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.
We have 510(k) clearance for three of our devices
from the FDA, including: (i) our Evo cortical electrode technology for recording, monitoring, and stimulating brain tissue for up to 30
days, (ii) 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, and (iii) our OneRF ablation
system for creation of radiofrequency lesions in nervous tissue for functional neurosurgical procedures. Our other products are still
under development.
We distribute our cEEG strip/grid electrodes,
cable assembly products and our OneRF Ablation System with Zimmer Biomet.
We have incurred losses
since inception. As of September 30, 2024, we had an accumulated deficit of $75.0 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 OneRF System, 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
Corporate Updates
OneRF Ablation System
In March 2024, we announced a limited commercial
launch of our OneRF ablation system. In October 2024, we amended and restated our Distribution Agreement with Zimmer to provide exclusive
right and license to distribute also our OneRF Ablation System.
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Nasdaq Notice
Since May 28, 2024, the closing price of our common
stock has been below $1.00. On July 11, 2024, we received a letter from the Listing Qualifications Department of the Nasdaq informing
us that because the closing bid price for our common stock listed on Nasdaq was below $1.00 for 30 consecutive trading days, the Company
was not in compliance with the Minimum Bid Price Requirement for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq
Marketplace Rule 5550(a)(2). In accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), the Company has a period of 180 calendar days from
July 11, 2024, or until January 7, 2025, to regain compliance with the Minimum Bid Price Requirement. If at any time before January 7,
2025, the closing bid price of the Company’s common stock closes at or above $1.00 per share for a minimum of 10 consecutive trading
days (which number days may be extended by Nasdaq), Nasdaq will provide written notification that the Company has achieved compliance
with the Minimum Bid Price Requirement, and the matter would be resolved.
The Notice also disclosed that in the event we
do not regain compliance with the Rule by January 7, 2025, we may be eligible for additional time. To qualify for additional time, we
would be required to meet the applicable market value of publicly held shares requirement for continued listing and all other applicable
standards for initial listing on The Nasdaq Capital Market, with the exception of the bid price requirement, and would need to provide
written notice of our intention to cure the deficiency during the second compliance period. If we meet these requirements, Nasdaq will
inform us that it has been granted an additional 180 calendar days. However, if it appears to the Staff that we will not be able to cure
the deficiency, or if we are otherwise not eligible, Nasdaq will provide notice that our securities will be subject to delisting.
We intend to continue actively monitor the closing
bid price for our common stock between now and January 7, 2025, and will consider available options to resolve the deficiency and regain
compliance with the Minimum Bid Price Requirement. If we do not regain compliance within the allotted compliance period, including any
extensions that may be granted by Nasdaq, Nasdaq will provide notice that our common stock will be subject to delisting. We would then
be entitled to appeal that determination to a Nasdaq hearings panel. There can be no assurance that we will regain compliance with the
Minimum Bid Price Requirement during the 180-day compliance period, secure a second period of 180 calendar days to regain compliance,
or maintain compliance with the other Nasdaq listing requirements.
Financing
Debt Facility Agreement
On August 2, 2024, we entered into a loan and
security agreement with Growth Opportunity Funding, LLC, as the Lender, which provides for a delayed draw term loan Debt Facility in an
aggregate principal amount not to exceed $3.0 million. We are permitted to borrow loans under the Debt Facility from time to time, for
general corporate purposes and subject to certain specified conditions, until the earliest of: (i) November 30, 2024, (ii) the occurrence
of any monetization or change in control, or (iii) at the Lender’s option, upon the occurrence and during the continuance of an
event of default under the Debt Facility Agreement. The Loan(s), upon issuance, will be secured by substantially all of our assets, subject
to certain exceptions set forth in the Debt Facility Agreement, and will be subject to covenants. On November 7, 2024, we mutually agreed
with the Lender to terminate the loan facility.
On August 2, 2024, we issued 100,000 Lender Warrants
to Lender to purchase shares of the Company’s common stock at exercise price of $0.66 per share. The warrants are immediately exercisable
and expire on August 2, 2029.
