Notes to Condensed Financial Statements
(unaudited)
NOTE 1 – Description of Business
and Basis of Presentation
NeuroOne Medical Technologies Corporation
(the “Company” or “NeuroOne”), a Delaware Corporation, is 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 had limited commercial
sales. The Company is currently raising capital to fund the development of its proprietary technology. The Company received 510(k)
clearance from the FDA to market the initial cEEG product and expects to submit an application for 510(k) clearance for a second
product by end of the first half of calendar year 2021.
The Company is based in Eden Prairie, Minnesota.
COVID-19
On March 11, 2020, the World Health Organization
declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout
the United States and around the world. As a result of the COVID-19 pandemic, the Company has experienced delays and disruptions
in its pre-clinical and clinical trials, as well as interruptions in its manufacturing, supply chain, and research and development
operations. Additionally, the development of the Company’s technology was delayed in fiscal year 2020 due to interruption
in global manufacturing and shipping due to the COVID-19 pandemic. For example, one of our key manufacturing partners and one of
the Company’s suppliers have had staffing issues due to COVID-19, leading to delays in the Company’s development builds
and delays in shipping product. Additionally, the Company’s own staff has been impacted by infections and mandatory quarantines.
The Company’s plans for further testing or clinical trials may be further impacted by the continuing effects of COVID-19.
The global outbreak of COVID-19 continues to rapidly evolve. In April 2020, given the impact of COVID-19 on the Company, the Company
applied for and received loan funding of $83,333 under the Paycheck Protection Program (“PPP”). The Company may be
required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, and it cannot provide
any assurance that it will be eligible for loan forgiveness, or that any amount of the PPP loan will ultimately be forgiven.
The extent to which the COVID-19 pandemic
may impact the Company’s business and pre-clinical and clinical trials will depend on future developments, which are highly
uncertain and cannot be predicted with confidence, such as the effect of the pandemic on its suppliers and distributors and the
global supply chain, the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social
distancing in the U.S. and other countries, business closures or business disruptions and the effectiveness of actions taken in
the U.S. and other countries to contain and treat the disease. The COVID-19 pandemic may also impact the Company’s business
because of employee illness, school closures, and other community response measures.
The COVID-19 pandemic may also impact the
Company’s ability to secure additional financing, or its ability to up-list from our current OTC Market (“OTCQB”).
Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic
continues, it may have a material adverse effect on the Company’s results of future operations, financial position, and liquidity
in fiscal year 2021 and beyond.
Basis of presentation
The accompanying unaudited condensed financial
statements have been prepared by the Company, 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 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 financial statements should
be read in conjunction with the audited financial statements and the notes thereto for the year ended September 30, 2020 included
in the Annual Report on Form 10-K. The condensed balance sheet at September 30, 2020 was derived from the audited financial statements
of the Company.
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
In December 2019, the Company merged its
wholly owned subsidiary, NeuroOne Inc., into NeuroOne Medical Technologies Corporation. The merger of the Company’s wholly
owned subsidiary did not have a financial impact to the periods presented. Upon close of the merger, the Company did not have any
remaining entities that required consolidation for financial statement reporting purposes.
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.
Reclassifications
Certain amounts presented in the prior
year period have been reclassified to conform to current period financial statement presentation. The change in accounts payable
and accrued expenses reported in the statements of cash flows during the comparable prior year period was reclassified into two
separate line item categories.
Immaterial Revision to Prior Period
Financial Statements
Subsequent to the quarter ended December 31, 2019, it was determined that non-cash entries related
to the operating lease liability and related right-of-use asset were inappropriately presented on a gross basis within the condensed
statement of cash flows. The Company assessed the materiality of this error considering both qualitative and quantitative factors
and determined it to be immaterial. A revision to the previously issued condensed statement of cash flows has been made. The error
had no impact to the condensed balance sheet, condensed statement of operations, condensed statement of changes in stockholders’
equity (deficit), or cash flows from investing and financing activities in the condensed statement of cash flows.
The effect of the revisions on the impacted
line items within operating cash flows of the Company’s condensed statement of cash flows for the quarter ended December
31, 2019 is as follows:
●
|
an addition of non-cash lease expense
of $9,870;
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●
|
a decrease in the change in prepaid and
other assets of $325,248, bringing the previously reported balance of ($332,075) to a revised balance of ($6,827); and
|
●
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a decrease in the change in accrued expenses,
deferred revenue, operating lease and other liabilities of $335,118, bringing the previously reported balance of $323,639 to a
revised balance, net of the $6,669 reclassification of accounts payable described above, to ($18,148).
|
There was no impact to net operating cash
flows.
NOTE 2 – Liquidity and Capital
Resources
The accompanying condensed financial statements
have been prepared on the basis that the Company will continue as a going concern. The Company has incurred losses since inception,
negative cash flows from operations, and has an accumulated deficit of $32,838,511 as of December 31, 2020. The Company has not
established a source of revenues to cover its full operating costs, and as such, has been dependent on funding operations through
the issuance of debt and sale of equity securities. Management believes that the Company, as a result of the cash flows received
from the 2021 Private Placement (See Note 13 – Subsequent Events), has adequate liquidity to fund its operations without
raising additional funds for at least twelve months from the date of issuance of these financial statements. Management believes
additional capital will be required for the Company to reach a point of break-even cash flows. The Company’s future operating
activities under the distribution and development agreement with Zimmer, Inc. coupled with its plans to raise capital or issue
debt financing may provide additional liquidity in the future, however these actions are not solely within the control of the Company
and we are unable to predict the ultimate outcome of these actions to generate the liquidity ultimately required.
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, primarily in connection with the convertible promissory
notes, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
Revenue Recognition
The Company entered into a development
and distribution agreement which has current and future revenue recognition implications. See Note 7 – Zimmer Development
Agreement.
Product Revenue
Revenues from product sales are recognized
when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the
consideration the Company expects to be entitled to in exchange for those goods or services. At the inception of each contract,
performance obligations are identified and the total transaction price is allocated to the performance obligations. The Company
commenced commercial sales of cEEG strip/grid and electrode cable assembly products in the first quarter of fiscal year 2021.
Cost of Product Revenue
Cost of product revenue consists of the
manufacturing and materials costs incurred by the Company’s third-party contract manufacturer in connection with Strip/Grid
Products and outside supplier materials costs in connection with the Electrode Cable Assembly Products. In addition, cost of product
revenue includes royalty fees incurred in connection with the Company’s license agreements.
