NeuroOne Medical Technologies Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial statements are unaudited. Unless noted otherwise, amounts are U.S. dollars.
Business context
NeuroOne is an early-stage medical technology company developing cortical strip and grid electrodes, depth electrodes, and related neuromodulation technologies for neurological conditions. It has not generated product revenue and has no regulatory approval to sell products. Management said cortical strip and grid electrode technology was being prepared for an FDA submission before the end of 2018; depth electrode technology remained under development.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| Operating expenses | $1.172 million | $889 thousand | $2.270 million | $1.405 million |
| Operating loss | $1.172 million | $889 thousand | $2.270 million | $1.405 million |
| Net loss | $1.261 million | $1.294 million | $2.618 million | $2.024 million |
| Basic and diluted loss per share | $0.16 | $0.22 | $0.33 | $0.37 |
| Operating cash flow | Not separately presented | Not separately presented | $(1.295) million | $(913) thousand |
Operating margins are not meaningful because the company had no revenue. Q2 net loss was slightly lower year over year, mainly reflecting a $216 thousand fair-value gain on warrant liabilities and conversion derivatives versus a $56 thousand expense in Q2 2017. For the first half, net loss increased, reflecting higher operating costs and a $186 thousand notes-extinguishment loss, partly offset by fair-value gains.
General and administrative expense rose to $947 thousand in Q2 and $1.939 million for the first half, driven primarily by stock-based consultant compensation and public-company legal and accounting costs. Research and development expense rose to $226 thousand in Q2 and $331 thousand for the first half, reflecting increased personnel and development activity.
At June 30, cash was $22,608, total assets were $229,696, current liabilities were $3.302 million, total liabilities were $7.518 million, and stockholders’ deficit was $7.289 million. Accumulated deficit was $7.943 million. First-half investing cash use was $55,000; financing provided $1.346 million. The filing does not report a meaningful gross or operating margin.
Changes, financing and outlook
- First-half operating cash use increased from $913 thousand to $1.295 million. Operating expenses increased by $865 thousand, and net loss increased by $594 thousand.
- At June 30, the company had convertible notes and accrued interest, unsecured loans, and other financing obligations. Management stated that available cash was insufficient to fund operations through fiscal 2018; the financial statements disclose substantial doubt about the company’s ability to continue as a going concern.
- On July 2, 2018, holders converted approximately $1.804 million of Series 1 notes and $259 thousand of Series 2 notes into 1,002,258 and 144,053 common shares, respectively. The agreements also provided for amended warrants and additional warrants. The Series 3 notes, with principal and accrued interest of approximately $1.596 million at June 30, remained outstanding and were due December 31, 2018 if not converted under their terms.
- A private placement launched in July 2018 had raised approximately $738 thousand gross by August 8, inclusive of $188 thousand in June advances. The offering permitted up to $10 million gross, with a possible $1.5 million over-allotment, at $2.50 per unit; each unit included one share and a warrant. Offering costs include a 10% broker commission and broker warrants.
- Management expects significant operating and R&D spending to continue and says additional financing is necessary. It warned that inability to raise capital could require spending reductions, delay or curtail development, or lead to cessation of operations. No specific revenue or profitability guidance was provided.
Risks, contingencies and unusual items
- A lawsuit brought by PMT alleges, among other claims, breaches of restrictive covenants and trade-secret-related misconduct involving former employees and the company. The company intends to defend itself; the outcome and potential loss were unknown at June 30.
- Disclosure controls and procedures were deemed ineffective because of material weaknesses involving complex debt and equity accounting, the close and reporting process, routine transaction controls, and segregation of duties. Management said remediation may be delayed by limited cash and staffing.
- Warrant liabilities and premium conversion derivatives are Level 3 fair-value estimates using significant unobservable inputs; their revaluations materially affected reported results.
- As of August 8, 2018, 9,456,505 common shares were outstanding, compared with 8,014,994 at June 30. Conversion shares, warrants, and the private placement could cause further dilution.
Key facts for investors to verify
- Whether the private placement closes, its net proceeds after fees, and whether those proceeds meet the company’s operating and debt needs.
- The status and terms of Series 3 note conversion or repayment, and the company’s cash runway after the July note conversions and financing.
- FDA submission timing and subsequent regulatory, clinical, and development milestones for the electrode technologies.
- Progress and potential financial impact of the PMT litigation, and remediation of the disclosed control weaknesses.
- The fully diluted share count, including conversion-related and financing warrants, and the resulting dilution to existing shareholders.