NEUROONE MEDICAL TECHNOLOGIES Corp 10-Q

Item 1. Financial Statements NeuroOne Medical Technologies Corporation Condensed Balance Sheets As of December 31, As of September 30, 2023 2023 (unaudited) Assets Current assets: Cash and cash equivalents $ 2,680,985 $ 5,322,493 Accounts receivable 543,399 — Inventory 1,608,657 1,726,686 Prepaid expenses and other assets 259,966 263,746 Total current assets 5,093,007 7,312,925 Intangible assets, net 83,998 89,577 Right-of-use assets 140,198 169,059 Property and equipment, net 505,175 525,753 Total assets $ 5,822,378 $ 8,097,314 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 760,000 $ 685,104 Accrued expenses and other liabilities 623,240 1,107,522 Total current liabilities 1,383,240 1,792,626 Operating lease liability, long term 20,982 55,284 Total liabilities 1,404,222 1,847,910 Commitments and contingencies (Note 4) Stockholders’ equity: Preferred stock, $ 0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding. — — Common stock, $ 0.001 par value; 100,000,000 shares authorized; 24,831,090 and 23,928,945 shares issued and outstanding as of December 31, 2023 and September 30, 2023, respectively. 24,831 23,929 Additional paid–in capital 70,424,528 68,911,778 Accumulated deficit ( 66,031,203 ) ( 62,686,303 ) Total stockholders’ equity 4,418,156 6,249,404 Total liabilities and stockholders’ equity $ 5,822,378 $ 8,097,314 See accompanying notes to condensed financial statements 1 NeuroOne Medical Technologies Corporation Condensed Statements of Operations (unaudited) For the three months ended December 31, 2023 2022 Product revenue $ 977,649 $ 114,579 Cost of product revenue 711,335 126,886 Product gross profit (loss) 266,314 ( 12,307 ) Collaborations revenue — 1,455,188 Operating expenses: Selling, general and administrative 2,173,472 1,663,737 Research and development 1,483,317 1,563,496 Total operating expenses 3,656,789 3,227,233 Loss from operations ( 3,390,475 ) ( 1,784,352 ) Other income 45,575 51,583 Loss before income taxes ( 3,344,900 ) ( 1,732,769 ) Provision for income taxes — — Net loss $ ( 3,344,900 ) $ ( 1,732,769 ) Net loss per share: Basic and diluted $ ( 0.14 ) $ ( 0.11 ) Number of shares used in per share calculations: Basic and diluted 23,995,610 16,230,997 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, 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 Balance at September 30, 2023 23,928,945 $ 23,929 $ 68,911,778 $ ( 62,686,303 ) $ 6,249,404 Issuance of common stock attributed to equity financings 868,243 868 1,255,403 — 1,256,271 Issuance costs related to equity financings — — ( 37,698 ) — ( 37,698 ) Stock-based compensation — — 308,638 — 308,638 Issuance of common stock upon vesting of restricted stock units 45,078 45 ( 45 ) — — Share repurchases for the payment of employee taxes ( 11,176 ) ( 11 ) ( 13,548 ) — ( 13,559 ) Net loss — — — ( 3,344,900 ) ( 3,344,900 ) Balance at December 31, 2023 24,831,090 $ 24,831 $ 70,424,528 $ ( 66,031,203 ) $ 4,418,156 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, 2023 2022 Operating activities Net loss $ ( 3,344,900 ) $ ( 1,732,769 ) Adjustments to reconcile net loss to net cash used in operating activities: Amortization and depreciation 58,657 35,889 Stock-based compensation 308,638 300,181 Amortization of discounts and premiums on short-term investments — ( 20,765 ) Non-cash lease expense 28,861 26,772 Change in assets and liabilities: Accounts receivable ( 543,399 ) ( 62,082 ) Inventory 118,029 ( 199,016 ) Prepaid and other assets 3,780 74,948 Accounts payable 79,527 ( 154,098 ) Deferred revenue — ( 1,455,188 ) Accrued expenses, operating leases and other liabilities ( 518,584 ) ( 306,125 ) Net cash used in operating activities ( 3,809,391 ) ( 3,492,253 ) Investing activities Purchases of short-term investments — ( 1,473,419 ) Maturities of short-term investments — 1,500,000 Purchase of property and equipment ( 37,131 ) ( 11,512 ) Net cash (used in) provided by investing activities ( 37,131 ) 15,069 Financing activities Proceeds from issuance of common stock attributed to equity financings 1,256,271 — Issuance costs related to equity financings ( 37,698 ) ( 15,713 ) Share repurchases for the payment of employee taxes ( 13,559 ) — Net cash provided by (used in) financing activities 1,205,014 ( 15,713 ) Net decrease in cash ( 2,641,508 ) ( 3,492,897 ) Cash at beginning of period 5,322,493 8,160,329 Cash at end of period $ 2,680,985 $ 4,667,432 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 Modification of right-of-use asset and associated lease liability $ — $ 97,536 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 a medical technology company focused on the development and commercialization of thin film electrode for continuous electroencephalogram (“cEEG”) and stereoelectrocencephalography (“sEEG”) recording, monitoring, ablation, drug delivery 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 United States (“U.S.”) Food and Drug Administration (“FDA”) for its Evo cortical electrode technology in November 2019 and 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. In December 2023, we received 510(k) clearance for our OneRF ablation system for creation of radiofrequency lesions in nervous tissue for functional neurosurgical procedures. The Company is based in Eden Prairie, Minnesota. Global Economic Conditions Generally, worldwide economic conditions remain uncertain, particularly due to the conflicts between Russia and Ukraine and in the Middle East, disruptions in the banking system and financial markets, 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 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 conflicts in Ukraine and the Middle East, disruptions in the banking system and financial markets, and steps taken by governments and central banks, 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 U.S. 