Collaborations Revenue
In determining the appropriate amount of
revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the following steps: (i) identification
of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance
obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including
the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated
selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
A performance obligation is a promise in
a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. Performance obligations
may include license rights, development services, and services associated with regulatory submission and approval processes. Significant
management judgment is required to determine the level of effort required under an arrangement and the period over which the Company
expects to complete its performance obligations under the arrangement. If the Company cannot reasonably estimate when its performance
obligations are either completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably
make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up
method.
As part of the accounting for these arrangements,
the Company must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation
identified in the contract. The Company uses key assumptions to determine the stand-alone selling price, which may include forecasted
revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory
success. The Company allocates the total transaction price to each performance obligation based on the estimated relative standalone
selling prices of the promised goods or service underlying each performance obligation.
Licenses of intellectual property:
If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations
identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when
the license is transferred to the customer, and the customer can use and benefit from the license. For licenses that are bundled
with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether
the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring
progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress
each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
Milestone payments: At the inception
of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being
achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable
that a significant revenue reversal would not occur, the value of the associated milestone (such as a regulatory submission) is
included in the transaction price. Milestone payments that are not within the control of the Company, such as approvals from regulators,
are not considered probable of being achieved until those approvals are received. When the Company’s assessment of probability
of achievement changes and variable consideration becomes probable, any additional estimated consideration is allocated to each
performance obligation based on the estimated relative standalone selling prices of the promised goods or service underlying each
performance obligation and recorded in license, collaboration, and other revenues based upon when the customer obtains control
of each element.
Royalties: For arrangements that
include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant
item to which the royalties relate, the Company recognizes revenue at the later of (a) when the related sales occur, or (b) when
the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
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:
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●
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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.
|
|
●
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Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
|
As of December 31, 2020 and September 30,
2020, the fair values of cash, accounts receivable, inventory, prepaid expenses, other assets, accounts payable and accrued expenses
approximated their carrying values because of the short-term nature of these assets or liabilities. The fair value of the convertible
notes while outstanding during the three months ended December 31, 2020 and 2019 were based on both the fair value of our common
stock, discount associated with the embedded redemption features, and cash flow models discounted at current implied market rates
evidenced in recent arms-length transactions representing expected returns by market participants for similar instruments and are
based on Level 3 inputs.
There were no transfers between fair value
hierarchy levels during the three months ended December 31, 2020 and 2019.
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
The fair value of financial instruments
measured on a recurring basis is as follows:
|
|
As of
December 31, 2020
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
As of
September 30, 2020
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes
|
|
$
|
1,007,206
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,007,206
|
|
Total liabilities at fair value
|
|
$
|
1,007,206
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,007,206
|
|
The following table provides a roll-forward
of the convertible notes at fair value on a recurring basis using unobservable level 3 inputs for the three months ended December
31 as follows:
|
|
2020
|
|
Convertible notes
|
|
|
|
Balance as of beginning of period – September 30, 2020
|
|
$
|
1,007,206
|
|
Change in fair value including accrued interest
|
|
|
(1,974
|
)
|
Conversion of convertible promissory notes to common stock
|
|
|
(1,005,232
|
)
|
Balance as of end of period – December 31, 2020
|
|
$
|
—
|
|
|
|
2019
|
|
Convertible notes
|
|
|
|
Balance as of beginning of period – September 30, 2019
|
|
$
|
—
|
|
Fair value attributed to convertible promissory notes upon issuance
|
|
|
5,066,740
|
|
Fair value attributed to note extinguishment
|
|
|
125,574
|
|
Balance as of end of period –December 31, 2019
|
|
$
|
5,192,314
|
|
Intellectual Property
The Company has entered into two licensing
agreements with major research institutions, which allows for access to certain patented technology and know-how. Payments under
those agreements are capitalized and amortized to general and administrative expense over the expected useful life of the acquired
technology.
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
Property and Equipment
Property and equipment is recorded at cost
and reduced by accumulated depreciation. Depreciation expense is recognized over the estimated useful lives of the assets using
the straight-line method. The estimated useful life for equipment and furniture ranges from three to seven years and three years
for software. Tangible assets acquired for research and development activities and that have alternative use are capitalized over
the useful life of the acquired asset. Estimated useful lives are periodically reviewed, and, when appropriate, changes are made
prospectively. Software purchased for internal use consists primarily of amounts paid for perpetual licenses to third-party software
providers and installation costs. When certain events or changes in operating conditions occur, asset lives may be adjusted and
an impairment assessment may be performed on the recoverability of the carrying amounts. Maintenance and repairs are charged directly
to expense as incurred.
Allowances for Doubtful Accounts
The Company records a provision for doubtful
accounts, when appropriate, based on historical experience and a detailed assessment of the collectability of its accounts receivable.
In estimating the allowance for doubtful accounts, the Company considers, among other factors, the aging of the accounts receivable,
its historical write-offs, the credit worthiness of each customer, and general economic conditions. Account balances are charged
off against the allowance when the Company believes that it is probable that the receivable will not be recovered. Actual write-offs
may be in excess of the Company’s estimated allowance.
Inventories
Inventories are stated at the lower of
cost (using the first-in, first-out “FIFO” method) or net realizable value. The Company calculates inventory valuation
adjustments for excess and obsolete inventory, when appropriate, based on current inventory levels, movement, expected useful lives,
and estimated future demand of the products and spare parts. The Company’s inventory is currently comprised of cEEG strip/grid
and electrode cable assembly finished good product. The strip/ grid products are produced by a third-party contract manufacturer
and the electrode cable assembly products are obtained from outside suppliers.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets,
which consist of licensed intellectual property and property and equipment for impairment whenever events or changes in circumstances
indicate that the carrying value of these assets may not be recoverable. The Company assesses the recoverability of long-lived
assets by determining whether or not the carrying value of such assets will be recovered through undiscounted expected future cash
flows. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying
value and the fair value of the impaired asset.
Research and Development Costs
Research and development costs are charged
to expense as incurred. Research and development expenses may include costs incurred in performing research and development activities,
including clinical trial costs, manufacturing costs for both clinical and pre-clinical materials as well as other contracted services,
license fees, and other external costs. Non-refundable 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.
Selling, General and Administrative
Selling, general and administrative expenses
consist primarily of personnel-related costs including stock-based compensation for personnel in functions not directly associated
with research and development activities. Other significant costs include legal fees relating to corporate matters, intellectual
property costs, professional fees for consultants assisting with regulatory, clinical, product development, financial matters,
and beginning in the first quarter of fiscal year 2021, sales and marketing in connection with the commercial sale of cEEG strip/grid
and electrode cable assembly products.
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
Income Taxes
For the Company, income taxes are accounted
for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base
and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred
tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset
will not be realized.
Net Loss Per Share
For the Company, basic loss per share of
common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.
