NeuroOne Medical Technologies Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020; comparison is with fiscal 2019. The filing was signed December 8, 2020. The company develops thin-film electrodes for neurological recording and, in development, ablation and stimulation. Its Evo cortical electrode had FDA 510(k) clearance, but the company had not recorded commercial product sales by fiscal year-end.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $1.93 million | $0 |
| Operating expenses | $6.83 million | $5.81 million |
| Loss from operations | $4.90 million | $5.81 million |
| Interest expense | $7.52 million | $0.28 million |
| Net loss | $13.64 million | $6.78 million |
| Basic and diluted loss per share | $0.84 | $0.57 |
| Net cash used in operating activities | $3.43 million | $5.40 million |
| Cash at fiscal year-end | $4.04 million | $0.26 million |
- FY2020 revenue was collaboration revenue from Zimmer’s $2.0 million upfront payment, not product sales. The company recognized $1.93 million and reported $73,434 of deferred revenue at September 30, 2020.
- Research and development expense increased to $2.08 million from $1.53 million; general and administrative expense increased to $4.75 million from $4.28 million. No product gross margin was reported because there were no commercial product sales.
- The larger net loss chiefly reflected $7.52 million of interest expense, including substantial non-cash financing costs, and a $2.02 million non-cash loss on note extinguishment. Operating loss narrowed year over year as collaboration revenue more than offset higher operating expenses.
- Cash provided by financing was $7.32 million, compared with $5.77 million in FY2019. Cash used in investing was $122,427. The filing reports a $30.88 million accumulated deficit.
- At year-end, current assets were $4.16 million and current liabilities were $2.36 million. Total liabilities were $2.69 million. These included $1.01 million of convertible notes at fair value, an $83,333 PPP loan liability, and $312,176 of lease liabilities ($57,848 current and $254,328 long-term).
- The company raised capital through 13% convertible notes and equity. Most 2019 and 2020 Paulson notes converted to common stock during 2020; $609,458 of principal and accrued interest on 2019 notes remained at September 30. The filing reports that $557,992 converted into 787,571 shares between October 1 and November 2, 2020. Warrants outstanding at year-end covered 10.17 million shares, and options covered 1.48 million shares.
Material developments and outlook
- In July 2020, NeuroOne entered an exclusive development and distribution agreement with Zimmer. NeuroOne funds product development and regulatory work; Zimmer is responsible for commercialization costs and agreed to use commercially reasonable efforts to market and sell products once available. The agreement includes potential additional milestone and exclusivity payments, subject to specified conditions.
- On December 7, 2020, after fiscal year-end, Zimmer Biomet placed the company’s first commercial product order. The filing does not report the order’s value or expected sales volume.
- Management expected to pursue FDA 510(k) clearance for a diagnostic depth electrode after planned testing, with a submission anticipated during 2021. Other products—including minimally invasive delivery, ablation, chronic stimulation and spinal cord stimulation—remained at earlier development stages and may require additional testing or clinical studies and more extensive regulatory review.
- COVID-19 delayed development builds, testing and shipping through supplier and manufacturing disruptions and staff infections or quarantines. Management warned that continued effects could adversely affect operations, liquidity and development in FY2021.
- The independent auditor gave an unmodified opinion on the financial statements but included a going-concern explanatory paragraph. Management and the auditor cited recurring losses, negative operating cash flows and inadequate liquidity without additional funding. The company said it may need further equity, debt or collaboration funding, or expense reductions; failure to secure funding could require it to curtail or cease operations.
- Management reported effective disclosure controls as of September 30, 2020 and no material change in internal control over financial reporting during the year. The auditor was not engaged to attest to internal control effectiveness.
Risks, contingencies and unusual items
- Funding and dilution: Cash was not expected to fund operating expenses without additional financing. Further equity or convertible debt could materially dilute shareholders; debt or partnership terms could restrict operations or require granting rights.
- Commercial and regulatory execution: The company had limited operating history and no product-sales revenue at year-end. Adoption, reimbursement, further FDA clearances, clinical evidence, manufacturing scale-up and Zimmer’s execution remain uncertain. Zimmer may terminate the agreement for any reason on 90 days’ notice.
- COVID-19 and suppliers: Development and supply-chain delays had already occurred; further disruptions could affect testing, regulatory timing and financing.
- PMT litigation: The company faces claims alleging, among other matters, unfair competition and interference. The court granted sanctions and partial summary judgment in April 2020; on October 12, 2020 it awarded NeuroOne $185,000 in sanctions, jointly and severally against PMT and its former litigation counsel. Other claims remained, with trial scheduled for May 2021, subject to possible delay. The company also sought to pursue counterclaims.
- Financing accounting: Fair-value changes, note conversion discounts, issuance costs and extinguishment accounting materially affected reported interest expense and net loss. The filing identifies significant Level 3 valuation inputs.
- Licenses and obligations: The company relies on WARF and Mayo intellectual property and development arrangements. WARF requires minimum annual royalties of $50,000 for 2020, $100,000 for 2021 and $150,000 from 2022 onward, in addition to sales-based royalties. A first commercial sale was reported on December 7, 2020, before WARF’s June 30, 2021 sales deadline.
Important facts for investors to verify
- Whether Zimmer’s December 2020 order led to repeat orders, meaningful revenue and product availability, and whether any additional agreement milestones were achieved or paid.
- Current cash, cash burn, financing needs and subsequent share issuance, including the effect of conversions, warrants, options and any new capital raises.
- The timing and outcome of depth-electrode testing and FDA submissions, and the clinical and regulatory requirements for therapeutic products.
- Whether COVID-related supply and development disruptions continued, and whether the company maintained adequate manufacturing capacity and product quality.
- The status and potential financial exposure of the remaining PMT litigation and counterclaims.
- The company’s ability to maintain WARF and Mayo licenses, meet royalty and other contractual obligations, and fund operations as a going concern.