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 (U.S. 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, 2023 included in the Company’s Annual Report on Form 10-K. The condensed balance sheet at September 30, 2023 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 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 $ 66.0 million as of December 31, 2023. To date, the Company’s revenues have not been sufficient to cover its full operating costs, and as such, it has been dependent on funding operations through the issuance of debt and sale of equity securities. The Company has adequate liquidity to fund its operations through mid-2024. The raising of additional funds is 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 and cash equivalents 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 U.S. GAAP 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. Segment Information Operating segments are components of an enterprise for which separate financial information is available and are evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s Chief Executive Officer views the Company’s operations and manages its business in one operating segment, which is the business of development and commercialization of products related to comprehensive neuromodulation cEEG and sEEG recording, monitoring, ablation, and brain stimulation solutions. Accordingly, the Company has a single reporting segment. 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 condensed 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 Investments The Company has periodically invested its excess cash in U.S. Treasury securities and highly rated corporate securities. The Company has held these investments to maturity. Securities with original maturity dates of more than three months were reported as held-to-maturity investments and were recorded at amortized cost, which approximated fair value due to the negligible risk of changes in value due to interest rates. There were no short-term investments outstanding as of December 31, 2023 and September 30, 2023. 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.” 6 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) 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. 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 Accounting 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. 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. 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”), depth electrodes (“sEEG 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 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. 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. 7 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) 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, 2023 and September 30, 2023, the fair values of cash, cash equivalents, accounts receivable, inventory, prepaids and other assets, accounts payable and accrued expenses and other liabilities 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, 2023 and 2022. 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 selling, general and administrative expense over the expected useful life of the acquired technology. 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. 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. 8 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) 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. Accounts Receivable and 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 economic conditions that could affect the collectability of the balances in the future. 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. The Company has not incurred any bad debt expense to date and no allowance for doubtful accounts has been recorded during the periods presented. Inventory Inventory is 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 Strip/Grid Products, sEEG and electrode cable assembly work-in-process and finished good product. The Strip/Grid Products and sEEG Products are produced by a third-party contract manufacturer and the Electrode Cable Assembly Products are obtained from outside suppliers. No inventory valuation allowance was required during the periods presented. Research and Development Costs Research and development costs are charged to expense as incurred. Research and development expenses comprise of costs incurred in performing research and development activities , including 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. 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. 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 over the requisite service period. 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. 