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, 2021. Forward-Looking Statements This Report contains forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “target,” “seek,” “contemplate,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-looking statements include statements about: ● the timing of and our ability to obtain and maintain regulatory clearance of our cortical strip, grid and depth electrode technology; ● even if our cortical strip, grid electrode and depth electrode technology is approved for commercial sale, our ability to successfully commercialize our technology in the United States; ● our ability to achieve or sustain profitability; ● our ability to raise additional capital and to fund our operations; ● the availability of additional capital on acceptable terms or at all as or when needed; ● the clinical utility of our cortical strip, grid and depth electrode including technology under development; ● our ability to develop additional applications of our cortical strip, grid and depth electrode technology with the benefits we hope to offer as compared to existing technology, or at all; ● the results of our development and distribution relationship with Zimmer, Inc. (“Zimmer”); ● the performance, productivity, reliability and regulatory compliance of our third party manufacturers of our cortical strip, grid electrode and depth electrode technology; ● our ability to develop future generations of our cortical strip, grid and depth electrode technology; ● our future development priorities; ● the impact of the COVID-19 pandemic and resulting macroeconomic conditions, including supply chain disruptions, labor shortages and inflationary pressures, on our business; ● our ability to obtain reimbursement coverage for our cortical strip, grid and depth electrode technology; ● our expectations about the willingness of healthcare providers to recommend our cortical strip, grid and depth electrode technology to people with epilepsy, Parkinson’s disease, dystonia, essential tremors, chronic pain due to failed back surgeries and other related neurological disorders; ● our future commercialization, marketing and manufacturing capabilities and strategy; ● our ability to comply with applicable regulatory requirements; ● our ability to maintain our intellectual property position; ● the outcome of legal proceedings with PMT Corporation (“PMT”); 18 ● our expectations regarding international opportunities for commercializing our cortical strip, grid and depth electrode technology under including technology under development; ● our estimates regarding the size of, and future growth in, the market for our technology, including technology under development; and ● our estimates regarding our future expenses and needs for additional financing. Forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate, and management’s beliefs and assumptions are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. You should refer to the “Risk Factors” section of our Annual Report on Form 10-K for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. These forward-looking statements speak only as of the date of this Report. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks and other information we describe in the reports we will file from time to time with the Securities and Exchange Commission (the “SEC”) after the date of this Report. Overview We are a medical technology company focused on the development and commercialization of thin film electrode technology for cEEG and sEEG recording, spinal cord stimulation, brain stimulation and ablation solutions for patients suffering from epilepsy, Parkinson’s disease, dystonia, essential tremors, chronic pain due to failed back surgeries and other related neurological disorders. Additionally, we are investigating the potential applications of our technology associated with artificial intelligence We are developing our cortical, sheet and depth electrode technology to provide solutions for diagnosis through cEEG recording and sEEG recording and treatment through brain stimulation and ablation, all in one product. A cEEG is a continuous recording of the electrical activity of the brain that identifies the location of irregular brain activity, which information is required for proper treatment. cEEG recording involves an invasive surgical procedure, referred to as a craniotomy. sEEG involves a less invasive procedure whereby doctors place electrodes in targeted brain areas by drilling small holes through the skull. Both methods of seizure diagnosis are used to identify areas of the brain where epileptic seizures originate in order to precisely locate the seizure source for therapeutic treatment if possible. Deep brain stimulation, or DBS, therapies involve activating or inhibiting the brain with electricity that can be given directly by electrodes on the surface or implanted deeper in the brain via depth electrodes. Introduced in 1987, this procedure involves implanting a power source referred to as a neurostimulator, which sends electrical impulses through implanted depth electrodes, to specific targets in the brain for the treatment of disorders such as Parkinson’s disease, essential tremors, dystonia, and chronic pain. The effects of DBS as a potential treatment for Alzheimer’s is also being evaluated by researchers. Unlike ablative technologies, the effects of DBS are reversible. RF ablation is a procedure that uses radiofrequency under the electrode contacts which is directed to the site of the brain tissue that is targeted for removal. The process involves delivering energy to the contacts, thereby heating them and destroying the brain tissue. The ablation does not remove the tissue. Rather, it is left in place and typically scar tissue forms in the place where the ablation occurs. This procedure is also known as brain lesioning