Diluted earnings or loss per share of common
stock is computed similarly to basic earnings or loss per share except the weighted average shares outstanding are increased to
include additional shares from the assumed exercise of any common stock equivalents, if dilutive. The Company’s convertible
promissory notes, warrants, stock options and restricted stock units while outstanding are considered common stock equivalents
for this purpose. Diluted earnings is computed utilizing the treasury method for the warrants, stock options and restricted stock
units. Diluted earnings with respect to the convertible promissory utilize the if-converted method. 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 months ended December 31, 2020 and 2019.
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 months
ended December 31, 2020 and 2019:
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|
2020
|
|
|
2019
|
|
Warrants
|
|
|
10,170,588
|
|
|
|
8,389,987
|
|
Stock options
|
|
|
1,603,485
|
|
|
|
1,595,818
|
|
Restricted stock units
|
|
|
54,952
|
|
|
|
14,006
|
|
Convertible notes
|
|
|
—
|
|
|
|
1,336,472
|
|
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
(ASU 2018-13). The new guidance modifies the disclosure requirements in Topic 820 as follows:
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●
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Removals: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements.
|
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●
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Modifications: for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.
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●
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Additions: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
|
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
This guidance is effective for all entities
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in
unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value
measurements, and the narrative description of measurement uncertainty should all be applied prospectively for only the most recent
interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all
periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or
modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date.
The Company adopted the new guidance on October 1, 2020 and it did not have a material impact on its financial statements.
In December 2019, the FASB issued ASU No.
2019-12, Income Taxes (Topic 740) which amends the existing guidance relating to the accounting for income taxes. This ASU is intended
to simplify the accounting for income taxes by removing certain exceptions to the general principles of accounting for income taxes
and to improve the consistent application of GAAP for other areas of accounting for income taxes by clarifying and amending existing
guidance. The ASU is effective for fiscal years beginning after December 15, 2020. The Company does not expect that the adoption
of this new guidance will have a material impact on the Company’s financial statements and plans to adopt this guidance on
a prospective basis for the provisions applicable to the Company.
In August 2020, FASB issued ASU 2020-06,
Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s
Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which, among
other things, provides guidance on how to account for contracts on an entity’s own equity. This ASU
eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting
for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement
provisions. In addition, this ASU modifies how particular convertible instruments and certain contracts that may be settled in
cash or shares impact the diluted EPS computation. The amendments in this ASU are effective for smaller reporting companies as
defined by the SEC for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early
adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating
the impact of ASU 2020-06 on its financial statements.
NOTE 4 - Commitments and Contingencies
WARF License Agreement
The Company has 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 micro electrode technology (the “WARF Agreement”). The Company entered into an Amended and Restated
Exclusive Start-up Company License Agreement (the “WARF License”) with WARF on January 21, 2020, which amended and
restated in full the prior license agreement between WARF and NeuroOne, LLC, a predecessor of the Company, dated October 1, 2014,
as amended on February 22, 2017, March 30, 2019 and September 18, 2019.
The WARF License grants to the Company
an exclusive 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. The Company has agreed to pay WARF a royalty equal to a single-digit
percentage of its product sales pursuant to the WARF License, with a minimum annual royalty payment of $50,000 for 2020, $100,000
for 2021 and $150,000 for 2022 and each calendar year thereafter that the WARF License is in effect. The minimum annual royalty
payment for calendar year 2020 in the amount of $50,000 was accrued by the Company as of December 31, 2020 and was reflected as
a component of cost of product revenue for the three month period ended December 31, 2020. If the Company or any of its sublicensees
contest the validity of any licensed patent, the royalty rate will be doubled during the pendency of such contest and, if the contested
patent is found to be valid and would be infringed by the Company if not for the WARF License, the royalty rate will be tripled
for the remaining term of the WARF License.
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
WARF may terminate the WARF License if
the Company defaults on the payments of amounts due to WARF or fails to timely submit development reports, or breaches any other
covenant in the WARF License and fails to remedy such default in ninety (90) days or in the event of certain bankruptcy events
involving the Company. WARF may also terminate the WARF License on ninety (90) days’ notice if the Company fails to have
commercial sales of one or more FDA-approved products under the WARF License by June 30, 2021. The WARF License otherwise expires
by its terms (i) on the date that no valid claims on the patents licensed thereunder remain or (ii) upon the cessation for more
than four (4) calendar quarters of the payment, once begun, of earned royalties under certain sections of the WARF License. The
Company expects the latest expiration of a licensed patent to occur in 2030. The first commercial sale occurred in December 2020,
prior to the June 30, 2021 deadline.
Mayo Agreement
The Company has 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 micro electrode technology (“Mayo Agreement”). If the Company is successful
in obtaining regulatory approval, the Company is to pay royalties to Mayo based on a percentage of net sales of products of the
licensed technology through the term of the Mayo Agreement, set to expire May 25, 2037. As of December 31, 2020, $2,144 in royalty
payments were due to Mayo given the commencement of commercial sales during the first quarter of 2021 and were reflected as a component
of cost of product revenue during the period.
Legal
PMT Litigation
From time to time, the Company is subject
to litigation and claims arising in the ordinary course of business. In May 2017, NeuroOne received a letter from PMT Corporation
(“PMT”), the former employer of Mark Christianson and Wade Fredrickson. PMT claimed that these officers had breached
their restrictive covenant obligations with PMT by virtue of their work for NeuroOne and such officer’s prior work during
employment with the prior employer, that these officers had breached their confidentiality and non-disclosure obligations to PMT
and federal and state law by misappropriating confidential and trade secret information, and that the Company is responsible for
tortious interference with contracts. The letter, which purported to attach a noncompete agreement signed by Mr. Fredrickson, demanded
that Mr. Fredrickson (who resigned from the Company in June 2017), Mr. Christianson and NeuroOne cease and desist all competitive
activities, that Mr. Fredrickson step down from his position and that Mr. Christianson and NeuroOne provide the former employer
access to NeuroOne’s systems to demonstrate that it is not using trade secrets or proprietary information nor competing with
the former employer.
On March 29, 2018, the Company was served
with a complaint filed by PMT adding the Company, NeuroOne and Mr. Christianson to its existing lawsuit against Mr. Fredrickson
in the Fourth Judicial District Court of the State of Minnesota. The complaint purported to attach Mr. Fredrickson’s noncompete
agreement as Exhibit A. In the lawsuit, PMT claims that Mr. Fredrickson and Mr. Christianson breached their non-competition, non-solicitation
and non-disclosure obligations, breached their fiduciary duty obligations, were unjustly enriched, engaged in unfair competition,
engaged in a civil conspiracy, tortiously interfered with PMT’s contracts and prospective economic advantage, and breached
a covenant of good faith and fair dealing. Against Mr. Fredrickson, PMT also alleges that he intentionally or negligently spoliated
evidence, made negligent or fraudulent misrepresentations, misappropriated trade secrets in violation of Minnesota law, and committed
the tort of conversion and statutory civil theft. Against the Company and NeuroOne, PMT alleges that the Company and NeuroOne were
unjustly enriched and engaged in unfair competition. PMT asked the Court to impose a constructive trust over the shares held by
Mr. Fredrickson and Mr. Christianson and to award compensatory damages, equitable relief, punitive damages, attorneys’ fees,
costs and interest.
