NeuroOne Medical Technologies Corporation — Form 10-Q
Reporting period: Three months ended December 31, 2020 (first quarter of fiscal 2021). The company is an early-stage medical technology developer; it began commercial sales of certain cEEG products during the quarter.
Financial highlights
| Metric | Quarter ended Dec. 31, 2020 | Prior-year quarter |
|---|---|---|
| Product revenue | $71,474 | $0 |
| Collaborations revenue | $22,274 | $0 |
| Product gross profit (loss) | $(37,657) | $0 |
| Operating expenses | $2,128,018 | $1,813,985 |
| Operating loss | $(2,143,401) | $(1,813,985) |
| Net loss | $(1,959,480) | $(4,637,066) |
| Net cash used in operations | $(1,904,232) | $(1,224,846) |
At December 31, 2020, cash was $7.13 million, current assets were $7.34 million, current liabilities were $6.18 million, and working capital was approximately $1.16 million. Total liabilities were $6.50 million; stockholders’ equity was $1.41 million. Current liabilities included a $5.00 million advance related to the subsequent private placement. Convertible notes were fully converted to common stock during the quarter. The company also reported an $83,333 PPP loan and $298,327 in operating lease liabilities.
Financing activities provided $5.00 million of cash during the quarter, primarily the advance for the 2021 private placement. Investing activities used no cash. The company reported no income tax provision. Product revenue was entirely from one customer, and one contract manufacturer produced all Strip/Grid Products.
Changes versus the prior-year quarter
- Commercial sales began in December 2020, generating $71,474 in product revenue, but product costs exceeded revenue by $37,657. Product costs included a $50,000 minimum WARF royalty for 2020.
- Operating expenses rose $314,033: R&D increased $432,339 to $934,158, while SG&A declined $118,306 to $1,193,860.
- Net loss narrowed by $2.68 million, largely because the prior-year quarter included substantial noncash interest and financing costs on convertible notes. Operating loss increased by $329,416, and operating cash use rose by approximately $679,000.
- Cash increased from $4.04 million at September 30, 2020 to $7.13 million at December 31, 2020, mainly due to the $5.00 million financing advance, partly offset by operating cash use.
Outlook, risks and unusual items
- On January 14, 2021, the company closed a private placement for 12.5 million shares and warrants to purchase 12.5 million shares, for $12.5 million gross proceeds. It reported $11.34 million in net proceeds on a pro forma basis; $5.00 million had been received by December 31. Management expected cash, including remaining placement proceeds, to fund operations for at least 12 months from the filing date. Additional capital is expected to be needed to reach break-even.
- The company expects continued losses and increased R&D and commercialization spending. It anticipates submitting a 510(k) application for a second product by the end of the first half of calendar 2021; timing and regulatory outcomes are uncertain. Zimmer milestone and royalty revenue is also contingent on development progress, product availability and sales.
- COVID-19 has disrupted trials, manufacturing, shipping, supply chains and R&D; further impacts could affect operations, liquidity and financing. The filing notes that the auditor’s prior-year report raised substantial doubt about going concern; management’s post-financing liquidity assessment was more favorable.
- The company recognized $185,000 of other income from PMT litigation sanctions paid in December 2020. PMT litigation remains ongoing, with trial set for December 2021, subject to possible delay; the outcome of claims against the company was not estimable.
- Zimmer holds exclusive global distribution rights under the development agreement. The company remains responsible for product development costs, and Zimmer may terminate the agreement on 90 days’ notice. Zimmer’s SEEG obligations and fees depend on milestones and product-availability deadlines.
- The filing reports effective disclosure controls as of December 31, 2020 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the 2021 placement proceeds provide sufficient runway given operating cash use and expected increases in development and commercialization costs.
- Progress toward the expected second-product 510(k) submission and Zimmer SEEG development milestones and related payments.
- Whether early product sales can grow and improve gross margins, including the effects of minimum royalties, supplier costs and customer concentration.
- Developments in the PMT litigation, the PPP loan’s forgiveness status, and the continuing effects of COVID-19 on trials and supply.
- The dilution and potential share issuance associated with the placement warrants, existing warrants and equity awards.