NeuroOne Medical Technologies Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; filed November 14, 2017. NeuroOne develops neuromodulation and EEG monitoring, ablation, and brain-stimulation technologies for neurological disorders. It had no product revenue and no regulatory approvals. The July 20, 2017 acquisition of NeuroOne, Inc. was accounted for as a reverse recapitalization; results shown before that date reflect NeuroOne and its predecessor LLC. Accordingly, prior-period comparisons are not comparable measures of the current business’s growth.
Financial results and position
| Metric | Three months ended Sept. 30, 2017 | Nine months ended Sept. 30, 2017 |
|---|---|---|
| Revenue | $0 | $0 |
| General and administrative expense | $622,141 | $1,798,131 |
| Research and development expense | $271,651 | $500,408 |
| Operating loss | $893,792 | $2,298,539 |
| Interest expense | $515,377 | $1,134,529 |
| Net loss | $1,409,169 | $3,433,068 |
| Basic and diluted loss per share | $0.19 | $0.55 |
Margins are not meaningful because the company had no revenue. For the nine months, operating cash use was $1,509,669; financing provided $1,057,481; cash declined $452,188. Cash at September 30 was $70,029. Total assets were $267,812, total liabilities $3,796,644, and stockholders’ deficit $3,528,832. Current liabilities were $3,022,472, including accrued expenses of $916,734, convertible notes and accrued interest of $1,459,841, and a premium debt conversion derivative of $441,823.
At September 30, the company reported $1,625,120 principal of convertible notes issued and $253,000 principal of short-term notes. The convertible notes bore 8% interest and were due at the earlier of November 21, 2017 or a qualifying financing; short-term notes mature February 18, 2018. Debt discounts and fair-value changes contributed substantially to interest expense. Warrant and conversion-derivative liabilities, both Level 3 estimates, totaled $1,215,995 at quarter-end.
Changes, outlook, and material matters
- Compared with the LLC’s very limited activity in 2016, 2017 expenses increased with staffing, development activity, acquisition-related legal and accounting costs, and financing-related interest and discounts. This comparison is significantly affected by the reverse recapitalization and the different operating history.
- Management stated that available resources were insufficient to fund operations through fiscal 2018 without additional financing. The filing identified substantial doubt about the company’s ability to continue as a going concern. Management planned to seek financing and said expenditures might need to be reduced if fundraising or operating results fell short; failure to obtain capital could force cessation of operations.
- After quarter-end, the company issued $150,000 of 8% convertible notes on October 4 and another $215,000 between November 2 and 7, 2017. The offering could raise up to $1 million, or more if authorized by the board. These notes mature in 2022 and may convert upon a qualifying financing; they do not eliminate the company’s funding risk.
- Licensed-technology obligations include a $120,000 contingent WARF payment upon specified financing or other events, a Mayo milestone payment of about $91,709 due upon the earlier of qualifying financing or December 31, 2017, and future minimum WARF royalties beginning in 2019. WARF requires a business plan by February 1, 2018 and an FDA 510(k) application by February 1, 2019; failure to meet obligations or milestones may permit termination.
- A former employer alleged trade-secret misuse and breaches of non-compete or non-solicitation obligations by certain employees. The company said it intended to defend against the claims; the filing does not report a resolution.
- Disclosure controls were deemed ineffective at September 30 due to material weaknesses involving complex stock and convertible-debt accounting, insufficient technical accounting resources, and lack of segregation of duties. Remediation could be delayed by limited cash.
- Management expected research and development and general and administrative expenses to rise as development, testing, regulatory work, and public-company costs increase. The technology remained under development; cortical-strip technology had been used in five research patients by Mayo but had not been tested in clinical trials.
Investor verification points
- Confirm the status and terms of the November 21, 2017 maturity or conversion of the pre-existing convertible notes, and the proceeds and dilution from subsequent financings.
- Assess cash runway, cash burn, and near-term obligations, including the February 2018 short-term-note maturity and the Mayo and WARF payments.
- Track FDA development milestones, WARF license compliance, and whether the company can retain its licensed intellectual property.
- Review developments in the former-employer claims and remediation of ineffective disclosure controls.
- Consider the uncertainty in Level 3 warrant and derivative valuations and the limited comparability of 2017 results with the predecessor LLC’s 2016 results.