ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and
analysis of financial condition and results of operations of NeuroOne together with our financial statements and the related notes included
elsewhere in this Report.
Overview
We are a medical technology
company focused on the development and commercialization of thin film electrode technology for continuous electroencephalogram (“cEEG”)
and stereoelectrocencephalography (“sEEG”), spinal cord stimulation, brain stimulation, drug delivery 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. We are also developing the capability to use our sEEG electrode technology to deliver drugs
or gene therapy while being able to record brain activity before, during, and after delivery. Additionally, we are investigating the potential
applications of our technology associated with artificial intelligence.
In November 2019, our Evo cortical electrode technology
received 510(k) clearance from the FDA for recording, monitoring, and stimulating brain tissue for up to 30 days, and in October 2022,
we received FDA clearance for our Evo sEEG electrode technology for temporary (less than 30 days) use with recording, monitoring, and
stimulation equipment for the recording, monitoring, and stimulation of electrical signals at the subsurface level of the brain.
We completed feasibility bench top testing with
a new design of our diagnostic and ablation depth electrode in the first calendar quarter of 2021 and signed a contract with RBC Medical
Innovations to develop hardware for the system in the third calendar quarter of 2021. We completed design verification of such hardware
early in the second calendar quarter of 2023. We also completed an animal feasibility study at Emory University in September 2021. We
completed additional animal studies early in the second quarter of calendar 2023 and received 510(k) clearance in December 2023 for creation
of radiofrequency lesions in nervous tissue for functional neurosurgical procedures. Our other products are still under development.
We commenced commercial
sales of cEEG strip/grid and electrode cable assembly products beginning in the first quarter of fiscal year 2021. We sold, on a limited
application basis for design verification, sEEG depth electrode products for non-human use beginning in late fiscal year 2021, and we
commenced commercial sales of our sEEG depth electrode products in late calendar 2022. Our other products are still under development.
59
NeuroOne Medical Technologies
Corporation
FORM 10-K
We have incurred losses since inception. As of September 30, 2023,
we had an accumulated deficit of $62.7 million, primarily as a result of expenses incurred in connection with our research and development,
selling, general and administrative expenses associated with our operations and interest expense, fair value adjustments and loss on extinguishments
related to our debt, offset in part by collaborations and product revenues.
Prior to FDA clearance
of certain of our products, our main sources of cash, cash equivalents and short-term investments were proceeds from the issuances of
notes, common stock, warrants and unsecured loans. See “Liquidity and Capital Resources—Capital Resources” below. While
we have begun to generate revenue from the sale of products based on our cEEG and sEEG technology and through milestone and other
payments from our current collaboration with Zimmer, we expect to continue to incur significant expenses and increasing operating
and net losses for the foreseeable future until and unless we generate a higher level of revenue from commercial sales, and we will
need to obtain substantial additional funding in connection with our continuing operations through public or private equity or debt financings,
through collaborations or partnerships with other companies or other sources.
We may be unable to raise
additional funds when needed on favorable terms or at all. Our failure to raise such capital as and when needed would have a negative
impact on our financial condition and our ability to develop and commercialize our cortical strip, grid electrode and depth electrode
technology and future products and our ability to pursue our business strategy. See “Liquidity and Capital Resources—Liquidity
Outlook” below.
Recent Developments and Upcoming Milestones
Corporate Updates
Appointment of COO
On November 14, 2023, we announced the appointment
of Christopher R. Volker as the Chief Operating Officer of the Company, effective on November 10, 2023.
sEEG Commercial Launch
In May 2023, we announced the commercial launch
of the Evo® sEEG electrode product line in the United States with exclusive distribution partner Zimmer Biomet. We have fulfilled
eight shipments of sEEG product to Zimmer Biomet in preparation for launch and completed initial training on the sEEG product line to
Zimmer Biomet sales personnel.
The first clinical case using the Evo® sEEG
electrode in robotic neurosurgery was performed by Dr. William Bingaman at the Cleveland Clinic. The procedure was the first to utilize
NeuroOne’s Evo sEEG electrode with Zimmer Biomet’s ROSA One® Brain, a robotic platform that assists surgeons in planning
and performing complex yet minimally invasive neurosurgical procedures.
OneRF Ablation
During the second fiscal quarter of 2023, we successfully
completed summative usability testing for OneRF with 15 neurosurgeons, and completed execution of internal device verification/validation
protocols for the final OneRF ablation system. We submitted a 510(k) application to the FDA for the OneRF ablation system in June 2023,
submitted responses to FDA comments on November 6, 2023 and received 510(k) clearance on December 6, 2023.
