NEUROONE MEDICAL TECHNOLOGIES Corp 10-Q

Item 1. Financial Statements NeuroOne Medical Technologies Corporation Condensed Balance Sheets December 31, 2022 September 30, 2022 (unaudited) Assets Current assets: Cash and cash equivalents $ 4,667,432 $ 8,160,329 Short-term investments 2,975,194 2,981,010 Accounts receivable 95,319 33,237 Inventory 903,554 704,538 Prepaid and other assets 325,488 296,649 Total current assets 8,966,987 12,175,763 Intangible assets, net 106,313 111,892 Right-of-use asset 252,119 181,355 Property and equipment, net 334,801 353,599 Total assets $ 9,660,220 $ 12,822,609 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 861,638 $ 927,662 Accrued expenses 473,085 715,839 Deferred revenue — 1,455,188 Total current liabilities 1,334,723 3,098,689 Operating lease liability, long term 153,721 119,556 Total liabilities 1,488,444 3,218,245 Commitments and contingencies (Note 4) Stockholders’ equity: Preferred stock, $ 0.001 par value; 10,000,000 shares authorized as of December 31, 2022 and September 30, 2022; no shares issued or outstanding as of December 31, 2022 and September 30, 2022. — — Common stock, $ 0.001 par value; 100,000,000 shares authorized as of December 31, 2022 and September 30, 2022; 16,238,464 and 16,216,540 shares issued and outstanding as of December 31, 2022 and September 30, 2022, respectively. 16,239 16,217 Additional paid–in capital 60,715,118 60,414,959 Accumulated deficit ( 52,559,581 ) ( 50,826,812 ) Total stockholders’ equity 8,171,776 9,604,364 Total liabilities and stockholders’ equity $ 9,660,220 $ 12,822,609 See accompanying notes to condensed financial statements 1 NeuroOne Medical Technologies Corporation Condensed Statements of Operations (unaudited) For the three months ended December 31, 2022 2021 Product revenue $ 114,579 $ 33,748 Cost of product revenue 126,886 46,844 Product gross loss ( 12,307 ) ( 13,096 ) Collaborations revenue 1,455,188 6,374 Operating expenses: Selling, general and administrative 1,663,737 1,742,141 Research and development 1,563,496 1,060,462 Total operating expenses 3,227,233 2,802,603 Loss from operations ( 1,784,352 ) ( 2,809,325 ) Other income 51,583 1,850 Loss before income taxes ( 1,732,769 ) ( 2,807,475 ) Provision for income taxes — — Net loss $ ( 1,732,769 ) $ ( 2,807,475 ) Net loss per share: Basic and diluted $ ( 0.11 ) $ ( 0.18 ) Number of shares used in per share calculations: Basic and diluted 16,230,997 15,408,480 See accompanying notes to condensed financial statements 2 NeuroOne Medical Technologies Corporation Condensed Statements of Changes in Stockholders’ Equity (unaudited) Common Stock Additional Paid–In Accumulated Total Stockholders’ Shares Amount Capital Deficit Equity Balance at September 30, 2021 12,010,019 $ 12,010 $ 47,369,090 $ ( 40,827,199 ) $ 6,553,901 Issuance of common stock in connection with public offering 4,172,057 4,172 13,346,410 — 13,350,582 Issuance cost in connection with public offering — — ( 1,352,280 ) — ( 1,352,280 ) Stock-based compensation — — 203,072 — 203,072 Issuance of common stock upon vesting of restricted stock units 5,646 6 ( 6 ) — — Net loss — — ( 2,807,475 ) ( 2,807,475 ) Balance at December 31, 2021 16,187,722 $ 16,188 $ 59,566,286 $ ( 43,634,674 ) $ 15,947,800 Balance at September 30, 2022 16,216,540 $ 16,217 $ 60,414,959 $ ( 50,826,812 ) $ 9,604,364 Stock-based compensation — — 300,181 — 300,181 Issuance of common stock upon vesting of restricted stock units 21,924 22 ( 22 ) — — Net loss — — — ( 1,732,769 ) ( 1,732,769 ) Balance at December 31, 2022 16,238,464 $ 16,239 $ 60,715,118 $ ( 52,559,581 ) $ 8,171,776 See accompanying notes to condensed financial statements 3 NeuroOne Medical Technologies Corporation Condensed Statements of Cash Flows (unaudited) For the three months ended December 31, 2022 2021 Operating activities Net loss $ ( 1,732,769 ) $ ( 2,807,475 ) Adjustments to reconcile net loss to net cash used in operating activities: Amortization and depreciation 35,889 25,161 Stock-based compensation 300,181 203,072 Amortization of discounts and premiums on short-term investments ( 20,765 ) — Non-cash lease expense 26,772 26,235 Change in assets and liabilities: Accounts receivable ( 62,082 ) 23,708 Inventory ( 199,016 ) ( 130,828 ) Prepaid and other assets 74,948 13,649 Accounts payable ( 154,098 ) 291,172 Deferred revenue ( 1,455,188 ) ( 6,374 ) Accrued expenses, operating leases and other liabilities ( 306,125 ) ( 317,456 ) Net cash used in operating activities ( 3,492,253 ) ( 2,679,136 ) Investing activities Purchases of short-term investments ( 1,473,419 ) — Maturities of short-term investments 1,500,000 — Purchase of property and equipment ( 11,512 ) ( 61,491 ) Net cash provided by (used in) investing activities 15,069 ( 61,491 ) Financing activities Proceeds from issuance of common stock attributed to the public offering — 13,350,582 Deferred issuance costs related to the at-the-market offering program and issuance costs related to the public offering ( 15,713 ) ( 1,326,978 ) Net cash (used in) provided by financing activities ( 15,713 ) 12,023,604 Net (decrease) increase in cash ( 3,492,897 ) 9,282,977 Cash at beginning of period 8,160,329 6,901,346 Cash at end of period $ 4,667,432 $ 16,184,323 Supplemental non-cash financing and investing transactions: Unpaid deferred offering and issuance costs attributed to the at-the-market offering program and public offering $ 88,074 $ 322 Modification of right-of-use asset and associated lease liability $ 97,536 $ — Reclass of deferred offering costs to additional paid-in capital in connection with public offering $ — $ 24,980 See accompanying notes to condensed financial statements 4 