ITEM 1.
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, Inc. (the “Acquisition”). Immediately following the closing of the Acquisition, the business of NeuroOne, Inc. became
our sole focus.
Corporate Overview and History of NeuroOne,
Inc.
NeuroOne, Inc. 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, Inc. on October 27, 2016, with NeuroOne,
Inc. 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, Inc., and all debts, liabilities and duties of the LLC became the debts, liabilities and duties of NeuroOne,
Inc., except for the Exclusive Start-up Company License Agreement, dated as of October 1, 2014, as amended on February 22, 2017, March
30, 2019 and September 18, 2019 (the “Original 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.
In December 2019, NeuroOne, Inc. was merged with and into the Company, with the Company remaining as the surviving entity.
We are a medical technology company focused on
the development and commercialization of thin film electrode technology for continuous electroencephalogram (cEEG) and stereoelectrocencephalography
(sEEG) recording, spinal cord stimulation, brain stimulation and ablation solutions for patients suffering from epilepsy, Parkinson’s
disease, dystonia, essential tremors, chronic pain due to failed back surgeries and other related neurological disorders. Additionally,
we are investigating the potential applications of our technology associated with artificial intelligence. 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.
We are developing our cortical, sheet and depth
electrode technology to provide solutions for diagnosis through cEEG recording and 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 tremors, dystonia, and chronic pain. The effects of DBS as a potential treatment for Alzheimer’s
is also being evaluated by researchers. Unlike ablative technologies, the effects of DBS are reversible.
RF ablation is a procedure that uses radiofrequency under the electrode
contacts which 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. In August 2021, the Company announced a strategic partnership with RBC Medical Innovations to develop a radio frequency
(RF) ablation generator. The following month, our RF ablation technology was tested by representatives from Emory University in Atlanta
Georgia in an animal study. The product remains in development.
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 institutional review board (“IRB”) approval at Mayo Clinic for clinical
research. In December 2020, we announced the first human commercial use of our Evo cortical electrode in a procedure performed at the
Mayo Clinic. Regarding our ablation electrode, the Cleveland Clinic has performed testing in bench top models and pre-clinical (or animal
testing) modes. These pre-clinical tests have demonstrated that the technology is capable of recording, ablation and acute stimulation,
although our ablation electrode technology remains in product development (meaning that additional testing will be needed prior to it
being cleared for sale by the U.S. Food and Drug Administration (the “FDA”)) for recording (or diagnostic) and therapeutic
modalities.
We received 510(k) FDA clearance for our Evo cortical
technology in November 2019, and in September 2021 we received FDA clearance to market our Evo sEEG electrode technology for temporary
(less than 24 hours) use with recording, monitoring, and stimulation equipment for the recording, monitoring, and stimulation of electrical
signals at the subsurface level of the brain.
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. The CDC and CURE also estimate
that epilepsy costs the United States $15.5 billion per year. 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. Sudden Unexpected Death in Epilepsy has an annual incidence of 1.16/1000 in epilepsy patients.
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 to 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.
|
1
|
American Association of Neurological Surgeons National Neurosurgical
Procedural Statistics 2012.
|
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 believe our technology, which has been developed to date by physicians at WARF and Mayo Clinic, will provide a number of advantages
over the current commercially available technologies, including the following:
|
●
|
Our
proprietary thin film technology under development has a smaller footprint with many more electrodes.
|
|
●
|
We
expect that our technology will eventually be able to be implanted using a minimally invasive procedure utilizing a dime sized burr hole
rather than a full craniotomy.
|
|
●
|
Our
technology may provide more accurate detection of irregular brain activity over currently available technology. In limited clinical testing,
doctors at Mayo Clinic have documented pre-seizure activity (micro-seizures) during their clinical research with their patients using
our cEEG technology.
|
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.
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.
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.
Spinal Cord Stimulation
Failed back surgery syndrome (“FBSS”)
is a condition that produces chronic lower back/leg pain due to one or more failed back surgeries. Typically, it is related to patients
that suffer with pain after surgery of the lumbar spine for degenerative disc disease. Re-operations are usually not recommended for these
patients due to low success rates. These patients experience greater levels of pain, a lower quality of life, varying levels of disability
and higher rate of unemployment. Spinal cord stimulation works by placing an electrode(s) in a targeted area of the spine which is then
connected to an implantable pulse generator that sends electrical stimulation to the electrode to block the pain signals from reaching
the brain.
The back pain market includes the following indications:
FBSS, Ischemic Limb Pain, and Complex Regional Pain Syndrome. Over half of this market is comprised of patients with FBSS. Certain studies
have indicated a benefit for these patients suffering from chronic back and lower limb pain when they have been treated with electrical
stimulation. Prior to the patient receiving an implant, they undergo a trial period that allows them to determine if they are receiving
relief from the therapy while preventing a surgery to implant the pulse generator that provides the stimulation. If the trial period is
successful, then the device is implanted in a follow-up procedure.
Artificial Intelligence
The brain consists of approximately 100 billion
nerve cells, which are small wires that pass electrical signals to control all of its functions. There have been a number of successful
clinical trials in which small metal wires, known as electrodes, are implanted in the brain to correct nerve damage using wireless communication
between implanted wires to simulate functional nerve cells. In addition to correcting damaged nerve cells, certain scientists have theorized
that if millions of wires could be implanted in the brain, these electrodes could present an opportunity to use artificial intelligence
to create infrared sight, increase hearing or perfect memory recall. However, there currently is no commercially available manufacturing
platform capable of making thousands of wires that can be placed within or on the brain and work reliably for the lifetime of a subject,
and are soft enough to match the tissue of the brain, that avoid damage to the brain.
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:
|
●
|
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.
|
|
●
|
Lower
Accuracy: Historically, clinical electrode manufacturers primarily provided electrodes that sample brain tissue at approximately
centimeter spatial scales. Advances in digital EEG acquisition have made recordings at sub-millimeter spatial scales possible, but high-spatial
resolution EEG has been slow to impact clinical practice. Existing, higher spatial scales increase the potential for missing data that
may be critical in the removal of brain tissue causing the irregular activity.
|
|
●
|
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.
|
|
●
|
Requirement
for a surgical incision: Currently, when patients have been implanted with paddle electrodes in the spinal area, a surgical incision
has been required. A technology that allows for percutaneous placement is desirable.
|
|
●
|
Limited
number of contacts on an electrode: Paddle electrodes currently are available in a variety of sizes and number of contacts. Physicians
want to explore adding a greater number of contacts on the same electrode in order to be able to be more precise in stimulating targeted
areas.
|
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 continuing
to develop applications of our strip, grid and depth electrodes with the goal of providing the following expected advantages:
|
●
|
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 limited, our cortical grid technology has demonstrated the ability to provide high 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.
|
|
●
|
Improved
accuracy of diagnostic technologies: Because we believe our thin film technology is capable of recording at higher fidelity than
current technologies used in EEG recording, we believe our technology may be able to more precisely determine the brain tissue causing
seizures. In December 2020, we announced the first human commercial use of our Evo cortical electrode to perform recording, functional
mapping, monitoring and stimulation of the brain. In the procedure, performed at the Mayo Clinic, our electrodes were used to record
evidence of pre-seizure activity, which may be critical in developing treatments to prevent the onset of seizures. We believe our technology
may be able to improve outcomes compared to using other diagnostic technologies regardless of whether we are able to offer an all in
one diagnostic and therapeutic solution.
|
|
●
|
Implantation
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 has been and will be implanted
via a full craniotomy until such time, if ever, as we are able to develop our minimally invasive procedure.
|
|
●
|
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, risks associated with surgical
procedures and minimizing the diagnostic, procedural and hospital costs. As discussed under “Our Strategy” below, our initial
product offering offers diagnostic-only capabilities while we advance the development of our all-in-one approach. Currently, we are developing
a combination recording, stimulation and RF ablation technology that will perform both diagnostic and therapeutic functions.
|
|
●
|
Percutaneous
placement of spinal cord stimulation paddle electrodes with scalability options: Due to the thin film nature of our electrode technology,
we believe that it may allow for percutaneous placement, thereby preventing the need to make surgical incisions to place the electrodes.
Minimally invasive and percutaneously placed technologies have become almost a requirement for adoption with patients and physicians.
In addition, our technology offers the ability to increase the number of contacts on a film that traditionally offers fewer contacts.
