NeuroOne Medical Technologies Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The unaudited financial statements report the pre-acquisition company, then a shell with no operations or revenue following the spin-off of its former business. NeuroOne, Inc. was acquired after quarter-end, on July 20, 2017; its business is not included in these results.
Financial results and liquidity
- Revenue: $0 in both the second quarter and first half of 2017, unchanged from the comparable 2016 periods. With no revenue, a meaningful gross or operating margin is not available.
- Operating expenses: General and administrative expense was $23,621 for Q2 and $32,375 for the first half, versus $14,108 and $18,493, respectively, in 2016. The company attributed the increases primarily to professional fees related to the acquisition.
- Net results: Q2 net loss was $23,621, compared with $24,699 in Q2 2016. First-half net loss was $14,845, compared with $33,657 in 2016. The 2017 first-half result included a $17,530 gain from discontinued operations, attributed to settlement of net liabilities; continuing-operations loss was $32,375.
- Cash flow: First-half operating cash use was $11,572, funded by $11,572 in related-party advances; investing cash flow was $0 and ending cash was $0. The filing’s MD&A cash-flow table labels amounts “in thousands,” while the financial statements show the same figures without that unit label; the text does not clearly reconcile this presentation.
- Balance sheet at June 30: Cash and total assets were $0. Current and total liabilities were $128,495, including $41,667 accounts payable, $1,498 accrued liabilities, and $85,330 in related-party advances. Stockholders’ deficit was $128,495; accumulated deficit was $179,145. Related-party advances were unsecured, non-interest-bearing, and payable on demand.
- Debt and liquidity: The filing reports no cash and does not identify conventional interest-bearing debt for the reporting entity at June 30. It states that the company lacked adequate liquidity to fund 2017 operations without additional capital and had a working-capital deficiency. NeuroOne, Inc.’s assumed convertible notes relate to the post-quarter acquisition and are not quantified in these pre-acquisition statements.
Material changes and subsequent events
- On June 28, 2017, the company completed its conversion from Nevada to Delaware, changed its name from Original Source Entertainment, Inc., and increased authorized common shares to 100 million and preferred shares to 10 million.
- On July 20, 2017, the company acquired all of NeuroOne, Inc. and issued 6,291,994 common shares at an exchange ratio of 17.0103706 shares per NeuroOne share. NeuroOne options were replaced, 365,716 shares were reserved for option exercise, warrants were replaced, and the company assumed NeuroOne’s outstanding convertible promissory notes. Former controlling shareholder Amer Samad surrendered 3.5 million shares for cancellation.
- As of August 11, 2017, 7,864,994 common shares were outstanding. The filing notes subsequent board and management changes, including new directors appointed August 4.
Outlook, risks, and controls
- Management said the company planned an equity financing in Q3 2017 and expected to need additional funding after the acquisition. It believed resources, including cash at the acquired subsidiary and funds expected to be raised, could support the operating plan through at least June 30, 2018. These expectations were conditional; management warned that failure to raise capital or achieve planned results could require spending reductions or cessation of operations.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern. The financial statements include no adjustments for the uncertainty. The filing also refers to a going-concern qualification in the prior-year auditor’s report.
- Disclosure controls and procedures were concluded to be ineffective as of June 30, 2017. No material changes in internal control over financial reporting during the quarter were reported.
- NeuroOne received a May 2017 letter from former employers of two officers alleging, among other matters, breaches of noncompetition and confidentiality obligations. The filing refers readers to the acquisition-related filings for details.
- The filing provides no quantitative guidance for revenue, earnings, or margins. It cautions that forward-looking statements are subject to risks and uncertainty.
Important facts for investors to verify
- Review the acquisition 8-K and its amendment for NeuroOne’s financial statements, pro forma results, convertible-note terms, and post-acquisition liquidity; these are not reflected in this 10-Q’s reported financial statements.
- Verify whether the planned financing was completed, its terms and dilution, and whether available resources supported the stated operating plan.
- Assess the amount, maturity, and conversion or repayment terms of assumed notes, warrants, and other potential share issuance.
- Review the former-employer allegations and the status of any related claims.
- Monitor remediation of ineffective disclosure controls and the going-concern uncertainty.