2024 Private Placement
On August 1, 2024, we entered into a Securities
Purchase Agreement which closed on August 2, 2024, with certain Purchasers, pursuant to which we, in the Private Placement, agreed to
issue and sell an aggregate of (i) 2,944,446 shares of the our common stock, and (ii) warrants to purchase an aggregate of 2,208,338 shares
of common stock at a purchase price of $0.90 per unit, consisting of one share and a PIPE warrant to purchase 0.75 shares of common stock,
resulting in total gross proceeds of approximately $2.65 million before deducting estimated expenses. In connection with the 2024 Private
Placement, we filed a registration statement with the U.S. Securities and Exchange Commission (“SEC”) covering the resale
of the securities issued in the 2024 Private Placement. One of the Purchasers in the 2024 Private Placement included Paul Buckman, a director
on the Company’s Board of Directors.
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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, 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 continue
to decline, our future cost of equity or debt capital and access to the capital markets could be adversely affected.
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, increased inflation, the conflicts in Ukraine and the Middle East, disruptions in the banking system
and financial markets, and steps taken by governments and central banks, 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, the sEEG Products and the Electrode Cable Assembly Products based on Evo cortical electrode technology and
the OneRF Products, which are products based on our OneRF Ablation System. We anticipate that we will generate additional revenue from
the sale of products based on Evo cortical electrode technology and our OneRF Ablation System.
In November 2019, we received FDA 510(k) clearance
for our cortical 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. In
December 2023, we received FDA 510(k) clearance for our OneRF Ablation System for creation of radiofrequency lesions in nervous tissue
for functional neurosurgical procedure.
Product Gross Profit
Product gross profit 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, OneRF 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 Distribution Agreement”) with Zimmer, pursuant to which we granted Zimmer
exclusive global rights to distribute the Strip/Grid Products and Electrode Cable Assembly Products. Additionally, we granted Zimmer the
exclusive right and license to distribute certain sEEG Products developed by the Company. The OneRF ablation system is not covered by
the Zimmer Distribution Agreement. The parties agreed to collaborate with respect to development activities under the Zimmer Distribution
Agreement through a joint development committee composed of an equal number of representatives of Zimmer and the Company.
Under the terms of the Zimmer Distribution Agreement,
we are responsible for all costs and expenses related to developing the Products (as defined therein), and Zimmer is responsible for all
costs and expenses related to the commercialization of the Products. In addition to the Zimmer Distribution Agreement, Zimmer and the
Company have entered into a MS Agreement and a Quality Agreement with respect to the manufacturing and supply of the Products.
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Pursuant to the Zimmer Distribution 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 Distribution Agreement (the “Zimmer
Amendment”) with Zimmer. Pursuant to the terms and conditions of the Zimmer 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 Distribution Agreement, certain fee
and milestone payment provisions in the Zimmer Distribution Agreement were replaced with the following below:
● $1.5 million for the sEEG exclusivity maintenance fee; and
In addition, in connection with the Zimmer 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, is exercisable commencing six months from the issuance date, and will expire on August 2, 2027.
The Zimmer Distribution Agreement and Zimmer 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 Distribution Agreement and Zimmer 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 Distribution Agreement and Zimmer
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. There was no collaboration revenue during the year ended September 30, 2024.
In October 2024, we amended and restated our development
and distribution agreement with Zimmer to grant exclusive right and license to distribute also our OneRF Ablation System for an upfront
fee of $3.0 million dollars and up to an additional $1.0 million dollars upon achievement of certain net sales milestone by Zimmer.
The Zimmer Amended and Restated Distribution Agreement
will expire on September 30, 2034 (the “Zimmer Term”), unless terminated earlier pursuant to its terms. Either party may terminate
the Zimmer Amended and Restated Distribution 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
Amended and Restated Distribution Agreement for any reason with 90 days’ written notice, and the Company may terminate the Zimmer
Amended and Restated Distribution 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 Amended and Restated Distribution Agreement shall be exclusive from
the effective date of the Zimmer 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 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 Distribution Agreement, see “—Liquidity and Capital Resources—Liquidity Outlook” below and see
“Note 7 — Zimmer Distribution Agreement” included in our financial statements
included in Item 8 — Financial Statements and Supplementary Data” in this Report.
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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, OneRF ablation system 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, ablation system 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 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.
Fair Value Change in Warrant Liability
The net change in fair value line item is attributed
to the warrant liability while outstanding.
