NEUROONE MEDICAL TECHNOLOGIES Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes included in Part I “Financial Information”, Item I “Financial Statements” of this Quarterly Report on Form 10-Q (the “Report”) and the audited financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended September 30, 2020. Forward-Looking Statements Certain statements contained in this Report are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give current expectations or forecasts of future events or our future financial or operating performance. We may, in some cases, use words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, and similar expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. These forward-looking statements reflect our management’s beliefs and views with respect to future events, are based on estimates and assumptions as of the date of this Report and are subject to risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those in these forward-looking statements. We discuss many of these risks in greater detail under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2020 and our Quarterly Report on Form 10-Q for the quarter ended December 31, 2020, and subsequent reports filed with or furnished to the Securities and Exchange Commission (the “SEC”). Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Any forward-looking statement made by us in this Report speaks only as of the date hereof or as of the date specified herein. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable laws or regulations. Overview To date, our primary activities have been limited to, and our limited resources have been dedicated to, performing business and financial planning, raising capital, recruiting personnel, negotiating with business partners and the licensors of our intellectual property and conducting research and development activities. Our Evo cortical technology (“cEEG”) has received 510(k) clearance from the FDA for recording, monitoring, and stimulating brain tissue for up to 30 days for which we have begun to generate revenue beginning in the first quarter of fiscal 2021 from the sale of products based on our Evo cortical technology. Our other products are still under development. We have incurred losses since inception. As of June 30, 2021, we had an accumulated deficit of $38.2 million, primarily as a result of expenses incurred in connection with our research and development, selling, general and administrative expenses associated with our operations and interest expense, fair value adjustments and loss on extinguishments related to our debt, offset in part by collaborations and product revenues. We expect to continue to incur significant expenses and increasing operating and net losses for the foreseeable future until and unless we generate a higher level of revenue from commercial sales. Our main source of cash to date, outside of collaborations and product revenues, has been proceeds from the issuances of notes, common stock, warrants and unsecured loans. See “—Liquidity and Capital Resources—Historical Capital Resources” below. At June 30, 2021, we had $9.0 million in cash deposits. Our existing cash and cash equivalents is not sufficient to fund our operating expenses through at least twelve months from the date of this filing. We will need to obtain substantial additional funding in connection with our continuing operations through public or private equity or debt financings or other sources such as additional product revenue and milestone payments from our current collaboration with Zimmer. However, we may be unable to raise additional funds when needed on favorable terms or at all. Our failure to raise such capital as and when needed would have a negative impact on our financial condition and our ability to develop and commercialize our cortical strip, grid electrode and depth electrode technology and future products and our ability to pursue our business strategy. See “—Liquidity and Capital Resources—Funding Requirements and Outlook” below. Recent Developments Change of Independent Registered Public Accounting Firm for Fiscal 2021 On June 18, 2021, the Audit Committee (the “Audit Committee”) of the Board of the Company (i) engaged Baker Tilly US, LLP (“Baker Tilly”) to serve as the Company’s independent registered public accounting firm for the Company’s fiscal year ending September 30, 2021, and (ii) determined to dismiss BDO USA, LLP (“BDO”), the Company’s independent registered public accounting firm for the year ending September 30, 2020 and the quarters ending December 31, 2020 and March 31, 2021. 27 NeuroOne Medical Technologies Corporation Form 10-Q 2021 Shelf Registration On June 4, 2021, NeuroOne filed a Form S-3 shelf registration statement under the Securities Act, which was declared effective by the SEC on June 14, 2021 (the “2021 Shelf”) under which the Company may offer and sell, from time to time in its sole discretion, securities having an aggregate offering price of up to $150 million. Nasdaq Capital Market The Company’s common stock commenced trading on The Nasdaq Capital Market on May 26, 2021 under the ticker symbol “NMTC.” Previously, the Company’s common stock was traded on the OTC Markets quotation system on the OTCQB. Reverse Stock Split Effective after the close of business on March 31, 2021, the Company completed a 1-for-3 reverse stock split of its common stock. All share and per share amounts in this Quarterly Report have been reflected on a post-split basis. 