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) NOTE 1 – Description of Business and Basis of Presentation NeuroOne Medical Technologies Corporation (the “Company” or “NeuroOne”), a Delaware corporation, is an early-stage medical technology company developing comprehensive neuromodulation electroencephalogram (cEEG) and stereoelectrocencephalography (sEEG) recording, monitoring, ablation, and brain stimulation solutions to diagnose and treat patients with epilepsy, Parkinson’s disease, dystonia, essential tremors, chronic pain due to failed back surgeries and other related neurological disorders. The Company received 510(k) clearance from the U.S. Food and Drug Administration (“FDA”) for its Evo cortical technology in November 2019 and in October 2022, the Company received 510(k) from the FDA clearance for its Evo sEEG electrode technology for temporary (less than 30 days) use with recording, monitoring, and stimulation equipment for the recording, monitoring, and stimulation of electrical signals at the subsurface level of the brain. To date, the Company has had limited commercial sales. The Company is based in Eden Prairie, Minnesota. Global Economic Conditions Generally, worldwide economic conditions remain uncertain, particularly due to the effects of the COVID-19 pandemic and increased inflation. The general economic and capital market conditions both in the U.S. and worldwide, have been volatile in the past and at times have adversely affected the Company’s access to capital and increased the cost of capital. The capital and credit markets may not be available to support future capital raising activity on favorable terms or at all. If economic conditions continue to decline, the Company’s future cost of equity or debt capital and access to the capital markets could be adversely affected. The COVID-19 pandemic that began in late 2019 introduced significant volatility to the global economy, disrupted supply chains and had a widespread adverse effect on the financial markets. Additionally, the Company’s operating results could be materially impacted by changes in the overall macroeconomic environment and other economic factors. Changes in economic conditions, supply chain constraints, logistics challenges, labor shortages, the conflict in Ukraine, and steps taken by governments and central banks, particularly in response to the COVID-19 pandemic as well as other stimulus and spending programs, have led to higher inflation, which has led to an increase in costs and has caused changes in fiscal and monetary policy, including increased interest rates. Basis of presentation The accompanying unaudited condensed financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. The condensed financial statements may not include all disclosures required by U.S. GAAP; however, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended September 30, 2022 included in the Annual Report on Form 10-K. The condensed balance sheet at September 30, 2022 was derived from the audited financial statements of the Company. In the opinion of management, all adjustments, consisting of only normal recurring adjustments that are necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods. 5 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) NOTE 2 – Going Concern The accompanying condensed financial statements have been prepared on the basis that the Company will continue as a going concern. The Company has incurred losses since inception, negative cash flows from operations, and an accumulated deficit of $ 52.6 million as of December 31, 2022. To date, the Company’s revenues have not been sufficient to cover its full operating costs, and as such, has been dependent on funding operations through the issuance of debt and sale of equity securities. The Company does not have adequate liquidity to fund its operations without raising additional funds and such actions are not solely within the control of the Company. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this condition. If the Company is unable to raise additional funds, or the Company’s anticipated operating results are not achieved, management believes planned expenditures may need to be reduced in order to extend the time period that existing resources can fund the Company’s operations. The Company intends to fund ongoing activities by utilizing its current cash, cash equivalents and short-term investments on hand, from product and collaborations revenue and by raising additional capital through equity or debt financings. If management is unable to obtain the necessary capital, it may have a material adverse effect on the operations of the Company and the development of its technology, or the Company may have to cease operations altogether. NOTE 3 – Summary of Significant Accounting Policies Management’s Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with an original contractual maturity on date of purchase of less than or equal to three months to be classified and presented as cash equivalents on the Balance Sheets. Cash equivalents are stated at cost, which approximates fair value. The Company’s cash and cash equivalents may include demand deposit accounts with large financial institutions, institutional money market funds, U.S. Treasury securities, and corporate notes and bonds. The Company monitors the creditworthiness of the financial institutions, institutional money market funds, and corporations in which the Company invests its surplus funds. The Company has experienced no credit losses from its cash and cash equivalent investments. Short Term Investment The Company invests its excess cash in United States (“U.S.”) Treasury securities and highly