On April 18, 2018, Mr. Christianson, the
Company and NeuroOne, Inc. filed a motion for dismissal, which was heard by the Court on October 11, 2018. The motion for dismissal
stated that: the contract claims against Mr. Christianson fail because his agreement was not supported by consideration; the Minnesota
Uniform Trade Secrets Act preempts plaintiff’s claims for unfair competition, civil conspiracy and unjust enrichment; plaintiff
fails to state a claim regarding alleged breach of the duties of loyalty and good faith/fair dealing; plaintiff cannot legally
obtain a constructive trust; plaintiff has insufficiently pled its tortious interference claims; and Plaintiff has not stated a
claim for unfair competition. On January 7, 2019, the judge granted the motion for dismissal with respect to PMT’s claim
for breach of the duty of good faith and fair dealing, and denied the motion for dismissal with respect to the other claims presented.
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
In April 2019, PMT served the Company,
NeuroOne, Inc and Christianson with a proposed Second Amended Complaint, which included new claims against the Company and NeuroOne,
Inc for tortious interference with contract and tortious interference with prospective business advantage and punitive damages
against the Company, NeuroOne Inc. and Christianson. On June 28, 2019, the Company presented evidence indicating that PMT had participated
in a fraud on the Court and sought an Order that PMT had waived the attorney client privilege.
On July 16, 2019, the defendants served
PMT with a joint notice of motion for sanctions seeking a variety of sanctions for litigation misconduct including, but not limited
to, dismissal of the case and an award of attorneys’ fees. The Company, NeuroOne Inc and Mr. Christianson further intend
to move for summary judgment on all remaining claims asserted against them as well as for leave to assert counterclaims against
PMT for abuse of process.
On August 30, 2019, the Hennepin
County District Court heard dispositive motions in this case. The district court judge indicated some claims would likely be tried
to a jury and encouraged the parties to settle.
On September 12, 2019, the district court
heard NeuroOne’s motion for sanctions. The district court held the sanctions hearing on December 17, 2019 and December 18,
2019 and indicated that a ruling would be made in approximately 90 days.
On April 29, 2020, the district court granted
the Company’s motion for sanctions. Additionally, the district court granted the Company’s motion for summary judgment
in part with respect to the counts for Christianson’s breach of non-confidentiality agreement, and denied the Company’s
motion for summary judgment on all other counts.
On August 24, 2020, defendants moved the
Court to amend their counterclaims for abuse of process against PMT to add a claim for punitive damages. On October 12, 2020 the
Court awarded NeuroOne $185,000 in Rule 11 sanctions and Fredrickson $145,000 in Rule 11 sanctions with respect to its misconduct
relating to the Fredrickson noncompete. PMT and its former litigation counsel, Barnes &Thornburg, were jointly and severally
liable for these awards, which were paid on December 11, 2020 and have been recognized in other income in the condensed statement
of operations. The Court granted NeuroOne’s motion to amend to permit its assertion of the right to assert a punitive damages
claim against PMT associated with the additional legal costs incurred by the Company in fighting the allegations relating to the
Fredrickson noncompete.
Trial has been set for December 2021, but
this may be delayed or impacted by the COVID-19 pandemic. The Company intends to continue to defend itself vigorously and to continue
to aggressively prosecute its affirmative counterclaim against PMT. The outcome of any claim against the Company by PMT was not
estimable as of the filing of this Form 10-Q.
Facility Lease
On October 7, 2019, the Company entered
into a non-cancellable lease agreement (the “Lease”) with Biynah Cleveland, LLC, BIP Cleveland, LLC, and Edenvale Investors
(together, the “Landlord”) pursuant to which the Company has agreed to lease office space located at 7599 Anagram Drive,
Eden Prairie, Minnesota (the “Premises”). The Company took possession of the Premises on November 1, 2019, with the
term of the Lease ending 65 months after such date, unless terminated earlier (the “Term”). The initial base rent for
the Premises is $6,410 per month for the first 17 months, increasing to $7,076 per month by the end of the Term. In addition, as
long as the Company is not in default under the Lease, the Company shall be entitled to an abatement of its base rent for the first
5 months. In addition, the Company will pay its pro rata share of the Landlord’s annual operating expenses associated with
the premises, calculated as set forth in the Lease of which the Company is entitled to an abatement of these operating expense
for the first 3 months.
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
Prior to the October 2019 Lease, the Company
entered into a non-cancellable facility lease for its operations and headquarters for an eleven-month term beginning on December
1, 2018. The monthly rent under that lease was $4,763.
During the three months ended December
31, 2020 and 2019, rent expense associated with the facility leases amounted to $29,461 and $22,004, respectively.
Supplemental cash flow information related
to the operating lease was as follows:
|
|
For the three months ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liability:
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
19,231
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Right-of -use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
—
|
|
|
$
|
335,119
|
|
Supplemental balance sheet information
related to the operating lease was as follows:
|
|
As of
December 31,
2020
|
|
|
As of
September 30,
2020
|
|
|
|
|
|
|
|
|
Right-of-use assets
|
|
$
|
268,932
|
|
|
$
|
282,211
|
|
|
|
|
|
|
|
|
|
|
Lease liability
|
|
$
|
298,327
|
|
|
$
|
312,176
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (years)
|
|
|
4.25
|
|
|
|
4.5
|
|
Weighted average discount rate
|
|
|
7.0
|
%
|
|
|
7.0
|
%
|
Maturity of the lease liability was as
follows:
|
|
As of
December 30,
2020
|
|
2021 (period from January 1, 2021 to September 30, 2021)
|
|
$
|
58,654
|
|
2022
|
|
|
79,832
|
|
2023
|
|
|
81,827
|
|
2024
|
|
|
83,873
|
|
2025
|
|
|
42,454
|
|
Total lease payments
|
|
|
346,640
|
|
Less imputed interest
|
|
|
(48,313
|
)
|
Total
|
|
|
298,327
|
|
Short-term portion
|
|
|
(59,350
|
)
|
Long-term portion
|
|
$
|
238,977
|
|
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
NOTE 5 – Intangibles and Property
and Equipment
Intangibles
Intangible assets rollforward is as follows:
|
|
Useful Life
|
|
|
|
Net Intangibles, September 30, 2020
|
|
12-13 years
|
|
$
|
156,523
|
|
Less: amortization
|
|
|
|
|
(5,579
|
)
|
Net Intangibles, December 31, 2020
|
|
|
|
|
150,944
|
|
Amortization expense was $5,579 for the
three months ended December 31, 2020 and 2019.