2021 Private Placement On January 12, 2021, we entered into a Common Stock and Warrant Purchase Agreement (the “2021 Purchase Agreement”) with certain accredited investors (the “Purchasers”), pursuant to which the Company, in a private placement (the “2021 Private Placement”), agreed to issue and sell an aggregate of 4,166,682 shares (the “Shares”) of the common stock of the Company, and warrants to purchase an aggregate of 4,166,682 shares of common stock (the “2021 Warrants”) at an aggregate purchase price of $3.00 per share of common stock and corresponding warrant, resulting in total gross proceeds of $12.5 million before deducting placement agent fees and offering expenses. The 2021 Warrants have an initial exercise price of $5.25 per share. See “— Liquidity and Capital Resources — Historical Capital Resources ” section below for additional information with regard to the 2021 Private Placement. COVID-19 On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic. As a result of the COVID-19 pandemic, the Company has experienced, and will likely continue to experience, delays and disruptions in our pre-clinical and clinical trials, as well as interruptions in our manufacturing, supply chain, and research and development operations. The global outbreak of COVID-19 continues to rapidly evolve. In April 2020, given the impact of COVID-19 on the Company, the Company applied for and received loan funding of $83,333 under the Paycheck Protection Program, which was forgiven by the U.S. Small Busing Administration on June 9, 2021. The extent to which the COVID-19 pandemic may impact our business and pre-clinical and clinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the effect of the pandemic on our suppliers and distributors and the global supply chain, the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social distancing in the U.S. and other countries, business closures or business disruptions and the effectiveness of actions taken in the U.S. and other countries to contain and treat the disease. The COVID-19 pandemic may also impact our business as a result of employee illness, school closures, and other community response measures. The COVID-19 pandemic may also impact our ability to secure additional financing. Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on the Company’s results of future operations, financial position, and liquidity in for the remainder of fiscal year 2021 and beyond. Financial Overview Product Revenue Our product revenue during the three and nine months ended June 30, 2021 was derived from the sale of strip/grid and electrode cable assembly products based on Evo cortical technology. For the foreseeable future, we anticipate that we will generate additional revenue from the sale of products based on Evo cortical technology. We have received FDA 510(k) clearance for our cortical strip electrode, but we do not expect to generate any revenue from the sale of our other products until we develop and obtain all required regulatory approvals or clearances for and commercialize depth electrode technology. If we fail to complete the development of the depth electrode technology, or any other product candidate we may pursue in the future, in a timely manner, or fail to obtain regulatory approval, we may never be able to generate revenue from product sales sufficient to sustain operations. 28 NeuroOne Medical Technologies Corporation Form 10-Q Product Gross Loss Product gross loss represents our product revenue less our cost of product revenue. Our cost of product revenue consists of the manufacturing and materials costs incurred by our third-party contract manufacturer in connection with our Strip/Grid Products and outside supplier materials costs in connection with the Electrode Cable Assembly Products. In addition, cost of product revenue includes royalty fees incurred in connection with our license agreements. Collaborations Revenue Collaborations revenue was derived from the upfront initial exclusivity fee payment under the Zimmer Development Agreement. We anticipate that we may earn additional revenues stemming from additional milestone and royalty payments from Zimmer, however, the hitting of milestones or level of sales required to earn royalty payments is uncertain. Selling, General and Administrative Selling, general and administrative expenses consist primarily of personnel-related costs including stock-based compensation for personnel in functions not directly associated with research and development activities. Other significant costs include legal fees relating to corporate matters, intellectual property costs, professional fees for consultants assisting with regulatory, clinical, product development, financial matters, and beginning in the first quarter of fiscal year 2021, sales and marketing in connection with the commercial sale of cEEG strip/grid and electrode cable assembly products. We anticipate that our general and administrative expenses will significantly increase in the future to support our continued research and development activities, further commercialization of our cortical strip technology, potential commercialization of our grid electrode and depth electrode technology, if approved, and the increased costs of operating as a public company. These increases will include increased costs related to the hiring of additional personnel and fees for legal and professional services, as well as other public-company related costs. Research and Development Research and development expenses consist of expenses incurred in performing research and development activities in developing our cortical strip, grid electrode and depth electrode technology. Research and development expenses include compensation and benefits for research and development employees including stock-based compensation, overhead expenses, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, costs related to regulatory operations, fees paid to