Increasing the number of contacts may allow for more precise stimulation in the spine, potentially improving the therapeutic outcomes.
|
Our Strategy
Our goal is to be the global leader in cEEG and
sEEG recording, monitoring, deep brain stimulation and ablation, owning the procedure from diagnosis through treatment. The key elements
of our strategy include:
|
●
|
Introduce
cortical strip and grid electrodes for the diagnosis of epilepsy in United States: In December 2019, we announced that we received
FDA 510(k) clearance to market our thin film cortical electrode technology for temporary (less than 30 days) recording, monitoring, and
stimulation on the surface of the brain. Our initial product offering has initially been and will be placed through traditional surgical
means involving a craniotomy until such time, if any, that we launch our minimally invasive procedure. In July 2020, we entered into
a development relationship with Zimmer, pursuant to which we granted Zimmer exclusive global rights to distribute the cortical strip
and grid electrodes, and Zimmer will use commercially reasonable efforts to promote, market and sell the strip and grid electrodes. We
believe, due to physician feedback, that our technology represents a major improvement over existing cortical electrodes for the recording
of brain activity. We are initially targeting epilepsy as we believe this is a clinical area of great need and a market that is underserved
with a quick path to commercialization. We believe the largest and quickest-to-market geography for our cortical strip and grid technology
under development is 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 exist for centers and physicians, (iii) average selling prices are
robust, and (iv) there is substantial physician enthusiasm for our technology under development.
|
|
●
|
Launch
depth electrodes for sEEG recording: In September 2021, we announced that we received FDA 510(k) clearance to market our Evo sEEG
electrode technology for temporary (less than 24 hours) use with recording, monitoring, and stimulation equipment for recording, monitoring,
and stimulation of electrical signals at the subsurface level of the brain. We filed for 510(k) clearance to expand the duration of use
up to less than 30 days in November 2021. This submission is pending FDA review. 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 offers advantages compared to
current depth electrode technology and will enable us to offer a therapeutic solution using this technology in the future. As we continue
to develop our technology, we plan to release further information about the expected advantages of our technology over currently available
therapies.
|
|
●
|
Utilize
these core technologies to develop all-in-one diagnostic and therapeutic solutions with the initial focus on a combination diagnostic
and ablation electrode: 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) and also
provide both acute and long term stimulation as well as depth electrode technology that can ablate brain tissue. 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) to pre-market approvals (“PMAs”) with human clinical data. We will engage the FDA at the proper time
to determine the most efficient regulatory path.
|
|
●
|
Develop
percutaneous placed electrodes for spinal cord stimulation with scalable contact configurations: Given that many surgically placed
technologies have become less invasive due to patient and physician demands, we believe that our flexible thin film technology will allow
for percutaneous placement, thus potentially eliminating the need to make a surgical incision. By leveraging our existing FDA cleared
cortical electrode and sEEG technology, we may be able to offer the ability to improve precision of where the stimulation is delivered.
NeuroOne’s platform thin film technology has the capability to increase the number of contacts in a similar footprint that has
fewer contacts.
|
|
●
|
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.
|
|
●
|
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 high fidelity thin film electrode
product that can provide stimulation and/or ablation therapies.
|
|
●
|
Investigate
the potential applications associated with Artificial Intelligence: We have been informed by some of our corporate advisors that
the ability to offer scale-able electrode technology that can provide thousands of electrodes in the brain may be helpful in treating
medical conditions that may benefit from using artificial intelligence. The Company has formed an advisory board that will provide guidance
to the Company as we continue to explore the opportunities in this exciting field.
|
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.
We seek to leverage scale-able technology and
produce ultra-thin, or paper-thin electrodes that allow for high-resolution and high-definition recordings, which would improve mapping
resolution and signal acquisition. If the Company is able to leverage scale-able technology, it would mean that our technology would be
able to incorporate smaller electrodes and thereby increase the number of electrodes on a given surface area. We expect that this would
increase the imaging resolution so that brain activity is displayed in greater definition. We also believe that the electrodes’
unique thinness and flexibility will provide a less invasive approach to electrode placement. The electrodes would be able to be placed
through a small quarter size hole instead of by an invasive full craniotomy procedure.
The images under “Cortical Electrode,”
from bottom to top, are images of our cortical electrode strip, our grid electrode, and the placement of the grid electrode on the brain,
respectively. The images under “High Density Interconnect” are both images of our product that connects our electrodes to
the head box, which is a piece of hardware that connects to electrodes to acquire, amplify, display, store and archive electrophysiological
signals, and is integrated as part of our manufactured electrode product. The images under “Head Box” and “Signal Monitoring
and Mapping” are images of the device which processes information received through the high density interconnect, and a sample output
of data acquisition, respectively, neither of which is one of the Company’s products.
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 Neurology 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 high 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 Evo cortical electrode technology has received
510(k) clearance from the FDA for recording, monitoring, and stimulating brain tissue for up to 30 days. Our Evo sEEG electrode technology
has received FDA 510(k) clearance from the FDA for use (less than 24 hours) with recording, monitoring, and stimulation equipment for
the recording, monitoring, and stimulation of electrical signals at the subsurface level of the brain. Our other products have not received
any clearance for commercialization by any U.S. or foreign regulatory body. To date, the Company has performed a number of bench top (which
includes feasibility testing) and pre-clinical tests (which include animal testing of device placement, ergonomics, performance, ease
of use, and other tests required by FDA regulations). As described in “—Government Regulation” below, the Company will
be required to perform additional testing of its technology in connection with seeking additional regulatory clearances or approvals.
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, Parkinson’s
disease, dystonia, essential tremors, chronic pain due to failed back surgeries and other related neurological disorders. While we expect
to make modifications to our 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 and 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 (cortical electrodes) and Cleveland Clinic (sEEG electrodes) have been responsible for all pre-clinical studies of our
technology under development to date. See “—WARF License” and “—Mayo Foundation for Medical Education and
Research License and Development Agreement” below. Further, as we announced in December 2020, Mayo Clinic doctors used our technology
in the first human commercial application of our Evo cortical electrode technology to perform recording, functional mapping and stimulation
of the brain on a human patient.
Below we have summarized, for each component of
our technology, the current stage of development or commercial production, the pre-clinical testing done to date by WARF, the Cleveland
Clinic or Mayo Clinic on such component, if any, our plans for further testing or clinical trials and our expectations regarding the requirements
for regulatory clearance or approval and timing of regulatory submissions.
Technology
|
|
Stage of Development and Pre-Clinical Testing to Date
|
|
Additional Expected Steps for Regulatory
Clearance or Approval
|
|
|
|
|
|
Cortical strip and grid electrodes for the diagnosis of epilepsy
|
|
The Company has finalized the design for the product
and there are no further expected changes to the device (“design freeze”).
Pre-clinical testing and clinical testing
on the final design has been conducted by Mayo Clinic and WARF (as described in “Mayo Clinic Studies” below). The product
is in commercial production.
|
|
The Company received FDA 510(k) clearance in the
fourth calendar quarter of 2019.
Commercial launch commenced utilizing Zimmer,
our distribution partner.
|
|
|
|
|
|
Depth electrodes for recording (diagnostic) purposes
|
|
We have frozen this design and the product is
in commercial production.
No clinical testing was required in order
to obtain FDA clearance.
|
|
The Company filed for FDA 510(k) marketing clearance for sEEG electrodes in May 2021 and received a 510(k) clearance from FDA for recording, monitoring and stimulation of brain tissue for less than 24 hours in September 2021. The Company filed for 510(k) clearance to expand the duration of use up to less than 30 days in November 2021. This submission is pending FDA review. Zimmer has indicated its desire to distribute this product once we receive FDA 510(k) clearance to market for less than 30 days use and has placed initial stocking orders.
|
Depth electrode diagnostic and ablation devices
|
|
No design freeze.
Pre-clinical testing, including benchtop and animal
testing, has been conducted on early designs. Additional pre-clinical testing at the Cleveland Clinic was completed in the second calendar
quarter of 2020.
Pre-clinical (animal) testing was conducted in
September 2021 with representatives from Emory University in Atlanta Georgia.
The Company announced a partnership
with RBC Medical Systems in August 2021 to develop an RF generator that will be used with the Company’s diagnostic and ablation
electrode.
No clinical testing planned
prior to FDA clearance because predicates did not perform clinical testing.
|
|
Once the design is finalized, we will be required
to conduct additional pre-clinical testing, which may include additional benchtop or animal testing for safety and performance.
We are planning a Pre-Submission (Q-Sub)
to the FDA for the RF Ablation System, to review the feasibility of “Breakthrough” designation and to complete animal studies
in the first calendar quarter of 2022. We anticipate filing a 510(k) submission in the fourth calendar quarter of 2022. We expect
that we will need to demonstrate design verification, which we estimate will cost us $200,000 to complete, biocompatibility, which we
estimate will require an investment of $100,000 to complete, and sterilization validation and adoption, which we estimate will require
$25,000 to complete. We may also need to demonstrate electrical safety, which we estimate will cost us $60,000. It is estimated the RF
generator will cost approximately $1.5 million to complete.
Future testing requirements for regulatory clearance
will continue to be evaluated as we develop the design and regulatory strategy for this product.
|
Spinal cord stim electrodes
|
|
No design freeze.
We performed pre-clinical in-house bench top testing
in August 2020 and are currently performing bench top testing at Carnegie Mellon University in Pittsburgh, Pennsylvania.
In June 2021 we started bench
top testing of prototypes to demonstrate chronic performance and longevity.
|
|
This device is in early stages of development.
Once the design is finalized, we will be required
to conduct additional pre-clinical testing, which may include additional benchtop or animal testing for safety and performance. Additionally,
the FDA may require that we conduct human clinical studies.
No FDA feedback has been sought or received by
us to date on the regulatory/clinical process that may be required for spinal cord stimulation indication, but we expect regulatory PMA
approval will require a more robust clinical process, human clinical data for a PMA (implanted system), depending on proposed indications
for use.
Future pre-clinical and clinical testing requirements
for regulatory submission will continue to be evaluated as we develop the design of this product.
|
|
|
|
|
|
Depth electrode chronic stimulation devices
|
|
No design freeze.
Bench top testing remains in progress and we expect
to announce results of these studies in the first quarter of 2022.
While this device remains in early development,
we began conducting bench top durability testing in the second calendar quarter of 2021 and expect to announce results in the first quarter
of 2022.
|
|
Following a design freeze, we will be required
to conduct additional pre-clinical testing, which may include additional benchtop or animal testing for safety and performance. Additionally,
FDA-approved human clinical studies will most likely be required.
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 approval for chronic stimulation
may require a more robust clinical process, which could a PMA with human clinical data. Because we have not yet met with the FDA, we cannot
yet determine what clinical data and testing we will need to complete or what the testing will need to demonstrate. However, we believe,
based on the experience of competitors for similar technology, that we will need to conduct clinical trials, which we estimate will require
an investment of approximately $2,000,000, as well as demonstrate biocompatibility, which we estimate will cost $150,000 to complete,
and demonstrate sterilization validation and adoption, which we estimate will cost $35,000 to complete.
|
Mayo Clinic and University of Wisconsin-Madison
Studies
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. 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
clinical electrodes. Electrophysiological recordings showed data obtained from polyimide electrodes which showed the feasibility of high
fidelity multi-scale electrophysiology while also displaying easier deployment of polyimide electrodes (NeuroOne technology) through minimally
invasive burr holes.
