NEUROONE MEDICAL TECHNOLOGIES Corp

NOTE 1 - Organization and Nature of Operations

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.

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 $75.0 million as of September 30, 2024. 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, including the net proceeds from the 2024 Private Placement (See Note 9 – Stockholders’ Equity) and the 2024 Debt Facility (See Note 10 - Debt Financing), to fund its operations through April 2025. 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

Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting standards generally accepted in the United States of America (“U.S. GAAP”).

Reclassifications

Certain amounts presented in the prior year period have been reclassified to conform to current period financial statement presentation. The financing proceeds and issuance costs attributed to the at-the-market offering program and private placement reflected in the statements of cash flows during the comparable prior year period were reclassified into two separate line item categories.

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 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 September 30, 2024 and 2023.

Revenue Recognition

The Company entered into a development and distribution agreement which has current and future revenue recognition implications. In addition, the Company has product revenue in connection with its OneRF product offerings (“OneRF Products”) which is not covered by a distribution agreement. See “Note 7*–*Zimmer Amended and Restated Distribution Agreement and Other Product Revenue.

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. When the Company has consigned inventory at a customer, revenue is recognized at the point in time when the customer issues a purchase order to the Company and when control of the promised goods or services is transferred to the Company’s customers. 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), OneRF 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.

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).

Warrant Liability

The Company issued warrants in connection with its 2024 Private Placement (See Note 9– Stockholders’ Equity). The Company accounts for these warrants as a liability at fair value when warrant pricing protection provisions are not available to other common stockholders. Additionally, issuance costs associated with the warrant liability are expensed as incurred and reflected as a financing cost in the accompanying statements of operations. The Company adjusts the liability for changes in fair value until the earlier of the exercise or expiration of the warrants for any period when pricing protections remain in place. Any future change in fair value of the warrant liability, when outstanding, is recognized in the statements of operations under the fair value change in warrant liability line item.

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:

As of September 30, 2024 and 2023, the fair values of cash, cash equivalents, accounts receivable, inventory, prepaids and deferred offering costs, accounts payable and accrued expenses and other liabilities approximated their carrying values because of the short-term nature of these assets or liabilities. The fair value of the warrant liability was based on Level 3 inputs as well the Company’s underlying stock price and associated volatility, expected term of the warrants and market interest rates. There were no transfers between fair value hierarchy levels during the years ended September 30, 2024 and 2023.

The fair value of financial instruments measured on a recurring basis is as follows:

There was not a warrant liability as of September 30, 2023.

The following table provides a roll-forward of the warrant liability measured at fair value on a recurring basis using unobservable level 3 inputs for the year ended September 30, 2024.

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. 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.

Accounts Receivable and Allowances for Credit Losses

The Company records a provision for credit losses, when appropriate, based on historical experience, current conditions and reasonable supportable forecasts. In estimating the allowance for credit losses, the Company considers, among other factors, the estimate of credit losses over the remaining expected life of the asset, primarily using historical experience and current 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 credit losses 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 Products, OneRF Products and Electrode Cable Assembly Products component, work-in-process and finished good product. The Strip/Grid Products, sEEG Products and OneRF 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.

Advertising Expense

Advertising expense is charged to selling, general and administrative expenses during the period that it is incurred. Total advertising expense amounted to $108,993 and $173,430 for the years ended September 30, 2024 and 2023, respectively.

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 financial and administrative 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.

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 years ended September 30, 2024 and 2023.

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 years ended September 30:

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 fiscal years beginning after December 15, 2024, 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 2023-09Income 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. 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.

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 Agreement”). 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 each of the years ended September 30, 2024 and 2023, $150,000 in royalty fees were incurred related to the WARF License 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 years ended September 30, 2024 and 2023, $6,861 and $7,486 in royalty fees were incurred, respectively, and were reflected as a component of cost of product revenue.

Facility Leases

Headquarters Lease

On May 20, 2024, the Company amended its non-cancellable headquarters lease (the “Lease”) with certain landlords (together, the “Landlord”) pursuant to which the Company leases 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 June 30, 2028, as amended, unless terminated earlier (the “Lease Term”). The base rent for the Premises ranges from $6,410 per month to $7,107 per month by the end of the Lease Term as amended. In addition, as long as the Company is not in default under the Lease, the Company will be entitled to an abatement of its base rent for the first two months of the amended Lease Term beginning in April 2025 and for the last month of the amended Lease Term (June 2028). In addition, the Company pays its pro rata share of the Landlord’s annual operating expenses associated with the Premises.

