Business context and reporting period
NeuroOne Medical Technologies Corporation filed this unaudited Form 10-Q for the three months ended March 31, 2018. The early-stage medical technology company is developing cortical strip, grid and depth electrode products for neurological monitoring and treatment. It had no product sales or regulatory marketing approvals; the filing says its cortical strip technology had been used in five Mayo Clinic patients for research, but had not been tested in clinical trials.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $1.10 million | $516,057; up $581,423 |
| Operating loss | $1.10 million | $516,057 loss |
| Net loss | $1.36 million | $729,575 loss |
| Basic and diluted loss per share | $0.17 | $0.14 |
| Operating cash used | $591,269 | $350,919 |
| Cash provided by financing | $590,000 | $315,120 |
Gross margin is not meaningful because the company reported no revenue. At March 31, cash was $25,198, total current assets were $32,344, and current liabilities were $5.00 million. Total liabilities were $6.64 million, including $2.51 million of convertible notes and accrued interest, $369,124 of short-term notes and unsecured loan net of discount, and $2.24 million of warrant and conversion-derivative liabilities. Stockholders’ deficit was $6.39 million; accumulated deficit was $6.68 million.
Changes versus the prior period
Net loss increased $627,199 year over year. General and administrative expense rose $548,419, primarily due to about $0.3 million of stock-based compensation for consulting services and about $0.3 million of legal and accounting costs, largely related to public-company expenses. Research and development expense increased $33,004. A $186,220 non-cash loss on extinguishment followed the March amendment of short-term notes. These charges were partly offset by $119,960 of income from changes in the fair value of warrant liabilities and conversion derivatives.
Cash used in operations increased by about $240,000. Financing inflows were $590,000, including note and warrant proceeds and a $115,000 unsecured loan; cash declined by $1,269 during the quarter.
Outlook, risks and unusual items
- Going concern and funding: Management stated that existing cash was insufficient to fund operations through fiscal 2018 and that substantial doubt existed about the company’s ability to continue as a going concern. It planned to seek additional debt or equity funding; absent funding, it might reduce spending or cease operations.
- Debt maturities: At March 31, principal and accrued interest on Series 1, Series 2 and Series 3 notes were $1,770,839, $254,124 and $1,167,494, respectively. The Series 1 and 2 notes were due July 31, 2018 absent qualifying financing; Series 3 notes were due December 31, 2018. The company said it would not have enough cash to repay the Series 1 and 2 notes if they became due.
- Development outlook: Management expected research, development and general and administrative expenses to increase. Revenue depends on product development, regulatory authorization and commercialization; the filing gives no specific launch timetable or financial guidance.
- Subsequent events: The company raised an additional $350,000 through Series 3 notes from April 13 to May 8, 2018. It issued 150,000 consulting shares after quarter-end. A $55,000 WARF license payment became due after the company reached a financing threshold and was paid April 22, 2018.
- Litigation: PMT sued the company, NeuroOne and an officer, alleging, among other matters, unfair competition and unjust enrichment. The company said it would defend itself; the outcome and potential loss were unknown, and the company had no insurance for the claim. The filing noted that loss of the officer’s services could harm operations and prospects.
- Controls: Management concluded disclosure controls were ineffective at March 31, citing material weaknesses in accounting for complex or non-routine transactions, financial close and reporting, routine transaction controls and segregation of duties. Remediation could be delayed by limited cash resources.
Important facts for investors to verify
- Whether the company secured enough funding to meet operating needs and the July and December 2018 note maturities.
- Post-quarter financing terms, subsequent cash use, and the impact of the $55,000 WARF payment and share issuances.
- Regulatory and clinical progress, development spending and any credible path to commercialization.
- Updates on the PMT litigation, potential exposure and any impact on key personnel.
- Progress remediating control weaknesses and the effect of additional debt, warrants and potential share dilution.