Additionally, doctors implanted our polyimide
thin film electrodes on five human patients who were undergoing surgery to remove brain tissue for drug resistant epilepsy. Electrophysiological
recordings from the polyimide thin film technology displayed in each of these patients demonstrated micro-seizure activity due to the
high fidelity multi-scale electrophysiology. In December 2020, we announced the first human commercial use of our Evo cortical electrode
to perform recording, functional mapping and stimulation of the brain. In the procedure, performed at the Mayo Clinic, our electrodes
were used to record evidence of pre-seizure activity which may be critical in developing treatments to prevent the onset of seizures.
Conclusions reached by the physicians at Mayo
Clinic were that thin, flexible polyimide electrodes (NeuroOne technology) provided recordings similar to standard clinical electrodes
with reduced immunological response. In addition, Mayo Clinic physicians observed that the flexibility of polyimide electrodes may reduce
pain and swelling associated with implantation of the device, and the single wire exiting the skull may reduce infection risk. The ability
to record micro-seizure and single neuron brain activity may also provide additional useful clinical data. 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 thin film cortical implant technology
has been tested by researchers at the University of Wisconsin-Madison in multiple pre-clinical animal studies conducted from 2006 to 2016,
which included mice, rats and primates. In these studies, our technology was able to record brain activity from different areas of the
brain, was implanted in a minimally invasive fashion, electrically provided brain stimulation and tissue ablation, and had increased flexibility
compared to existing commercially available technology, which allowed the grids to conform more easily to the brain surface (and may have
reduced pain and swelling, compared to less flexible devices).
Sales and Marketing
Zimmer Development Agreement
Based on the size and maturity of the U.S. market,
our initial commercial focus, on July 20, 2020, we entered into an exclusive development and distribution agreement (the “Development
Agreement”) with Zimmer, pursuant to which we 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”), including to approximately 188 Level 4 epilepsy centers. Additionally, we 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,
we are responsible for all costs and expenses related to developing the Products, and Zimmer is 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, we are 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 payment of $2.0 million to the Company.
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 we may terminate the Development Agreement
if Zimmer acquires or directly or indirectly owns a controlling interest in certain competitors of the Company.
We will investigate markets outside of the U.S.
with the assistance of Zimmer and formulate a plan to enter those markets with the support of Zimmer.
For more information regarding the Development
Agreement, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Overview—Collaborations
Revenue” and “Note 7 – Zimmer Development Agreement” included in “Item 8 — Financial Statements and
Supplementary Data” in this Report.
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 the Centers for Medicare and Medicaid Services
(“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:
|
●
|
61531
Subdural implantation of strip electrodes through one or more burr or trephine (saw) hole(s) for long-term seizure monitoring;
|
|
●
|
61533
Craniotomy with elevation of bone flap: for subdural implantation of an electrode array, for long term seizure monitoring;
|
|
●
|
61535
Craniotomy with elevation of bone flap; for removal of epidural or subdural electrode array, without excision of cerebral tissue (separate
procedure); and
|
|
●
|
61760
Stereotactic implantation of depth electrodes into the cerebrum for long term seizure monitoring.
|
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 October 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:
|
●
|
G40.0
Localization-related (focal) (partial) idiopathic epilepsy and epileptic syndromes with seizures of localized onset;
|
|
●
|
G40.1
Localization-related (focal) (partial) symptomatic epilepsy and epileptic syndromes with simple partial seizures;
|
|
●
|
G40.2
Localization-related (focal) (partial) symptomatic epilepsy and epileptic syndromes with complex partial seizures;
|
|
●
|
G40.3
Generalized idiopathic epilepsy and epileptic syndromes;
|
|
●
|
G40.A
Absence epileptic syndrome;
|
|
●
|
G40.4
Other generalized epilepsy and epileptic syndromes;
|
|
●
|
G40.50
Epileptic seizures related to external causes, not intractable;
|
|
●
|
G40.80
Other epilepsy; and
|
|
●
|
G40.82
Epileptic spasms.
|
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, if government and other third-party payors
do not provide adequate coverage and reimbursement for our products and the related insertion and removal procedures, our financial performance
will be negatively impacted.
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 requirements; however, see “Risk Factors—Risks Related to Our Business—The COVID-19
pandemic has adversely impacted, and may continue to impact, our business”. 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, which includes
our Director of Electrode Development, utilizes advice from leading experts in the neurotech field on our scientific advisory board and
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 as well as stimulation for spinal cord stimulation for back related pain. Our research and development
expenses were $3.9 million and $2.1 million for the years ended September 30, 2021 and 2020, respectively.
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. 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’s
Cortac Strips and grid electrodes and Depthalon depth electrodes are used for recording brain activity similar to other competitive technologies.
In addition, Dixie Medical has launched a product line of depth electrodes and CorTec has launched a cortical electrode product line called
AirRay. 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 thin film electrode technology for use in the brain although none are
expected to be commercially available in 2022.
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. For a discussion of the key competitive factors that we believe will impact the success of our cortical strip and sheet electrodes
under development, if successfully developed and approved, see “—Our Solution” above.
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
In January 2020, we entered into the Amended and
Restated Exclusive Start-Up Company License Agreement, dated as of January 21, 2020, as amended on June 15, 2020 (the “WARF License”)
with WARF, which amended and restated in full the Original WARF License. Pursuant to the WARF License, WARF has granted to us 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. We have 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 calendar year 2020, $100,000 for calendar year 2021 and $150,000
for calendar year 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 paid in January 2021. If we or any of our 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 us if not for the WARF License, the royalty rate will be tripled for the remaining term of the WARF License.
WARF may terminate this license 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 had failed to have commercial
sales of one or more FDA-approved products under the WARF License by June 30, 2021 or (ii) if, after royalties earned on sales begin to
be paid, such earned royalties cease for more than four calendar quarters. The first commercial sale occurred on December 7, 2020, prior
to the June 30, 2021 deadline. 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— Risks Related
to Our Business—We depend on intellectual property licensed from WARF for our technology, including our technology under development,
and the termination of this license would harm our business” for additional information regarding the WARF License.
Mayo Foundation for Medical Education and Research
License and Development Agreement
In May 2017, we entered into the Amended and Restated
License and Development Agreement, dated as of May 25, 2017 (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 (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.
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, see “Risk Factors— Risks Related to Our Business—We depend on our partnership with Mayo 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, and 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 September 30, 2021, 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,
a pending U.S. patent application filed by us and published in 2018 covering our applications and additional devices used during the diagnostic
and therapeutic ablation and stimulation procedures, pending U.S. and European patent applications filed by us and published in 2020 relating
to improved neural depth electrodes, a pending U.S. patent application filed by us and published in 2020 relating to agent-delivering
neural electrodes, three pending U.S. applications (and corresponding PCT applications) filed in 2020 and 2021 relating to minimally invasive
electrodes, spinal cord stimulation devices, and additional electrode improvements and one additional pending U.S. application relating
to devices with temperature sensors. 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 applications, the resulting patents are projected
to expire between 2038 and 2042.
Our patent applications may not result in issued
patents, 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, 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 a registered U.S. trademark for the “EVO”
trademark. The document(s) updating the owner’s name were filed with the U.S. Trademark Office on November 30, 2021, with an effective
date of December 30, 2019.
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 medical devices subject to extensive and ongoing regulation by the FDA and the U.S. CMS. Regulations cover virtually every critical
aspect of a medical device company’s business operations, including research activities, product development, quality, manufacturing,
supplier management and risk management, contracting, reimbursement, medical communications, and sales and marketing. In the United States,
the Federal Food, Drug and Cosmetic Act (“FDCA”), and the implementing regulations of the FDA (specifically, 21 Code of Regulations
(21 CFR Parts 801- labeling, 803 – medical device reporting, 807 – registration and listing, subpart E premarket notification
510k, 812 - investigational device exemption, 814 – premarket approval and 820 – quality system regulation) and applicable
FDA guidance) 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 and local quality regulations,
such as ISO 13485, ISO 14971, and FDA’s Quality System Regulation (“QSR”) contained in 21 CFR Part 820.
Regulatory Framework in the United States
Device classification
The FDA characterizes medical devices into one
of three classes, Class I, II, and III. Regulatory control increases from Class I to Class III.
The device classification regulation defines the regulatory requirements for a general device type. Most Class I devices are exempt from
Premarket Notification under 510(k); most Class II devices require Premarket Notification under 510(k); and most Class III devices require
Premarket Approval.
Class I devices are subject to controls for labeling.
However, most such devices are exempt from 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. 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 guidance, 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. Premarket Approval
is required for most Class III devices.
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, but
must meet the requirement of compliance with substantially all of the QSR. However, a pre-market approval (“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 multiple years to complete.
Based on FDA classifications, we believe our diagnostic
strip, grid depth electrode and RF ablation technology will be categorized by the FDA as Class II devices that do 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.
The 510(k) clearance process
Under the 510(k) clearance process, the manufacturer
must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to a legally
marketed predicate device. A predicate device is a legally marketed device that is not subject to a PMA, i.e., a device that was legally
marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has been reclassified from Class
III to Class II or I, or a device that was previously found substantially equivalent through the 510(k) process. To be “substantially
equivalent,” the proposed device must have the same intended use, indications for use as the predicate device, and either have the
same technological characteristics as the predicate device or have different technological characteristics and not raise different questions
of safety or effectiveness than the predicate device. Clinical data is sometimes required to support substantial equivalence.