rated corporate securities. The Company intends and has the ability to hold these investments to maturity. Securities with original maturity dates of more than three months are reported as held-to-maturity investments and are recorded at amortized cost, which approximates fair value due to the negligible risk of changes in value due to interest rates. All investments held as of December 31, 2022 and September 30, 2022 had contractual maturities of less than one year. The amortized cost and estimated fair values of the Company’s investments as of December 31, 2022 and September 30, 2022 are as follows: December 31, 2022 Unrealized Unrealized Amortized Cost Holding Gains Holding Losses Fair Value Short-term: U.S. treasury and corporate notes $ 2,975,194 $ — $ 769 $ 2,974,425 Total $ 2,975,194 $ — $ 769 $ 2,974,425 6 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) September 30, 2022 Unrealized Unrealized Amortized Cost Holding Gains Holding Losses Fair Value Short-term: U.S. treasury and corporate notes $ 2,981,010 $ — $ 2,870 $ 2,978,140 Total $ 2,981,010 $ — $ 2,870 $ 2,978,140 Revenue Recognition The Company entered into a development and distribution agreement which has current and future revenue recognition implications. See “Note 7 – Zimmer Development Agreement.” In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. Product Revenue Revenues from product sales are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. At the inception of each customer contract, performance obligations are identified and the total transaction price is allocated to the performance obligations. The Company commenced commercial sales of cEEG strip/grid and electrode cable assembly products in the first quarter of fiscal year 2021. Cost of Product Revenue Cost of product revenue consists of the manufacturing and materials costs incurred by the Company’s third-party contract manufacturer in connection with the Company’s strip and grid cortical electrodes (the “Strip/Grid Products”) and outside supplier materials costs in connection with the electrode cable assembly products (“Electrode Cable Assembly Products”) . In addition, cost of product revenue includes royalty fees incurred in connection with the Company’s license agreements. Collaborations Revenue A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Account Standards Codification (“ASC”) Topic 606. (“ASC 606”). Performance obligations may include license rights, development services, and services associated with regulatory submission and approval processes. Significant management judgment is required to determine the level of effort required under an arrangement and the period over which the Company expects to complete its performance obligations under the arrangement. If the Company cannot reasonably estimate when its performance obligations are either completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method. As part of the accounting for collaboration arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. The Company uses key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. The Company allocates the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised goods or service underlying each performance obligation. 7 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) Licenses of intellectual property : If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer, and the customer can use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. Milestone payments : At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone (such as a regulatory submission) is included in the transaction price. Milestone payments that are not within the control of the Company, such as approvals from regulators, are not considered probable of being achieved until those approvals are received. When the Company’s assessment of probability of achievement changes and variable consideration becomes probable, any additional estimated consideration is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised goods or service underlying each performance obligation and recorded in collaborations revenues based upon when the customer obtains control of each element. Royalties : For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Fair Value of Financial Instruments The Company’s accounting for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring or nonrecurring basis adheres to the Financial Accounting Standards Board (“FASB”) fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: ● Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the Company at the measurement date. ● Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. ● Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. As of December 31, 2022 and September 30, 2022, the fair values of cash, cash equivalents, short-term investments, accounts receivable, inventory, prepaid and other assets, accounts payable and accrued expenses approximated their carrying values because of the short-term nature of these assets or liabilities. There were no transfers between fair value hierarchy levels during the three months ended December 31, 2022 and 2021. Intellectual Property The Company has entered into two licensing agreements with major research institutions, which allow for access to certain patented technology and know-how. Payments under those agreements are capitalized and amortized to general and administrative expense over the expected useful life of the acquired technology. 