NeuroOne Medical Technologies Corporation — Form 10-Q
Reporting period: Three and six months ended March 31, 2019 (fiscal second quarter); financial statements are unaudited. NeuroOne is an early-stage medical technology company developing thin-film electrodes for brain recording, stimulation and ablation. It has no product sales and no regulatory approval to commercialize its products.
Financial condition and results
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $1.52 million (2018: $1.10 million) | $2.60 million (2018: $1.87 million) |
| Net loss | $2.21 million (2018: $1.36 million) | $3.56 million (2018: $2.98 million) |
| Basic and diluted loss per share | $0.20 (2018: $0.17) | $0.34 (2018: $0.38) |
| Cash used in operations | Six-month outflow: $2.58 million (2018: $1.19 million) | |
| Cash at period end | $2.31 million |
No operating margin or gross margin is meaningful because the company reported no revenue. At March 31, 2019, current assets were $2.39 million and current liabilities were $2.13 million, for working capital of approximately $255,000. Total liabilities were $2.13 million, including $229,000 of unsecured loans; convertible notes and warrant-related liabilities were nil after conversion/reclassification. Accumulated deficit was $14.02 million.
Financing provided $4.93 million of cash in the six-month period, primarily from private placements. Investing cash outflow was $65,000. Common shares issued and outstanding were 12.94 million at March 31 and 13.21 million at May 8, 2019.
Changes versus prior comparable periods
- Quarterly operating expenses rose $424,000 year over year. General and administrative expense increased to $1.08 million, mainly from payroll, legal, accounting and public-company costs; research and development increased to $436,000 as development activity and related staffing, consulting and materials costs grew.
- Six-month operating expenses increased $726,000. Lower interest expense partly offset higher operating costs, but quarterly and six-month net losses increased.
- Operating cash use more than doubled year over year, to $2.58 million for six months, while financing proceeds lifted cash from $13,260 at September 30, 2018 to $2.31 million.
- On February 28, 2019, $1.54 million of 8% convertible notes and accrued interest converted into 839,179 common shares and 839,179 warrants, triggering a non-cash $553,447 extinguishment loss. The conversion also removed the related derivative and warrant liabilities from the balance sheet.
Outlook, risks and unusual items
- Going concern and funding: Management says available liquidity is insufficient to fund operations through fiscal 2019 and substantial doubt exists about the company’s ability to continue as a going concern. Additional financing is needed; the company has no committed external funding source. Failure to raise capital could require reduced spending or cessation of operations.
- Business outlook: Management expects continued significant losses and increased R&D and G&A expenses. Revenue depends on product development, regulatory approval and successful commercialization. The filing provides no specific revenue, earnings or commercialization guidance.
- Financing and dilution: Through March 31, the 2019 private placement raised approximately $4.76 million gross; it offered up to 4 million units at $2.50 each, each including a share and a warrant. The company reported 6.45 million outstanding warrants and another 221,074 warrants committed for issuance. Subsequent to quarter-end, it raised $453,000 gross through May 3.
- Debt and subsequent events: Unsecured loans were $229,000 at quarter-end. The company made loan repayments in April and May; a May letter agreement said $75,000 remained outstanding under a December 2018 note, with maturity modified to June 30, 2019.
- Litigation: PMT Corporation’s lawsuit alleges, among other claims, unfair competition and trade-secret-related misconduct. The company is defending the case; outcome and potential loss are unknown, and no reserve was accrued.
- Controls: Management concluded disclosure controls were ineffective at March 31 due to previously identified material weaknesses involving complex debt/equity accounting and financial close/reporting, including limited segregation of duties. Remediation may be delayed by limited cash resources.
- Other exposure: The company owes royalties on future product sales under its WARF and Mayo arrangements; WARF minimum annual royalties begin at $50,000 for 2019. The filing reports no off-balance-sheet arrangements.
Important facts for investors to verify
- How much additional capital is required, how long available cash can fund operations, and whether subsequent financing proceeds materially changed the going-concern assessment.
- Regulatory and development milestones for the electrode products, and the timing and cost of any required preclinical or clinical work.
- Full potential dilution from outstanding and committed warrants, options, placement-agent warrants and future private-placement units.
- Current status, potential exposure and any later developments in the PMT litigation.
- Progress and timing of remediation of the disclosed material weaknesses in financial reporting controls.