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 $4,241. On November 4, 2022, the Los Gatos Lease was extended for an additionaltwo 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 years ended September 30, 2024 and 2023, rent expense associated with the facility leases amounted to $173,090 and $171,633, respectively.

Supplemental cash flow information related to theoperating lease was as follows:

Supplemental balance sheet information related to the operating lease was as follows:

Maturity of the lease liability was as follows:

NOTE 5 - Supplemental Balance Sheet Information

Inventory

Inventory consisted of the following:

The Company had finished goods on consignment in the amount of $102,318 as of September 30, 2024. There wasno consigned inventory as of September 30, 2023.

Intangibles

Intangible assets roll forward is as follows:

The Company anticipates amortization expense of approximately $22,000 per year for fiscal year 2025 through 2027 based upon the two current license agreements.

Property and Equipment

Property and equipment, net held for use by category are presented in the following table:

Depreciation expense was $224,476 and $176,951 for the years ended September 30, 2024 and 2023, respectively. Equipment with a net book value of $39,643 was disposed by the Company resulting in net proceeds of $7,500 during the year ended September 30, 2023.

NOTE 6 - Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following

NOTE 7 - Zimmer Distribution Agreement and Other Product Revenue

On July 20, 2020, the Company entered into an exclusive development and distribution agreement (the “Zimmer Distribution 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 Distribution Agreement through a joint development committee composed of an equal number of representatives of Zimmer and the Company.

Under the terms of the Zimmer Distribution 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 Distribution 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 Distribution 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 Distribution Agreement) for such Product.

Pursuant to the Zimmer Distribution 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 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 Distribution Agreement, the fee and milestone payment provisions in the Zimmer Distribution Agreement were replaced with the following below:

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 Distribution 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 Distribution 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 Distribution Agreement for any reason with 90 days’ written notice, and the Company may terminate the Zimmer Distribution 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 Distribution Agreement shall be exclusive from the effective date of the Zimmer Amendment until the end of the term of the Zimmer Amendment.

The Zimmer Distribution 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 Distribution Agreement and Zimmer 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 Distribution 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 Distribution 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 year ended September 30, 2023 in connection with the Zimmer Distribution Agreement and Zimmer Amendment. Given the achievement of the milestones under the Zimmer Distribution Agreement and Zimmer Amendment by December 31, 2022, no collaborations revenue was recognized during the year ended September 30, 2024.

A reconciliation of the closing balance of deferred revenue related to the Zimmer Distribution Agreement and the Zimmer Amendment is as follows as of September 30, 2024 and 2023:

Product Revenue

Product revenue related to the Company’s Strip/Grid Products, sEEG Products, OneRF Products and Electrode Cable Assembly Products. Product revenue recognized during the years ended September 30, 2024 and 2023 was $3,453,003 and $1,952,441, respectively, inclusive of OneRF Product revenue that amounted to $340,185 during the year ended September 30, 2024. There was no OneRF Product revenue recognized during the prior year period presented. The OneRF Products were not covered by the Zimmer Distribution Agreement during the year ended September 30, 2024.

NOTE 8 - Stock-Based Compensation

During the years ended September 30, 2024 and 2023, stock-based expense related to the stock options and restricted stock units was included in selling, general and administrative and research and development costs as follows in the accompanying statements of operations:

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. Effective October 1, 2021, no shares were available for issuance under the 2016 Equity Incentive Plan.

Inducement Plan

In addition to the Company’s 2017 Equity Incentive Plan (the “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.

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 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 and 2023,1,051,556 and 129,479 shares were added to the 2017 Plan, respectively, as a result of the evergreen provision.

Stock Options

During the years ended September 30, 2024 and 2023,1,225,669 and 459,512 stock options were granted to employees, directors and consultants, respectively, with a weighted average grant date fair value of $1.08 and $0.88 per share, respectively. The options granted have vesting periods ranging from being immediate tofour years. All options expireten years from the date of grant. The total expense for the years ended September 30, 2024 and 2023 related to the stock options was $808,057 and $632,315, respectively. The following table summarizes the Company’s stock option plan activity for the years ended September 30, 2024 and 2023 as follows:

The weighted-average assumptions used in the Black-Scholes option-pricing model are as follows for the stock options granted during the years ended September 30:

During the years ended September 30, 2024 and 2023,289,072 and 337,753 stock options vested, respectively. During the years ended September 30, 2024 and 2023,120,000 and 1,000 stock options were forfeited, respectively. No options were exercised during the years ended September 30, 2024 and 2023.