9 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) Income Taxes 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 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 while outstanding are considered common stock equivalents for this purpose. Diluted earnings or loss per share of common stock 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 the three months ended December 31: 2023 2022 Warrants 5,143,293 7,103,344 Stock options 2,814,096 1,313,646 Restricted stock units 355,691 392,500 Unissued vested restricted stock units — 7,322 Recent Accounting Pronouncements In November 2023, the FASB issued Accounting Standards Update ("ASU") 2023-07 - Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , which enhances reportable segment disclosure requirements, primarily through disclosures of significant segment expenses. This ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The guidance must be applied retrospectively to all prior periods presented. The Company is currently evaluating the impact of adoption of this guidance on its financial statements. In December 2023, the FASB issued ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures , which enhances income tax disclosures primarily related to the rate reconciliation and income taxes paid information. This guidance also includes certain other amendments to improve the effectiveness of income tax disclosures. This ASU is effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years and should be applied on a prospective basis, with retrospective application permitted. The Company is currently evaluating the impact of adoption of this guidance on its financial statements. In June 2016, the FASB issued Accounting Standards Update 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. The FASB issued the final ASU to delay adoption for smaller reporting companies to fiscal years beginning after December 15, 2022. The Company adopted the guidance on October 1, 2023. The adoption of this ASU did not have a material impact on the Company’s 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 Company entered into an Amended and Restated Exclusive Start-up Company License Agreement (the “WARF License”) with WARF on January 21, 2020, which amended and restated in full the prior license agreement between WARF and NeuroOne, LLC, a predecessor of the Company, dated October 1, 2014, as amended on February 22, 2017, March 30, 2019 and September 18, 2019. 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. WARF may also terminate the WARF License (i) on 90 days’ notice if we had failed to have commercial sales of one or more FDA-approved products under the WARF License by June 30, 2021 or (ii) if, after royalties earned on sales begin to be paid, such earned royalties cease for more than four calendar quarters. The first commercial sale occurred on December 7, 2020, prior to the June 30, 2021 deadline. 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, 2023 and 2022, $ 37,500 in royalty fees were incurred related to the WARF License during each of these periods 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, 2023 and 2022, $ 269 and $ 690 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 “Lease 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 Lease 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. 11 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) 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, 2023 and 2022, rent expense associated with the facility leases amounted to $ 43,053 and $ 42,474 , respectively. Supplemental cash flow information related to the operating leases was as follows: For the three months ended December 31, 2023 2022 Cash paid for amounts included in the measurement of lease liability: Operating cash flows from operating leases $ 34,070 $ 32,928 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, 2023 As of September 30, 2023 Right-of-use assets $ 140,198 $ 169,059 Lease liabilities $ 153,721 $ 184,400 Weighted average remaining lease term (years) 1.2 1.4 Weighted average discount rate 7.8 % 7.8 % Maturity of the lease liabilities was as follows: Calendar Year As of December 31, 2023 2024 $ 139,969 2025 21,227 Total lease payments 161,196 Less imputed interest ( 7,475 ) Total 153,721 Short-term portion (included in other liabilities) ( 132,739 ) Long-term portion $ 20,982 12 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) 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. NOTE 5 – Supplemental Balance Sheet Information Prepaid and other assets Prepaid and other assets consisted of the following: As of December 31, 2023 As of September 30, 2023 Prepaids $ 238,645 $ 263,746 Other 21,321 — Total $ 259,966 $ 263,746 Inventory Inventory consisted of the following: As of December 31, 2023 As of September 30, 2023 Component inventory $ 1,043,906 $ 1,202,778 Work-in-process 384,659 343,597 Finished goods 180,092 180,311 Total $ 1,608,657 $ 1,726,686 Intangibles Intangible assets rollforward is as follows: Useful Life Net Intangibles, September 30, 2023 12 - 13 years $ 89,577 Less: amortization ( 5,579 ) Net Intangibles, December 31, 2023 $ 83,998 Amortization expense was $ 5,579 for each of the three months ended December 31, 2023 and 2022. 13 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) Property and Equipment Property and equipment held for use by category are presented in the following table: As of December 31, 2023 As of September 30, 2023 Equipment and furniture $ 893,237 $ 860,737 Total property and equipment 893,237 860,737 Less accumulated depreciation ( 388,062 ) ( 334,984 ) Property and equipment, net $ 505,175 $ 525,753 Depreciation expense was $ 53,078 and $ 30,310 for the three months ended December 31, 2023 and 2022, respectively. NOTE 6 - Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consisted of the following: As of December 31, 2023 As of September 30, 2023 Accrued payroll $ 340,490 $ 874,382 Operating lease liability, short term 132,739 129,116 Royalty payments 140,011 104,024 Other 10,000 — Total $ 623,240 $ 1,107,522 NOTE 7 – Zimmer Development Agreement On July 20, 2020, the Company entered into an exclusive development and distribution agreement (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 the Electrode Cable Assembly Products. Additionally, the Company granted Zimmer the exclusive right and license to distribute certain sEEG Products developed by the Company 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 and a Supplier 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. 