8 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) Property and Equipment Property and equipment is recorded at cost and reduced by accumulated depreciation. Depreciation expense is recognized over the estimated useful lives of the assets using the straight-line method. The estimated useful life for equipment and furniture ranges from three to seven years and three years for software. Tangible assets acquired for research and development activities and that have alternative use are capitalized over the useful life of the acquired asset. Estimated useful lives are periodically reviewed, and, when appropriate, changes are made prospectively. Software purchased for internal use consists primarily of amounts paid for perpetual licenses to third-party software providers and installation costs. When certain events or changes in operating conditions occur, asset lives may be adjusted and an impairment assessment may be performed on the recoverability of the carrying amounts. Maintenance and repairs are charged directly to expense as incurred. Impairment of Long-Lived Assets The Company evaluates its long-lived assets, which consist of licensed intellectual property, property and equipment and right of use assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. The Company assesses the recoverability of long-lived assets by determining whether or not the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Allowances for Doubtful Accounts The Company records a provision for doubtful accounts, when appropriate, based on historical experience and a detailed assessment of the collectability of its accounts receivable. In estimating the allowance for doubtful accounts, the Company considers, among other factors, the aging of the accounts receivable, its historical write-offs, the credit worthiness of each customer, and general economic conditions. Account balances are charged off against the allowance when the Company believes that it is probable that the receivable will not be recovered. Actual write-offs may be in excess of the Company’s estimated allowance. Inventories Inventories are stated at the lower of cost (using the first-in, first-out “FIFO” method) or net realizable value. The Company calculates 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. The Company’s inventory is currently comprised of cEEG strip/grid and electrode cable assembly work-in-process and finished good product. The Strip/Grid Products are produced by a third-party contract manufacturer and the Electrode Cable Assembly Products are obtained from outside suppliers. Research and Development Costs Research and development costs are charged to expense as incurred. Research and development expenses may include costs incurred in performing research and development activities, including clinical trial costs, manufacturing costs for both clinical and pre-clinical materials as well as other contracted services, license fees, and other external costs. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity is performed or when the goods have been received, rather than when payment is made, in accordance with ASC 730, Research and Development . 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 and litigation costs relating to corporate matters, intellectual property costs, professional fees for consultants assisting with regulatory, clinical, product development, financial matters, and sales and marketing in connection with the commercial sales of the Company’s products. 9 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) Stock-Based Compensation The Company accounts for stock-based compensation in accordance with the provisions of ASC 718, Compensation — Stock Compensation (“ASC 718”). Accordingly, compensation costs related to equity instruments granted are recognized at the grant-date fair value. The Company records forfeitures when they occur. Stock-based compensation arrangements to non-employees are accounted for in accordance with the applicable provisions of ASC 718. Income Taxes For the Company, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Net Loss Per Share For the Company, basic loss per share of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings or loss per share of common stock is computed similarly to basic earnings or loss per share except the weighted average shares outstanding are increased to include additional shares from the assumed exercise of any common stock equivalents, if dilutive. The Company’s warrants, stock options and restricted stock units are considered common stock equivalents for this purpose. Diluted earnings is computed utilizing the treasury method for the warrants, stock options and restricted stock units. No incremental common stock equivalents were included in calculating diluted loss per share because such inclusion would be anti-dilutive given the net loss reported for both the three months ended December 31, 2022 and 2021. The following potential common shares were not considered in the computation of diluted net loss per share as their effect would have been anti-dilutive for the three months ended December 31: 2022 2021 Warrants 7,103,344 6,753,444 Stock options 1,313,646 1,111,226 Restricted stock units 392,500 6,888 Unissued vested restricted stock units 7,322 — Recent Accounting Pronouncements In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “ Financial Instruments – Credit Losses” . The ASU sets forth a “current expected credit loss” (“CECL”) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. Recently, the FASB issued the final ASU to delay adoption for smaller reporting companies to fiscal years beginning after December 15, 2022. The Company does not expect that the adoption of this ASU will have a material impact on its financial statements. In August 2020, FASB issued ASU 2020-06 , Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which, among other things, provides guidance on how to account for contracts on an entity’s own equity. This ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, this ASU modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in this ASU are effective for smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company adopted ASU 2020-06 effective October 1, 2022 and the ASU did not have a material impact to our financial statements. 