Restricted Stock Units

A summary of restricted stock unit (“RSU”) activity is as follows for the years ended September 30, 2024 and 2023:

During the years ended September 30, 2024 and 2023,1,006,725 and 310,728 RSUs were granted to members of the Company’s board of directors and employees with a grant date fair value of $1.03 and $1.60 per unit, respectively. The RSUs granted in fiscal year 2024 vest over afour-year period in equal annual installments on the anniversary date of the grant, subject to the recipient’s continued service on such dates. The RSUs granted in fiscal 2023 vest over aone tothree year period with some of the RSUs vesting ratably on a monthly basis and others vesting at 50 percent on the first anniversary of the grant date with the remaining RSUs vesting in equal quarterly installments on the last day of each quarter over 24 months, subject to the recipient’s continued service on such dates. During the years ended September 30, 2024 and 2023,270,333 and 331,788 RSUs vested, respectively. The total expense for the years ended September 30, 2024 and 2023 related to the RSU’s was $536,419 and $473,142, respectively. No RSUs were forfeited during the years ended September 30, 2024 and 2023.

General

As of September 30, 2024,297,461 shares were available for future issuance on a combined basis under the 2017 Plan and the Inducement Plan. Unrecognized stock-based compensation was $2,373,628 as of September 30, 2024. The unrecognized share-based expense is expected to be recognized over a weighted average period of 2.3 years.

NOTE 9 - Stockholders’ Equity

August 2024 Private Placement

On August 1, 2024, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain accredited investors (the “Purchasers”), pursuant to which the Company, in a private placement (the “2024 Private Placement”), agreed to issue and sell an aggregate of (i)2,944,446 shares of the Company’s common stock, par value $0.001 per share and (ii) warrants to purchase an aggregate of 2,208,333 shares of common stock (the “PIPE Warrants”) at a purchase price of $0.90 per unit, consisting of one share and a PIPE Warrant to purchase 0.75 shares of common stock, resulting in total gross proceeds of approximately $2.65 million before deducting expenses. Issuance costs attributed to the 2024 Private Placement amounted to approximately $0.2 million. The 2024 Private Placement closed on August 2, 2024.

The PIPE Warrants are exercisable beginning on the date of issuance, have an exercise price of $1.19 per share, subject to adjustment, and will expire on the third anniversary of the date of issuance. One of the Purchasers in the 2024 Private Placement included Paul Buckman, a director on the Company’s Board of Directors.

The PIPE Warrants were accounted for and classified as liabilities on the accompanying balance sheets given certain price reset provisions not used for a fair valuation under a fixed for fixed settlement scenario as required for equity balance sheet classification. A Monte Carlo simulation model was used to estimate the aggregate fair value of the PIPE Warrants. Input assumptions used were as follows on August 2, 2024 and September 30, 2024: risk-free interest rate 3.63% and 3.53%, respectively; expected volatility of 116.1% and 115.7%; respectively; expected life of 3 years and 2.84 years, respectively; and expected dividend yield zero percent for both dates. The underlying stock price used was the market price as quoted on Nasdaq as of August 2, 2024 and September 30, 2024. The aggregate fair value of the PIPE Warrants of $1,813,223 upon issuance was recorded as a long term liability on the accompanying balance sheets. The Company recorded the fair value change of the PIPE Warrants in the amount of $327,092 to the fair value change in warrant liability line item on the accompanying statements of operations for the year ended September 30, 2024.

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 was 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. On August 16, 2024, we increased the amount of common stock that can be sold pursuant to the Sales Agreement by $3.0 million.

During the years ended September 30, 2024 and 2023,3,748,913 and 1,439,677 shares of common stock were issued, respectively, under the ATM for an aggregate offering price of $5,033,906 and $2,552,656, respectively. Issuance costs incurred under the ATM during the years ended September 30, 2024 and 2023 were $277,903 and $234,725, respectively.

The total aggregate offering price and common stock issued since inception of the ATM though September 30, 2024 was $7,586,562 and 5,188,590 shares, respectively. Cumulative issuance costs incurred under the ATM through September 30, 2024 was $512,628 of which $41,305 was included as a deferred cost on the balance sheet as of September 30, 2024.