Property and Equipment
Property and equipment held for use by
category are presented in the following table:
|
|
As of
December 31,
2020
|
|
|
As of
September 30,
2020
|
|
Equipment and furniture
|
|
$
|
195,756
|
|
|
$
|
195,756
|
|
Software
|
|
|
1,895
|
|
|
|
1,895
|
|
Total property and equipment
|
|
|
197,651
|
|
|
|
197,651
|
|
Less accumulated depreciation
|
|
|
(44,777
|
)
|
|
|
(31,620
|
)
|
Property and equipment, net
|
|
$
|
152,874
|
|
|
$
|
166,031
|
|
Depreciation expense was $13,157 and $4,319
for the three months ended December 31, 2020 and 2019, respectively.
NOTE 6 - Accrued Expenses and Other
Liabilities
Accrued expenses consisted of the following
at December 31, 2020 and September 30, 2020:
|
|
As of
December 31,
2020
|
|
|
As of
September 30,
2020
|
|
Accrued payroll
|
|
$
|
282,253
|
|
|
$
|
238,212
|
|
Operating lease liability, short term
|
|
|
59,350
|
|
|
|
57,848
|
|
Royalty Payments
|
|
|
52,144
|
|
|
|
—
|
|
Accrued issuance costs
|
|
|
—
|
|
|
|
50,400
|
|
Other
|
|
|
218,125
|
|
|
|
166,302
|
|
Total
|
|
$
|
611,872
|
|
|
$
|
512,762
|
|
The “other” category is primarily
comprised of board fees.
Paycheck Protection Program
The CARES Act, signed into law in March
2020, established the Paycheck Protection Program (“PPP”). The PPP authorizes over $600 billion in forgivable loans
to small businesses. Loan amounts are forgiven to the extent proceeds are used to cover documented payroll, mortgage interest,
rent, and utility costs over a 24-week measurement period following loan funding. There can be no assurance that this PPP loan
will be forgiven. Loans have a maturity of 2 years and an interest rate of 1%. Prepayments may be made without penalty. In April
2020, the Company received loan funding of $83,333 under the PPP and was recorded as a long-term liability. Interest in connection
with the PPP was nominal during the three months ended December 31, 2020.
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
NOTE 7 – Zimmer Development Agreement
On July 20, 2020, the Company entered into
an exclusive development and distribution agreement (the “Development Agreement”) with Zimmer, Inc. (“Zimmer”),
pursuant to which the Company granted Zimmer exclusive global rights to distribute NeuroOne’s strip and grid cortical electrodes
(the “Strip/Grid Products”) and electrode cable assembly products (the “Electrode Cable Assembly Products”).
Additionally, the Company granted Zimmer the exclusive right and license to distribute certain depth electrodes developed by the
Company (“SEEG Products”, and together with the Strip/Grid Products and Electrode Cable Assembly Products, the “Products”).
The parties have agreed to collaborate with respect to development activities under the Development Agreement through a joint development
committee composed of an equal number of representatives of Zimmer and the Company.
Under the terms of the Development Agreement,
the Company will be responsible for all costs and expenses related to developing the Products, and Zimmer will be responsible for
all costs and expenses related to the commercialization of the Products. In addition to the Development Agreement, Zimmer and the
Company have entered into a Manufacturing and Supply Agreement (the “MS Agreement”) and a supplier quality agreement
(the “Quality Agreement”) with respect to the manufacturing and supply of the Products.
Except as otherwise provided in the Development
Agreement, the Company will be responsible for performing all development activities, including non-clinical and clinical studies
directed at obtaining regulatory approval of each Product. Zimmer has agreed to use commercially reasonable efforts to promote,
market and sell each Product following the “Product Availability Date” (as defined in the Development Agreement) for
such Product.
Pursuant to the Development Agreement, Zimmer made an upfront
initial exclusivity fee payment of $2.0 million (the “Initial Exclusivity Fee”) to the Company. In addition, the Company
is to receive the following fee payments (the “Interim Fee Bonus”) upon reaching certain milestones:
Scenario 1: Except where Zimmer
timely delivers a Design Modification Notice pursuant to Section 1.2, if one or more of the events set forth below occurs on or
before the deadline indicated for such event and the Product Availability Date (as defined in the Development Agreement) for the
SEEG Products occurs on or before June 30, 2021, then the Company shall receive the additional amount indicated for such event
as part of the SEEG Exclusivity Maintenance Fee:
|
●
|
Design freeze for the SEEG Products by November 30, 2020 - $500,000
|
|
●
|
Acceptance of all Deliverables for SEEG Products under the Development Plan (as defined in the Development Agreement) by April 30, 2021 - $500,000
|
Scenario 2: Notwithstanding Scenario
1 above, if Zimmer timely delivers a Design Modification Notice to the Company pursuant to Section 1.2, and one or more of the
events set forth below occurs on or before the deadline indicated for such event and the Product Availability Date for the SEEG
Products occurs on or before June 30, 2021 as determined by Zimmer, then the Company shall receive the additional amount indicated
for such event as part of the SEEG Exclusivity Maintenance Fee:
|
●
|
Acceptance of all Deliverables for SEEG Products under the Development Plan other than the Modified Connector by April 30, 2021 - $500,000
|
|
●
|
Acceptance of all Deliverables for SEEG Products under the Development Plan, including the Modified Connector by September 30, 2021 - $500,000
|
For purposes of the Development Agreement,
each of the foregoing events shall have occurred only if the Company has demonstrated the achievement of the event to Zimmer’s
reasonable satisfaction. Notwithstanding the foregoing, the events in Sections 6.1(c)(ii), (iii) and (iv) of the Development Agreement
shall not be deemed to be met if FDA Approval for the SEEG Products is not received prior to the applicable deadline.