14 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) On August 2, 2022, the Company entered into a Third Amendment to Exclusive Development and Distribution Agreement (the “Zimmer Amendment”) with Zimmer. Pursuant to the terms and conditions of the Zimmer 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 Zimmer Development Agreement even though the satisfaction was after the deadlines originally identified. In addition, in connection with the Zimmer 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, is 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. 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 (the “Term”), 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 as defined in the Zimmer Development Agreement shall be exclusive from the effective date of the Zimmer Amendment until the end of the term of the Zimmer Amendment. The Zimmer Development Agreement and Zimmer 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 Zimmer Amendment: (1) the Company’s obligation to grant Zimmer access to its intellectual property; (2) completion 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 Zimmer Amendment, outside of the sEEG exclusivity maintenance obligation, were met by September 30, 2022. The remaining performance obligation in deferred revenue as of September 30, 2022 attributed to sEEG exclusivity maintenance was completed in first quarter of fiscal year 2023. The aggregate transaction price associated with the Zimmer Development Agreement and Zimmer Amendment was $ 5.4 million comprising the Initial Exclusivity Fee of $ 2.0 million and the $ 3.5 million payment under the Zimmer Amendment, less the fair value 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. The Company recognized collaborations revenue in the amount of $ 1,455,188 during the three months ended December 31, 2022 in connection with the Zimmer Development Agreement and Zimmer Amendment. Given the achievement of the milestones under the Zimmer Development Agreement and Zimmer Amendment by December 31, 2022, no collaborations revenue was recognized during the three months ended December 31, 2023. A reconciliation of the closing balance of deferred revenue related to the Zimmer Development Agreement and Zimmer Amendment is as follows during the three months ended as of December 31, 2023 and 2022: 2023 2022 Deferred Revenue Balance as of beginning of period – September 30 $ — $ 1,455,188 Revenue recognized — ( 1,455,188 ) Balance as of end of period – December 31 $ — $ — 15 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) Product Revenue Product revenue recognized during the three months ended December 31, 2023 and 2022 was $ 977,649 and $ 114,579 , 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 $ 49,272 and $ 53,026 for the three months ended December 31, 2023 and 2022, respectively. NOTE 8 – Stock-Based Compensation During the three-month periods ended December 31, 2023 and 2022, stock-based compensation expense was included in selling, general and administrative and research and development costs as follows in the accompanying condensed statements of operations. 2023 2022 Selling, general and administrative $ 243,198 $ 255,465 Research and development 65,440 44,716 Total stock-based compensation expense $ 308,638 $ 300,181 The Company’s 2017 Equity Incentive Plan (“2017 Plan”) provides for the issuance of restricted shares and stock options to employees, directors, and consultants of the Company. Inducement Plan In addition to the Company’s 2017 Plan, the Company adopted the NeuroOne Medical Technologies Corporation 2021 Inducement Plan (the “Inducement Plan”) on October 4, 2021, pursuant to which the Company reserved 420,350 shares of its common stock to be used exclusively for grants of awards to individuals who were not previously employees or directors of the Company, as an inducement material to the individual’s entry into employment with the Company within the meaning of Rule 5635(c)(4) of the Nasdaq Listing Rules. The Inducement Plan was approved by the Company’s Board of Directors without stockholder approval in accordance with such rule. On November 9, 2023, the Company’s Board of Directors adopted the First Amendment to the Company’s Inducement Plan, increasing the aggregate number of shares of common stock that may be issued pursuant to equity incentive awards under the Inducement Plan by 150,000 shares for a total of 570,350 shares of common stock that may be issued pursuant to equity incentive awards under the Inducement 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 Company’s Board of Directors 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. On January 1, 2024, 1,051,556 shares were added to the 2017 Plan as a result of the evergreen provision. See Note 12 – Subsequent Events. 