consultants and other outside expenses. Research and development costs are expensed as incurred and costs incurred by third parties are expensed as the contracted work is performed. Lastly, de minimis income from the sale of prototype products and related materials are offset against research and development expenses. We expect our research and development expenses to significantly increase over the next several years as we develop our cortical strip, grid electrode and depth electrode technology and conduct preclinical testing and clinical trials and will depend on the duration, costs and timing to complete our preclinical programs and clinical trials. Interest Expense Interest expense primarily consists of interest costs related to our 2019 Paulson Notes and 2020 Paulson Notes. Net valuation change of instruments measured at fair value The net valuation change of instruments measured at fair value include the change in fair value of the 2019 Paulson Notes and 2020 Paulson Notes. Loss on notes extinguishment Loss on note extinguishment includes the loss associated with debt instrument modifications and conversions accounted for as debt extinguishments. Other Income Consists of proceeds outside of normal operating activity relating to legal settlements and to the forgiveness of the paycheck protection program loan. 29 NeuroOne Medical Technologies Corporation Form 10-Q Results of Operations Comparison of the Three Months Ended June 30, 2021 and 2020 The following table sets forth the results of operations for the three-months ended June 30, 2021 and 2020, respectively. For the three months ended June 30, (unaudited) 2021 2020 Period to Period Change Product revenue $ 40,096 $ — $ 40,096 Cost of product revenue 61,935 — 61,935 Product gross loss (21,839 ) — (21,839 ) Collaborations revenue 17,451 — 17,451 Operating expenses: Selling, general and administrative 2,129,474 1,146,339 983,135 Research and development 901,134 447,154 453,980 Total operating expenses 3,030,608 1,593,493 1,437,115 Loss from operations (3,034,996 ) (1,593,493 ) (1,441,503 ) Interest expense — (4,749,263 ) 4,749,263 Net valuation change of instruments measured at fair value — 1,269,543 (1,269,543 ) Loss on note extinguishment — (2,017,847 ) 2,017,847 Other income 83,387 — 83,387 Loss before income taxes (2,951,609 ) (7,091,060 ) 4,139,451 Provision for income taxes — — Net loss $ (2,951,609 ) $ (7,091,060 ) $ 4,139,451 Product Revenue and Product Gross Loss Product revenue and product gross loss was $40,000 and $(62,000), respectively, during the three months ended June 30, 2021. The product revenue during the second quarter related to the sale of our Strip/Grid Products and Electrode Cable Assembly Products. Cost of product revenue consisted of the manufacturing and materials costs incurred by our third-party contract manufacturer in connection with our Strip/Grid Products and outside supplier materials costs in connection with the Electrode Cable Assembly Products. In addition, cost of product revenue included royalty fees incurred in connection with our license agreements of approximately $26,000. There was no product revenue or product gross loss recognized during the comparable prior year period. Collaborations Revenue Collaborations revenue was $17,000 for the three months ended June 30, 2021. Revenue during the period was derived from the Zimmer Development Agreement and represented the portion of the upfront initial development fee payment eligible for revenue recognition during the third quarter of fiscal year 2021. The amount of revenue recognized related to the upfront fee was based on development completed in connection with SEEG Products, and to a lesser extent, the Strip/Grid Products. There was no collaborations revenue recognized during the comparable prior year period. Selling, general and administrative expenses Selling, general and administrative expenses were $2.1 million for the three months ended June 30, 2021, compared to $1.1 million for the three months ended June 30, 2020. The $1.0 million increase was primarily due to an increase in sales and marketing expenses of $0.2 million, stock-based compensation of $0.5 million, payroll related costs of $0.2 million and public company related costs of $0.1 million in the current quarter when compared to the prior year period. 30 NeuroOne Medical Technologies Corporation Form 10-Q Research and development expenses Research and development expenses were $0.9 million for the three months ended June 30, 2021, compared to $0.4 million during for the three months ended June 30, 2020. The $0.5 million increase period over period was attributed to supporting development activities, which primarily included salary-related expenses and costs related to consulting services, materials and supplies associated with the development of SEEG Products and to a lesser extent Strip/Grid Products. Interest expense Interest expense for the three months ended June 30, 2020 was attributed to non-cash interest expense in connection with our 2020 Paulson Notes and a nominal amount related to the 2019 Paulson Notes, both of which are described further below, and was comprised of issuance costs of $1.0 million and day-one interest at issuance of $3.8 million representing the amount by which fair value exceeded the 2020 Paulson Note proceeds. Interest on principal in connection with the 2019 Paulson Notes and 2020 Paulson Notes is included in the net valuation change of instruments measured at fair value line item. During the three months ended June 30, 2021, no interest expense was incurred as there was no debt outstanding. Net valuation change of instruments measured at fair value: The net valuation change of instruments measured