as it causes irreversible lesions. We received 510(k) FDA clearance for our Evo cortical technology in November 2019, and in September 2021 we received FDA clearance to market our Evo sEEG electrode technology for temporary (less than 24 hours) use with recording, monitoring, and stimulation equipment for the recording, monitoring, and stimulation of electrical signals at the subsurface level of the brain. Our submission to the FDA seeking 510(k) for use of our Evo sEEG electrode technology for up to 30 days was made in November 2021 and is pending. We submitted responses on February 9, 2022 to questions from the FDA regarding our submission and the FDA acknowledged receipt of our response on February 10, 2022. The Company commenced commercial sales of cEEG strip/grid and electrode cable assembly products beginning in the first quarter of fiscal year 2021. The Company sold, on a limited application basis for design verification, sEEG depth electrode products for non-human use in late fiscal year 2021 and the first quarter of fiscal year 2022. Our other products are still under development. Prior to FDA approval or clearance of certain of our products, our primary activities were limited to, and our limited resources were 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. We have incurred losses since inception. As of December 31, 2021, we had an accumulated deficit of $43.6 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. Prior to FDA approval of certain of our products, our main source of cash was proceeds from the issuances of notes, common stock, warrants and unsecured loans. See “—Liquidity and Capital Resources—Capital Resources” below. While we have begun to generate revenue from the sale of products based on our cEEG and sEEG technology and through milestone payments from our current collaboration with Zimmer, 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, and we will need to obtain substantial additional funding in connection with our continuing operations through public or private equity or debt financings, through collaborations or partnerships with other companies or other sources. 19 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—Liquidity Outlook” below Recent Developments and Upcoming Milestones Corporate Updates In November 2021, we submitted a clearance request to the FDA for less than 30-day use of our Evo® sEEG Electrode, which has already been 510(k) cleared for temporary (less than 24 hours) use, and our request is pending. We expect to be commercial ready pending that approval. Product shipment following FDA clearance of our SEEG product family may also qualify the Company for an additional milestone payment from our distribution partner Zimmer Biomet, who has placed initial stocking orders. We completed feasibility bench top testing with a new design of our diagnostic and ablation depth electrode in the first calendar quarter of 2021, and signed a contract with RBC Medical Innovations to develop and manufacture hardware (a radio frequency generator) for the system in the third calendar quarter of 2021. We are targeting the third calendar quarter of 2022 for completion of a prototype of hardware and the submission of an application for FDA clearance in early calendar 2023. We also completed an animal feasibility study at Emory University in September 2021 and additional animal studies are planned. Subsequent to the end of the fiscal quarter, we also announced that we have surpassed five years of accelerated aging testing for our recording electrodes. COVID-19 On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic. COVID-19 and its variants continue to impact the United States and the world. As a result of the COVID-19 pandemic, the Company has experienced delays and disruptions in our pre-clinical and clinical trials, as well as interruptions in our manufacturing, supply chain, and research and development operations. For example: ● development of our technology has been and may continue to be delayed in fiscal year 2021 and continuing into fiscal 2022 due to interruptions in global manufacturing and shipping as a result of the COVID-19 pandemic and macroeconomic conditions, including as one of our key manufacturing partners and one of the Company’s suppliers had staffing issues leading to delays in the Company’s development builds and delays in shipping product; ● the Company’s own staff has been impacted by infections and mandatory quarantines; ● the Company is currently experiencing and may continue to experience product shortages of its primary component, polyimide film, due to supply chain shortages attributed to COVID related issues; ● the Company is experiencing and may continue to experience delays in timelines for product availability and delivery from vendors, including related to staffing shortages, both generally and due to employee illness, and due to increases in demand from other larger or more longstanding customers of our suppliers placing large orders due to concerns with supply chain disruption and the impact of COVID-19. The Company’s plans for further testing or clinical trials and costs to obtain components may be further impacted by the continuing effects of COVID-19, supply chain challenges and inflationary pressures. The global outbreak of COVID-19 continues to rapidly evolve as new variants emerge. 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 impact of inflation, the ultimate geographic spread of the disease and its variants, 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 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 fiscal year 2022 and beyond. Financial Overview Product Revenue Our product revenue was derived from the sale of strip/grid, depth electrode and electrode cable assembly products based on Evo cortical and sEEG technology. For the foreseeable future, we anticipate that we will generate additional revenue from the sale of products based on Evo cortical and sEEG technology. 