10 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) NOTE 4 – Commitments and Contingencies WARF License Agreement The Company has entered into an exclusive start-up company license agreement with the Wisconsin Alumni Research Foundation (“WARF”) for WARF’s neural probe array and thin film micro electrode technology (the “WARF License”). The WARF License grants to the Company an exclusive license to make, use and sell, in the United States only, products that employ certain licensed patents for a neural probe array or thin-film micro electrode array and method. The Company 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 the Company or any of its 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 the Company if not for the WARF License, the royalty rate will be tripled for the remaining term of the WARF License. WARF may terminate the WARF License on 30 days’ written notice if we default on the payments of amounts due to WARF or fail to timely submit development reports, actively pursue our development plan or breach any other covenant in the WARF License and fail to remedy such default in 90 days or in the event of certain bankruptcy events involving us. The WARF License otherwise expires by its terms on the date that no valid claims on the patents licensed thereunder remain. The Company expects the latest expiration of a licensed patent to occur in 2030. During the three months ended December 31, 2022 and 2021, $ 37,500 and $ 25,000 in royalty fees were incurred related to the WARF License, respectively and were reflected as a component of cost of product revenue. Mayo Agreement The Company has an exclusive license and development agreement with the Mayo Foundation for Medical Education and Research (“Mayo”) related to certain intellectual property and development services for thin film micro electrode technology (“Mayo Agreement”). If the Company is successful in obtaining regulatory approval, the Company is to pay royalties to Mayo based on a percentage of net sales of products of the licensed technology through the term of the Mayo Agreement, set to expire May 25, 2037. During the three months ended December 31, 2022 and 2021, $ 690 and $ 739 in royalty fees were incurred related to the Mayo Agreement, respectively, and were reflected as a component of cost of product revenue. Facility Leases Headquarters Lease On October 7, 2019, the Company entered into a non-cancellable lease agreement (the “Lease”) with certain landlords (together, the “Landlord”) pursuant to which the Company has agreed to lease office space located at 7599 Anagram Drive, Eden Prairie, Minnesota (the “Premises”). The Company took possession of the Premises on November 1, 2019, with the term of the Lease ending 65 months after such date, unless terminated earlier (the “Term”). The initial base rent for the Premises is $6,410 per month for the first 17 months, increasing to $7,076 per month by the end of the Term. In addition, as long as the Company is not in default under the Lease, the Company shall be entitled to an abatement of its base rent for the first 5 months. In addition, the Company will pay its pro rata share of the Landlord’s annual operating expenses associated with the premises, calculated as set forth in the Lease of which the Company is entitled to an abatement of these operating expense for the first 3 months. Los Gatos Lease On July 1, 2021, the Company entered into a non-cancellable facility lease (the “Los Gatos Lease”), pursuant to which the Company agreed to rent office space for its research and development operations located at 718 University Avenue, Suite #111, Los Gatos, California. The facility space under the Los Gatos Lease is approximately 1,162 square feet. The Company took possession of the office space on July 2, 2021. The initial monthly rent under the Los Gatos Lease was approximately $ 4,241 . On November 4, 2022, the Los Gatos Lease was extended for an additional two years to December 31, 2024. The rent under the extended Los Gatos Lease ranges from $ 4,453 to $ 4,632 per month beginning on January 1, 2023. During the three months ended December 31, 2022 and 2021, rent expense associated with the facility leases amounted to $ 42,474 and $ 43,045 , respectively. 11 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) Supplemental cash flow information related to the operating leases was as follows: For the three months ended December 31, 2022 2021 Cash paid for amounts included in the measurement of lease liability: Operating cash flows from operating leases $ 32,928 $ 32,435 Right-of -use assets obtained in exchange for lease obligations: Modification of right-of-use asset and associated lease liability $ 97,536 $ — Supplemental balance sheet information related to the operating leases was as follows: As of December 31, 2022 As of September 30, 2022 Right-of-use assets $ 252,119 $ 181,355 Lease liabilities $ 272,405 $ 202,895 Weighted average remaining lease term (years) 2.2 2.4 Weighted average discount rate 7.8 % 6.9 % Maturity of the lease liabilities was as follows: Calendar Year As of December 31, 2022 2023 $ 135,773 2024 139,969 2025 21,227 Total lease payments 296,969 Less imputed interest ( 24,564 ) Total 272,405 Short-term portion ( 118,684 ) Long-term portion $ 153,721 Other In the ordinary course of business, from time to time, the Company may be subject to a broad range of claims and legal proceedings that relate to contractual allegations, patent infringement and other claims. The Company establishes accruals when applicable for matters and commitments which it believes losses are probable and can be reasonably estimated. To date, no loss contingency for such matters and potential commitments have been recorded. Although it is not possible to predict with certainty the outcome of these matters or potential commitments, the Company is of the opinion that the ultimate resolution of these matters and potential commitments will not have a material adverse effect on its results of operations or financial position. 