NeuroOne Medical Technologies Corporation — Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2019; statements are unaudited. The company is an early-stage medical technology developer focused on thin-film brain electrodes and related recording, stimulation and ablation technologies. It has not generated product revenue and has no regulatory clearance to sell its products.
Financial performance and condition
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | None | None |
| General and administrative expense | $1.44 million (2018: $0.95 million) | $3.39 million (2018: $2.48 million) |
| Research and development expense | $0.42 million (2018: $0.23 million) | $1.07 million (2018: $0.57 million) |
| Net loss | $1.86 million (2018: $1.26 million) | $5.43 million (2018: $4.24 million) |
| Net loss per share | $0.14 (2018: $0.16) | $0.48 (2018: $0.54) |
- Cash flow: Nine-month operating cash use was $4.25 million, investing cash use was $0.12 million, and financing provided $5.61 million. Cash increased $1.23 million to $1.25 million.
- Liquidity and liabilities: Current assets were $1.30 million versus current liabilities of $1.81 million, a working-capital deficit of about $0.51 million. Total liabilities were $1.81 million. No unsecured loans or convertible notes remained outstanding at June 30 following repayment and conversions.
- Equity and dilution: Stockholders’ deficit was $0.27 million. There were 13.42 million shares outstanding at June 30 and 13.49 million as of August 9. The company reported 6.84 million outstanding warrants at June 30, in addition to options and other potential share awards.
- Margins: Not applicable because the company had no revenue. Interest expense was zero in the quarter and $0.28 million for the nine months.
Material changes versus prior comparable periods
- Quarterly operating expenses increased $0.69 million; nine-month operating expenses increased $1.42 million. Management attributed the increases mainly to additional business-development personnel, legal, accounting and board costs, and increased product-development activity.
- Nine-month net loss increased $1.18 million, principally reflecting higher operating expenses and a $0.55 million non-cash loss on note extinguishment. Lower interest expense partly offset these increases.
- Operating cash use rose from $1.89 million to $4.25 million for the nine-month comparison, while financing proceeds increased, primarily from private placements.
- The company converted its 2017 convertible notes in February 2019 into 839,179 common shares and 839,179 warrants; the conversion produced the reported $0.55 million extinguishment loss. Private placements and equity exercises also increased cash and share count.
Outlook, risks and unusual items
- Going concern: Management stated that June 30 cash was insufficient to fund operations through September 30, 2019, raising substantial doubt about the company’s ability to continue as a going concern. It planned to seek additional debt or equity funding and warned that failure to raise capital could force spending reductions or cessation of operations.
- Funding after quarter-end: The 2019 private placement was terminated July 1 after an additional $115,000 gross issuance. Through June 30, it had raised approximately $5.73 million gross. The filing also reports broker warrants issued July 1. These transactions do not remove the stated financing risk; cash available after quarter-end is not clearly quantified in the filing text.
- Product development and regulation: The company expected expenses and losses to increase as it develops products, conducts testing and clinical work, seeks approvals, and prepares for possible commercialization. On July 25, 2019, it withdrew its 510(k) submission for cortical electrode technology after the FDA requested additional sterilization data that could not be supplied within the required period. A later submission and clearance are not assured.
- Litigation: PMT Corporation’s claims against the company, its subsidiary and an executive remained pending. The company reported that the outcome and potential loss were unknown and had accrued no reserve. Motions concerning sanctions, amendment of the complaint and other matters were pending or planned.
- Controls: Management concluded disclosure controls were ineffective at June 30 due to previously identified material weaknesses involving complex debt and equity accounting and the close and reporting process. The company said limited resources could delay remediation.
- Other obligations: The WARF license includes minimum annual royalties of $50,000 for 2019, increasing in later years; product-sales royalties also apply under the WARF and Mayo agreements. The filing reports no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether post-quarter financing and cash on hand were sufficient to extend the company’s runway beyond September 30, 2019, and what subsequent funding terms or dilution may apply.
- The timing, cost and outcome of obtaining the requested sterilization data and resubmitting the 510(k), including any further FDA requirements.
- Potential exposure and procedural developments in the PMT litigation, given the absence of an accrued reserve and the stated uncertainty of loss.
- The company’s cash burn, spending plans and progress toward product commercialization, since it has no revenue and expects continued losses.
- Share-count and potential dilution from warrants, options, restricted stock units and placement-agent warrants, including the terms and status of instruments issued after June 30.
- Whether management remediates the disclosed control weaknesses and improves financial reporting controls.