Spinal Cord Stimulation Program
During the second fiscal quarter of 2023, we completed
an initial animal implant of novel thin film paddle leads for spinal cord stimulation (SCS). The devices are intended for the treatment
of patients with chronic back pain due to multiple failed back surgery syndrome, intractable low back, and leg pain. A percutaneous (through
a needle) delivery system for paddle leads is also under development and has been successfully bench-tested.
60
NeuroOne Medical Technologies
Corporation
FORM 10-K
Global Economic Conditions
Generally, worldwide economic conditions remain
uncertain, particularly due to the conflicts between Russia and Ukraine and the Middle East, disruptions in the banking system and financial
markets, lingering effects of the COVID-19 pandemic and increased inflation. The general economic and capital market conditions both in
the U.S. and worldwide, have been volatile in the past and at times have adversely affected our access to capital and increased the cost
of capital. The capital and credit markets may not be available to support future capital raising activity on favorable terms or at all.
If economic conditions decline, our future cost of equity or debt capital and access to the capital markets could be adversely affected.
The COVID-19 pandemic
that began in late 2019 introduced significant volatility to the global economy, disrupted supply chains and had a widespread adverse
effect on the financial markets. Additionally, our operating results could be materially impacted by changes in the overall macroeconomic
environment and other economic factors. Changes in economic conditions, supply chain constraints, logistics challenges, labor shortages,
the conflicts in Ukraine and the Middle East, disruptions in the banking system and financial markets, and steps taken by governments
and central banks, particularly in response to the COVID-19 pandemic as well as other stimulus and spending programs, have led to higher
inflation, which has led to an increase in costs and has caused changes in fiscal and monetary policy, including increased interest rates.
Financial Overview
Product Revenue
Our product revenue was derived from the sale
of our Strip/Grid Products, depth electrodes (“sEEG Products”) and electrode
cable assembly products (“Electrode Cable Assembly Products”) based on Evo cortical electrode technology. We anticipate that
we will generate additional revenue from the sale of products based on Evo cortical electrode technology.
In November 2019, we received FDA 510(k) clearance
for our cortical strip electrode for temporary (less than 30 days) recording, monitoring, and stimulation on the surface of the brain.
In October 2022, we received FDA 510(k) clearance for our Evo sEEG electrode technology for temporary (less than 30 days) use with recording,
monitoring, and stimulation equipment for the recording, monitoring, and stimulation of electrical signals at the subsurface level of
the brain.
Product Gross Profit (Loss)
Product gross profit (loss) represents our product
revenue less our cost of product revenue. Our cost of product revenue consists of the manufacturing and materials costs incurred by our
third-party contract manufacturer in connection with our Strip/Grid Products, sEEG Products and outside supplier materials costs of producing
the Electrode Cable Assembly Products. In addition, cost of product revenue includes royalty fees incurred in connection with our license
agreements.
Collaborations Revenue
On July 20, 2020, we entered into an exclusive
development and distribution agreement (the “Zimmer Development Agreement”) with Zimmer, pursuant to which we granted Zimmer
exclusive global rights to distribute the Strip/Grid Products and electrode cable assembly products (the “Electrode Cable Assembly
Products”). 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 Zimmer Development Agreement through a joint development
committee composed of an equal number of representatives of Zimmer and the Company.
Under the terms of the Zimmer 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 Zimmer Development Agreement, Zimmer and the Company have entered
into an MS Agreement and a Quality Agreement with respect to the manufacturing and supply of the Products.
61
NeuroOne Medical Technologies
Corporation
FORM 10-K
Except as otherwise provided in the Zimmer 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 Zimmer Development Agreement) for such Product.
Pursuant to the Zimmer Development Agreement,
Zimmer made an upfront initial exclusivity fee payment of $2.0 million (the “Initial Exclusivity Fee”) to the Company
in fiscal year 2020. In addition, on August 2, 2022, we entered into a Third Amendment to the Zimmer Development Agreement (the “Amendment”)
with Zimmer. Pursuant to the terms and conditions of the Amendment, Zimmer made a $3.5 million payment to us in August 2022. In consideration
of the mutual covenants and agreements contained in the Zimmer Development Agreement, certain fee and milestone payment provisions in
the Zimmer Development Agreement were replaced with the following below:
● $1.5 million for the sEEG exclusivity maintenance fee; and
In addition, in connection with the Amendment,
we issued to Zimmer a warrant to purchase common stock (the “2022 Zimmer Warrant”). The 2022 Zimmer Warrant is exercisable
for up to an aggregate of 350,000 shares of our Common Stock. The 2022 Zimmer Warrant has an exercise price of $3.00 per
share, will be exercisable commencing six months from the issuance date, and will expire on August 2, 2027.