12 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) NOTE 5 – Supplemental Balance Sheet Information Prepaid and other assets Prepaid and other assets consisted of the following: As of December 31, 2022 As of September 30, 2022 Prepaids $ 221,701 $ 296,649 Deferred offering costs 103,787 — Total $ 325,488 $ 296,649 Inventory Inventory consisted of the following: As of December 31, 2022 As of September 30, 2022 Work-in-process $ 903,554 $ 630,570 Finished goods — 73,968 Total $ 903,554 $ 704,538 Intangibles Intangible assets rollforward is as follows: Useful Life Net Intangibles, September 30, 2022 12 - 13 years $ 111,892 Less: amortization ( 5,579 ) Net Intangibles, December 31, 2022 $ 106,313 Amortization expense was $ 5,579 for each of the three month periods ended December 31, 2022 and 2021. Property and Equipment Property and equipment held for use by category are presented in the following table: As of December 31, 2022 As of September 30, 2022 Equipment and furniture $ 549,573 $ 538,061 Software 1,895 1,895 Total property and equipment 551,468 539,956 Less accumulated depreciation ( 216,667 ) ( 186,357 ) Property and equipment, net $ 334,801 $ 353,599 Depreciation expense was $ 30,310 and $ 19,582 for the three month periods ended December 31, 2022 and 2021, respectively. 13 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) NOTE 6 – Accrued Expenses Accrued expenses consisted of the following: As of December 31, 2022 As of September 30, 2022 Accrued payroll $ 186,517 $ 521,368 Operating lease liability, short term 118,684 83,339 Royalty Payments 145,883 111,132 Other 22,001 — Total $ 473,085 $ 715,839 NOTE 7 – Zimmer Development Agreement On July 20, 2020, the Company entered into an exclusive development and distribution agreement (as amended from time to time, the “Zimmer Development Agreement”) with Zimmer, Inc. (“Zimmer”), pursuant to which the Company granted Zimmer exclusive global rights to distribute the Strip/Grid Products and electrode cable assembly products (the “Electrode Cable Assembly Products”). Additionally, the Company granted Zimmer the exclusive right and license to distribute certain depth electrodes developed by the Company (“sEEG Products”, and together with the Strip/Grid Products and Electrode Cable Assembly Products, the “Products”). The parties have agreed to collaborate with respect to development activities under the Zimmer Development Agreement through a joint development committee composed of an equal number of representatives of Zimmer and the Company. Under the terms of the Zimmer Development Agreement, the Company is responsible for all costs and expenses related to developing the Products, and Zimmer is responsible for all costs and expenses related to the commercialization of the Products. In addition to the Zimmer Development Agreement, Zimmer and the Company have entered into a Manufacturing and Supply Agreement (the “MS Agreement”) and a supplier quality agreement (the “Quality Agreement”) with respect to the manufacturing and supply of the Products. Except as otherwise provided in the Zimmer Development Agreement, the Company is responsible for performing all development activities, including non-clinical and clinical studies directed at obtaining regulatory approval of each Product. Zimmer has agreed to use commercially reasonable efforts to promote, market and sell each Product following the “Product Availability Date” (as defined in the Zimmer Development Agreement) for such Product. Pursuant to the Zimmer Development Agreement, Zimmer made an upfront initial exclusivity fee payment of $ 2.0 million (the “Initial Exclusivity Fee”) to the Company in fiscal year 2020. On August 2, 2022, the Company entered into a Third Amendment to the Zimmer Development Agreement with Zimmer. Pursuant to the terms and conditions of the Third Amendment, Zimmer made a $ 3.5 million payment to the Company. In consideration of the mutual covenants and agreements contained in the Zimmer Development Agreement, the fee and milestone payment provisions in the Zimmer Development Agreement were replaced with the following below: ● $ 1.5 million for the sEEG Exclusivity Maintenance Fee; and ● $ 2.0 million for satisfaction of each of the milestone events related to the design of sEEG products set forth in the Development Agreement even though the satisfaction was after the deadlines originally identified. In addition, in connection with the Third Amendment, the Company issued Zimmer a warrant to purchase common stock (the “2022 Zimmer Warrant”). The 2022 Zimmer Warrant is exercisable for up to an aggregate of 350,000 shares of the Company’s common stock. The 2022 Zimmer Warrant has an exercise price of $ 3.00 per share, will be exercisable commencing six months from the issuance date, and will expire on August 2, 2027. The fair value of the 2022 Zimmer Warrant of $ 0.1 million was based on the Black-Scholes pricing model. Input assumptions used were as follows: a risk-free interest rate of 2.9 %; expected volatility of 53.5 %; expected life of 5 years; expected dividend yield of 0 %; and the underlying fair market of the common stock. The 2022 Zimmer Warrant was classified in stockholders’ equity as the number of shares were fixed and determinable, no cash settlement was required and no other provisions precluded equity treatment. 