After a 510(k) premarket notification is submitted,
the FDA determines whether to accept it for substantive review. If it lacks necessary information for substantive review, the FDA will
refuse to accept the 510(k) notification. If it is accepted for filing, the FDA begins a substantive review. By statute, the FDA is required
to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance
often takes longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the
FDA may require further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly
prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market
the device.
If the FDA determines that the device is not “substantially
equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill
the more rigorous premarketing requirements of the PMA approval process, or seek reclassification of the device through the De Novo process.
The De Novo request provides a marketing pathway to classify novel medical devices for which general
controls alone, or general and special controls, provide reasonable assurance of safety and effectiveness for the intended use, but for
which there is no legally marketed predicate device. De Novo classification is a risk-based classification process. The De Novo
classification process is an alternate pathway to classify medical devices that are automatically classified into Class III but which
are low to moderate risk. A manufacturer can submit a Pre-submission (Q-Sub) for De Novo review if the manufacturer is unable to identify
an appropriate predicate device and the new device or new use of the device presents a moderate or low risk.
After a device receives 510(k) clearance, any
modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended
use, will require a new 510(k) clearance or, depending on the modification, could require a De Novo device application and potentially
a PMA application. The FDA requires each manufacturer to determine whether the proposed change requires a new submission in the first
instance, but the FDA can review any such decision and disagree with a manufacturer’s determination. Many minor modifications are
accomplished by a letter-to-file in which the manufacture documents the change in an internal letter-to-file based on adherence to FDA
guidance on changes to an existing 510(k) device. The letter-to-file is in lieu of submitting a new 510(k) to obtain clearance for such
change. The FDA can always review these letters to file in an inspection. If the FDA disagrees with a manufacturer’s determination
regarding whether a new premarket submission is required for the modification of an existing 510(k)-cleared device, the FDA can require
the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or approval of a De Novo or PMA application
is obtained. In addition, in these circumstances, the FDA can impose significant regulatory fines or penalties for failure to submit the
requisite application(s).
The PMA approval process
Following receipt of a PMA application, the FDA
conducts an administrative review to determine whether the application is sufficiently complete to permit a substantive review. If it
is not, the agency will refuse to file the PMA. If it is, the FDA will accept the application for filing and begin its review. The FDA
has 180 days to review a filed PMA application, although the review of an application more often occurs over a significantly longer period
of time. During this review period, the FDA may request additional information or clarification of information already provided, and the
FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the
FDA.
Before approving or denying a PMA, an FDA advisory
committee may review the PMA at a public meeting and provide the FDA with the committee’s recommendation on whether the FDA should
approve the submission, approve it with specific conditions, or not approve it. The FDA is not bound by the recommendations of an advisory
committee, but it considers such recommendations carefully when making decisions.
Prior
to approval of a PMA, the FDA may conduct inspections of the clinical trial data and clinical trial sites, as well as inspections of
the manufacturing facility and processes. Overall, the 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:
|
●
|
the
device may not be safe, effective, reliable or accurate to the FDA’s satisfaction;
|
|
●
|
the
data from pre-clinical studies and clinical trials may be insufficient to support approval;
|
|
●
|
the
manufacturing process or facilities may not meet applicable requirements; and
|
|
●
|
changes
in FDA approval policies or adoption of new regulations may require additional data.
|
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
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 Investigational Device Exemption (“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:
|
●
|
the
FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical trial on hold;
|
|
●
|
patients
do not enroll in clinical trials at the rate expected;
|
|
●
|
patients,
sponsor (NeuroOne) or study sites do not comply with trial protocols;
|
|
●
|
patient
follow-up is not at the rate expected;
|
|
●
|
patients
experience adverse side effects;
|
|
●
|
patients
die during a clinical trial, even though their death may not be related to the products that are part of our trial;
|
|
●
|
institutional
review boards and third-party clinical investigators may delay or reject the trial protocol;
|
|
●
|
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;
|
|
●
|
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;
|
|
●
|
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.
|
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 a 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.
The
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.
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 (the “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 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
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 Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False
Claims Act (the “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 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.
False
Claims Act
The
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 False Claims Act have made it easier
for private parties to bring “qui tam” whistleblower lawsuits against companies under the 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.
Human
Capital
As
of September 30, 2021, we had 11 employees, all of whom are full-time, 6 of whom are engaged in research and development activities,
and all of whom are located in the United States. As of September 30, 2021, we also retained the services of approximately 11 regular
consultants. 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. During our 2021 fiscal year, we did not experience any turnover among our employees.
Corporate
Information
Our
principal executive offices are located at 7599 Anagram Drive, Eden Prairie, Minnesota 55344, and our telephone number is 952-426-1383.
Our website address is www.n1mtc.com. Information on our website is not part of this Annual Report.
ITEM 1A. RISK FACTORS
Summary
of Risk Factors
The
risk factors summarized and detailed below could materially harm our business, operating results and financial condition, impair our
future prospects and cause the price of our common stock to decline. These are not all of the risks we face and other factors not presently
known to us or that we currently believe are immaterial may also affect our business if they occur. Material risks that may affect our
business, operating results and financial condition include, but are not necessarily limited to, those relating to:
|
●
|
we
have incurred significant operating losses since inception and cannot assure you that we will ever achieve or sustain profitability;
|
|
●
|
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;
|
|
●
|
the
COVID-19 pandemic has adversely impacted and will likely continue to adversely impact our business, including through component shortages,
including of our primary component, polyimide film, due to supply chain shortages attributed to COVID related issues, supply chain disruptions,
including related to staffing availability, and delays in product availability and delivery, impacts on pre-clinical and clinical trials
and regulatory clearances/approvals;
|
|
●
|
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;
|
|
●
|
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;
|
|
●
|
changes
in the configuration of our cortical strip, grid electrode and depth electrode technology under development may result in additional
costs or delay;
|
|
●
|
if
we are unable to successfully develop, receive regulatory clearance/approval for and commercialize our technology and other products
under development, or if we experience significant delays in doing so, our business will be harmed;
|
|
●
|
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;
|
|
●
|
if
our competitors are better able to develop and market products for the diagnosis and treatment of epilepsy, Parkinson’s disease,
dystonia, essential tremors, chronic pain due to failed back surgeries and other related neurological 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
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;
|
|
●
|
we
depend on intellectual property licensed from WARF for our technology under development, and the termination of this license would harm
our business;
|
|
●
|
we
depend on our partnership with Mayo 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;
|
|
●
|
even
if we have our cortical strip, grid electrode and depth electrode technology approved for commercial sale, if we are unable to expand
our 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
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;
|
|
●
|
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;
|
|
●
|
potential
complications from our cortical strip, grid electrode and depth electrode technology that are currently unknown may come to light;
|
|
●
|
if
there are significant disruptions in our information technology systems, our business, financial condition and operating results could
be adversely affected;
|
|
●
|
we
have entered into, and 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;
|
|
●
|
our
future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel;
|
|
●
|
our
ability to protect our intellectual property and proprietary technology is uncertain;
|
|
●
|
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;
|
|
●
|
our
products and operations are subject to extensive governmental regulation, and failure to comply with applicable requirements could cause
our business to suffer;
|
|
●
|
the
price of our Common Stock might fluctuate significantly, and you could lose all or part of your investment; and
|
|
●
|
we
intend to issue more shares to raise capital, which will result in substantial dilution.
|
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 September 30, 2021, we had an accumulated deficit of $40.8 million primarily as a result of expenses incurred in connection with
our operations and from our research and development programs. We expect to continue to incur significant expenses and increasing operating
costs resulting in net losses for the foreseeable future, and management has raised substantial doubt about our ability to continue as
a going concern. There was also substantial doubt about the Company’s ability to continue as a going concern as of and for the year ended September 30, 2020. 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 all required steps for regulatory clearance to
expand the use of our depth electrodes for sEEG recording in the U.S. for up to 30 days, 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, 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 cannot assure you that we will ever be able to
achieve profitability. Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual
basis. Our failure to become and remain profitable would depress the value of our Company and could impair our ability to raise capital,
expand our business, maintain our development efforts, obtain regulatory approvals or continue our operations.
We
have a limited operating history, making it difficult for you to evaluate our business and your investment.
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, dystonia, essential tremors, chronic pain
due to failed back surgeries and other related neurological disorders. 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.
From our inception through September 30, 2021,
we have generated limited in revenue from the commercial sales of our products. Because we have generated very limited revenues from commercialization,
our operations to date have been principally financed through public and private offerings of our Common Stock and convertible debt and
exercises of options and warrants.
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.
However, the factors included above 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
Company has limited experience in medical device development and may not be able to successfully develop any device or therapy. Our ability
to become profitable depends primarily on: our ability to further develop our cortical strip, grid electrode and depth electrode technology,
our successful completion of all necessary pre-clinical testing and clinical trials on such technology, our ability to obtain clearance
or approval for such technology and successfully commercialize such technology, our ongoing research and development efforts, the timing
and cost of clinical trials, our ability to identify personnel with the necessary skill sets or enter into favorable alliances with third-parties
who can provide substantial capabilities in clinical development, regulatory affairs, sales, marketing and distribution and our ability
to obtain and maintain necessary intellectual property rights to such technology. Our limited experience in medical device development
may make it more difficult for us to complete these tasks.
Even
if we successfully develop and market such technology, we may not generate sufficient or sustainable revenue to achieve or sustain profitability,
which could cause us to cease operations and cause you to lose all of your investment.
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.
Our independent registered public accounting
firm and our former independent registered public accounting firm included explanatory paragraphs in the reports on our financial
statements as of and for the years ended September 30, 2021 and 2020, respectively, noting the existence of substantial doubt about
our ability to continue as a going concern. At September 30, 2021, we had $6.9 million in cash deposits. Our existing cash and cash
equivalents will not be sufficient to fund our operating expenses. 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.