The Zimmer Development Agreement will expire on
the tenth anniversary of the date of the first commercial sale of the last Products to achieve a first commercial sale (the “Zimmer
Term”), unless terminated earlier pursuant to its terms. Either party may terminate the Zimmer 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 Zimmer Development Agreement for any reason with 90 days’ written notice, and
the Company may terminate the Zimmer Development Agreement if Zimmer acquires or directly or indirectly owns a controlling interest in
certain competitors of the Company. The license rights granted to Zimmer under the Zimmer Development Agreement shall be exclusive from
the effective date of the Amendment until the end of the Zimmer Term.
All payments attributed to the Initial Exclusivity
Fee, the sEEG exclusivity maintenance fee and sEEG design milestone payment are non-refundable.
The Zimmer Development Agreement and Amendment
were accounted for under the provisions of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with
Customers (“ASC 606”). In accordance with the provisions under ASC 606, we identified five performance obligations under
the Zimmer Development Agreement and Amendment: (1) our obligation to grant Zimmer access to our intellectual property; (2) completion
of sEEG Product development; (3) completion of Strip/Grid Product development; (4) the provision of sEEG exclusivity maintenance; and
(5) sEEG design modifications as requested by Zimmer. All performance obligations under the Zimmer Development Agreement and Amendment
were met as of December 31, 2022.
In October 2022, we received 510(k) clearance
from the FDA for our Evo sEEG electrode technology for temporary (less than 30 days) use with recording, monitoring, and stimulation equipment
for the recording, monitoring, and stimulation of electrical signals at the subsurface level of the brain. Accordingly, we recognized
revenue in the amount of $1.5 million during the year ended September 30, 2023 related to the completion of the sEEG exclusivity maintenance
milestone. During the year ended September 30, 2022, we recognized revenue in the amount of $1.9 million related to sEEG Product development.
62
NeuroOne Medical Technologies
Corporation
FORM 10-K
The achievement of the level of sales required
to earn royalty payments from Zimmer is uncertain.
For further discussion about the determination
of collaborations revenue, product revenue and cost of product revenue, and for a discussion of milestones and royalty payments under
the Zimmer Development Agreement, see “—Liquidity and Capital Resources—Liquidity Outlook” below and see “Note
7 — Zimmer Development Agreement” included in our financial statements included in “Item 8 — Financial Statements
and Supplementary Data” in this Report.
Selling, General and Administrative
Selling, general and administrative expenses consist
primarily of personnel-related costs including stock-based compensation for personnel in functions not directly associated with research
and development activities. Other significant costs include legal and litigation costs relating to corporate matters, intellectual property
costs, professional fees for consultants assisting with financial and administrative matters, and sales and marketing in connection with
the commercial sale of cEEG strip/grid, sEEG depth electrode and electrode cable assembly products. We anticipate that our selling, general
and administrative expenses will increase in the future to support our continued research and development activities, further commercialization
of our cortical strip and grid technology, and our depth electrode technology, and the increased costs of operating as a public company.
These increases will include increased costs related to the hiring of additional personnel and fees for legal and professional services,
as well as other public company related costs.
Research and Development
Research and development expenses consist of expenses
incurred in performing research and development activities in developing our cortical strip and grid electrode and depth electrode technology.
Research and development expenses include compensation and benefits for research and development employees including stock-based compensation,
overhead expenses, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, costs related to regulatory
operations, fees paid to consultants and other outside expenses. Research and development costs are expensed as incurred and costs incurred
by third parties are expensed as the contracted work is performed. Lastly, de minimis income from the sale of prototype products and related
materials are offset against research and development expenses.
We expect our research and development expenses
to significantly increase over the next several years as we develop our cortical strip and grid electrode and depth electrode technology
and conduct preclinical testing and clinical trials and will depend on the duration, costs and timing to complete our preclinical programs
and clinical trials.
Other Income, net
Other income, net primarily consists of interest
income related to our cash, cash equivalents, investment income or loss from short-term investments and other income or expense outside
of normal operating activity relating to legal settlements, sales of non-commercial supplies and other items as applicable.
Results of Operations
Comparison of the Fiscal Years Ended September
30, 2023 and 2022
The following table sets forth our results of
operations for the fiscal years ended September 30, 2023 and 2022.