July 2023 Public Offering

On July 24, 2023, the Company entered into an underwriting agreement with The Benchmark Company, LLC, as underwriter (“Benchmark”), relating to the issuance and sale of 5,250,000 shares of the Company’s common stock, par value $0.001 per share, at a price to the public of $1.00 per share (the “July 2023 Public Offering”). In addition, under the terms of the July 2023 Public Offering, the Company granted Benchmark an option, exercisable for 30 days, to purchase up to an additional 787,500 shares of common stock on the same terms (“the Overallotment Option”). The July 2023 Public Offering closed on July 27, 2023, and the Company completed the sale and issuance of an aggregate of 6,037,500 shares of its common stock, including the exercise in full of the Overallotment Option.

The net proceeds to the Company from the July 2023 Public Offering were approximately $5.2 million after deducting underwriting discounts and other offering expenses payable by the Company. The Company used the net proceeds from this offering to: (i) support the commercial launch of the EVO sEEG electrode with Zimmer Biomet, (ii) support the FDA submission for the OneRF ablation system and (iii) complete the design of a novel drug delivery electrode, among other general corporate purposes.

Warrant Activity and Summary

The following table summarizes warrant activity during the years ended September 30, 2024 and 2023:

The following table summarizes information about warrants outstanding at September 30, 2024:

NOTE 10 - Debt Financing

Debt Facility Financing

On August 2, 2024, the Company entered into a loan and security agreement (the “Debt Facility Agreement”) with Growth Opportunity Funding, LLC, as the lender (the “Lender”), which provides for a delayed draw term loan facility in an aggregate principal amount not to exceed $3.0 million (the “Debt Facility”). The Company was permitted to borrow loans under the Debt Facility from time to time (collectively, the “Loans”), for general corporate purposes and subject to certain specified conditions, until the earliest of: (i) November 30, 2024, (ii) the occurrence of any Monetization Event (as defined below) or Change of Control (as defined in the Debt Facility Agreement), or (iii) at the Lender’s option, upon the occurrence and during the continuance of an event of default under the Debt Facility Agreement. On November 7, 2024, the Company terminated the Debt Facility Agreement (See Note 14 – Subsequent Events).

The Loans would have matured on February 2, 2026, if issued. Interest on any outstanding principal amount would have been at a rate of 10% per annum, payable monthly in arrears and at the maturity date. As of September 30, 2024, no amounts were drawn under the Debt Facility Agreement by the Company.

At closing of the Debt Facility, the Company issued to the Lender a warrant exercisable forfive years for 100,000 shares of common stock at an exercise price of $0.66 per share, subject to adjustment (the “Closing Date Debt Facility Warrant”). The Closing Date Debt Facility Warrantwas accounted for and classified as equity on the accompanying balance sheets.

At the time of any borrowing of Loans, the Company would have issued to the Lender additional warrants exercisable forfive years for 50,000 shares of common stock (for each $500,000 of Loans borrowed) at the same per share exercise price as the Closing Date Debt Facility Warrant ( the “Additional Debt Facility Warrants”, and together with the Closing Date Debt Facility Warrant, the “Debt Facility Warrants”).

The Company was permitted to voluntarily prepay the outstanding Loans at any time, without premium or penalty, upon five business days’ prior written notice to the Lender. The Company was required to prepay outstanding Loans upon the occurrence of (i) any Change of Control or (ii) certain other events as more fully described in the Debt Facility Agreement, but in any event including any capital raise or other transaction pursuant to which the Company received cumulative cash proceeds in excess of $5.0 million in the aggregate (each such event in this prong (ii), a “Monetization Event”). The obligations of the Company under the Debt Facility were secured by a first-priority security interest in substantially all assets of the Company, subject to certain exceptions set forth in the Debt Facility Agreement.

The Debt Facility Agreement included other customary representations and warranties, conditions, affirmative and negative covenants, and events of default.

Issuance costs incurred through September 30, 2024 in connection with the Debt Facility amounted to $202,656 which included legal fees of $74,532, warrant fair of the warrant issuance in the amount of $53,124 and a transaction fee to the lender in the amount of $75,000 and were initially recorded as a deferred cost on the accompanying balance sheets. The deferred costs were being amortized over the term of the Debt Facility. For the year ended September 30, 2024, $101,329 of the deferred costs were amortized and were included in the financing costs line item in the accompanying statements of operations.

