July 20, 2017)
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10.7
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First
Amendment to Promissory Note issued pursuant to November 2016 Promissory Note and Warrant Subscription Agreement (incorporated
by reference to Exhibit 10.7 on the Registrant’s Current Report on Form 8-K filed on July 20, 2017)
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10.8
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Form
of Second Amendment to Promissory Note issued pursuant to November 2016 Promissory Note and Warrant Subscription Agreement
(incorporated by reference to Exhibit 4.3 on the Registrant’s Current Report on Form 8-K filed on November 27, 2017)
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10.9
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Form
of Capital Stock Purchase Warrant issued pursuant to November 2016 Promissory Note and Warrant Subscription Agreement (incorporated
by reference to Exhibit 10.8 on the Registrant’s Current Report on Form 8-K filed on July 20, 2017)
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10.10
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Form
of First Amendment to Capital Stock Purchase Warrant issued pursuant to November 2016 Promissory Note and Warrant Subscription
Agreement (incorporated by reference to Exhibit 10.9 on the Registrant’s Current Report on Form 8-K filed on July 20,
2017)
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10.11
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Form
of Second Amendment to Capital Stock Purchase Warrant issued pursuant to November 2016 Promissory Note and Warrant Subscription
Agreement (incorporated by reference to Exhibit 4.4 on the Registrant’s Current Report on Form 8-K filed on November
27, 2017)
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10.12
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Stockholders
Agreement by and among NeuroOne, Inc., and the stockholders party thereto dated as of October 20, 2016 (incorporated by reference
to Exhibit 10.10 on the Registrant’s Current Report on Form 8-K filed on July 20, 2017)
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10.13 +
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2016
Equity Incentive Plan of NeuroOne, Inc. (incorporated by reference to Exhibit 10.11 on the Registrant’s Current
Report on Form 8-K filed on July 20, 2017)
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10.14
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Form
of Stock Option Award Agreement pursuant to 2016 Equity Incentive Plan of NeuroOne, Inc. (incorporated by reference to
Exhibit 10.12 on the Registrant’s Current Report on Form 8-K filed on July 20, 2017)
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Exhibit No.
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Document
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10.15
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Restricted
Stock Purchase Agreement by and between NeuroOne, Inc. and Thomas Bachinski, dated as of April 10, 2017 (incorporated
by reference to Exhibit 10.13 on the Registrant’s Current Report on Form 8-K filed on July 20, 2017)
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10.16 +
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2017
Equity Incentive Plan of the Company (incorporated by reference to Appendix G to Schedule 14C filed on April 20, 2017)
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10.17 +
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NeuroOne
Medical Technologies Corporation 2017 Equity Incentive Plan Option Agreement (incorporated by reference to Exhibit 10.15 on
the Registrant’s Current Report on Form 8-K filed on July 20, 2017)
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10.18 +
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NeuroOne
Medical Technologies Corporation 2017 Equity Incentive Plan Restricted Stock Unit Agreement (incorporated by reference to
Exhibit 10.16 on the Registrant’s Current Report on Form 8-K filed on July 20, 2017)
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10.19 +
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Employment
Agreement by and between NeuroOne LLC and Dave Rosa, dated as of October 5, 2016 (incorporated by reference to Exhibit 10.17
on the Registrant’s Current Report on Form 8-K filed on July 20, 2017)
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10.20 +
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Offer
Letter to Mark Christianson from NeuroOne, Inc. dated December 1, 2016 (incorporated by reference to Exhibit 10.18 on the
Registrant’s Current Report on Form 8-K filed on July 20, 2017)
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10.21 +
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Offer
Letter to Thomas Bachinski from NeuroOne, Inc. dated January 9, 2017 (incorporated by reference to Exhibit 10.19 on the Registrant’s
Current Report on Form 8-K filed on July 20, 2017)
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10.22 +
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Offer
Letter to Wade Fredrickson from NeuroOne, Inc. dated December 1, 2016 (incorporated by reference to Exhibit 10.20 on the Registrant’s
Current Report on Form 8-K filed on July 20, 2017)
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10.23 +
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Form
of Indemnification Agreement with the Company’s Officers and Directors (incorporated by reference to Appendix E to Schedule
14C filed on April 20, 2017)
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10.24
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Resignation
Letter of Amer Samad (incorporated by reference to Exhibit 10.22 on the Registrant’s Current Report on Form
8-K filed on July 20, 2017)
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10.25 +
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Release
Agreement of Wade Fredrickson dated June 28, 2017 (incorporated by reference to Exhibit 10.23 on the Registrant’s Current
Report on Form 8-K filed on July 20, 2017)
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10.26
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Employment
Agreement by and between NeuroOne Medical Technologies Corporation and David A. Rosa dated August 4, 2017 (incorporated by
reference to Exhibit 10.1 on the Registrant’s Current Report on Form 8-K filed on August 7, 2017)
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10.27
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Form
of August 2017 Subscription Agreement (incorporated by reference to Exhibit 10.1 on the Registrant’s Current Report
on Form 8-K filed on August 23, 2017)
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10.28
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Form
of Promissory Note issued pursuant to August 2017 Subscription Agreement (incorporated by reference to Exhibit 4.1 on the
Registrant’s Current Report on Form 8-K filed on August 23, 2017)
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10.29
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First
Amendment to Promissory Note by and between NeuroOne Medical Technologies Corporation and the Subscribers dated as of November
30 (incorporated by reference to Exhibit 10.1 on the Registrant’s Current Report on Form 8-K filed on December 6, 2017)