Financing Costs
Financing costs consists of the amortization of
the deferred issuance costs associated with the debt facility (as described further below) and issuance costs attributed to the warrants
issued in connection with the 2024 Private Placement (as described further below).
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, while outstanding, 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, 2024 and 2023
The following table sets forth our results of
operations for the fiscal years ended September 30, 2024 and 2023.
For the years ended September 30,
Operating expenses:
Fair value change in warrant liability (327,092 ) — (327,092 )
Provision for income taxes — — —
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Product Revenue and Product Gross Profit
Product revenue was $3.5 million during the year
ended September 30, 2024 with a gross profit and gross profit percentage of $1.1 million and 31.3%, respectively. Product revenue was
$2.0 million during the year ended September 30, 2023 with a gross profit and gross profit percentage of $0.5 million and 23.4%, respectively.
The increase in gross profit percentage during the current period was largely due to the higher sales volume that exceeded fixed royalty
and overhead period costs and due to slightly lower overall material supply costs. Product revenue consisted of Strip/Grid Products, sEEG
Products, OneRF Products and Electrode Cable Assembly Products sales. 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 OneRF 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 $157,000 in connection with our license agreements during each of the years ended September 30,
2024 and 2023.
Collaborations Revenue
There was no collaborations revenue during the
year ended September 30, 2024. Collaborations revenue was approximately $1.5 million during the year ended September 30, 2023. Revenue
during the prior year period was derived from the Zimmer Distribution Agreement in connection with the completion of the sEEG maintenance
fee obligation as a result of securing FDA approval.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were
$7.9 million and $6.9 million for the years ended September 30, 2024 and 2023, respectively. The $1.0 increase period over period was
primarily due to an increase in payroll related costs of approximately $0.4 million, stock-based compensation of $0.2 million, professional
and board fees of $0.3 million and marketing and sales costs of $0.2 million, offset slightly by a reduction in general operating costs
of $0.1 million on a net basis.
Research and Development Expenses
Research and development expenses were approximately
$5.1 million for the year ended September 30, 2024, compared to $6.9 million for the year ended September 30, 2023. The $1.9 million decrease
period over period was attributed to the net reduction in development activities associated with our sEEG Products, Strip/Grid Products
and OneRF Products given the commercialization of these products. Activity associated with new technology development partially offset
the overall net decrease in research and development costs during the current period. Development activities primarily included salary-related
expenses and costs related to consulting services, materials and supplies.
Fair Value Change in Warrant Liability
The net change in fair value of the warrant liability
during the year ended September 30, 2024 was $0.3 million. The change was due primarily to fluctuations in our common stock fair value.
There were no warrants outstanding during the year ended September 30, 2023 that were measured on a fair value basis.
Financing Costs
Financing costs during the year ended September
30, 2024 consisted of the amortization of the deferred issuance costs associated with the debt facility (described further below) in the
amount of $0.1 million and issuance costs attributed to the warrants issued in connection with the 2024 Private Placement (described further
below) in the amount of $0.1 million. We did not incur any financing costs during the year ended September 30, 2023.
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Other Income, net
Other income, net during the year ended September
30, 2024 consisted principally of interest income attributed to our cash and cash equivalents.
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.
Liquidity and Capital Resources
Overview
As of September 30, 2024, our principal source
of liquidity consisted of cash and cash equivalents in the aggregate of approximately $1.5 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. Our additional material cash needs include commitments under operating leases, royalty
obligations under our intellectual property licenses with the Wisconsin Alumni Research Foundation and the Mayo Foundation for Medical
Education and Research as well as other administrative services. See “Funding Requirements” below for more information. We
anticipate that our expenses will increase substantially as we continue to develop and commercialize our electrode technology and pursue
pre-clinical and clinical trials, seek regulatory approvals, manufacture products, market and distribute our OneRF Products, hire additional
staff, add operational, financial and management systems and continue to operate as a public company. On August 2, 2024, we closed the
2024 Private Placement, a private placement of shares of common stock and warrants for total gross proceeds of approximately $2.65 million,
and entered into the Debt Facility, a delayed draw term debt facility in an aggregate principal amount not to exceed $3.0 million.
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 more recent financings described below.