at fair value for the 2019 Paulson Notes for the three months ended June 30, 2021 and 2020 was none and a benefit of $1.3 million, respectively. The change was due to accrued interest on the 2019 Paulson Notes and due to fluctuations in our common stock fair value and the number of potential shares of common stock issuable upon conversion of the 2019 Paulson Notes while outstanding. Loss on note extinguishment Non-cash loss on note extinguishment for the three months ended June 30, 2020 was $2.0 million. The 2019 Paulson notes were amended on April 24, 2020 to add a 40% discount to the optional conversion feature and to extend the maturity date by six months. The April 2020 amendment was accounted for as a note extinguishment given the significant modification made to the optional conversion feature. There were no note extinguishments during the three months ended June 30, 2021. Other Income Other income during the three months ended June 30, 2021 consisted of the forgiveness of the paycheck protection program loan in the amount of $0.1 million. We did not have other income during the comparable prior year period. 31 NeuroOne Medical Technologies Corporation Form 10-Q Comparison of the Nine Months Ended June 30, 2021 and 2020 The following table sets forth the results of operations for the nine months ended June 30, 2021 and 2020, respectively. For the nine months ended June 30, (unaudited) 2021 2020 Period to Period Change Product revenue $ 129,810 $ — $ 129,810 Cost of product revenue 210,429 — 210,429 Product gross loss (80,619 ) — (80,619 ) Collaborations revenue 59,838 — 59,838 Operating expenses: Selling, general and administrative 4,636,586 3,493,761 1,142,825 Research and development 2,916,721 1,291,075 1,625,646 Total operating expenses 7,553,307 4,784,836 2,768,471 Loss from operations (7,574,088 ) (4,784,836 ) (2,789,252 ) Interest expense (3,053 ) (7,446,770 ) 7,443,717 Net valuation change of instruments measured at fair value 1,974 1,175,685 (1,173,711) Loss on note extinguishment — (2,017,847 ) 2,017,847 Other income 270,162 — 270,162 Loss before income taxes (7,305,005 ) (13,073,768 ) 5,768,763 Provision for income taxes — — — Net loss $ (7,305,005 ) $ (13,073,768 ) $ 5,768,763 Product Revenue and Product Gross Loss Product revenue and product gross loss was $0.1 million and $(0.2) million during the nine months ended June 30, 2021, respectively. The product revenue consisted of Strip/Grid Products and Electrode Cable Assembly Products sales. Cost of product revenue consisted of the manufacturing and materials costs incurred by our third-party contract manufacturer in connection with our Strip/Grid Products and outside supplier materials costs in connection with the Electrode Cable Assembly Products. In addition, cost of product revenue included royalty fees incurred, including the royalty fees to WARF and Mayo of $0.1 million in connection with our license agreements. There was no product revenue or product gross loss recognized during the comparable prior year period. Collaborations Revenue Collaborations revenue was $60,000 for the nine months ended June 30, 2021. Revenue during the period was derived from the Zimmer Development Agreement and represented the portion of the upfront initial development fee payment eligible for revenue recognition during the nine months ended June 30, 2021. The amount of revenue recognized related to the upfront fee was based on development completed in connection with SEEG products, and to a lesser extent, the Strip/Grid Products. There was no collaborations revenue recognized during the comparable prior year period. Selling, general and administrative expenses Selling, general and administrative expenses were $4.6 million for the nine months ended June 30, 2021, compared to $3.5 million for the nine months ended June 30, 2020. The $1.1 million increase was primarily due to an increase in sales and marketing expenses of $0.7 million, payroll related costs of $0.2 million, public company and governance costs of $0.4 million and other operating expenses and fees of $0.1 million, offset in part by a decrease in stock-based compensation of $0.1 million and legal costs of $0.2 million. Research and development expenses Research and development expenses were $2.9 million for the nine months ended June 30, 2021, compared to $1.3 million during for the nine months ended June 30, 2020. The $1.6 million increase period over period was attributed to supporting development activities, which primarily included salary-related expenses and costs related to consulting services, materials and supplies associated with the development of SEEG Products and to a lesser extent Strip/Grid Products. 32 NeuroOne Medical Technologies Corporation Form 10-Q Interest expense Interest expense for the nine months ended June 30, 2021 was $3,000 and consisted of issuance costs in connection with our 2019 Paulson Notes described further below. Interest expense during the nine months ended June 30, 2020 was primarily attributed to non-cash interest expense in connection with our 2019 Paulson Notes and 2020 Paulson Notes. Interest expense attributed to the 2019 Paulson Notes and 2020 Paulson Notes was comprised of issuance costs of $1.8 million and day-one interest at issuance of $5.6 million representing the amount by which fair value exceeded note proceeds. Interest on principal in connection with the 2019 Paulson Notes and 2020 Paulson Notes is included in the net valuation change of instruments measured at fair value line item. Net valuation change of instruments measured at fair value: The net valuation change of instruments measured at fair value for the 2019 Paulson Notes for the nine months ended June 30, 2021 