The
COVID-19 pandemic has adversely impacted, and may continue to impact, our business.
Since
the beginning of the COVID-19 pandemic, governments, public institutions, and other organizations have taken and are continuing to take
certain preventative or protective measures to combat the transmission of the virus, including implementation of travel restrictions
or bans, vaccination mandates, closures of non-essential businesses, limitations of public gatherings, other social distancing and shelter-in-place
measures, and delays or cancellations of elective surgeries. The Company, our employees, contractors, suppliers, and other partners may
be prevented from conducting business activities for an indefinite period of time due to shutdowns or other regulatory requirements that
may be requested or mandated by state and federal governmental authorities.
We
have experienced, and will likely continue to experience, disruptions that could negatively or severely impact our business and planned
clinical trials, including:
|
●
|
delays
or difficulties in conducting pre-clinical and clinical trials;
|
|
●
|
interruption
in global manufacturing and shipping, including testing equipment and personal protective equipment used at our facilities;
|
|
●
|
material
shortages for manufacturing, including those the Company is currently experiencing related to its primary component, polyimide film,
due to supply chain shortages attributed to COVID related issues;
|
|
●
|
delays
in timelines for product availability and delivery from vendors, including related to staffing shortages, both generally and due to employee
illness, and due to increases in demand from other larger or more longstanding customers of our suppliers placing large orders due to
concerns with supply chain disruption and the impact of COVID-19;
|
|
●
|
changes
in local regulations as part of a response to the COVID-19 pandemic, which may require us to change the way in which clinical trials
are conducted and may result in unexpected costs; and
|
|
●
|
delay
in the timing of interactions with the FDA due to absenteeism by federal employees or by the diversion of their efforts and attention
to approval of other therapeutics or other activities related to COVID-19.
|
In
addition, COVID-19 could disrupt our operations due to absenteeism by infected or ill members of management or other employees, or absenteeism
by members of management and other employees who elect not to come to work due to the illness affecting others in our office or laboratory
facilities, or due to quarantines. COVID-19 illness could also impact members of our Board and its ability to hold meetings.
As
the COVID-19 pandemic continues to adversely affect our operating and financial results, it may also have the effect of heightening many
of the other risks described in the risk factors in this Report. Further, the COVID-19 pandemic may also affect our operating and financial
results in a manner that is not presently known to us or that we currently do not expect to present significant risks to our operations
or financial results, particularly if the COVID-19 pandemic and its associated impacts reoccur in successive waves in the coming months.
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:
|
●
|
the
cost of further developing our cortical strip, grid electrode and depth electrode technology;
|
|
●
|
obtaining
and maintaining regulatory clearance or approval for our cortical strip, grid electrode and depth electrode technology;
|
|
●
|
the
costs associated with commercializing our cortical strip, grid electrode and depth electrode technology;
|
|
●
|
any
change in our development priorities;
|
|
●
|
the revenue generated by sales of our cortical strip, grid electrode and depth electrode technology;
|
|
●
|
the costs associated with expanding our sales and marketing infrastructure for commercialization of our cortical strip grid electrode and depth electrode technology;
|
|
●
|
any
change in our plans regarding the manner in which we choose to commercialize any approved product in the United States;
|
|
●
|
the
cost of ongoing compliance with regulatory requirements;
|
|
●
|
expenses
we incur in connection with potential litigation or governmental investigations;
|
|
●
|
expenses
and costs we incur in connection with changes in the economy and regulatory process in connection with the COVID-19 pandemic;
|
|
●
|
the
costs to develop additional intellectual property;
|
|
●
|
anticipated
or unanticipated capital expenditures; and
|
|
●
|
unanticipated
general and administrative expenses.
|
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 additional 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.
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 two products, our cortical strip and grid electrodes and our sEEG electrode technology for less than 24 hours use, which have each
received 510(k) clearance from the FDA. If we are unable to successfully develop, and receive regulatory approval for our sEEG electrode
for use up to 30 days or our other products under development, or if we experience significant delays in doing so, our business will
be harmed.
Two of our products have received 510(k) clearance
from the FDA. Our Evo cortical electrode technology has received 510(k) clearance from the FDA for recording, monitoring, and stimulating
brain tissue for up to 30 days, and our Evo sEEG electrode technology has received 510(k) clearance from the FDA for use (less than 24
hours) with recording, monitoring, and stimulation equipment for recording, monitoring, and stimulation of electrical signals at the subsurface
level of the brain. Our submission to the FDA seeking 510(k) for use of our Evo sEEG electrode technology for up to 30 days is pending.
None of our other products have received clearance or approval for commercial sale. Our ability to generate revenue from our developed
products, if any, will depend heavily on their successful development and regulatory approval.
Before
obtaining marketing clearance or approval from regulatory authorities for the sale of our cortical strip, grid electrode and depth electrode
technology under development in the United States for certain indications, we must complete all pre-clinical testing, clinical trials
and other regulatory requirements necessitated by the FDA 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 clearance or 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:
|
●
|
regulators
may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
|
|
●
|
the
failure to successfully complete pre-clinical testing requirements required by the FDA;
|
|
●
|
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;
|
|
●
|
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;
|
|
●
|
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;
|
|
●
|
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;
|
|
●
|
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;
|
|
●
|
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;
|
|
●
|
the
cost of clinical trials of our products may be greater than we anticipate;
|
|
●
|
the
supply or quality of our products or other materials necessary to conduct clinical trials of our products may be insufficient or inadequate;
|
|
●
|
the
COVID-19 pandemic may cause delays and disruptions in the supply chain, clinical trials, clinical development, and regulatory approval
process; and
|
|
●
|
delays
from our suppliers and manufacturers could impact clinical trial completion and impact revenue.
|
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, if the results of these
trials or tests are not favorable or if there are safety concerns, we may:
|
●
|
not
obtain marketing approval at all;
|
|
●
|
be
delayed in obtaining marketing approval for our cortical strip, grid electrode and depth electrode technology under development in a
jurisdiction;
|
|
●
|
be
subject to additional post-marketing testing requirements; or
|
|
●
|
have
our cortical strip, grid electrode and depth electrode technology removed from the market after obtaining marketing approval.
|
Our
development costs will also increase if we experience delays in testing or marketing approvals, including, but not limited to, the COVID-19
pandemic. 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.
Even
if we obtain regulatory approval for our products, we will remain subject to extensive regulatory scrutiny and compliance obligations.
Both
before and after a product is commercially released, we will have ongoing responsibilities under FDA 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 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 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, it could ban these products, suspend or cancel our marketing authorizations, impose “stop-sale”
and “stop-import” orders, 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 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.
In
addition, even though we have obtained FDA clearance to market two of our products, and even if we obtain the proper regulatory approval
or clearance to market any additional products under development, the FDA has the power to require us to conduct post-market surveillance
studies, which are designed to identify adverse events, device malfunctions or complaints from patients implanted with the device during
a specified period after the commencement of commercial use in the U.S. The FDA may also require us to conduct post-approval studies
to further monitor the safety and/or effectiveness of our products. Failure to conduct required surveillance or studies in a timely manner
could result in the revocation of the approved PMA product that is subject to such a requirement and could also result in the recall
or withdrawal of the product, which would prevent us from generating sales from that product in the United States.
If
we are unable to expand our sales and marketing infrastructure, and execute other steps necessary to penetrate market opportunities and
produce our products, 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, and have not generated significant revenues to date. To achieve commercial
success and generate sufficient revenue in the United States for our cortical strip, grid electrode and depth electrode technology, we
will need to further 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.
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 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.
Moreover,
we expect the revenue opportunity for additional uses of our technology to be greater than the technology and uses that have currently
been cleared by the FDA, and so we believe our ability to generate significant revenue in the future will be dependent upon the receipt
of additional FDA clearances.
Our
revenue will be dependent, in part, upon the size of the markets in 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.
The
success of any products that we develop will depend on several factors, including:
|
●
|
receipt
of timely commercialization approvals from applicable regulatory authorities;
|
|
●
|
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;
|
|
●
|
launching
commercial sales of our cortical strip, grid electrode and depth electrode technology, if approved for marketing;
|
|
●
|
market
acceptance of our cortical strip, grid electrode and depth electrode technology, if approved, by people with epilepsy, Parkinson’s
disease, dystonia, essential tremors, chronic pain due to failed back surgeries and other related neurological disorders, the medical
community and third-party payors;
|
|
●
|
our
success in educating healthcare providers and people with epilepsy, Parkinson’s disease, dystonia, essential tremors, chronic pain
due to failed back surgeries and other related neurological disorders about the benefits, administration and use of our cortical strip,
grid electrode and depth electrode technology and future versions;
|
|
●
|
the
prevalence and severity of adverse events, including, but not limited to, events related to the COVID-19 pandemic;
|
|
●
|
the
perceived advantages, cost, safety, convenience and accuracy of alternative therapies;
|
|
●
|
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;
|
|
●
|
maintaining
compliance with regulatory requirements, including current good manufacturing practices; and
|
|
●
|
obtaining
and maintaining a continued acceptable performance and safety profile of our cortical strip, grid electrode and depth electrode technology
following approval.
|
The
continuing development and commercialization of our products depends upon us maintaining strong relationships with academic and healthcare
institutions and professionals.