August 2024 Private Placement
On August 1, 2024,
we entered into a Securities Purchase Agreement with certain Purchasers, pursuant to which we, in a private placement,
agreed to issue and sell an aggregate of (i) 2,944,446 shares of our Company’s common stock (the “Shares”), par value
$0.001 per share and (ii) warrants to purchase an aggregate of 2,208,333 shares of common stock (the “PIPE Warrants”)
at a purchase price of $0.90 per unit, consisting of one share and a PIPE Warrant to purchase 0.75 shares of common stock, resulting
in total gross proceeds of approximately $2.65 million before deducting estimated expenses. The 2024 Private Placement closed on
August 2, 2024. Issuance costs attributed to the 2024 Private Placement amounted to $0.2 million.
The PIPE Warrants are
exercisable beginning on the date of issuance, have an exercise price of $1.19 per share, subject to adjustment, and will expire on the
third anniversary of the date of issuance.
In
connection with the 2024 Private Placement, we agreed to file a registration statement with the SEC covering the resale of the Shares
and the shares of common stock issuable upon exercise of the PIPE Warrants which became effective on September 13, 2024.
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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 of up to 3% of the gross proceeds. 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 our common stock previously
sold. Subsequently, on December 1, 2023, however, we increased the amount of common stock that can be sold pursuant to the Sales Agreement,
such that we were offering up to an aggregate of $4.8 million of our common stock for sale under the Sales Agreement, including the shares
of our common stock previously sold. On January 5, 2024, we further 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 $9.3 million of our common stock for sale under the Sales Agreement,
including the shares of common stock previously sold. Through September 30, 2024, we have issued 5,188,590 shares of common stock under
the ATM for gross proceeds in the amount of $7.6 million. We incurred issuance costs in connection with the ATM in the amount of $0.5
million through September 30, 2024 of which $41,000 was reflected as a deferred cost on our balance sheet. On August 16, 2024, we increased
the amount of common stock that can be sold pursuant to the Sales Agreement by $3.0 million.
Debt Facility Financing
On August 2, 2024, we entered into the Debt Facility
Agreement with Growth Opportunity Funding, LLC, as the Lender, which provided for a delayed draw term loan facility in an aggregate principal
amount not to exceed $3.0 million. We were permitted to borrow loans under the Debt Facility Agreement from time to time, for general
corporate purposes and subject to certain specified conditions, until the earliest of: (i) November 30, 2024, (ii) the occurrence of any
Monetization Event (as defined below) or Change of Control (as defined in the Debt Facility Agreement), or (iii) at the Lender’s
option, upon the occurrence and during the continuance of an event of default under the Debt Facility Agreement. On November 7, 2024,
the Company terminated the Debt Facility Agreement and no amounts were drawn under the Debt Facility Agreement.
The Loans would have matured on February 2,
2026 if issued. The rate of interest on any outstanding principal amount would have been 10% per annum, payable monthly in arrears and
at the maturity date. As of the closing date of the Debt Facility Agreement, no amounts were drawn by the Company thereunder. Financing
costs incurred in connection with the Debt Facility Agreement amounted to $0.3 million inclusive of the standby fee of $0.1 million to
the Lender.
On August
2, 2024, we issued to the Lender a warrant exercisable for five years for 100,000 shares of our common stock at an exercise price
of $0.66 per share, subject to adjustment (the “Closing Date Debt Facility Warrant”). At the time of any borrowing of Loans,
we would have been required to issue to the Lender additional warrants exercisable for five years for 50,000 shares of common stock (for
each $500,000 of Loans borrowed) at the same per share exercise price as the Closing Date Debt Facility Warrant (the “Additional
Debt Facility Warrants”, and together with the Closing Date Debt Facility Warrant, the “Debt Facility Warrants”).
We were permitted to
voluntarily prepay the outstanding Loans at any time, without premium or penalty, upon five business days’ prior written notice
to the Lender. We were required to prepay outstanding Loans upon the occurrence of (i) any Change of Control or (ii) certain other events
as more fully described in the Debt Facility Agreement, but in any event including any capital raise or other transaction pursuant to
which we received cumulative cash proceeds in excess of $5.0 million in the aggregate (each such event in this prong (ii), a “Monetization
Event”). Our obligations under the Debt Facility Agreement were secured by a first-priority security interest in substantially all
assets of the Company, subject to certain exceptions set forth in the Debt Facility Agreement.