20 We have received FDA 510(k) clearance for our cortical strip electrode, but we do not expect to generate any significant 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 for human use. 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. Product Gross Profit (Loss) Product gross profit (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 and depth electrode 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 achievement and timing of future milestones or level of sales required to earn royalty payments from Zimmer is uncertain. For a discussion of milestones and royalty payments under the Zimmer Development Agreement, see “—Liquidity and Capital Resources—Liquidity Outlook” below and see “Note 7 — Zimmer Development Agreement” included in our condensed financial statements included in “Part 1, Item 1 – Financial Statements” in this Report. 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 financial and administrative matters, and sales and marketing in connection with the commercial sale of cEEG strip/grid, sEEG depth electrode and electrode cable assembly products. We anticipate that our selling, 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 further 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 consists of interest costs related to our convertible notes issued in 2019 (the “2019 Paulson Notes”) outstanding during the first quarter of fiscal year 2021. 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 outstanding during the first quarter of fiscal year 2021. Other Income Other income primarily consists of interest income related to our cash deposits and proceeds outside of normal operating activity relating to legal settlements. 21 Results of Operations Comparison of the Three Months Ended December 31, 2021 and 2020 The following table sets forth the results of operations for the three-months ended December 31, 2021 and 2020, respectively. For the three months ended December 31, (unaudited) 2021 2020 Period to Period Change Product revenue $ 33,748 $ 71,474 $ (37,726 ) Cost of product revenue 46,844 109,131 (62,287 ) Product gross profit (loss) (13,096 ) (37,657 ) 24,561 Collaborations revenue 6,374 22,274 (15,900 ) Operating expenses: Selling, general and administrative 1,742,141 1,193,860 548,281 Research and development 1,060,462 934,158 126,304 Total operating expenses 2,802,603 2,128,018 674,585 Loss from operations (2,809,325 ) (2,143,401 ) (665,924 ) Interest expense — (3,053 ) 3,053 Net valuation change of instruments measured at fair value — 1,974 (1,974 ) Other income 1,850 185,000 (183,150 ) Loss before income taxes (2,807,475 ) (1,959,480 ) (847,995 ) Provision for income taxes — — — Net loss $ (2,807,475 ) $ (1,959,480 ) $ (847,995 ) Product Revenue and Product Gross Profit (Loss) Product revenue was $34,000 and $71,000 during the three months ended December 31, 2021 and 2020, respectively. Product gross profit (loss) was $(13,000) and $(38,000) during the three months ended December 31, 2021 and 2020, respectively. The product revenue consists of the sale of our strip/grid, depth electrode 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 and depth electrode products, and outside supplier materials costs in connection with the electrode cable assembly products. In addition, cost of product revenue included royalty fees incurred of $26,000 and $52,000 in connection with our license agreements during the three months ended December 31, 2021 and 2020, respectively. Collaborations Revenue Collaborations revenue was $6,000 and $22,000 for the three months ended December 31, 2021 and 2020, respectively. Revenue during each period was derived from the Zimmer Development Agreement and represented the portion of the upfront initial development fee payment eligible for revenue recognition during such period. The amount of revenue recognized related to the upfront fee was based on development completed in connection with depth electrode products, and to a lesser extent, the strip/grid products. Selling, general and administrative expenses Selling, general and administrative expenses were $1.7 million for the three months ended December 31, 2021, compared to $1.2 million for the three months ended December 31, 2020. The $0.5 million increase was primarily due to an increase in legal costs of $0.3 million, sales and marketing of $0.1 million and operating costs of $0.1 million on a net basis. Research and development expenses Research and development expenses were $1.1 million for the three months ended December 31, 2021, compared to $0.9 million during for the three months ended December 31, 2020. The $0.1 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 depth electrode products and to a lesser extent strip/grid products. 22 Interest expense Interest expense for the three months ended December 31, 2020 was $3,000 and consisted of issuance costs in connection with our 2019 Paulson Notes. The 2019 Paulson Notes were not outstanding and there was no interest expense during the three month period ended December 31, 2021. 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 December 31, 2020 was a benefit of $2,000. 