NeuroOne Medical Technologies Corporation — Form 10-Q
Reporting period: Fiscal first quarter ended December 31, 2018; filed February 14, 2019. Figures are unaudited. The company is an early-stage medical-device developer focused on thin-film electrode technology for brain recording, stimulation, and ablation. It reported no product sales and has no products approved for sale.
Key financial results
| Metric | Three months ended Dec. 31, 2018 | Prior-year period |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $1.076 million | $774,000 |
| Operating loss | $1.076 million | $774,000 |
| Interest expense | $264,000 | $338,000 |
| Net loss | $1.353 million | $1.625 million |
| Basic and diluted loss per share | $0.14 | $0.21 |
| Cash used in operating activities | $700,000 | $598,000 |
| Cash provided by financing activities | $1.037 million | $647,000 |
Margins: Not meaningful because the company had no revenue. At December 31, cash was $351,000, total assets $578,000, current liabilities $4.712 million, total liabilities $5.536 million, and stockholders’ deficit $4.958 million. Convertible promissory notes, net and accrued interest, were $1.658 million; unsecured loans were $528,000. Cash increased by $337,000 during the quarter, primarily from financing. The filing states existing cash was insufficient to fund fiscal 2019 operations.
Changes versus the prior-year quarter
- Net loss narrowed by $273,000, despite operating expenses increasing $302,000. The improvement reflected lower interest expense and fair-value charges, and no 2017-period note-extinguishment loss.
- General and administrative expense rose $328,000 to $867,000, primarily due to consulting-related stock compensation and higher legal, accounting, and board costs. Research and development expense decreased $26,000 to $209,000.
- Operating cash use increased $101,000. Financing cash inflows rose to $1.037 million, including private-placement proceeds and unsecured loans.
Outlook, financing, and risks
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern. It has incurred recurring losses, an accumulated deficit of $11.811 million, and inadequate liquidity to fund fiscal 2019. Management plans to seek financing; absent funding, it may reduce spending or cease operations. The financial statements include no adjustments for the outcome of this uncertainty.
- Debt maturity: The 2017 convertible notes, with $1.658 million of principal and accrued interest at December 31, were amended to mature June 30, 2019. If a qualifying equity financing exceeding $3 million is not completed by then, the notes become due and payable. The notes may convert at a discount in a qualifying financing. The company reported approximately $2.2 million raised toward the $3 million target as of the report date.
- Fundraising and dilution: A new private placement offers units at $2.50, each comprising a common share and a warrant exercisable at $3.00; the stated offering maximum was $10 million. The company had sold $400,000 through December 31 and reported aggregate gross proceeds of approximately $695,000 through February 12, 2019. It also had $528,000 in unsecured loans, generally interest-free and due on specified dates or upon qualifying financings. Further equity or convertible financing may dilute existing shareholders; debt or partnerships may impose restrictions or require relinquishing rights.
- Business outlook: No revenue guidance or specific commercialization timetable was provided. Management expects significant future R&D and administrative spending, including preclinical and clinical work and regulatory efforts. Product revenue depends on obtaining regulatory approval and successfully commercializing the technology; neither is assured.
- Litigation: PMT’s claims against the company and related parties remain pending. On January 7, 2019, a court dismissed the claim for breach of good faith and fair dealing but denied dismissal of other claims. The company intends to defend the case; potential loss is unknown, no reserve was recorded, and the company disclosed no insurance coverage for losses from the claim.
- Controls: Management concluded disclosure controls were ineffective at December 31, 2018 due to material weaknesses involving complex debt and equity accounting and the financial close/reporting process, including inadequate segregation of duties. Remediation may be delayed by limited cash resources.
- Other commitments: The company reported a $65,000 WARF patent-cost reimbursement milestone paid in February 2019 and minimum annual WARF royalties of $50,000 for 2019, rising in later years. Mayo royalties are due if products are sold.
Important facts for investors to verify
- Whether the company raised sufficient capital to meet the June 30, 2019 note maturity and fund operations through fiscal 2019.
- Actual proceeds, expenses, warrant issuance, and dilution from the private placements and any subsequent financings.
- Cash runway, upcoming loan payments, and whether management’s going-concern plans were achieved.
- Regulatory, preclinical, and clinical progress, and any concrete commercialization milestones.
- Developments and potential financial exposure in the PMT litigation, which had no recorded reserve.
- Whether the disclosed material weaknesses were remediated and disclosure controls became effective.