The Debt Facility Agreement
included other customary representations and warranties, conditions, affirmative and negative covenants, and events of default.
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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.
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” of 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. 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. See “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 2028.
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.
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Liquidity Outlook
For a discussion of potential fee payments under
the Zimmer Distribution Agreement, see “Note 7 — Zimmer Distribution Agreement and Other Product Revenue” 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 and OneRF Products 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. On
October 2024, we entered into an Amended and Restated Distribution Agreement with Zimmer to provide Zimmer with the exclusive right and
license to distribute also our OneRF Ablation System for an upfront payment of $3.0 million, with eligibility for an additional $1.0 million
payment from Zimmer upon achievement of certain specified net sales milestones.
As of September 30, 2024, we had cash and cash
equivalents in the aggregate of approximately $1.5 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, 2024 and 2023, 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, depth electrode, ablation system technology and future products and 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 (used in) provided by investing activities (120,197 ) 2,649,964
Net decrease in cash and cash equivalents $ (3,862,451 ) $ (2,837,836 )
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Net cash used in operating activities
Net cash used in operating activities was $11.0
million for the year ended September 30, 2024, which consisted of a net loss of $12.3 million partially offset by non-cash stock-based
compensation, depreciation, amortization related to intangible assets and deferred financing costs, operating lease expense, fair value
change in warrant liability and the proceeds from the issuance of warrants in connection with the 2024 Private Placement totaling approximately
$2.3 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 use of approximately $1.0 million. The net cash use stemming from the change in operating assets and liabilities
was primarily attributable to an increase in inventory purchases and to an increases in our accounts receivable attributed largely to
the timing of customer payments. Partially offsetting the net cash operating use during the period was an increase in our accounts payable
and accrued expenses coupled with a decrease in prepaid expenses resulting from timing of payments and fluctuations in our operations.
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 Distribution 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) provided by investing activities
Net cash used in investing activities was $0.1
million for the year ended September 30, 2024 and consisted of outlays for purchases of property and equipment.
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 provided by financing activities
Net cash provided by financing activities was
$7.3 million for the year ended September 30, 2024, which consisted of net proceeds from the ATM of $4.8 million and net proceeds from
the 2024 Private Placement of $2.6 million, offset partially by repurchases of common stock for the payment of employee taxes in the amount
of $81,000 and debt facility issuance costs of approximately $75,000.
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.
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.
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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 Amended and Restated Distribution Agreement and
Other Product Revenue” 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.
Fair Value of Warrant
liability
We issued warrants in connection with our August
2024 Private Placement. The warrants were classified as a liability on our balance sheet and were recorded at fair value as certain provisions
precluded equity accounting treatment for these instruments. We will continue to adjust the liabilities for changes in fair value until
the earlier of the exercise, expiration, or until such time that cash settlement or indexation provisions are no longer in effect for
the warrants. For discussions about the application of fair value associated with the warrants, see “Note 9 – Stockholders’
Equity” 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 12 — 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.
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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-4
Statements of Operations F-5
Statements of Changes in Stockholders’ Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
F-1
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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, 2024 and 2023, the related
statements of operations, changes in stockholders’ equity, and cash flows, for each of the two years in the period ended
September 30, 2024, 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, 2024 and
2023, and the results of the Company’s operations and cash flows for each of the two years in the period ended September 30,
2024, 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.
F-2
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Critical Audit Matter
The critical audit matter communicated below
is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to
the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions
on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of warrants
Critical Audit Matter Description
As described in Note 9 to the financial statements, the Company
completed a private placement offering during the year which included the issuance of warrants. Management determined the proper classification
of the warrants by reviewing the terms and conditions of the issued warrants and applying the applicable accounting guidance, including
Accounting Standards Codification (ASC) 480, Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging. Management concluded
the warrants met the criteria for the classification as a liability. The Company determined the fair value of warrants at the date of
issuance and year-end using a Monte Carlo simulation model.
We identified the assessment of the measurement of fair value
of the common stock warrants as a critical audit matter. Specifically, there was a high degree of subjective auditor judgment, including
the involvement of professionals with specialized skills and knowledge, due to the complex valuation methodology that incorporates several
assumptions.
How We Addressed the Matter in