If
we fail to maintain our strong working relationships with healthcare and academic institutions and their professionals such as the Mayo
Clinic, the Cleveland Clinic and Emory University, many of our products may not be developed and marketed in line with the needs and
expectations of the professionals who use and support our products, which could cause a decline in our earnings and profitability. The
development, marketing and sales of many of our products depends on our maintaining working relationships with healthcare institutions
and professionals. We rely on these professionals to provide us with considerable knowledge and experience regarding the development,
marketing and sale of our products. In addition, as a result of the COVID-19 pandemic, our access to these professionals has been limited
at times, and travel restrictions, shutdowns and similar measures have impacted our ability to maintain these relationships, thereby
affecting our ability to develop, gain regulatory clearance or approval and market our products. If we are unable to maintain strong
relationships with these institutions and professionals, the development and marketing of our products could suffer, which could have
a material adverse effect on our business, results of operations, financial condition, and cash flows.
Our
success depends on our ability to continue to develop, commercialize and gain market acceptance for our cortical strip, grid electrode
and depth electrode technology.
Our
current business strategy is highly dependent on developing and commercially launching 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, dystonia, essential tremors, chronic pain due to failed back surgeries
and other related neurological 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
depend on educating people with epilepsy, Parkinson’s disease, dystonia, essential tremors, chronic pain due to failed back surgeries
and other related neurological 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, our ability to successfully diagnose
and treat epilepsy, Parkinson’s disease, dystonia, essential tremors, chronic pain due to failed back surgeries and other related
neurological disordersin 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:
|
●
|
the
failure of our cortical strip, grid electrode and depth electrode technology to achieve wide acceptance among people with epilepsy, Parkinson’s
disease, dystonia, essential tremors, chronic pain due to failed back surgeries and other related neurological disorders, their caregivers,
healthcare providers, third-party payors and key opinion leaders in the community;
|
|
●
|
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;
|
|
●
|
perceived
risks associated with the use of our cortical strip, grid electrode and depth electrode technology or similar products or technologies
generally;
|
|
●
|
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;
|
|
●
|
adverse
results of clinical trials relating to our cortical strip, grid electrode and depth electrode technology or similar competitive products;
and
|
|
●
|
loss
of regulatory clearance or approval for our cortical strip, grid electrode and depth electrode technology, adverse publicity or other
adverse events including any product liability lawsuits.
|
In
addition, our cortical strip, grid electrode and depth electrode technology may be perceived by people with epilepsy, Parkinson’s
disease, dystonia, essential tremors, chronic pain due to failed back surgeries and other related neurological 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, dystonia, essential tremors, chronic pain due to
failed back surgeries and other related neurological disordersof 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.
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 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, dystonia, essential tremors, chronic pain due to failed back surgeries and other related neurological disorderscan 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, dystonia, essential tremors, chronic pain due to failed
back surgeries and other related neurological 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 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.
If
sufficient coverage and reimbursement is not available for our any product we develop, in the United States, 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.
If
our competitors are better able to develop and market products for the diagnosis and treatment of epilepsy, Parkinson’s disease,
dystonia, essential tremors, chronic pain due to failed back surgeries and other related neurological disordersthat 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, dystonia, essential
tremors, chronic pain due to failed back surgeries and other related neurological disorders by securing broad market acceptance of our
cortical strip, grid electrode and depth electrode technology. Any product we develop that achieves regulatory clearance or approval
will have to compete for market acceptance and market share. We believe that the primary competitive factors of our cortical strip, grid
electrode and depth electrode technology will be: 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 are: (i) in the market for diagnosis, PMT, Ad-Tec Medical and Integra Lifesciences,
(ii) in the market for neuro-ablation, Medtronic and Monteris Medical and (iii) in the market for neurostimulation, 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 to subsequently adopt our product, then we may never
achieve profitability and such failure to adopt our product could have a material adverse effect on our business, financial condition
and operating results.
Additionally,
the Mayo Clinic is conducting testing of its own minimally invasive cortical electrode delivery device. In the event the Mayo Clinic
completes development of its own device prior to us, we may forego completing development of our device and we may be unable to enter
into any arrangement with Mayo Clinic relating to its device. If we are unable to pursue the development of a minimally invasive cortical
electrode device, this may delay our ability to become profitable and we could be forced to terminate our operations.
In
addition to facing competition from major competitors and potentially our development partner, 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:
|
●
|
more
experienced sales forces;
|
|
●
|
greater
name recognition;
|
|
●
|
more
established sales and marketing programs and distribution networks;
|
|
●
|
earlier
regulatory clearance or approval in the United States or foreign jurisdictions;
|
|
●
|
long
established relationships with physicians and hospitals;
|
|
●
|
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;
|
|
●
|
the
ability to acquire and integrate our competitors and/or their technology;
|
|
●
|
demonstrated
ability to develop product enhancements and new product offerings;
|
|
●
|
established
history of product reliability, safety and durability;
|
|
●
|
the
ability to offer rebates or bundle multiple product offerings to offer greater discounts or incentives;
|
|
●
|
greater
financial and human resources for product development, sales, and marketing; and
|
|
●
|
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.
|
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, dystonia, essential tremors, chronic pain due to failed back
surgeries and other related neurological disorderswho 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, dystonia, essential tremors, chronic pain due
to failed back surgeries and other related neurological 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 WARF for our technology, including our technology under development, and the termination
of this license would harm our business.
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.
WARF
may terminate this license in the event that 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 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. The original license agreement entered
into with WARF in 2014 required that we meet certain milestones 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” included in “Item 8
— Financial Statements and Supplementary Data” in this Report.
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 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
depend on a limited number of third-party suppliers for the components of our cortical strip, grid electrode and depth electrode technology,
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
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
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, product discontinuations, or complications arising in connection
with the COVID-19 pandemic. 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, 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.
See
“—The COVID-19 pandemic has adversely impacted, and may continue to impact, our business” above.
We
contract with third parties for the manufacture of our cortical strip, grid electrode and depth electrode technology, including our 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. 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 manufactured small quantities of our cortical electrodes. 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:
|
●
|
quality
or reliability defects;
|
|
●
|
inability
to secure product components in a timely manner, in sufficient quantities or on commercially reasonable terms;
|
|
●
|
failure
to increase production to meet demand;
|
|
●
|
inability
to modify production lines to enable us to efficiently produce future products or implement changes in current products in response to
regulatory requirements;
|
|
●
|
difficulty
identifying and qualifying alternative manufacturers in a timely manner;
|
|
●
|
inability
to manufacture product components cost-effectively;
|
|
●
|
inability
to establish agreements with future third-party manufacturers or to do so on acceptable terms;
|
|
●
|
potential damage to or destruction of our manufacturers’ equipment or facilities;
|
|
●
|
failure
to complete sterilization on time or in compliance with the required regulatory standards;
|
|
●
|
transportation
and import and export risk;
|
|
●
|
delays
in analytical results or failure of analytical techniques that we will depend on for quality control and release of products;
|
|
●
|
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; or
|
|
●
|
latent
defects that may become apparent after products have been released and that may result in a recall of such products.
|
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.
Potential
complications from our cortical strip, grid electrode and depth electrode technology that are currently unknown may come to light.
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 clearance or approval for certain products, we could be subject to liability and, even for cleared/approved
products, our technology would not be widely adopted. 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 adversely affecting our financial condition and results of operations or liquidity.
Our
cortical strip, grid electrode and depth electrode technology may contain undetected errors or defects. As a result, we may be subject
to warranty and liability claims for damages related to errors or defects in such products. 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:
|
●
|
distraction
of management’s attention from our primary business;
|
|
●
|
the
inability to commercialize our cortical strip, grid electrode and depth electrode technology;
|
|
●
|
damage
to our business reputation;
|
|
●
|
product
recalls or withdrawals from the market;
|
|
●
|
withdrawal
of clinical trial participants;
|
|
●
|
substantial
monetary awards or settlements to patients or other claimants; or
|
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
currently maintain commercial product liability insurance with an aggregate limit of $5,000,000. We cannot be assured that such insurance
would adequately protect our assets from the financial impact of defending a product liability claim because these policies typically
have substantial deductibles. 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.
We
depend on sophisticated information technology systems, and any breach or disruption affecting these systems could adversely affect our
business, financial condition and operating results.
The
efficient operation of our business depends on our information technology systems, which we use to manage product development tasks,
research and development data and accounting and financial functions. In the future, we may rely on our information technology systems
for inventory management and technical support functions. Our information technology systems are vulnerable to damage or interruption
from earthquakes, fires, floods, 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. 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. 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, adversely affect our products, or result in delays in our product development,
clinical trial or commercialization efforts, increased overhead costs and damage our reputation. Any of these results could negatively
affect our business, financial condition and operating results.
Zimmer
has exclusive global rights to distribute our strip and grid cortical electrodes and electrode cable assembly products. Zimmer’s
failure to timely develop or commercialize these products would have a material adverse effect on our business and operating results.
Further, our inability to agree with Zimmer on dates of completion for product development, regulatory clearance and commercialization
milestones on which various fee payments to the Company are based under the Zimmer Development Agreement could have a material adverse
impact on our financial and operating results.
The
Company granted Zimmer an exclusive global right to distribute our strip and grid cortical electrodes and electrode cable assembly products.
Additionally, we granted Zimmer the exclusive right and license to distribute certain depth electrodes developed by the Company. The
collaboration with Zimmer may not be successful due to several factors, including the following:
|
●
|
Zimmer
may not be able to obtain from us or manufacture our products in a timely or cost-effective manner;
|
|
●
|
Zimmer
may not timely perform its obligations under the Zimmer Development Agreement;
|
|
●
|
Zimmer
may fail to effectively commercialize our products; or
|
|
●
|
contractual
disputes or other disagreements between us and Zimmer, including those regarding the development, manufacture, and commercialization
of our products, interpretation of the Zimmer Development Agreement, and ownership of proprietary rights.
|
Any
of the foregoing could adversely impact the likelihood and timing of any payments we are eligible to receive under the Zimmer Development
Agreement. Neither the Product Availability Date nor the Acceptance of all Deliverables for SEEG Products under the Development Plan
(which are key milestones for payments under the Development Agreement) has occurred. In September 2021, the Company received 510(k)
clearance from the FDA to market its Evo sEEG Electrode technology for temporary (less than 24 hours) use with recording, monitoring,
and stimulation equipment for the recording, monitoring, and stimulation of electrical signals at the subsurface level of the brain.