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. There was no net valuation change of instruments measured at fair value during the three month period ended December 31, 2021 as the 2019 Paulson Notes were not outstanding. Other Income Other income during the three month period ended December 31, 2021 consisted of $2,000 related primarily to interest income attributed to our cash deposits. Other income during the three months ended December 31, 2020 consisted primarily of proceeds received in connection with the PMT Corporation litigation in the amount of $0.2 million. Liquidity and Capital Resources Overview As of December 31, 2021, our principal source of liquidity consisted of cash deposits of $16.2 million. While we began to generate revenue in fiscal year 2021 from commercial sales and through milestone payments under our collaboration with Zimmer, we expect to continue to incur significant expenses and increasing operating and net losses for the foreseeable future until and unless we generate an adequate level of revenue from commercial sales to cover expenses. Our most significant cash requirements relate to the funding of our ongoing product development and commercialization operations and our royalty obligations under our intellectual property licenses with the Wisconsin Alumni Research Foundation (“WARF”) and the Mayo Foundation for Medical Education and Research (“Mayo”). Our additional material cash needs include commitments under operating leases and other administrative services. See “—Funding Requirements” below for more information. 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, manufacture products, establish our own sales, marketing and distribution infrastructure to commercialize our ablation electrode technology, hire additional staff, add operational, financial and management systems and continue to operate as a public company. Capital Resources Our sources of cash to date have been limited collaboration and product revenues and proceeds from the issuances of notes with warrants, common stock with and without warrants and unsecured loans, with the terms of our most recent financings described below. October 2021 Underwritten Public Offering On October 13, 2021, we entered into Underwriting Agreement relating to the issuance and sale of 3,750,000 shares of our common stock at a price to the public of $3.20 per share. In addition, under the terms of the Underwriting Agreement, we granted the Underwriter an option, exercisable for 30 days, to purchase up to an additional 562,500 shares of common stock on the same terms. The base offering closed on October 15, 2021, and the sale of 422,057 shares of common stock subject to the Underwriter’s overallotment option closed on November 15, 2021. The gross proceeds from this offering were approximately $13.4 million prior to deducting underwriting discounts and other offering expenses payable by us. 2021 Private Placement On January 12, 2021, we entered into a 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 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. Funding Requirements As noted above, certain of our cash requirements relate to the funding of our ongoing product development and commercialization operations and our milestone and royalty obligations under our intellectual property licenses with the Wisconsin Alumni Research Foundation (“WARF”) and the Mayo Foundation for Medical Education and Research (“Mayo”). See “Item 1—Business—Clinical Development and Regulatory Pathway—Clinical Experience, Future Development and Clinical Trial Plans” in our Annual Report on Form 10-K for the year ended September 30, 2021 for a discussion of design, development, pre-clinical and clinical activities that we may conduct in the future, including expected cash expenditures required for some of those activities, to the extent we are able to estimate such costs. 23 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. 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. See “Note 4 – Commitments and Contingencies” included in our condensed financial statements included in “Part 1, Item 1 – Financial Statements” in this Report for more information about the WARF License and the Mayo Development Agreement. Our other cash requirements within the next twelve months include accounts payable, accrued expenses, purchase commitments and other current liabilities. Our other cash requirements greater than twelve months from various contractual obligations and commitments include operating leases and contracted services. Refer to “Note 4 – Commitments and Contingencies” included in our condensed financial statements included in “Part 1, Item 1 – Financial Statements” in this Report for further detail of our lease obligations and the timing of expected future payments. Contracted services include agreements with third-party service providers for clinical research, product development, manufacturing, supplies, payroll services, equipment maintenance services, and audits for periods up to fiscal 2023. We expect to satisfy our short-term and long-term obligations through cash on hand and, until we generate an adequate level of revenue from commercial sales to cover expenses, if ever, from future equity and debt financings. Liquidity Outlook For a discussion of potential fee payments under the Zimmer Development Agreement, see “Note 7 — Zimmer Development Agreement” included in our condensed financial statements included in “Part 1, Item 1 – Financial Statements” in this Report. The Company does not intend to deliver saleable product to Zimmer unless and until it receives regulatory clearance to expand the use of its Evo sEEG Electrode technology for up to 30 days, at which point the Company and Zimmer intend to commence negotiations regarding payments of applicable milestone payments described therein, notwithstanding the deadlines for the Product Availability Date and the Acceptance of all Deliverables for SEEG Products. Zimmer has exclusive global rights to distribute our strip and grid cortical electrodes, depth electrodes and electrode cable assembly products. Zimmer’s failure to timely develop or commercialize these products would have a material adverse effect on our business and operating results. Further, our inability to agree with Zimmer on dates of completion for product development, regulatory clearance and commercialization milestones on which various fee payments to the Company are