and 2020 was a benefit of $2,000 and $1.2 million, respectively. The change was due to accrued interest on the 2019 Paulson Notes and due to fluctuations in our common stock fair value and the number of potential shares of common stock issuable upon conversion of the 2019 Paulson Notes while outstanding. Loss on note extinguishment Non-cash loss on note extinguishment for the nine months ended June 30, 2020 was $2.0 million. The 2019 Paulson notes were amended on April 24, 2020 (the “April 2020 Amendment”) to add a 40% discount to the optional conversion feature and to extend the maturity date by six months. The April 2020 Amendment was accounted for as a note extinguishment given the significant modification made to the optional conversion feature. There were no note extinguishments during the nine months ended June 30, 2021. Other Income Other income during the nine months ended June 30, 2021 consisted principally of proceeds received in connection with the PMT Corporation litigation in the amount of $0.2 million and the forgiveness of the paycheck protection program loan in the amount of $0.1 million. We did not have other income during the comparable prior year period. Liquidity and Capital Resources Historical Capital Resources As of June 30, 2021, our principal source of liquidity consisted of cash deposits of $9.0 million. We have just begun to generate revenue from commercial sales during the first quarter of fiscal year 2021, and we anticipate that we will continue to incur losses for the foreseeable future until and unless we generate an adequate level of revenue from commercial sales to cover expenses. We anticipate that our expenses will increase substantially as we develop and commercialize our cortical strip, grid electrode and depth electrode technology and pursue pre-clinical and clinical trials, seek regulatory approvals, contract to manufacture any products, establish our own sales, marketing and distribution infrastructure to commercialize our cortical strip, grid electrode and depth electrode technology under development, if approved, hire additional staff, add operational, financial and management systems and continue to operate as a public company. Our source of cash, outside of collaboration and product revenues, to date has been proceeds from the issuances of notes with warrants, common stock with and without warrants and unsecured loans, the terms of which are further described below. See also “—Funding Requirements and Outlook” below. 2021 Private Placement On January 12, 2021, we entered into the “2021 Purchase Agreement with certain accredited investors, pursuant to which the Company, in a private placement (the “2021 Private Placement”), agreed to issue and sell an aggregate of 4,166,682 shares (the “Shares”) of the common stock of the Company, and warrants to purchase an aggregate of 4,166,682 shares of common stock (the “2021 Warrants”) at an aggregate purchase price of $3.00 per share of common stock and corresponding warrant, resulting in total gross proceeds of $12.5 million before deducting placement agent fees and estimated offering expenses. The 2021 Warrants have an initial exercise price of $5.25 per share. The 2021 Warrants became immediately exercisable beginning on the date of issuance and will expire on the fifth anniversary of such date. Prior to expiration, subject to the terms and conditions set forth in the 2021 Warrants, the holders of such 2021 Warrants may exercise the 2021 Warrants for shares of common stock by providing notice to the Company and paying the exercise price per share for each share so exercised or by utilizing the “cashless exercise” feature contained in each 2021 Warrant. The 2021 Private Placement closed on January 14, 2021. In connection with the 2021 Private Placement, the Company agreed to file a registration statement with the SEC covering the resale of the Shares, the 2021 Warrants and the shares of common stock issuable upon exercise of the 2021 Warrants. The Company has agreed to file such registration statement within 30 days of the execution of the 2021 Purchase Agreement on January 12, 2021 and filed such registration statement on February 10, 2021. 33 NeuroOne Medical Technologies Corporation Form 10-Q Common Stock Offerings On July 24, 2020, we entered into a Securities Purchase Agreement (“2020 Purchase Agreement”) with an accredited investor pursuant to which we, in a private placement, issued and sold 25,000 shares of the Company’s common stock for gross proceeds in the amount of $135,000. Under the 2020 Purchase Agreement, we agreed to use the net proceeds from the private placement for funding operations or working capital and general corporate purposes. We granted the investor indemnification rights with respect to representations, warranties and agreements under the 2020 Purchase Agreement. On October 23, 2019, the Company entered into Securities Purchase Agreements with certain accredited investors, pursuant to which the Company, in a private placement, issued and sold 47,223 shares of the Company’s common stock to the accredited investors at a price of $5.40 per share, for gross proceeds amounting to $0.3 million before deducting offering expenses. The Company filed a registration statement with the SEC covering the resale of the shares of common stock sold in the private placement on August 11, 2020. 