FDA clearance is one condition of the Product Availability Date. However, the Company does not intend to deliver saleable product to
Zimmer if and until it receives regulatory clearance to expand the use of its Evo sEEG Electrode technology for up to 30 days, at which
point the Company and Zimmer intend to commence negotiations regarding payments by Zimmer under the Development Agreement notwithstanding
the deadlines under the Development Agreement for the Product Availability Date and the Acceptance of all Deliverables for SEEG Products.
Accordingly, the amount of the SEEG Exclusivity Maintenance Fee and the Interim Fee Bonus that we may receive under the Development Agreement
will depend on the outcome of such negotiations, and we cannot guarantee any particular outcome.
Moreover,
the Company is reliant on Zimmer to drive the commercialization and sales of our products. If Zimmer does not perform its obligations
under the Zimmer Development Agreement, we may be forced to incur material expenses to build a sales organization and infrastructure
to market our products which sales would be substantially delayed and could result in a material adverse effect on our business, results
of operations and prospects and would likely cause our stock price to decline.
We
have entered into, and may enter into additional 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.
Risks
Related to our Intellectual Property
Our
ability to protect our intellectual property and proprietary technology is uncertain.
The
medical device market in which we operate is largely technology driven. We rely primarily on patent, trademark and trade secret laws,
as well as confidentiality and non-disclosure agreements, to protect our intellectual property and proprietary technologies. 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. 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 a registered U.S. trademark for the “EVO” 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.
There
is limited market awareness of our technology, and we may not be able to establish or strengthen our brand.
There
is currently limited market awareness of our technology. 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, and
increasing market awareness of our technology, 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.
We
could become subject to patent 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:
|
●
|
stop
selling our products or using technology that contains the allegedly infringing intellectual property;
|
|
●
|
incur
significant legal expenses;
|
|
●
|
pay
substantial damages to the party whose intellectual property rights we are allegedly infringing;
|
|
●
|
redesign
those products that contain the allegedly infringing intellectual property; or
|
|
●
|
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.
|
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.
We
are currently subject to litigation with the former employer of a current employee of NeuroOne, which is described in more detail under
“Note 4—Commitments and Contingencies” included in “Item 8 — Financial Statements and Supplementary Data”
in this Annual Report.
Even
if we successfully defend against these claims, litigation could result in substantial costs 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 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.
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:
|
●
|
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;
|
|
●
|
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;
|
|
●
|
we
might not have been the first to file patent applications covering certain of our inventions;
|
|
●
|
others
may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual
property rights;
|
|
●
|
it
is possible that our pending patent applications will not lead to issued patents;
|
|
●
|
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;
|
|
●
|
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;
|
|
●
|
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
|
|
●
|
we
may not develop additional proprietary technologies that are patentable.
|
Risks
Related to our Legal and Regulatory Environment
Our
products and operations are subject to extensive governmental regulation, and any adverse regulatory action may materially adversely
affect our financial condition and business operations.
Our
medical devices and technologies and business activities, including marketing, manufacturing, sales and development processes, are subject
to regulation by the FDA, U.S. Department of Justice, Health and Human Services – Office of Inspector General, and other federal
and state, governmental authorities. These governmental authorities enforce laws and regulations that are meant to assure product safety
and effectiveness, including the regulation of, among other things:
|
●
|
product
design and development;
|
|
●
|
pre-clinical
studies and clinical trials;
|
|
●
|
establishment
registration and product listing;
|
|
●
|
labeling,
content and language of instructions for use and storage;
|
|
●
|
marketing,
manufacturing, sales and distribution;
|
|
●
|
pre-market
clearance or approval;
|
|
●
|
servicing
and post-market surveillance;
|
|
●
|
record-keeping
procedures;
|
|
●
|
product
import and export;
|
|
●
|
advertising
and promotion; and
|
|
●
|
recalls
and field safety corrective actions.
|
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.
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
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:
|
●
|
the
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;
|
|
●
|
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 Anti-Kickback
Statute constitutes a false or fraudulent claim for purposes of the false claims statutes;
|
|
●
|
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;
|
|
●
|
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;
|
|
●
|
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;
|
|
●
|
federal
consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;
|
|
●
|
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
|
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.
Legislative
or regulatory healthcare reforms may have a material adverse effect on our business, financial condition, results or operations and cash
flows.
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 and Health Care and Education
Affordability Reconciliation Act of 2010 were enacted into law in the U.S. in March 2010. Certain provisions of this law, including comparative
effectiveness research, pilot programs to evaluate alternative payment methodologies and other changes to the payment systems, have started
changing the way healthcare is delivered, reimbursed and funded. While the extent to which it has affected our business is not clear,
these changes, over the long-term, may adversely affect our business and results of operations. The current U.S. administration may attempt
to reverse some of the previous administration’s changes to the ACA, particularly related to healthcare coverage for the uninsured,
and is further expected to introduce more ambitious healthcare legislation, which could include what is commonly referred to as a “public
option” or changes to Medicare age requirements. If passed, this legislation would lead to increased coverage levels and utilization
of services; however, at this point, the impact of any such changes is unclear because specific changes have not been enacted or implemented.
We
cannot predict whether any additional healthcare reform proposals will be adopted or how such proposals may impact our business and operations.
However, any changes that lower reimbursements for either our products or procedures using our products, reduce medical procedure volumes,
increase cost containment pressures on us or others in the healthcare sector, or impose additional or heightened regulatory requirements
could adversely affect our business and results of operations.
Risks
Related to our Common Stock
The
price of our Common Stock might fluctuate significantly, and you could lose all or part of your investment.
Volatility
in the market price of our Common Stock may prevent you from being able to sell your shares of our Common Stock at or above the price
you paid for your shares. The trading price of our Common Stock may be volatile and subject to wide price fluctuations in response to
various factors, including:
|
●
|
actual
or anticipated fluctuations in our quarterly financial and operating results;
|
|
●
|
our
progress toward developing our cortical strip and sheet electrode technology;
|
|
●
|
the
commencement, enrollment and results of our future clinical trials;
|
|
●
|
adverse
results from, delays in or termination of our clinical trials;
|
|
●
|
adverse
regulatory decisions, including failure to receive regulatory approval;
|
|
●
|
publication
of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities
analysts, if any;
|
|
●
|
perceptions
about the market acceptance of our products and the recognition of our brand;
|
|
●
|
adverse
publicity about our products or industry in general;
|
|
●
|
overall
performance of the equity markets;
|
|
●
|
introduction
of products, or announcements of significant contracts, licenses or acquisitions, by us or our competitors;
|
|
●
|
legislative,
political or regulatory developments;
|
|
●
|
additions
or departures of key personnel;
|
|
●
|
threatened
or actual litigation and government investigations;
|
|
●
|
third-party
promotional activities, which are subject to ongoing regulatory obligations;
|
|
●
|
sale
of shares of our Common Stock by us or members of our management; and
|
|
●
|
general
economic conditions.
|
These
and other factors might cause the market price of our Common Stock to fluctuate substantially, which may negatively affect the liquidity
of our Common Stock. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility
has had a significant impact on the market price of securities issued by many companies across many industries. The changes frequently
appear to occur without regard to the operating performance of the affected companies. Accordingly, the price of our Common Stock could
fluctuate based upon factors that have little or nothing to do with our Company, and these fluctuations could materially reduce our share
price.
Securities
class action litigation has often been instituted against companies following periods of volatility in the overall market and in the
market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our
management’s attention and resources, and harm our business, operating results and financial condition.
Any
failure to maintain an effective system of internal controls could result in material misstatements of our financial statements or cause
us to fail to meet our reporting obligations or fail to prevent fraud in which case, our stockholders could lose confidence in our financial
reporting, which would harm our business and could negatively impact the price of our stock.
We are required to comply with the internal control
evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”) and management is required
to report annually on our internal control over financial reporting. Our independent registered public accounting firm will not be required
to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of SOX until the date
we have a public float of $75 million or greater.
If we fail to maintain effective internal controls
and procedures for financial reporting, it could result in material misstatements in the annual or interim financial statements that would
not be prevented or detected in a timely manner. We identified material weaknesses in our internal control over financial reporting in
2018, and we cannot assure you that material weaknesses or significant deficiencies will not occur in the future and that we will be able
to remediate such weaknesses or deficiencies in a timely manner, which could impair our ability to accurately and timely report our financial
position, results of operations or cash flows.
We
intend to issue more shares to raise capital, which will result in substantial dilution.
Our
certificate of incorporation authorizes the issuance of a maximum of 100,000,000 shares of Common Stock and 10,000,000 shares of preferred
stock. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of
equity, debt financings, or other capital sources. Any additional financings effected by us may result in the issuance of additional
securities without stockholder approval and the substantial dilution in the percentage of Common Stock held by our then existing stockholders.
Moreover, the Common Stock issued in any such transaction may be valued on an arbitrary or non-arm’s-length basis by our management,
resulting in an additional reduction in the percentage of Common Stock held by our current stockholders. Our Board has the power to issue
any or all of such authorized but unissued shares without stockholder approval. To the extent that additional shares of Common Stock
are issued, dilution to the interests of our stockholders will occur and the rights of the holder of Common Stock might be materially
and adversely affected.