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
In addition to the Initial Exclusivity
Fee and Interim Fee Bonus, in order to maintain the exclusivity of the SEEG Distribution License, Zimmer must pay the SEEG Exclusivity
Maintenance Fee to the Company, on or prior to the SEEG Exclusivity Confirmation Date, in immediately available funds as follows:
|
●
|
if the Product Availability Date for the SEEG Products occurs on or before June 30, 2021, then $3,000,000, plus the amount of any Interim Fee Bonuses earned pursuant to Section 6.1(c), including any such Interim Fee Bonus earned after June 30, 2021 pursuant to Section 6.1(c)(iv) following the delivery of a Design Modification Notice;
|
|
●
|
if the Product Availability Date for the SEEG Products occurs after June 30, 2021, but on or before September 30, 2021, then $3,000,000, plus if Zimmer timely issues a Design A-9 Modification Notice, any Interim Fee Bonus earned pursuant to Section 6.1(c)(iv);
|
|
●
|
if the Product Availability Date for the SEEG Products occurs after September 30, 2021, but on or before December 31, 2021, then $2,500,000; and
|
|
●
|
if the Product Availability Date for the SEEG Products occurs after December 31, 2021, then $1,500,000.
|
Notwithstanding any other provision of
the Development Agreement, if the Product Availability Date for the SEEG Products has not occurred on or before June 30, 2022,
Zimmer shall have the right to terminate the SEEG Distribution License by delivering written notice to the Company to that effect
and, upon delivery of such notice, Zimmer shall be relieved of all of its obligations hereunder with respect to SEEG Products,
including any obligation to pay the SEEG Exclusivity Maintenance Fee or to purchase, market, distribute or sell any SEEG Products.
The Initial Exclusivity Fee and the SEEG Exclusivity Maintenance Fee (including any Interim Fee Bonus(es) Fess), once paid, are
non-refundable.
The Development Agreement will expire on
the tenth anniversary of the date of the first commercial sale of the last of the Products to achieve a first commercial sale,
unless terminated earlier pursuant to its terms. Either party may terminate the Development Agreement (x) with written notice for
the other party’s material breach following a cure period or (y) if the other party becomes subject to certain insolvency
proceedings. In addition, Zimmer may terminate the Development Agreement for any reason with 90 days’ written notice, and
the Company may terminate the Development Agreement if Zimmer acquires or directly or indirectly owns a controlling interest in
certain competitors of the Company.
At inception of the Zimmer Development
Agreement through December 31, 2020, the Company had identified three performance obligations under the Zimmer Development Agreement
and consisted of the following: (1) the Company obligation to grant Zimmer access to its intellectual property; (2) complete SEEG
Product development; and (3) complete Strip/Grid Product development. Accordingly, the Company recognized revenue in the amount
of $22,274 related to the development of the Products completed during the period in connection with the Initial Exclusivity Fee
payment. The Zimmer Development Agreement was accounted for under the provisions of ASC 606, Revenue from Contracts with Customers.
A reconciliation of the closing balance
of deferred revenue related to the Zimmer Development Agreement is as follows as of December 31, 2020:
|
|
2020
|
|
Deferred Revenue
|
|
|
|
Balance as of beginning of period – September 30, 2020
|
|
$
|
73,434
|
|
Revenue recognized
|
|
|
(22,274
|
)
|
Balance as of end of period – December 31, 2020
|
|
$
|
51,160
|
|
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
The remaining performance obligations reflected
in deferred revenue as of December 31, 2020 are expected to be completed in the latter half of fiscal year 2021.
Product Revenue
In December 2020, the Company commenced
commercial sales of its Strip/Grid Products and Electrode Cable Assembly Products in connection with the Development Agreement.
Product revenue recognized during the three month period ended December 31, 2020 was $71,474.
Advertising Expense
Advertising expense is charged to selling, general and administrative
expenses during the period that it is incurred. Total advertising expense amounted to $29,007 for the three month period ended
December 31, 2020. Advertising expense during the prior year period was negligible.
NOTE 8 - Convertible Promissory Notes
and Warrant Agreements
|
|
As of
December 31,
2020
|
|
|
As of
September 30,
2020
|
|
Paulson convertible notes, principal
|
|
$
|
—
|
|
|
$
|
546,000
|
|
Accrued interest
|
|
|
—
|
|
|
|
63,458
|
|
Fair value adjustments
|
|
|
—
|
|
|
|
397,748
|
|
|
|
$
|
—
|
|
|
$
|
1,007,206
|
|
2019 Paulson Convertible Note Offering
On November 1, 2019, the Company entered
into a subscription agreement with certain accredited investors, pursuant to which the Company, in a private placement (the “2019
Paulson Private Placement”), agreed to issue and sell to the investors 13% convertible promissory notes (each, a “2019
Paulson Note” and collectively, the “2019 Paulson Notes”) and warrants (each, a “2019 Paulson Warrant”
and collectively, the “2019 Paulson Warrants”) to purchase shares of the Company’s common stock.
The initial closing of the 2019 Paulson
Private Placement was consummated on November 1, 2019, and, on that date and through December 3, 2019, the Company issued the 2019
Paulson Notes in an aggregate principal amount of $3,234,800 to the subscribers for gross proceeds equaling the principal amount.
The 2019 Paulson Private Placement terminated on December 3, 2019.
On April 24, 2020, the Company and holders
of a majority in aggregate principal amount of the 2019 Paulson Notes entered into an amendment to the 2019 Paulson Notes (the
“Second 2019 Paulson Notes Amendment”) to, among other things:
|
i.
|
Extended the Maturity Date – The Second 2019 Paulson Notes Amendment extended the maturity date of the 2019 Paulson Notes from May 1, 2020 to November 1, 2020 (in either case, unless a change of control transaction happens prior to such date);
|
|
ii.
|
Revised Optional Conversion Terms – The Second 2019 Paulson Notes Amendment provided that the amount of shares to be received upon the a subscriber’s optional conversion of the 2019 Paulson Notes prior to a 2019 Qualified Financing (as defined in the 2019 Paulson Notes) would have equaled: (1) the Outstanding Balance as defined below of such subscriber’s 2019 Paulson Note elected by the subscriber to be converted divided by (2) an amount equal to 0.6 multiplied by the volume weighted average price of the common stock for the ten (10) trading days immediately preceding the date of conversion; and
|
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
|
iii.
|
Revise the Registration Date – The Second 2019 Paulson Notes Amendment provided that promptly following the earlier of (1) May 1, 2020, if the applicable subscriber converted all or a majority of the Outstanding Balance of such subscriber’s 2019 Paulson Note prior to such date; (2) the final closing a 2019 Qualified Financing; and (3) the maturity date, the Company will enter into a registration rights agreement with the applicable subscriber containing customary and usual terms pursuant to which the Company shall agree to prepare and file with the SEC a registration statement on or prior to the 90th calendar day following the registration date, covering the resale of any common stock received on conversion of such 2019 Paulson Notes, and shares of common stock underlying the Warrants.