2020 Paulson Convertible Notes On April 30, 2020, the Company entered into a subscription agreement with certain accredited investors, pursuant to which the Company, in a private placement (the “2020 Paulson Private Placement”), agreed to issue and sell to the investors 13% convertible promissory notes (each, a “2020 Paulson Note” and collectively, the “2020 Paulson Notes”) and warrants (each, a “2020 Paulson Warrant” and collectively, the “2020 Paulson Warrants”) to purchase shares of the Company’s common stock. Between April 30, 2020 and June 30, 2020, the Company issued 2020 Paulson Notes in an aggregate principal amount of $5.1 million to the Subscribers. The final closing under the 2020 Paulson Private Placement occurred on June 30, 2020. In July 2020, all remaining 2020 Paulson Notes outstanding were automatically converted into common stock following the announcement of a Strategic Transaction (as defined in the 2020 Paulson Notes) with Zimmer, Inc. Refer to “—Liquidity and Capital Resources—Historical Capital Resources” in our Annual Report on Form 10-K for the year ended September 30, 2020 for additional information related to the 2020 Paulson Convertible Notes. 2019 Paulson Convertible Notes On November 1, 2019, the Company entered into a subscription agreement with certain accredited investors, pursuant to which the Company, in a private placement (the “2019 Paulson Private Placement”), agreed to issue and sell to the investors 13% convertible promissory notes (each, a “2019 Paulson Note” and collectively, the “2019 Paulson Notes”) and warrants (each, a “2019 Paulson Warrant” and collectively, the “2019 Paulson Warrants”) to purchase shares of the Company’s common stock. The initial closing of the private placement was consummated on November 1, 2019, and, on that date and through December 3, 2019, the Company issued 2019 Paulson Notes in an aggregate principal amount of $3,234,800 to the Subscribers for gross proceeds equaling the principal amount. The private placement terminated on December 3, 2019. Between April 24, 2020 and December 15, 2020, all of the holders elected to convert outstanding principal and accrued and unpaid interest of 2019 Paulson Notes in the amount of $3,453,883 into shares of common stock. Refer to “—Liquidity and Capital Resources—Historical Capital Resources” in our Annual Report on Form 10-K for the year ended September 30, 2020 for additional information related to the 2019 Paulson Convertible Notes. Paycheck Protection Program Loan In connection with the CARES Act, the Company received loan funding of approximately $83,000 under the Paycheck Protection Program (“PPP”), which was forgiven by the U.S. Small Business Administration on June 9, 2021. Financings Prior to Fiscal Year 2020 Our sources of cash prior to fiscal year 2020 were generated from the following financing arrangements: 2019 Unit Private Placement From December 28, 2018 through July 1, 2019, the Company entered into Subscription Agreements (each, a “2019 Purchase Agreement”) with certain accredited investors (the “New Purchasers”), pursuant to which the Company, in a new private placement (the “2019 Unit Private Placement”), agreed to issue and sell Units (the “2019 Units”), each consisting of (i) one share of common stock and (ii) a warrant to purchase one share of common stock for total gross proceeds to the Company of $5,845,448 before deducting offering expenses. Refer to “—Liquidity and Capital Resources—Historical Capital Resources” in our Annual Report on Form 10-K for the year ended September 30, 2020 for additional information related to the 2019 Unit Private Placement. 34 NeuroOne Medical Technologies Corporation Form 10-Q 2018 Private Placement From July 9, 2018 through November 30, 2018 (the final closing), the Company entered into subscription agreements (each, a “Purchase Agreement”) with certain accredited investors (the “Purchasers”), pursuant to which the Company, in a private placement (the “2018 Private Placement”), agreed to issue and sell to the Purchasers units (each, a “2018 Unit”), each consisting of (i) one share of common stock and (ii) a warrant to purchase one share of common stock for total gross proceeds to the Company of $1,538,000 before deducting offering expenses. Refer to “—Liquidity and Capital Resources—Historical Capital Resources” in our Annual Report on Form 10-K for the year ended September 30, 2020 for additional information related to the 2018 Private Placement. Series 3 Notes and Warrants (2017 Convertible Notes) From October 2017 to May 2018, the Company issued convertible notes (the “Series 3 Notes” or “2017 Convertible Notes”) in an aggregate principal amount of $1.5 million that bear interest at a fixed rate of 8% per annum and warrants to purchase shares of the Company’s capital stock (the “Series 3 Warrants”). On February 28, 2019, the outstanding principal and interest on the Series 3 Notes converted into shares of common stock and common stock purchase warrants. Refer to “—Liquidity and Capital Resources—Historical Capital Resources” in our Annual Report on Form 10-K for the year ended September 30, 2020 for additional information related to the Series 3 Notes and Warrants (2017 Convertible Notes). Series 2 Notes and Warrants In August 2017, the Company entered into a subscription agreement in an aggregate principal amount of $253,000 to certain accredited investors (the “Series 2 Notes”). On July 2, 2018, the Series 2 Notes were converted into shares of common stock and warrants. Refer to “—Liquidity and Capital Resources—Historical Capital Resources” in our Annual Report on Form 10-K for the year ended September 30, 2020 for additional information related to the Series 2 Notes and warrants. Series 1 Notes and Warrants From November 2016 to June 2017, the Company issued convertible promissory notes in an aggregate principal amount of $1.6 million and warrants to purchase shares of the Company’s capital stock (the “Series 1 Notes”). The Series 1 Notes were converted into shares of common stock and warrants. Refer to “—Liquidity