For the years ended September 30,
Operating expenses:
Provision for income taxes — — —
63
NeuroOne Medical Technologies
Corporation
FORM 10-K
Product Revenue and Product Gross Profit (Loss)
Product revenue and product gross profit were
$2.0 million and $0.5 million, respectively, during the year ended September 30, 2023. Product revenue and product gross loss were $0.2
million and $0.1 million, respectively, during the year ended September 30, 2022. The increase in gross profit during the current period
was largely due to the higher sales volume that exceeded fixed royalty and other overhead costs in the current year resulting in a positive
gross margin of 23.4% for the first time in our history. Product revenue consisted of Strip/Grid Products, sEEG Products and Electrode
Cable Assembly Products sales. The increase in product revenue of $1.8 million year over was attributed primarily to the sale of our sEEG
Products that followed the FDA 510(k) clearance in October 2022 for our Evo sEEG electrode technology for temporary (less than 30 days)
use. Cost of product revenue consisted of the manufacturing and materials costs incurred by our third-party contract manufacturer in connection
with our Strip/Grid Products, sEEG Products and outside supplier materials costs in connection with the Electrode Cable Assembly Products.
In addition, cost of product revenue included royalty fees incurred of approximately $0.2 million and $0.1 million in connection with
our license agreements during the years ended September 30, 2023 and 2022, respectively.
Collaborations Revenue
Collaborations revenue was $1.5 million and $1.9
million during the years ended September 30, 2023 and 2022, respectively. Revenue during the periods presented were derived from the Zimmer
Development Agreement and Amendment and represented the portion of our performance obligations that were met in connection with the upfront
initial development fee and payments associated with the Amendment.
Selling, general and administrative expenses
Selling, general and administrative expenses were
$6.9 million and $7.0 million for the years ended September 30, 2023 and 2022, respectively. The negligible change period over period
was composed primarily due to an increase in payroll related costs of approximately $0.3 million offset by a reduction in professional
service and marketing related costs of $0.4 million.
Research and development expenses
Research and development expenses were $6.9 million
for the year ended September 30, 2023, compared to $4.9 million for the year ended September 30, 2022. The $2.0 million increase during
fiscal 2023 over the comparable prior year period was attributed to supporting development activities, which primarily included salary-related
expenses and costs related to consulting services, materials and supplies associated with the development of future sEEG product applications
and other products utilizing new technologies.
Other Income, net
Other income, net during the year ended September
30, 2023 related to interest income attributed to our cash, cash equivalents and short-term investments in the amount of $0.2 million,
while outstanding, which was partially offset by an exploit loss of $94,000 and a loss on disposal of equipment in the amount of $32,000.
Other income, net during the year ended September
30, 2022 consisted principally of interest income attributed to our cash, cash equivalents and short-term investments, while outstanding.
64
NeuroOne Medical Technologies
Corporation
FORM 10-K
Liquidity and Capital Resources
Overview
As of September 30, 2023, our principal source
of liquidity consisted of cash and cash equivalents in the aggregate of approximately $5.3 million. While we began to generate revenue
in fiscal year 2021 from commercial sales and through milestone and other payments under our collaboration with Zimmer, we expect to continue
to incur significant expenses and increasing operating and net losses for the foreseeable future until and unless we generate an adequate
level of revenue from commercial sales to cover expenses. Our most significant cash requirements relate to the funding of our ongoing
product development and commercialization operations and our royalty obligations under our intellectual property licenses with the Wisconsin
Alumni Research Foundation (“WARF”) and the Mayo Foundation for Medical Education and Research (“Mayo”). Our
additional material cash needs include commitments under operating leases and other administrative services. See “Funding Requirements”
below for more information. We anticipate that our expenses will increase substantially as we develop and commercialize our cortical strip,
grid electrode and depth electrode technology and pursue pre-clinical and clinical trials, seek regulatory approvals, manufacture products,
establish our own sales, marketing and distribution infrastructure to commercialize our ablation electrode technology, hire additional
staff, add operational, financial and management systems and continue to operate as a public company.
Capital Resources
Our sources of cash, cash equivalents and short-term
investments to date have been limited to collaboration and product revenues, along with proceeds from the issuances of notes with warrants,
common stock with and without warrants and unsecured loans with the terms of our financings described below.
July 2023 Public Offering
On July 24, 2023, we entered into an underwriting
agreement with The Benchmark Company, LLC, as underwriter (“Benchmark”), relating to the issuance and sale of 5,250,000 shares
of our common stock, par value $0.001 per share, at a price to the public of $1.00 per share (the “July 2023 Public Offering”).
