NeuroOne Medical Technologies Corporation — Form 10-Q
Reporting period: Three months ended December 31, 2019, the first quarter of fiscal 2020. The unaudited filing describes an early-stage medical technology company developing thin-film electrode products for neurological monitoring, stimulation and ablation. The company reported no product sales.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2019 | Prior-year comparable quarter |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $1.814 million | $1.076 million |
| Operating loss | $1.814 million | $1.076 million |
| Interest expense | $2.698 million | $0.264 million |
| Net loss | $4.637 million | $1.353 million |
| Basic and diluted loss per share | $0.34 | $0.14 |
| Cash used in operating activities | $1.225 million | $0.700 million |
| Cash provided by financing activities | $3.019 million | $1.037 million |
With no revenue, operating and gross margins are not meaningful. General and administrative expense was $1.312 million and R&D expense was $0.502 million. At December 31, cash was $2.044 million, total current assets were $2.092 million, current liabilities were $6.973 million, and total liabilities were $7.271 million. The company had a $4.612 million stockholders’ deficit and a $21.876 million accumulated deficit.
Changes and financing
- Net loss increased by $3.284 million year over year. Operating expenses rose $0.738 million, reflecting higher personnel and stock-based compensation and increased product-development activity.
- Interest expense rose $2.433 million, principally due to $1.832 million of non-cash day-one expense when the new convertible notes’ fair value exceeded proceeds, plus $0.866 million of related issuance costs. The notes’ subsequent fair-value change added $0.126 million of expense.
- The company issued $3.235 million principal of 13% Paulson convertible notes, raising proceeds equal to principal, and raised $0.255 million from a common-stock placement. Financing inflows exceeded operating and investing cash outflows, increasing cash by $1.784 million from September 30.
- Paulson notes had a reported fair value of $5.192 million at quarter-end; contractual principal and accrued interest were $3.289 million. The notes mature May 1, 2020, with conversion provisions and potential dilution. A qualifying equity financing generally requires proceeds exceeding $3 million.
- The company adopted lease accounting and recorded a $0.338 million lease liability and a $0.325 million right-of-use asset for its new facility lease.
Outlook, risks and unusual items
Management stated that existing cash would not fund operating expenses through fiscal 2020 and that substantial additional funding is needed. The filing reports substantial doubt about the company’s ability to continue as a going concern. If financing is unavailable, management may have to reduce planned spending or cease operations. No specific financial forecast or quantified revenue guidance is provided.
The company said its initial device had received marketing clearance, it expected to submit a second product for clearance by year-end, and it was evaluating commercialization options. It expects R&D and general and administrative expenses to increase as development, trials, regulatory work and potential commercialization proceed.
- Debt and dilution: The Paulson notes are due May 1, 2020; the company warned it may lack funds to repay or amend them. Conversion terms and warrants could materially dilute existing shareholders.
- Litigation: PMT’s ongoing Minnesota lawsuit alleges, among other claims, trade-secret and unfair-competition misconduct. The company disputes the claims; the case could entail costs, damages, or effects on personnel and intellectual property. A ruling on dispositive motions and sanctions was expected in 2020.
- Licensing: A January 2020 amended WARF license requires minimum annual royalties of $50,000 in 2020, $100,000 in 2021, and $150,000 annually thereafter, and gives WARF a termination right if commercial sales of an FDA-approved licensed product are not achieved by June 30, 2020. The company also depends on its Mayo agreement.
- Other items: $1.801 million of cash deposits exceeded federal insurance limits. The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Current cash, financing plans, and the ability to repay, convert, or refinance the Paulson notes by May 1, 2020.
- Progress toward the company’s stated product-clearance and commercialization plans, including the WARF license’s June 30, 2020 sales condition.
- Updated liquidity, operating cash burn, and any change in the going-concern assessment.
- Developments and potential financial or operational consequences of the PMT litigation.
- Potential dilution from convertible notes, warrants, stock awards, and subsequent share issuances.