and Capital Resources—Historical Capital Resources” in our Annual Report on Form 10-K for the year ended September 30, 2020 for additional information related to the Series 1 Notes and warrants. Unsecured Loans From March 2018 to December 2018, the Company received gross proceeds from unsecured loans in the amount of $528,000. The unsecured loans were repaid in full as of June 30, 2019. Funding Requirements and Outlook At June 30, 2021, we had approximately $9.0 million in cash deposits. Our existing cash and cash is not sufficient to fund our operating expenses through at least twelve months from the date of this filing. While our future operating activities under the distribution and development agreement with Zimmer, Inc. coupled with our plans to raise capital or issue debt financing, may provide additional liquidity in the future, these actions are not solely within our control. If we are unable to raise additional funds, or if our anticipated operating results are not achieved, we believe planned expenditures may need to be reduced in order to extend the time period that existing resources can fund our operations. If we are unable to obtain the necessary capital, it may have a material adverse effect on our operations and the development of our technology, or we may have to cease operations altogether. We have agreements with the Wisconsin Alumni Research Foundation (“WARF”) and the Mayo Foundation for Medical Education and Research (“Mayo”) that require us to make certain milestone and royalty payments. 35 NeuroOne Medical Technologies Corporation Form 10-Q On January 22, 2020, we entered into an Amended and Restated License Agreement (the “WARF License”) with WARF, which amended and restated in full our prior license agreement with WARF, dated October 1, 2014 (the “Original WARF License”). Under the WARF License, we have agreed to pay WARF a royalty equal to a single-digit percentage of our product sales pursuant to the WARF License, with a minimum annual royalty payment of $50,000 for 2020, $100,000 for 2021 and $150,000 for 2022 and each calendar year thereafter that the WARF License is in effect. The minimum annual royalty payment for calendar year 2020 in the amount of $50,000 was paid in January 2021. If we or any of our sublicensees contest the validity of any licensed patent, the royalty rate will be doubled during the pendency of such contest and, if the contested patent is found to be valid and would be infringed by us if not for the WARF License, the royalty rate will be tripled for the remaining term of the WARF License. Under the Amended and Restated License and Development Agreement with Mayo (the “Mayo Development Agreement”), we have agreed to pay Mayo a royalty equal to a single-digit percentage of our product sales pursuant to the Mayo Development Agreement. Nothing further was due until we started selling our products. As of June 30, 2020, $3,894 in royalty payments were earned by Mayo given the commencement of commercial sales in fiscal year 2021. Refer to the Company’s Annual Report on Form 10-K for the year ended September 30, 2020 with regard to: “Item 1—Business—WARF License,” “Business—Mayo Foundation for Medical Education and Research License and Development Agreement,” “Item 1A—Risk Factors—Risks Relating to Our Business—We depend on intellectual property licensed from WARF for our technology under development, and the termination of this license would harm our business” and “Item 1A—Risk Factors—We depend on our partnership with Mayo to license certain know how for the development and commercialization of our technology.” To continue to fund operations, we will need to secure additional funding or take steps to reduce expenses. We may obtain additional financing in the future through the issuance of our common stock and securities convertible into our common stock, through other equity or debt financings or through collaborations or partnerships with other companies. We may not be able to raise additional capital on terms acceptable to us, or at all. Further, any failure to raise capital when needed could compromise our ability to execute on our business plan. The development and commercialization of our cortical strip, grid electrode and depth electrode technology is subject to numerous uncertainties, and we have based these estimates on assumptions that may prove to be substantially different than we currently anticipate and could use our cash resources sooner than we expect. Additionally, the process of developing medical devices is costly, and the timing of progress in pre-clinical tests and clinical trials is uncertain. Our ability to successfully transition to profitability will be dependent upon achieving certain regulatory approval and then a level of product sales adequate to support our cost structure. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities. Cash Flows The following is a summary of cash flows for each of the periods set forth below. For the nine Months Ended June 30, 2021 2020 Net cash used in operating activities $ (6,573,520 ) $ (3,697,970 ) Net cash used by investing activities (31,970 ) (66,068 ) Net cash provided by financing activities 11,559,834 7,327,246 Net increase in cash $ 4,954,344 $ 3,563,208 Net cash used in operating activities Net cash used in operating activities was $6.6 million for the nine months ended June 30, 2021, which consisted of a net loss of $7.3 million partially offset principally by non-cash stock-based compensation, depreciation, amortization related to intangible assets, revaluation of convertible notes, operating lease expense and the forgiveness of the paycheck protection program loan, totaling approximately $1.5 million in the