NOTE 11 - Concentrations

Revenue

For the year ended September 30, 2024, one customer accounted for 90% of the Company’s product revenue andthree customers accounted for the remaining 10% of product revenue. For the year ended September 30, 2023, one customer accounted 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 12 - Income Taxes

The effective tax rate for the Company for the years ended September 30, 2024 and 2023 waszero percent. A reconciliation of income tax computed at the statutory federal income tax rate to the provision (benefit) for income taxes included in the accompanying statements of operations for the years ended September 30 is as follows:

Significant components of the Company’s deferred tax assets and liabilities are summarized in the tables below as of September 30:

As of September 30, 2024 and 2023, the Company had gross deferred tax assets of approximately $19,165,000 and $15,633,000, respectively. Realization of the deferred assets is primarily dependent upon future taxable income, if any, the amount and timing of which are uncertain. The Company has had significant pre-tax losses since its inception. The Company has not yet generated revenues from sales to the level of becoming profitable. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance of approximately $19,028,000 and $15,428,000 as of September 30, 2024 and 2023, respectively. Net deferred tax assets will continue to require a valuation allowance until the Company can demonstrate their realizability through sustained profitability or another source of income.

As of September 30, 2024 and 2023, the Company’s federal net operating loss carryforwards were approximately $47,958,000 and $40,571,000, respectively. The Company had federal research credit carryforwards as of September 30, 2024 and 2023 of approximately $1,304,000 and $1,074,000, respectively. The federal net operating loss incurred prior to January 1, 2018 and tax credit carryforwards will begin to expire in 2036 if not utilized. Federal net operating losses incurred after December 31, 2017 will not expire. As of September 30, 2024 and 2023, the Company had state net operating loss carryforwards of approximately $48,030,000 and $40,522,000, respectively. The Company had state research credit carryforwards of approximately $747,000 and $598,000 as of September 30, 2024 and 2023, respectively. The state net operating loss carryforwards will begin to expire in 2031, if not utilized, and the state research credit carryforwards will begin to expire in 2032 if not utilized.

Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. Generally, in addition to certain entity reorganizations, the limitation applies when one or more “5-percent shareholders” increase their ownership, in the aggregate, by more than 50 percentage points over a 36-month testing period or beginning the day after the most recent ownership change, if shorter. The annual limitation may result in the expiration of net operating losses and credits before utilization.

In accordance with ASC 740, Income Taxes (“ASC 740”), specifically related to uncertain tax positions, a Company is required to use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. A reconciliation of the beginning and ending amounts of unrecognized tax positions for the years ended September 30 is as follows:

If recognized, none of the unrecognized tax positions would impact the Company’s income tax benefit or effective tax rate as long as the Company’s net deferred tax assets remain subject to a full valuation allowance. The Company does not expect any significant increases or decreases to the Company’s unrecognized tax positions within the next 12 months.

In accordance with this guidance, the Company has adopted a policy under which, if required to be recognized in the future, interest related to the underpayment of income taxes will be classified as a component of interest expense and any related penalties will be classified in operating expenses in the accompanying statements of operations.

The Company has tax filing obligations in the following jurisdictions: U.S. federal, Minnesota and California. The income tax returns since 2021 are subject to examination by the federal and state taxing authorities.

NOTE 13 - Defined Contribution Plan

The Company has a 401(k) defined contribution plan (the “401K Plan”) for all employees over age 21. Employees can defer up to 100% of their compensation through payroll withholdings into the 401K Plan subject to federal law limits. The Company may match 100% of deferrals up to 3% of one’s contributions. The Company’s matching contributions to employee deferrals are discretionary. The Company may also make discretionary profit sharing contributions under the 401K Plan in the future, but it has not done so through September 30, 2024.

Employee contributions and any employer matching contributions made to satisfy certain non-discrimination tests required by the Internal Revenue Code are 100% vested upon contribution. Discretionary employer matches to employee deferrals vest over a six year period beginning on the second anniversary of an employee’s date of hire. Discretionary profit sharing contributions vest over a five year period beginning on the first anniversary of an employee’s date of hire. The Company did not make any contributions to the 401K Plan during the years ended September 30, 2024 and 2023.

NOTE 14 - Subsequent Events

On October 25, 2024, we entered into the Zimmer Amended and Restated Distribution Agreement with Zimmer pursuant to which we granted Zimmer the exclusive right and license to distribute our OneRF Ablation System for an upfront payment of $3.0 million, with eligibility for an additional $1.0 million payment from Zimmer upon achievement of certain specified net sales milestones.

On November 7, 2024, the Company terminated the Debt Facility Agreement and no amounts were drawn under the Debt Facility Agreement, The Company and paid the standby fee of $125,000 to the Lender.