As
of September 30, 2021, we had outstanding warrants to purchase an aggregate of 7,503,808 shares of Common Stock at a weighted average
exercise price of $6.06 per share, and options to purchase an aggregate of 1,122,560 shares of Common Stock at a weighted average exercise
price of $5.89 per share. For a description of our outstanding warrants and information about the number of shares of Common Stock for
which they are exercisable, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity
and Capital Resources—Historical Capital Resources.” To the extent these outstanding options or warrants are exercised, there
will be further dilution to holders of our Common Stock.
Anti-takeover
provisions in the Company’s certificate of incorporation and bylaws may prevent or frustrate attempts by stockholders to change
the Board or current management and could make a third-party acquisition of the Company difficult.
The
Company’s certificate of incorporation and bylaws contain provisions that may discourage, delay or prevent a merger, acquisition
or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive
a premium for their shares. For example, our certificate of incorporation permits the Board without stockholder approval to issue up
to 10,000,000 shares of preferred stock and to fix the designation, power, preferences, and rights of those shares. Furthermore, our
Board has the ability to increase the size of the Board and fill the newly created vacancies without stockholder approval. These provisions
could limit the price that investors might be willing to pay in the future for shares of the Common Stock.
We
are a smaller reporting company, and the reduced reporting requirements applicable to smaller reporting companies may make our Common
Stock less attractive to investors.
We
are a “smaller reporting company” as defined in Section 12 of the Exchange Act. For as long as we continue to be a smaller
reporting company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies
that are not smaller reporting companies such as, reduced disclosure obligations regarding executive compensation in our annual and periodic
reports and proxy statements and stockholder approval of any golden parachute payments not previously approved. We will remain a “smaller
reporting company” as long as (i) our public float remains less than $250 million or (ii) our annual revenues are less than $100
million and we either have no public float, or our public float is less than $700 million. Public float is measured as of the last business
day of our most recently-completed second fiscal quarter, and annual revenues are as of the most recently completed fiscal year for which
audited financial statements are available. We cannot predict if investors will find our Common Stock less attractive because we may
rely on these exemptions. If some investors find our Common Stock less attractive as a result, there may be a less active trading market
for our Common Stock and our stock price may be more volatile.
Our
Common Stock has been, and may in the future be subject to the “penny stock” rules of the SEC, which makes transactions in
our stock cumbersome and may reduce the value of an investment in our stock.
The
SEC has adopted regulations which generally define a “penny stock” as an equity security that has a market price of less
than $5.00 per share, subject to specific exemptions. The SEC’s penny stock rules require a broker-dealer, before a transaction
in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about
penny stocks and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations
for the penny stock, the compensation of the broker-dealer and the salesperson in the transaction, and monthly account statements showing
the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that
before a transaction in a penny stock occurs, the broker-dealer must make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser’s agreement to the transaction. If our Common Stock is subject to the “penny
stock” rules, these rules may restrict the ability of brokers-dealers to sell our Common Stock and may affect the ability of investors
to sell their shares, until our Common Stock no longer is considered a penny stock.
We
have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to
the value of our stock.
We
have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings
for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Accordingly,
you may have to sell some or all of your shares of our Common Stock in order to generate cash flow from your investment. You may not
receive a gain on your investment when you sell shares and you may lose the entire amount of the investment.
If
securities or industry analysts do not publish research or reports, or publish unfavorable research or reports, about us, our business
or our market, our stock price and trading volume could decline.
The
trading market for our Common Stock will be influenced by the research and reports that securities or industry analysts publish about
us and our business. Securities or industry analysts may elect not to provide coverage of our Common Stock, and such lack of coverage
may adversely affect the market price of our Common Stock. In the event we do not secure additional securities or industry analyst coverage,
we will not have any control over the analysts or the content and opinions included in their reports. The price of our stock could decline
if one or more securities or industry analysts downgrade our stock or issue other unfavorable commentary or research. If one or more
securities or industry analysts ceases coverage of our Company or fails to publish reports on us regularly, demand for our stock could
decrease, which in turn could cause our stock price or trading volume to decline.
If
we fail to comply with the continued listing standards of the Nasdaq Capital Market, our Common Stock could be delisted. If it is delisted,
our Common Stock and the liquidity of our Common Stock would be impacted.
The
continued listing of our Common Stock on Nasdaq is contingent on NeuroOne’s continued compliance with a number of listing standards.
There is no assurance that NeuroOne will remain in compliance with these standards. Delisting from Nasdaq would adversely affect our
ability to raise additional financing through the public or private sale of equity securities, significantly affect the ability of investors
to trade our securities and negatively affect the value and liquidity of our Common Stock. Delisting also could limit our strategic alternatives
and attractiveness to potential counterparties and have other negative results, including the potential loss of employee confidence,
the loss of institutional investors or interest in business development opportunities. Moreover, NeuroOne committed in connection with
the sale of securities to use commercially reasonable efforts to maintain the listing of its Common Stock during such time that certain
warrants are outstanding.
Risks
Related to the Acquisition
We
may be subject to unknown risks as a result of our completed Acquisition by Original Source Entertainment, Inc.
Original
Source Entertainment, Inc., which was renamed NeuroOne Medical Technologies Corporation in connection with the Acquisition, was formed
to license songs to the television and movie industry and has generated very little revenues. Prior to the Acquisition, its operations
have been primarily limited to organizational, start-up, and capital formation activities, with no employees other than the former officers.
In connection with the Acquisition, the liabilities existing in Original Source Entertainment, Inc. at the time of the Acquisition were
cancelled or paid by a related party, as required by the Merger Agreement with NeuroOne, Inc. and OSOK Acquisition Company (the “Merger
Agreement”). Despite this requirement and the representations and warranties of Original Source Entertainment, Inc. in the Merger
Agreement, there may be unknown liabilities, or liabilities that were known but believed to be immaterial, related to the business of
Original Source Entertainment, Inc. that may become material liabilities we are subject to in the future. If we are subject to material
liabilities as a result of the conduct of Original Source Entertainment, Inc., we may have limited recourse for such liabilities, which
could have a material impact on our business and stock price.
Additional
risks may exist since we were engaged in a transaction that can be generally characterized as a “reverse merger” with a shell
company. Securities analysts of major brokerage firms may not provide coverage of the Company since there is little incentive to brokerage
firms to recommend the purchase of the Common Stock. No assurance can be given that brokerage firms will want to conduct any secondary
offerings.
General
Risk Factors
Changes
in tax laws or exposure to additional income tax liabilities could have a material impact on our business, results of operations, financial
condition and cash flows.
We
are subject to income and other non-income-based taxes and tariffs in the U.S., and our operations, plans and results are affected by
tax and other initiatives. The tax laws in the U.S. and any other countries in which we and our affiliates do business could change on
a prospective or retroactive basis, and any such changes could materially adversely affect our business, our results of operations, and
our effective tax rate. For example, on December 22, 2017, the U.S. enacted the Tax Act, which 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%, and the recent change
in administration and control of Congress in the U.S. may result in additional U.S. tax law changes that could have a material impact
on our future effective tax rate. Notwithstanding the reduction in the corporate income tax rate under the Tax Act, guidance on tax reform
continues to be released and such guidance may adversely affect our business and financial condition. It is also unknown if and to what
extent various states will conform to the Tax Act or any future tax reform legislation. The impact of the tax reform implemented under
the Tax Act and any future tax reform legislation on holders of our Common Stock is likewise uncertain and could be adverse. We urge
you to consult with your legal and tax advisors with respect to this legislation and the potential tax consequences of investing in our
Common Stock. The decrease in the corporate tax rate resulted in changes in the valuation of our deferred tax assets and liabilities.
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
may seek to grow our business through acquisitions of complementary products or technologies, and the failure to complete 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. The success of our strategy relating
to future acquisitions, investments or alliances will depend on a number of factors, including our ability to:
|
●
|
identify suitable opportunities for acquisition, investment or alliance, if at all;
|
|
●
|
manage acquisition, investment or alliance opportunities within our capital capacity and prioritize those investments to execute on our strategy;
|
|
●
|
manage our due diligence process to uncover potential issues and liabilities with targets;
|
|
●
|
finance any future acquisition, investment or alliance on terms acceptable to us, if at all;
|
|
●
|
complete acquisitions, investments or alliances in a timely manner on terms that are satisfactory to us, if at all;
|
|
●
|
successfully integrate and operate acquired businesses;
|
|
●
|
successfully identify and retain key target employees;
|
|
●
|
comply with applicable laws and regulations;
|
|
●
|
protect intellectual property and to prevail in litigation related to newly acquired technologies;
|
|
●
|
assimilate
the acquired products or technologies;
|
|
●
|
maintain
uniform standards, procedures, controls and policies;
|
|
●
|
anticipate
costs associated with acquisitions;
|
|
●
|
avoid
the diversion of management’s attention from our existing business;
|
|
●
|
manage
risks associated with entering new markets in which we have limited or no experience; and
|
|
●
|
manage
legal and accounting costs relating to the acquisitions or compliance with regulatory matters.
|
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 our officers
and 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, including, but not limited to, changes
related to the COVID-19 pandemic. 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 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.
We
have incurred, and may continue to incur increased costs and demands upon management as a result of being a public company.
As
a public company in the United States, we incur significant legal, accounting and other costs. These additional costs could negatively
affect our financial results. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure,
including regulations implemented by the SEC and the stock exchange on which we may list our Common Stock, may increase legal and financial
compliance costs and make some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations
and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies.
We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general
and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance
activities. If, notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities
may initiate legal proceedings against us and our business may be harmed.
Failure
to comply with these rules might also make it more difficult for us to obtain some types of insurance, including director and officer
liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain
the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons
to serve on our Board, on committees of our Board or as members of senior management.