In addition, under the terms of the July 2023 Public Offering, we granted Benchmark an option, exercisable for 30 days, to purchase up
to an additional 787,500 shares of common stock on the same terms (“the Overallotment Option”). The July 2023 Public Offering
closed on July 27, 2023, and we completed the sale and issuance of an aggregate of 6,037,500 shares of our common stock, including the
exercise in full of the Overallotment Option.
The net proceeds to us from the July 2023 Public
Offering were approximately $5.2 million after deducting underwriting discounts and other offering expenses payable by the Company. We
intend to use the net proceeds from this offering to: (i) support the commercial launch of the EVO sEEG electrode with Zimmer Biomet,
(ii) support the FDA submission for the OneRF ablation system, and (iii) complete the design of a novel drug delivery electrode, among
other general corporate purposes.
At-The-Market Offering
On December 21, 2022, we entered into a Capital
on DemandTM Sales Agreement (“Sales Agreement”) with JonesTrading Institutional Services LLC (“JonesTrading”)
to create an at-the-market offering program (“ATM”) under which we may offer and sell shares having an aggregate offering
price of up to $14.5 million. JonesTrading is entitled to a commission at a fixed commission rate equal to up to 3% of the gross proceeds.
Through September 30, 2023, we have issued 1,439,677 shares of common stock under the ATM for gross proceeds in the amount of $2.6 million.
We incurred issuance costs in connection with the ATM in the amount of $0.2 million through September 30, 2023. On July 24, 2023, we decreased
the amount of common stock that can be sold pursuant to the Sales Agreement, such that we were offering up to an aggregate of $2.6 million
of our common stock for sale under the Sales Agreement, including the shares of common stock previously sold. On December 1, 2023, we
increased the amount of common stock that can be sold pursuant to the Sales Agreement, such that we are offering up to an aggregate of
$4.8 million of our common stock for sale under the Sales Agreement, including the shares of common stock previously sold.
65
NeuroOne Medical Technologies
Corporation
FORM 10-K
October 2021 Underwritten Public Offering
On October 13, 2021, we entered into an underwriting
agreement relating to the issuance and sale of 3,750,000 shares of our common stock at a price to the public of $3.20 per share (the “October
2021 Underwritten Public Offering”). In addition, under the terms of the underwriting agreement, we granted the underwriter an option,
exercisable for 30 days, to purchase up to an additional 562,500 shares of common stock on the same terms. The base offering closed on
October 15, 2021, and the sale of 422,057 shares of common stock subject to the underwriter’s overallotment option closed on November
15, 2021. The gross proceeds from this offering were approximately $13.4 million prior to deducting underwriting discounts and other offering
expenses payable by us.
Funding Requirements
As noted above, certain of our cash requirements
relate to the funding of our ongoing product development and commercialization operations and our milestone and royalty obligations under
our intellectual property licenses with WARF and Mayo. See “Item
1—Business—Clinical Development and Regulatory Pathway—Clinical Experience, Future Development and Clinical Trial Plans”
in this Report for a discussion of design, development, pre-clinical and clinical activities that we may conduct in the future, including
expected cash expenditures required for some of those activities, to the extent we are able to estimate such costs.
On January 21, 2020,
we entered into an Amended and Restated License Agreement (the “WARF License”) with WARF, which amended and restated in full
our prior license agreement with WARF, dated October 1, 2014 (the “Original WARF License”). Under the WARF License, 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 2020, $100,000 for 2021 and $150,000 for 2022 and each calendar year thereafter that the WARF License is
in effect. 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.
Under the Amended and
Restated License and Development Agreement with Mayo (the “Mayo Development Agreement”), we have agreed to pay Mayo a royalty
equal to a single-digit percentage of our product sales pursuant to the Mayo Development Agreement. Refer to “Note 4 – Commitments
and Contingencies” included in our financial statements included in “Item 8 — Financial Statements and Supplementary
Data” in this Report for more information about the WARF License and the Mayo Development Agreement.
Our other cash requirements
within the next twelve months include accounts payable, accrued expenses, purchase commitments and other current liabilities. Our other
cash requirements greater than twelve months from various contractual obligations and commitments include operating leases and contracted
services. Refer to “Note 4 – Commitments and Contingencies” included in our financial statements included in “Item
8 — Financial Statements and Supplementary Data” in this Report for further detail of our lease obligations and the timing
of expected future payments. Contracted services include agreements with third-party service providers for clinical research, product
development, manufacturing, supplies, payroll services, equipment maintenance services, and audits for periods up to fiscal year 2025.