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10.30
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Form
of Capital Stock Purchase Warrant pursuant to August 2017 Subscription Agreement (incorporated by reference to Exhibit 4.2
on the Registrant’s Current Report on Form 8-K filed on August 23, 2017)
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10.31
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Form
of October 2017 Subscription Agreement (incorporated by reference to Exhibit 10.1 on the Registrant’s Current Report
on Form 8-K filed on October 6, 2017)
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10.32
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Form
of Promissory Note issued pursuant to October 2017 Subscription Agreement (incorporated by reference to Exhibit 4.1 on the
Registrant’s Current Report on Form 8-K filed on October 6, 2017)
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10.33
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Form
of Capital Stock Purchase Warrant issued pursuant to October 2017 Subscription Agreement (incorporated by reference to Exhibit
4.2 on the Registrant’s Current Report on Form 8-K filed on October 6, 2017)
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10.34
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Form
of Amended and Restated Subscription Agreement (incorporated by reference to Exhibit 10.1 on the Registrant’s Current
Report on Form 8-K filed on December 20, 2017)
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10.35
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Form
of Amended and Restated Promissory Note issued pursuant to Amended and Restated Promissory Note and Warrant Subscription Agreement
(incorporated by reference to Exhibit 4.1 on the Registrant’s Current Report on Form 8-K filed on December 20, 2017)
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10.36
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Form
of Amended and Restated Capital Stock Purchase Warrant issued pursuant to Amended and Restated Promissory Note and Warrant
Subscription Agreement (incorporated by reference to Exhibit 4.2 on the Registrant’s Current Report on Form 8-K filed
on December 20, 2017)
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Exhibit No.
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D
ocument
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10.37
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Form
of Amended and Restated Note issued pursuant to August 2017 Subscription Agreement, as amended (incorporated by reference
to Exhibit 4.1 on the Registrant’s Current Report on Form 8-K filed on March 16, 2018)
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10.38
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Form
of Replacement Warrant issued pursuant to August 2017 Subscription Agreement, as amended (incorporated by reference to Exhibit
4.2 on the Registrant’s Current Report on Form 8-K filed on March 16, 2018)
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10.39
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Form
of Additional Warrant issued pursuant to August 2017 Subscription Agreement, as amended (incorporated by reference to Exhibit
4.3 on the Registrant’s Current Report on Form 8-K filed on March 16, 2018)
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10.40
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Non-Employee
Director Compensation Policy (incorporated by reference to Exhibit 10.40 to 10-K filed April 16, 2018)
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10.41
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Lock-up
Agreement, effective as of March 1, 2018 by and between Wade Fredrickson and the Company (incorporated by reference to Exhibit
10.41 to 10-K filed April 16, 2018)
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10.42
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Promissory
Note between the Company and Lifestyle Healthcare LLC, dated May 17, 2018 (incorporated by reference to Exhibit 10.1 to 8-K
filed May 23, 2018)
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10.43
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Promissory
Note between the Company and Jainal Bhuyan, dated May 17, 2018 (incorporated by reference to Exhibit 10.2 to 8-K filed May
23, 2018)
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10.44
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Form
of Series 1 Notes Debt Conversion Agreement (incorporated by reference to Exhibit 10.1 to 8-K filed July 6, 2018)
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10.45
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Form
of Series 2 Notes Debt Conversion Agreement (incorporated by reference to Exhibit 10.2 to 8-K filed July 6, 2018)
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10.46
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Form
of Warrant (incorporated by reference to Exhibit 4.1 to 8-K filed July 13, 2018)
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10.47
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Form
of Purchase Agreement (incorporated by reference to Exhibit 10.1 to 8-K filed July 13, 2018)
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10.48
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Form
of Registration Rights Agreement (incorporated by reference to Exhibit 10.2 to 8-K filed July 13, 2018)
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10.49
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Amendment
to Lock-Up Agreement, dated July 17, 2018, between the Company and Wade Frederickson (incorporated by reference to 8-K filed
July 23, 2018)
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16.1
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Letter
from Pritchett, Siler & Hardy, P.C., dated July 11, 2017 (incorporated by reference to Exhibit 16.2 on the Registrant’s
Current Report on Form 8-K filed on July 20, 2017)
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21.1
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Subsidiaries
of the Registrant (incorporated by reference to Exhibit 21.1 to 10-K filed April 16, 2018)
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23.1
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Consent of BDO USA, LLP
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23.2
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Consent of Sichenzia Ross Ference LLP (including in Exhibit 5.1)
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema Document
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document
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*
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Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees to furnish supplementally
a copy of any omitted schedule or exhibit to the Agreement and Plan of Merger to the Securities and Exchange Commission upon
request.
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#
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Portions of this exhibit have been omitted pursuant to a request for confidential treatment
and have been separately filed with the Securities and Exchange Commission.
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+
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Indicates management contract or compensatory plan.
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