aggregate. The net change in our net operating assets and liabilities associated with fluctuations in our operating activities resulted in a cash use of $0.7 million. The change in operating assets and liabilities was primarily attributable to a decrease in accounts payable and accrued expenses attributed to the timing of payments coupled to a lesser extent with an increase in accounts receivable, inventory and prepaid and other assets. Net cash used in operating activities was $3.7 million for the nine months ended June 30, 2020, which consisted of a net loss of $13.1 million partially offset primarily by non-cash interest, stock-based compensation, depreciation, amortization related to intangible assets, operating lease expense, revaluation of convertible notes and loss on notes extinguishment, totaling approximately $9.8 million in the aggregate. The net change in our net operating assets and liabilities associated with fluctuations in our operating activities resulted in a cash use of approximately $0.5 million. The change in operating assets and liabilities was primarily attributable to a decrease in accounts payable and accrued expenses and by an increase in our prepaid expenses. 36 NeuroOne Medical Technologies Corporation Form 10-Q Net cash used by investing activities Net cash used by investing activities was $32,000 and $66,000 during the nine months ended June 30, 2021 and 2020, respectively, and consisted of outlays for furniture and equipment. Net cash provided by financing activities Net cash provided by financing activities was $11.6 million for the nine months ended June 30, 2021, which consisted primarily of net proceeds received from the 2021 Private Placement in the amount of $11.3 million. There were also exercises of stock options and warrants during the nine months ended June 30, 2021 resulting in additional cash proceeds of $0.3 million, offset in part by deferred offering costs of $24,000. Net cash provided by financing activities was $7.3 million for the nine months ended June 30, 2020, which consisted primarily of net proceeds received upon the issuance of the 2019 and 2020 Paulson Notes and the common stock offering totalling $7.2 million in the aggregate, and $0.1 million in proceeds received from the Paycheck Protection Program. Critical Accounting Policies Our financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles require us to make estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expense during the periods presented. We believe that the estimates and judgments upon which we rely are reasonably based upon information available to us at the time that we make these estimates and judgments. To the extent that there are material differences between these estimates and actual results, our financial results will be affected. The accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in Note 3 — “Summary of Significant Accounting Policies” to our condensed financial statements included in “Part 1, Item 1 – Financial Statements” in this Report. During the nine months ended June 30, 2021, we commenced commercial sales of the Strip/Grid Products and Electrode Cable Assembly Products. As a result, we added the following critical accounting policies below: Product Revenue Revenues from product sales are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. At the inception of each contract, performance obligations are identified and the total transaction price is allocated to the performance obligations. Cost of Product Revenue Cost of product revenue consists of the manufacturing and materials costs incurred by our third-party contract manufacturer in connection with our Strip/Grid Products and outside supplier materials costs in connection with the Electrode Cable Assembly Products. In addition, cost of product revenue includes royalty fees incurred in connection with our license agreements. 37 NeuroOne Medical Technologies Corporation Form 10-Q Allowances for Doubtful Accounts We record a provision for doubtful accounts, when appropriate, based on historical experience and a detailed assessment of the collectability of our accounts receivable. In estimating the allowance for doubtful accounts, we consider, among other factors, the aging of the accounts receivable, our historical write-offs, the credit worthiness of each customer, and general economic conditions. Account balances are charged off against the allowance when we believe that it is probable that the receivable will not be recovered. Actual write-offs may be in excess of our estimated allowance. Inventories Inventories are stated at the lower of cost (using the first-in, first-out “FIFO” method) or net realizable value. We calculate inventory valuation adjustments for excess and obsolete inventory, when appropriate, based on current inventory levels, movement, expected useful lives, and estimated future demand of the products and spare parts. Our inventory is currently comprised of cEEG strip/grid and electrode cable assembly finished good products. The strip/ grid products are produced by a third-party contract manufacturer and the electrode cable assembly products are obtained from outside suppliers. There were no additional material changes to our critical accounting policies or estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended September 30, 2020. Recent Accounting Pronouncements Refer to Note 3 — “Summary of Significant Accounting Policies” to our condensed financial statements included in “Part 1, Item 1 – Financial Statements” in this Report for a discussion of recently issued accounting pronouncements. Off Balance Sheet Arrangements None. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable for smaller reporting companies.