14 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) The Zimmer Development Agreement will expire on the tenth anniversary of the date of the first commercial sale of the last Products to achieve a first commercial sale, unless terminated earlier pursuant to its terms. Either party may terminate the Zimmer Development Agreement (x) with written notice for the other party’s material breach following a cure period or (y) if the other party becomes subject to certain insolvency proceedings. In addition, Zimmer may terminate the Zimmer Development Agreement for any reason with 90 days’ written notice, and the Company may terminate the Zimmer Development Agreement if Zimmer acquires or directly or indirectly owns a controlling interest in certain competitors of the Company. The license rights granted to Zimmer under the Strip/Grid Distribution License and sEEG Distribution License shall be exclusive from the effective date of the Third Amendment until the end of the term. The Zimmer Development Agreement and Third Amendment were accounted for under the provisions of ASC 606. In accordance with the provisions under ASC 606, the Company identified five performance obligations under the Zimmer Development Agreement and Third Amendment: (1) the Company’s obligation to grant Zimmer access to its intellectual property; (2) completion of sEEG Product development; (3) completion of Strip/Grid Product development; (4) the provision of sEEG exclusivity maintenance; and (5) completion of sEEG design modifications as requested by Zimmer. All performance obligations under the Zimmer Development Agreement and Third Amendment were met as of December 31, 2022. The aggregate transaction price associated with the Zimmer Development Agreement and Third Amendment was $ 5.4 million comprising the Initial Exclusivity Fee of $ 2.0 million and the $ 3.5 million payment under the Third Amendment, less the fair value of the 2022 Zimmer Warrant of $ 0.1 million. The transaction price was allocated between performance obligations based on their relative standalone selling prices. The Company used a market based valuation approach and an expected cost plus margin approach with regard to estimating the standalone selling price for the performance obligations. In October 2022, the Company received 510(k) clearance from the FDA for its Evo sEEG electrode technology for temporary (less than 30 days) use with recording, monitoring, and stimulation equipment for the recording, monitoring, and stimulation of electrical signals at the subsurface level of the brain. Accordingly, the Company recognized revenue in the amount of $ 1,455,188 during the three months ended December 31, 2022 related to the completion of the sEEG exclusivity maintenance milestone. During the three months ended December 31, 2021, the Company recognized revenue in the amount of $ 6,374 related to sEEG Product development. A reconciliation of the closing balance of deferred revenue related to the Zimmer Development Agreement and Third Amendment is as follows during the three months ended as of December 31, 2022 and 2021: 2022 2021 Deferred Revenue Balance as of beginning of period – September 30 $ 1,455,188 $ 8,622 Revenue recognized ( 1,455,188 ) ( 6,374 ) Balance as of end of period – December 31 $ — $ 2,248 Product Revenue Product revenue recognized during the three month periods ended December 31, 2022 and 2021 was $ 114,579 and $ 33,748 , respectively, related to the Company’s Strip/Grid Products, sEEG Products and Electrode Cable Assembly Products. Advertising Expense Advertising expense is charged to selling, general and administrative expenses during the period that it is incurred. Total advertising expense amounted to $ 53,026 and $ 61,335 for the three month periods ended December 31, 2022 and 2021, respectively. 15 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) NOTE 8 – Stock-Based Compensation During the three month periods ended December 31, 2022 and 2021, stock-based compensation expense was included in general and administrative and research and development costs as follows in the accompanying condensed statements of operations. 2022 2021 General and administrative $ 255,465 $ 163,001 Research and development 44,716 40,071 Total stock-based compensation expense $ 300,181 $ 203,072 Stock Options During the three month periods ended December 31, 2022 and 2021, under the 2017 Equity Incentive Plan (the “2017 Plan”) and the 2021 Inducement Plan (the “Inducement Plan”), the Company granted 73,731 and 2,000 stock options, respectively, to its employees and consultants. Vesting generally occurs over an immediate to 48 month period based on a time of service condition. The weighted-average grant date fair value of the grants issued during the three month periods ended December 31, 2022 and 2021 was $ 0.66 and $ 1.72 per share, respectively. The total expense for the three months ended December 31, 2022 and 2021 related to stock options was $ 181,744 and $ 162,361 , respectively. The total number of stock options outstanding as of December 31, 2022 and September 30, 2022 was 1,313,646 and 1,239,915 , respectively. The weighted-average assumptions used in the Black-Scholes option-pricing model are as follows for the