16 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) Stock Options During the three months ended December 31, 2023 and 2022, under the 2017 Plan and the Inducement Plan, the Company granted 1,160,669 and 73,731 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 months ended December 31, 2023 and 2022 was $ 1.08 and $ 0.66 per share, respectively. The total expense for the three months ended December 31, 2023 and 2022 related to stock options was $ 187,431 and $ 181,744 , respectively. The total number of stock options outstanding as of December 31, 2023 and September 30, 2023 was 2,814,096 and 1,708,427 , 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, 2023 and 2022: 2023 2022 Expected stock price volatility 112.0 % 53.5 % Expected life of options (years) 6.1 5.1 Expected dividend yield 0 % 0 % Risk free interest rate 4.7 % 4.0 % During the three months ended December 31, 2023 and 2022, 56,616 and 127,446 stock options vested, and 55,000 and zero 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, 2023 and 2022. 37,679 and 21,930 previously granted RSUs vested during these periods, respectively. The total expense for the three months ended December 31, 2023 and 2022 related to these RSUs was $ 121,207 and $ 118,437 , respectively. No RSUs were forfeited during the three months ended December 31, 2023 and 2022. General As of December 31, 2023, 182,314 shares were available in the aggregate for future issuance under the 2017 Equity Incentive Plan and Inducement Plan. Unrecognized stock-based compensation was $ 2,372,540 as of December 31, 2023. The unrecognized share-based expense is expected to be recognized over a weighted average period of 2.5 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 and another supplier was responsible for the development of the Company’s OneRF Ablation system. NOTE 10 – Income Taxes The effective tax rate for the three months ended December 31, 2023 and 2022 was zero percent. As a result of the analysis of all available evidence as of December 31, 2023 and September 30, 2023, 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, 2023 and 2022. 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. 17 NeuroOne Medical Technologies Corporation Notes to Condensed Financial Statements (unaudited) NOTE 11 – Stockholders’ Equity At-The-Market Offering On December 21, 2022, the Company entered into a Capital on Demand TM Sales Agreement (the “Sales Agreement”) with JonesTrading Institutional Services LLC (“JonesTrading”) that created an at-the-market offering program (“ATM”) under which the Company may offer and sell common stock having an aggregate offering price of up to $ 14.5 million. JonesTrading is entitled to a commission at a fixed commission rate of up to 3 % of the gross proceeds. On July 24, 2023, the Company decreased the amount of common stock that can be sold pursuant to the Sales Agreement, such that the Company was offering up to an aggregate of $ 2.6 million of its common stock for sale under the Sales Agreement, including the shares of common stock previously sold. Subsequently on December 1, 2023, however, the Company increased the amount of common stock that can be sold pursuant to the Sales Agreement, such that the Company was offering up to an aggregate of $ 4.8 million of its common stock for sale under the Sales Agreement, including the shares of common stock previously sold. On January 5, 2024, the Company further increased the amount of common stock that can be sold pursuant to the Sales Agreement, such that the Company is offering up to an aggregate of $ 9.3 million of its common stock for sale under the Sales Agreement, including the shares of common stock previously sold. See Note 12 – Subsequent Events. During the three months ended December 31, 2023, 868,243 shares of common stock were issued under the ATM for an aggregate offering price of $ 1,256,271 . The total aggregate offering price and common stock issued since inception of the ATM though December 31, 2023 was $ 3,808,927 and 2,307,920 shares, respectively. Issuance costs incurred under the ATM during the three months ended December 31, 2023 were $ 37,698 . During the three months ended December 31, 2022, deferred issuance costs in the amount of $ 103,787 were incurred in connection with the ATM, but no shares of common stock were issued under the ATM during that period. Warrant Activity and Summary Warrants Exercise Price Per Warrant Weighted Average Exercise Price Weighted Average Term (Years) Outstanding and exercisable at September 30, 2023 6,202,426 $ 3.00 - 900 $ 5.92 2.00 Issued — $ — $ — — Exercised — $ — $ — — Expired ( 1,059,133 ) $ 9.00 $ — — Outstanding and exercisable at December 31, 2023 5,143,293 $ 3.00 - 9.00 $ 5.29 2.11 The following table summarizes information about warrants outstanding at December 31, 2023: Exercise Price Number Outstanding Weighted Average Remaining Contractual life (Years) Number Exercisable $ 3.00 350,000 3.59 350,000 $ 5.25 4,166,682 2.04 4,166,682 $ 5.61 220,855 4.50 220,855 $ 6.00 45,171 0.50 45,171 $ 7.50 279,727 0.16 279,727 $ 8.25 62,906 0.50 62,906 $ 9.00 17,952 0.50 17,952 Total 5,143,293 5,143,293 NOTE 12 – Subsequent Events 2017 Plan Evergreen Provision Effective January 1, 2024, 1,051,556 shares were added to the 2017 Plan as a result of the evergreen provision. See Note 8 – Stock-Based Compensation. At-The-Market Offering On January 5, 2024, the Company increased the amount of common stock that can be sold pursuant to the Sales Agreement with JonesTrading, such that we are offering up to an aggregate of $ 9.3 million of common stock for sale under the Sales Agreement, including the shares of common stock previously sold. As a of result of the higher issuance threshold under the Sales Agreement, the Company sold an additional 1,080,314 shares of common stock for net proceeds in the amount of $ 1.5 million during January 2024. 18 NeuroOne Medical Technologies Corporation Form 10-Q