We expect to satisfy
our short-term and long-term obligations through cash on hand and, until we generate an adequate level of revenue from commercial sales
to cover expenses, if ever, from future equity and debt financings.
Liquidity Outlook
For a discussion of potential fee payments under
the Zimmer Development Agreement, see “Note 7 — Zimmer Development Agreement” included in our financial statements included
in “Item 8 — Financial Statements and Supplementary Data” in this Report. Even though we have received regulatory clearance
to expand the use of our Evo sEEG electrode technology for up to 30 days, commercial sales of the sEEG electrodes are expected to take
some time to be a significant source of liquidity. Zimmer has exclusive global rights to distribute our strip and grid cortical electrodes,
depth 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.
66
NeuroOne Medical Technologies
Corporation
FORM 10-K
At September 30, 2023, we had cash and cash equivalents
in the aggregate of approximately $5.3 million. Management has noted the existence of substantial doubt about our ability to continue
as a going concern. Additionally, our independent registered public accounting firm included an explanatory paragraph in the report on
our financial statements as of and for the years ended September 30, 2023 and 2022, respectively, noting the existence of substantial
doubt about our ability to continue as a going concern. Our existing cash and cash equivalents may not be sufficient to fund our operating
expenses through at least twelve months from the date of this filing. To continue to fund operations, we will need to secure additional
funding through public or private equity or debt financings, through collaborations or partnerships with other companies or other sources.
We may not be able to raise additional capital on terms acceptable to us, or at all. Any failure to raise capital when needed could compromise
our ability to execute on our business plan. If we are unable to raise additional funds, or if our anticipated operating results are not
achieved, we believe planned expenditures may need to be reduced in order to extend the time period that existing resources can fund our
operations. If we are unable to obtain the necessary capital, it may have a material adverse effect on our operations and the development
of our technology, or we may have to cease operations altogether.
The development and commercialization of our cortical
strip, grid electrode and depth electrode technology is subject to numerous uncertainties, and we could use our cash and cash equivalent
resources sooner than we expect. Additionally, the process of developing medical devices is costly, and the timing of progress in pre-clinical
tests and clinical trials is uncertain. Our ability to successfully transition to profitability will be dependent upon achieving further
regulatory approvals and achieving a level of product sales adequate to support our cost structure. We cannot assure you that we will
ever be profitable or generate positive cash flow from operating activities.
Cash Flows
The following is a summary of cash flows for each
of the periods set forth below.
For the Years Ended
September 30,
Net cash provided by (used in) investing activities 2,649,964 (3,244,765 )
Net cash used in operating activities
Net cash used in operating activities was $12.9
million for the year ended September 30, 2023, which consisted of a net loss of $11.9 million partially offset by non-cash stock-based
compensation, depreciation, amortization related to intangible assets and short term investment premiums and discounts, operating lease
expense and loss on disposal of fixed assets, totaling approximately $1.4 million in the aggregate. The net change in our net operating
assets and liabilities associated with fluctuations in our operating activities resulted in a cash use of approximately $2.4 million.
The net cash use stemming from the change in operating assets and liabilities was primarily attributable to both a decrease in deferred
revenue in connection with the completion of the remaining milestone performance obligation under the Zimmer Development Agreement and
to an increase in inventory purchases, attributed to the timing of payments. Partially offsetting the net cash operating use during the
period was a decrease in our accounts receivable, prepaid expenses and by an increase in our accrued expenses, on a net basis, resulting
from timing of payments and fluctuations in our operations.
Net cash used in operating activities was $7.5
million for the year ended September 30, 2022, which consisted of a net loss of $10.0 million partially offset primarily by stock-based
compensation, depreciation, amortization related to intangible assets and to short-term investment discounts and premiums, non-cash lease
expense and non-cash consideration associated with the Zimmer Development Agreement, totaling approximately $1.3 million in the aggregate.
The net change in our net operating assets and liabilities associated with fluctuations in our operating activities resulted in a cash
source of approximately $1.2 million. The year on year change in operating assets and liabilities was primarily attributable to a net
increase in accounts payable, accrued expenses and deferred revenue, offset partially by increases in inventory purchases and prepaid
expenses.
67
NeuroOne Medical Technologies
Corporation
FORM 10-K
Net cash provided by (used in) investing activities
Net cash provided by investing activities was
$2.6 million for the year ended September 30, 2023 and consisted of maturities of short-term investments in the amount of $4.5 million,
offset by purchases of short term investments of $1.5 million, consisting of treasury and corporate notes. The balance of activity during
the period consisted of outlays for purchases of property and equipment in the amount $0.4 million offset slightly by net proceeds associated
with the disposal of equipment.