stock options granted during the three month periods ended December 31, 2022 and 2021: 2022 2021 Expected stock price volatility 53.5 % 56.0 % Expected life of options (years) 5.1 6.0 Expected dividend yield 0 % 0 % Risk free interest rate 4.0 % 1.1 % During the three month periods ended December 31, 2022 and 2021, 127,446 and 18,843 stock options vested, and zero and 13,334 stock options were forfeited during these periods, respectively. Restricted Stock Units There were no restricted stock units (“RSUs”) granted during the three months ended December 31, 2022 and 2021. Additionally, 21,930 and 5,644 RSUs vested during these periods, respectively. The total expense for the three months ended December 31, 2022 and 2021 related to these RSUs was $ 118,437 and $ 40,711 , respectively. No RSUs were forfeited during the three month periods ended December 31, 2022 and 2021. General As of December 31, 2022, 1,630,141 shares were available in the aggregate for future issuance under the 2017 Equity Incentive Plan and Inducement Plan. Unrecognized stock-based compensation was $ 1,422,392 as of December 31, 2022. The unrecognized share-based expense is expected to be recognized over a weighted average period of 1.8 years. NOTE 9 – Concentrations Revenue One customer accounts for all of the Company’s product and collaborations revenue. Supplier concentration One contract manufacturer produces all of the Company’s Strip/Grid Products and sEEG Products. 16 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) NOTE 10 – Income Taxes The effective tax rate for the three months ended December 31, 2022 and 2021 was zero percent. As a result of the analysis of all available evidence as of December 31, 2022 and September 30, 2022, the Company recorded a full valuation allowance on its net deferred tax assets. Consequently, the Company reported no income tax benefit during the three months ended December 31, 2022 and 2021. If the Company’s assumptions change and the Company believes that it will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be recognized as a reduction of future income tax expense. If the assumptions do not change, each period the Company could record an additional valuation allowance on any increases in the deferred tax assets. NOTE 11 – Stockholders’ Equity At-The-Market Offering On December 21, 2022, the Company entered into a Capital on Demand TM Sales Agreement with JonesTrading Institutional Services LLC (“JonesTrading”) to create an at-the-market offering program (“ATM”) under which the Company may offer and sell shares having an aggregate offering price of up to $ 14.5 million. JonesTrading is entitled to a commission at a fixed commission rate equal to up to 3 % of the gross proceeds. As of December 31, 2022, no issuances of securities have occurred in connection with the ATM, and deferred issuance costs in the amount of $ 103,787 have been incurred in connection with the ATM. Public Offering On October 13, 2021, the Company, entered into an Underwriting Agreement (the “Underwriting Agreement”) with Craig-Hallum Capital Group LLC, as underwriter (the “Underwriter”), relating to the issuance and sale of 3,750,000 shares of the Company’s common stock at a price to the public of $ 3.20 per share. In addition, under the terms of the Underwriting Agreement, the Company 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 to the Company from this offering were approximately $ 13.4 million prior to deducting underwriting discounts and other offering expenses payable by the Company in the amount of approximately $ 1.4 million in the aggregate. Warrant Activity and Summary There was no warrant activity during the three months ended December 31, 2022. The following table summarizes information about warrants outstanding at December 31, 2022: Exercise Price Number Outstanding Weighted Average Remaining Contractual life (Years) Number Exercisable at December 31, 2022 $ 3.00 350,000 4.59 — $ 5.25 4,166,682 3.04 4,166,682 $ 5.61 916,704 1.48 916,704 $ 6.00 45,171 1.50 45,171 $ 7.50 279,727 1.16 279,727 $ 8.25 62,906 1.50 62,906 $ 9.00 1,282,154 0.92 1,282,154 Total 7,103,344 6,753,344 17 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) NOTE 12 – Subsequent Events 2017 Plan Evergreen Provision Under the 2017 Plan, the shares reserved automatically increase on January 1st of each year, for a period of not more than ten years from the date the 2017 Plan is approved by the stockholders of the Company, commencing on January 1, 2019 and ending on (and including) January 1, 2027, to an amount equal to 13 % of the fully-diluted shares outstanding as of December 31st of the preceding calendar year. Notwithstanding the foregoing, the Board may act prior to January 1st of a given year to provide that there will be no January 1st increase in the share reserve for such year or that the increase in the share reserve for such year will be a lesser number of shares of common stock than would otherwise occur pursuant to the preceding sentence. “Fully Diluted Shares” as of a date means an amount equal to the number of shares of common stock (i) outstanding and (ii) issuable upon exercise, conversion or settlement of outstanding awards under the 2017 Plan and any other outstanding options, warrants or other securities of the Company that are (directly or indirectly) convertible or exchangeable into or exercisable for shares of common stock, in each case as of the close of business of the Company on December 31 of the preceding calendar year. Effective January 1, 2023, 129,479 shares were added to the 2017 Plan as a result of the evergreen provision. 18 NeuroOne Medical Technologies Corporation Form 10-Q