|
The 2019 Paulson Notes had a fixed interest
rate of 13% per annum and required the Company to repay the principal and accrued and unpaid interest thereon on November 1, 2020
(the “Maturity Date”). Interest on principal amounted to $5,701 and $53,875 during the three month period ended December
31, 2020 and 2019, respectively, and was recorded under the net valuation change of instruments measured at fair value in the condensed
statements of operations. The subscriber, prior to the Second 2019 Paulson Notes Amendment, had the option to convert the outstanding
principal and accrued and unpaid interest of such subscriber’s 2019 Paulson Note (the “Outstanding Balance”)
into common stock in an amount equal to the Outstanding Balance divided by the ten day volume weighted average closing price of
the common stock prior to conversion. In addition, both before and after the Second 2019 Paulson Note Amendment, if the Company
raised more than $3,000,000 in an equity financing (the “Qualified Financing”) before the Maturity Date, each subscriber
had the option to convert the Outstanding Balance into the securities issued by the Company in such Qualified Financing in an amount
equal to (i) the Outstanding Balance divided by (ii) the lower of 0.6 multiplied by (A) the actual per share price of securities
issued by the Company in the Qualified Financing or (B) the ten day volume weighted average closing price of the common stock prior
to the first closing of a Qualified Financing. If a change of control transaction had occurred prior to a Qualified Financing or
the Maturity Date, the 2019 Paulson Notes would have become payable on demand as of the closing date of such transaction. Change
of control meant a merger or consolidation with another entity in which the Company’s stockholders did 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 Company elected to account for the
2019 Paulson Notes on a fair value basis under ASC 825 to comprehensively value and streamline
the accounting for the embedded conversion options. The fair value of the 2019 Paulson Notes was significantly higher than
the proceeds received as of each of the respective issuance dates given the significant redemption discount associated with the
Qualified Financing provision. The excess of fair value over proceeds at issuance amounted to $1,831,940 and was recorded to interest
expense in the condensed statements of operations during the three months ended December 31, 2019. Subsequent to issuance, the
fair value change of the Paulson Notes amounted to a benefit of $(1,974) and an expense of $125,574 during the three months ended
December 31, 2020 and 2019, respectively, and was recorded under the net valuation change of instruments measured at fair value
in the condensed statements of operations.
Each 2019 Paulson Warrant grants the holder
the option to purchase the number of shares of common stock equal to (i) 0.5 multiplied by (ii) the principal amount of such subscriber’s
2019 Paulson Notes divided by 1.87, with an exercise price per share equal to $1.87. As of the final closing on December 3, 2019,
the Company issued 2019 Paulson Warrants exercisable for 864,913 shares of common stock in connection with all closings of the
2019 Paulson Private Placement. The 2019 Paulson Warrants are immediately exercisable and expire on November 1, 2022. The exercise
price is subject to adjustment in the event of any stock dividends or splits, reverse stock split, recapitalization, reorganization
or similar transaction, as described therein. The 2019 Paulson warrants were deemed to be a free-standing instrument and were accounted
for as equity. Given that the fair value of the 2019 Paulson Notes exceeded the proceeds received at issuance, there was no value
attributed to the 2019 Paulson Warrants in the condensed financial statements.
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
Issuance costs during the three month period
ended December 31, 2020 in connection with the 2019 Paulson Private Placement were $3,053 and related to legal costs. Issuance
costs incurred during the three months ended December 31, 2019 were $865,567. During the first quarter of 2020, Paulson Investment
Company (“Paulson”) received a cash commission equal to 12% of the gross proceeds from the sale of the 2019 Paulson
Notes which amounted to $388,176, and 10-year warrants to purchase an amount of Common Stock equal to 259,476 shares of common
stock at an exercise price equal to $1.87 per share (the “Broker Warrants”) at a fair value $419,635. Lastly, issuance
costs during the first quarter of fiscal year 2020 included legal and third party fees in the amount of $57,756. The issuance costs
during both periods were recorded as a component of interest in the accompanying statements of operations.
During the first quarter of fiscal year
2021, the remaining holders of the 2019 Paulson Notes elected to convert the remaining outstanding principal and accrued and unpaid
interest in the amount of $615,159 into 878,253 shares of common stock.
NOTE 9 – Stock-Based Compensation
During the three month periods ended December
31, 2020 and 2019, stock-based expense related to stock-based awards amounted to $245,829 and $587,677, respectively, and was included
in general and administrative and research and development costs as follows in the accompanying condensed statements of operations.
|
|
2020
|
|
|
2019
|
|
General and administrative
|
|
$
|
181,792
|
|
|
$
|
563,768
|
|
Research and development
|
|
|
64,037
|
|
|
|
23,909
|
|
Total stock-based compensation expense
|
|
$
|
245,829
|
|
|
$
|
587,677
|
|
Stock Options
During the three month period ended December
31, 2020 and 2019, under the 2017 Equity Incentive Plan (the “2017 Plan”), the Company granted 125,000 and 800,000
stock options, respectively, to its employees, consultants and scientific advisory board members. Vesting generally occurs over
an immediate to 48 month period based on a time of service condition although vesting acceleration is provided under one grant
in the event that certain milestones are met. The grant date fair value of the grants issued during the three month periods ended
December 31, 2020 and 2019 was $0.53 and $1.06 per share, respectively. The total expense for the three months ended December 31,
2020 and 2019 related to stock options was $100,147 and $438,083, respectively. The total number of stock options outstanding as
of December 31, 2020 and September 30, 2020 was 1,603,485 and 1,478,485, respectively.
The weighted-average assumptions used in
the Black-Scholes option-pricing model are as follows for the stock options granted during the three month period ended December
31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
Expected stock price volatility
|
|
|
54.3
|
%
|
|
|
52.8
|
%
|
Expected life of options (years)
|
|
|
5.8
|
|
|
|
5.7
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk free interest rate
|
|
|
0.5
|
%
|
|
|
1.7
|
%
|
During the three month periods ended December
31, 2020 and 2019, 215,326 and 375,830 stock options vested, and zero and 7,497 stock options were forfeited during these periods,
respectively.
Restricted Stock Units
There were no restricted stock units (“RSUs”)
granted during the three months ended December 31, 2020 and 2019, and 25,144 and 10,503 RSUs vested during these periods, respectively.
The total expense for the three months ended December 31, 2020 and 2019 related to these RSUs was $43,082 and $25,001, respectively.
The number of RSUs forfeited during the three month periods ended December 31, 2020 and 2019 was zero and 7,003, respectively.
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
Other Stock-Based Awards
In August 2020, an additional consulting
agreement was executed whereby 120,000 shares of common stock were issued, subject to Company repurchase. The stock award under
the agreement vests over a six-month period. As of December 31, 2020, 80,000 shares were vested under this agreement of which 60,000
shares vested during the first quarter of fiscal year 2021. Compensation expense related to the stock awards granted under this
consulting agreement amounted to $102,600 for the three month ended December 31, 2020 and was included in the total stock-based
expense.