based under the Zimmer Development Agreement could have a material adverse impact on our financial and operating results. At December 31, 2021, we had approximately $16.2 million in cash deposits. Management has noted the existence of substantial doubt about our ability to continue as a going concern. Additionally, our independent registered public accounting firm and our former independent registered public accounting firm included explanatory paragraphs in the reports on our financial statements as of and for the years ended September 30, 2021 and 2020, respectively, noting the existence of substantial doubt about our ability to continue as a going concern. Our existing cash may not be sufficient to fund our operating expenses through at least twelve months from the date of this filing. To continue to fund operations, we will need to secure additional funding through public or private equity or debt financings, through collaborations or partnerships with other companies or other sources. We may not be able to raise additional capital on terms acceptable to us, or at all. Any failure to raise capital when needed could compromise our ability to execute on our business plan. 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. The development and commercialization of our cortical strip, grid electrode and depth electrode technology is subject to numerous uncertainties, and we 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 further regulatory approvals and achieving 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 Three Months Ended December 31, 2021 2020 Net cash used in operating activities $ (2,679,136 ) $ (1,904,232 ) Net cash used by investing activities (61,491 ) — Net cash provided by financing activities 12,023,604 4,996,947 Net increase in cash $ 9,282,977 $ 3,092,715 24 Net cash used in operating activities Net cash used in operating activities was $2.7 million for the three months ended December 31, 2021, which consisted of a net loss of $2.8 million partially offset by non-cash stock-based compensation, depreciation, amortization related to intangible assets and operating lease expense, totaling approximately $0.3 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 $0.1 million. The net cash use stemming from the change in operating assets and liabilities was primarily attributable to an increase in inventory purchases, net decrease in account payable and accrued expenses attributed to the timing of payments, partially offset by a decrease in accounts receivable in connection with the Zimmer Development Agreement. Net cash used in operating activities was $1.9 million for the three months ended December 31, 2020, which consisted of a net loss of $2.0 million partially offset by non-cash stock-based compensation, depreciation, amortization related to intangible assets, revaluation of convertible notes and operating lease expense, totaling approximately $0.3 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 $0.2 million. The change in operating assets and liabilities was primarily attributable to a net increase in accounts receivable in connection with the Zimmer Development Agreement and a decrease in accounts payable attributed to the timing of payments. Net cash used by investing activities Net cash used by investing activities consisted of outlays for furniture and equipment during the three months ended December 31, 2021. There were no investing activities during the three months ended December 31, 2020. Net cash provided by financing activities Net cash provided by financing activities was $12.0 million for the three months ended December 31, 2021, which consisted of net proceeds from the October 2021 Underwritten Public Offering. Net cash provided by financing activities was $5.0 million for the three months ended December 31, 2020, which consisted primarily of proceeds received in advance of the 2021 Private Placement. Critical Accounting Estimates 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. Of these policies, the following are considered critical to an understanding of our condensed financial statements included in “Part 1, Item 1 – Financial Statements” in this Report as they require the application of the most subjective and the most complex judgments: Revenues: For discussion about the determination of collaborations revenue, product revenue and cost of product revenue, see “Note 7 — Zimmer Development Agreement” included in our condensed financial statements included in “Part 1, Item 1 – Financial Statements” in this Report. To date, we have not had, nor expect to have in the future, significant variable consideration adjustments related to product revenue, such as chargebacks, sales allowances and sales returns. Stock-based Compensation For discussions about the application of grant date fair value associated with our stock-based compensation, see “Note 9 — Stock-Based Compensation” included in our condensed financial statements included in “Part 1, Item 1 – Financial Statements” in this Report. Income Tax Assets and Liabilities Income tax assets and liabilities include income tax valuation allowances. For additional information, see “Note 11 — Income Taxes” included in our condensed financial statements included in “Part 1, Item 1 – Financial Statements” in this Report and “Note 11 – Income Taxes” in Part II, Item 8 “Financial Statements" of our Annual Report on Form 10-K for the year ended September 30, 2021. 25 Contingencies We are subject to numerous contingencies arising in the ordinary course of business, including legal contingencies. For additional information, see “Note 4 — Commitments and Contingencies” included in our condensed financial statements included in “Part 1, Item 1 – Financial Statements” in this Report. 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable for smaller reporting companies.