Net cash used by investing activities for the
year ended September 30, 2022 was $3.2 million and consisted of purchases of short-term investments consisting of treasury and corporate
notes of approximately $3.5 million and outlays for purchases of property and equipment of $0.3 million which were partially offset by
maturities of short-term investments in the amount of $0.5 million.
Net cash provided by financing activities
Net cash provided by financing activities was
$7.4 million for the year ended September 30, 2023, which consisted of net proceeds from the July 2023 Public Offering of $5.2 million
and from the ATM of $2.3 million, offset partially by repurchases of common stock for the payment of employee taxes in the amount of $0.1
million.
Net cash
provided by financing activities was $12.0 million for the year ended September 30, 2022, which consisted of net proceeds from the October
2021 Underwritten Public Offering.
Critical Accounting Policies and Significant
Judgments and Estimates
Our financial statements are prepared in accordance
with U.S. generally accepted accounting principles. These accounting principles require us to make estimates and judgments that can affect
the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and
expense during the periods presented. We believe that the estimates and judgments upon which we rely are reasonably based upon information
available to us at the time that we make these estimates and judgments. To the extent that there are material differences between these
estimates and actual results, our financial results will be affected. The accounting policies that reflect our more significant estimates
and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are
described in “Note 3 — Summary of Significant Accounting Policies” to our financial statements included in “Item
8 — Financial Statements and Supplementary Data” in this Report.
68
NeuroOne Medical Technologies
Corporation
FORM 10-K
Of these policies, the following are considered
critical to an understanding of our financial statements included in “Item 8 — Financial Statements and Supplementary Data”
in this Report that require the application of the most subjective and the most complex judgments:
Revenues:
For discussion about the determination of collaborations
revenue, product revenue and cost of product revenue, see “Note 7 — Zimmer Development Agreement” included in “Item
8 — Financial Statements and Supplementary Data” in this Report. To date, we have not had, nor expect to have in the future,
significant variable consideration adjustments related to product revenue, such as chargebacks, sales allowances and sales returns.
Stock-based Compensation
For discussions about the application of grant
date fair value associated with our stock-based compensation, see “Note 8 — Stock-Based Compensation” included in “Item
8 — Financial Statements and Supplementary Data” in this Report.
Income Tax Assets
and Liabilities
Income tax assets and liabilities include income
tax valuation allowances. For additional information, see “Note 11 — Income Taxes” included in “Item 8 —
Financial Statements and Supplementary Data” in this Report.
Contingencies
We are subject to numerous contingencies arising
in the ordinary course of business, including legal contingencies. For additional information, see “Note 4 — Commitments
and Contingencies” included in “Item 8 — Financial Statements and Supplementary Data” in this Report.
Recent Accounting Pronouncements
See “Note 3 — Summary of Significant
Accounting Policies” included in “Item 8 — Financial Statements and Supplementary Data” in this Report regarding
the impact of certain recent accounting pronouncements on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable.
69
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID 23) F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Changes in Stockholders’ Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the board of directors of NeuroOne Medical Technologies Corporation:
Opinion on the Financial Statements
We have
audited the accompanying balance sheets of NeuroOne Medical Technologies Corporation (the "Company") as of September 30, 2023 and 2022,
the related statements of operations, changes in stockholders’ equity, and cash flows, for each of the two years in the period ended
September 30, 2023, and the related notes (collectively referred to as the " financial statements"). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of September 30, 2023 and 2022, and the results of
the Company’s operations and cash flows for each of the two years in the period ended September 30, 2023, in conformity with accounting
principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 of the financial statements, the Company had recurring losses from
operations and an accumulated deficit, expects to incur losses for the foreseeable future and requires additional working capital. These
are the reasons that raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans
in regard to these matters are also described in Note 2. The financial statements do not contain any adjustments that might result from
the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility
is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
Critical Audit Matter
Critical audit matters are matters arising from the current
period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate
to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex
judgments. We determined that there are no critical audit matters.
/s/ Baker Tilly US, LLP
We have served as the Company's auditor since
2021.