In October 2019, two consulting agreements
were executed whereby up to 115,000 shares of common stock were issuable of which 90,000 shares of common stock were issued and
60,000 shares were vested as of December 31, 2019 under these agreements. Vesting was based on a time-based vesting condition ranged
over a three to nine month period commencing upon the execution of the consulting agreements. Compensation expense related to the
stock awards granted under these consulting agreements amounted to $124,593 and was included in the total stock-based expense referenced
above for the three month period ended December 31, 2019. The expense was based on the fair value of the underlying common stock
at the point of vesting which ranged from $2.00 to $2.65 per share.
General
As of December 31, 2020, 1,714,400 shares
were available for future issuance on a combined basis under the 2016 Equity Incentive Plan and 2017 Plan. Unrecognized stock-based
compensation was $666,127 as of December 31, 2020. The unrecognized share-based expense is expected to be recognized over a weighted
average period of 1.9 years.
NOTE 10 – Concentrations
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. The Company has not experienced any losses
on its deposits since inception, and management believes that minimal credit risk exists with respect to these financial institutions.
As of December 31, 2020, the Company had $6,889,912 of deposits in excess of federally insured amounts.
Revenue
One customer accounts for all of the Company’s product
and collaborations revenue.
Supplier concentration
One contract manufacturer produces all of the Company’s
Strip/Grid Products.
NOTE 11 – Income Taxes
The effective tax rate for the three months
ended December 31, 2020 and 2019 was zero percent. As a result of the analysis of all available evidence as of December 31,
2020 and September 30, 2020, the Company recorded a full valuation allowance on its net deferred tax assets. Consequently,
the Company reported no income tax benefit during the three months ended December 31, 2020 and 2019. 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.
NeuroOne
Medical Technologies Corporation
Notes
to Condensed Financial Statements, continued
(unaudited)
NOTE
12 – Stockholders’ Deficit
2021
Private Placement
On
January 12, 2021, the Company entered into a common stock and warrant purchase agreement with certain accredited investors pursuant
to which the Company, in a private placement (the “2021 Private Placement”), agreed to issue and sell an aggregate
of 12,500,000 shares of the common stock and warrants to purchase an aggregate of 12,500,000 shares of common stock resulting
in total gross proceeds of $12.5 million before deducting placement agent fees and estimated offering expenses. See Note 13 –
Subsequent Events.
2019
Common Stock Offering
On
October 23, 2019, the Company entered into Securities Purchase Agreements with certain accredited investors, pursuant to which
the Company, in a private placement, has issued and sold 141,666 shares of the Company’s common stock to the accredited
investors at a price of $1.80 per share, for gross proceeds amounting to $255,000. The Company filed a registration statement
with the SEC covering the resale of the shares of common stock sold in the private placement on August 11, 2020.
Warrant
Activity and Summary
The
following table summarizes warrant activity during the three month period ended December 31, 2020:
|
|
|
|
|
Exercise
Price
|
|
|
Weighted
Average
|
|
|
Weighted
Average
|
|
|
|
Warrants
|
|
|
Per Warrant
|
|
|
Exercise Price
|
|
|
Term (years)
|
|
Outstanding and exercisable at September 30, 2020
|
|
|
10,170,588
|
|
|
|
$1.80 - 3.00
|
|
|
$
|
2.35
|
|
|
|
2.89
|
|
Issued
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Outstanding and exercisable at December 31, 2020
|
|
|
10,170,588
|
|
|
|
$1.80 - 3.00
|
|
|
$
|
2.35
|
|
|
|
2.64
|
|
NOTE
13 – Subsequent Events
2017
Plan Evergreen Provision
Under
the 2017 Plan, the shares reserved automatically increase on January 1st of each year, for a period of not more than ten years
from the date the 2017 Plan is approved by the stockholders of the Company, commencing on January 1, 2019 and ending on (and including)
January 1, 2027, to an amount equal to 13% of the fully-diluted shares outstanding as of December 31st of the preceding calendar
year. Notwithstanding the foregoing, the Board may act prior to January 1st of a given year to provide that there will be no January
1st increase in the share reserve for such year or that the increase in the share reserve for such year will be a lesser number
of shares of common stock than would otherwise occur pursuant to the preceding sentence. “Fully Diluted Shares” as
of a date means an amount equal to the number of shares of common stock (i) outstanding and (ii) issuable upon exercise, conversion
or settlement of outstanding awards under the 2017 Plan and any other outstanding options, warrants or other securities of the
Company that are (directly or indirectly) convertible or exchangeable into or exercisable for shares of common stock, in each
case as of the close of business of the Company on December 31 of the preceding calendar year. On January 1, 2021, 1,453,867 shares
were added to the 2017 Plan as a result of the evergreen provision.
NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements,
continued
(unaudited)
2021
Private Placement
On
January 12, 2021, the Company entered into a Common Stock and Warrant Purchase Agreement (the “2021 Purchase Agreement”)
with certain accredited investors (the “Purchasers”), pursuant to which the Company, in the 2021 Private Placement,
agreed to issue and sell an aggregate of 12,500,000 shares (the “Shares”) of the common stock of the Company, par
value $0.001 per share (the “Common Stock”), and warrants to purchase an aggregate of 12,500,000 shares of Common
Stock (the “2021 Warrants”) at an aggregate purchase price of $1.00 per share of Common Stock and corresponding warrant,
resulting in total gross proceeds of $12.5 million before deducting placement agent fees and estimated offering expenses. The
2021 Warrants have an initial exercise price of $1.75 per share. The 2021 Warrants are exercisable beginning on the date of issuance
and will expire on the fifth anniversary of such date. Prior to expiration, subject to the terms and conditions set forth in the
2021 Warrants, the holders of such 2021 Warrants may exercise the 2021 Warrants for Warrant Shares by providing notice to the
Company and paying the exercise price per share for each share so exercised or by utilizing the “cashless exercise”
feature contained in each 2021 Warrant. The 2021 Private Placement closed on January 14, 2021.The Company received $5,000,000
of the 2021 Private Placement proceeds on December 31, 2020.
Stock-Based
Awards
On
January 1, 2021, the Company granted 180,000 stock options to an executive officer at an exercise price of $1.57 per share under
the 2017 Plan. The stock options vest over a four year period.
On
January 27, 2021, the Company granted 1,560,000 stock options to four employees, including three executive officers at an exercise
price of $1.99 per share under the 2017 Plan. All of the stock options vest over a four year period, except that 250,000 stock
options granted to our Chief Executive Officer vest upon certain performance objectives.
NeuroOne
Medical Technologies Corporation
Form
10-Q