Minneapolis, Minnesota
December 15, 2023
F-2
NeuroOne Medical Technologies Corporation
Balance Sheets
As of September 30,
Assets
Current assets:
Accounts receivable — 33,237
Liabilities and Stockholders’ Equity
Current liabilities:
Commitments and contingencies (Note 4)
Stockholders’ equity:
See accompanying notes to financial statements
F-3
NeuroOne Medical Technologies Corporation
Statements of Operations
Years ended September 30,
Operating expenses:
Provision for income taxes — —
Net loss per share:
Basic and diluted $ (0.65 ) $ (0.63 )
Number of shares used in per share calculations:
See accompanying notes to financial statements
F-4
NeuroOne Medical Technologies Corporation
Statements of Changes in Stockholders’
Equity
Common Stock Additional Paid–In Accumulated Total Stockholders’
Shares Amount Capital Deficit Equity
Issuance cost in connection with public offering — — (1,352,280 ) — (1,352,280 )
See accompanying notes to financial statements
F-5
NeuroOne Medical Technologies Corporation
Statements of Cash Flows
Years ended September 30,
Operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of fixed assets 32,143 —
Issuance of warrants in connection with Zimmer contract amendment — 104,562
Change in assets and liabilities:
Investing activities
Proceeds from the disposal of fixed assets 7,500 —
Net cash provided by (used in) investing activities 2,649,964 (3,244,765 )
Financing activities
Share repurchases for the payment of employee taxes (119,419 ) —
Net (decrease) increase in cash and cash equivalents (2,837,836 ) 1,258,983
Supplemental non-cash financing and investing transactions:
Unpaid purchases of property and equipment $ 4,631 $ —
Modification of right-of-use asset and associated lease liability $ 97,536 $ —
See accompanying notes to financial statements
F-6
NeuroOne Medical Technologies
Corporation
Notes to Financial Statements
NOTE 1 - Organization and Nature of Operations
NeuroOne Medical Technologies Corporation (the
“Company” or “NeuroOne”), a Delaware corporation, is a medical technology company focused on the development
and commercialization of thin film electrode for continuous electroencephalogram (“cEEG”) and stereoelectrocencephalography
(“sEEG”) recording, monitoring, ablation, drug delivery 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.
The Company received 510(k) clearance from the
United States (“U.S.”) Food and Drug Administration (“FDA”) for its Evo cortical electrode technology in November
2019 and in October 2022, the Company received 510(k) clearance from the FDA for its Evo sEEG electrode technology for temporary (less
than 30 days) use with recording, monitoring, and stimulation equipment for the recording, monitoring, and stimulation of electrical signals
at the subsurface level of the brain.
The Company is based in Eden Prairie, Minnesota.
Global Economic Conditions
Generally, worldwide economic conditions remain
uncertain, particularly due to the conflicts between Russia and Ukraine and in the Middle East, disruptions in the banking system and
financial markets, lingering effects of the COVID-19 pandemic and increased inflation. The general economic and capital market conditions
both in the U.S. and worldwide, have been volatile in the past and at times have adversely affected the Company’s access to capital
and increased the cost of capital. The capital and credit markets may not be available to support future capital raising activity on
favorable terms or at all. If economic conditions continue to decline, the Company’s future cost of equity or debt capital and
access to the capital markets could be adversely affected.
The COVID-19 pandemic that began in late 2019
introduced significant volatility to the global economy, disrupted supply chains and had a widespread adverse effect on the financial
markets. Additionally, the Company’s operating results could be materially impacted by changes in the overall macroeconomic environment
and other economic factors. Changes in economic conditions, supply chain constraints, logistics challenges, labor shortages, the conflicts
in Ukraine and the Middle East, disruptions in the banking system and financial markets, and steps taken by governments and central banks,
particularly in response to the COVID-19 pandemic as well as other stimulus and spending programs, have led to higher inflation, which
has led to an increase in costs and has caused changes in fiscal and monetary policy, including increased interest rates.
NOTE 2 - Going Concern
The accompanying financial statements have been
prepared on the basis that the Company will continue as a going concern. The Company has incurred losses since inception, negative cash
flows from operations, and an accumulated deficit of $62.7 million as of September 30, 2023. To date, the Company’s revenues have
not been sufficient to cover its full operating costs, and as such, has been dependent on funding operations through the issuance of debt
and sale of equity securities. With the July 2023 public offering, the Company has adequate liquidity to fund its operations through March
31, 2024. The raising of additional funds is not solely within the control of the Company. These factors raise substantial doubt about
the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result
from the outcome of this condition. If the Company is unable to raise additional funds, or the Company’s anticipated operating results
are not achieved, management believes planned expenditures may need to be reduced in order to extend the time period that existing resources
can fund the Company’s operations. The Company intends to fund ongoing activities by utilizing its current cash and cash equivalents
on hand, from product and collaborations revenue and by raising additional capital through equity or debt financings. If management is
unable to obtain the necessary capital, it may have a material adverse effect on the operations of the Company and the development of