NeuroOne Medical Technologies Corporation (NASDAQ:NMTC ) Q3 2022 Earnings Conference Call August 11, 2022 5:30 PM ET

Dave Rosa - President and Chief Executive Officer

Ron McClurg - Chief Financial Officer

Alexander Nowak - Craig-Hallum Capital Group

Ben Haynor - Alliance Global Partners

Ladies and gentlemen, thank you for standing by. And welcome to the NeuroOne Medical Technologies Corporation Third Quarter of Fiscal Year 2022 Financial Results Conference Call. Today’s call will be conducted by the company’s Chief Executive Officer, Dave Rosa; and Chief Financial Officer, Ron McClurg.

Before I turn the call over to Mr. Rosa, I’d like to remind you that this conference call will include forward-looking statements within the meaning of U.S. Federal Securities laws with respect to future operations, financial results, events, trends, and performance, which are based on management’s beliefs and assumptions as of today’s call or other specified date.

Forward-looking statements may involve known and unknown risks, uncertainties, and other factors, which may cause actual results to differ materially from those expressed or implied by such statements. See our earnings release and SEC filings for information regarding specific risks and uncertainties that could cause actual results to differ. Except as required by law, we undertake no obligation to update such forward-looking statements.

With that said, I’ll turn the call over to Dave Rosa, CEO of NeuroOne. Dave?

Thanks, operator. During and since the third fiscal quarter, the company accomplished a great deal with respect to our sEEG electrode program, development of our OneRF ablation system, improvements to the balance sheet and cost reductions. First, let’s address the progress we made with our sEEG product line. On our previous call, we discussed that we had appealed the FDA decision to deny clearance to increase the duration of use from less than 24 hours to 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.

On May 16, the company issued a press release stating that the FDA had denied our appeal. The FDA also stated that the company may submit a new 510(k) with new evidence, specifically as it relates to the subacute toxicity endpoint, to support a finding of substantial equivalence. The company completed the process of collecting this data and submitted a special 510(k) on August 8, which was earlier than previously targeted.

We continue to believe that the design and materials used for the sEEG electrodes are sufficient to meet the FDA guidance for device biocompatibility. On July 12, we reached a major milestone with our Evo sEEG electrode as it was used for the first time clinically at Emory University for intraoperative brain mapping at the subsurface level of the brain. We expect to perform additional similar cases in the near future in an effort to continue to gain more clinical experience with the electrode.

Moving on to our combined diagnostic and therapeutic ablation electrode, which we have named OneRF. We made tremendous progress over the quarter, which allowed us to complete the full system prototypes 2 months earlier than anticipated, including the RF generator from RBC Medical. We accomplished another major milestone by successfully completing testing of the full system, including NeuroOne’s electrode and other accessories.

Next up for the project is to complete additional preclinical testing for use in our 510(k) submission to the FDA. We are still targeting an FDA submission by the end of the first calendar quarter of 2023. As mentioned in my opening comments, we are also excited to strengthen our balance sheet through an amendment to our existing agreement with Zimmer Biomet, providing the company with an accelerated $3.5 million payment relating to certain milestones.

In exchange, Zimmer Biomet received a warrant to purchase 350,000 shares of NeuroOne’s common stock at $3 per share. This provided additional capital for the company without requiring highly diluted financing. We appreciate Zimmer’s interest in supporting NeuroOne as we continue to strengthen the partnership.

With respect to cost reduction initiatives and supply chain management, we successfully completed qualification of a second source to manufacture electrodes for both the Evo cortical and sEEG product lines, reducing supply risk for both of the product lines. Additionally, we are currently weighing the potential to bring certain aspects of the manufacturing process in-house.

In terms of cost reduction efforts, we successfully validated a new cable assembly manufacturer, which significantly reduces our cost for this component. We also completed the process to extend the shelf life for the Evo cortical product line to 3 years, which reduces the cost of expired product as well as supply chain risk.

Let’s now move to our chronic use electrode program. As we continue to develop the technology we remain focused on developing a system for the treatment of chronic back pain due to failed back surgeries that provides the capabilities of recording and stimulation, and a thin film electrode technology. We recently established a physician advisory board comprised of leading anesthesiologist and neurosurgeons that have extensive experience with implanting these systems.

Later this month, we will convene the group to begin to develop the framework of the feature set customized to the advantages of our electrode technology. The company continued to expand its exposure and presented at the HC Wainwright Global Investment Conference and the NobleCon 18 Investor Conference. We also established the Evo cortical electrode in partnership – sorry, we also exhibited the Evo cortical electrode in partnership with Zimmer Biomet at the American Association of Neurological Surgeons Annual Scientific Meeting, and American Society for Stereotactic and Functional Neurosurgery Biennial Meeting.

We’re also proud to have our first peer-reviewed paper presenting the biocompatibility results for Evo thin film subdural electrode published in the frontiers of Neuroscience journal this past April. Also, we were recently informed that the Evo sEEG implantation accuracy study was accepted as a podium presentation at the Biennial Meeting of the World Society for Stereotactic & Functional Neurosurgery, to be held in South Korea September 4 through 7, 2022.

Over the past quarter and early August, the company accomplished a number of major milestones. I’m thankful for the team of consultants and employees that expedited that process to resubmit the sEEG electrode for FDA clearance for less than 30 days use. We remain pleased with the test results of the Evo sEEG product line, and we look forward to engaging with FDA in the near future to discuss our recent resubmission.

In addition, the team also achieved a major milestone for the OneRF ablation system by successfully completing functional testing in July much earlier than expected. Securing $3.5 million from Zimmer Biomet without the need to have to do a highly dilutive financing was also a key accomplishment. We look forward to building on the exciting momentum we generated over the last quarter in early August as we continue to address both our short-term and long-term company objectives.

Thank you for your time and attention. I would now like to turn the call over to Ron McClurg, our CFO for review of fiscal third quarter financial results. Ron?

Thank you, Dave. Product revenue was $32,000 in the third quarter of fiscal 2022 compared to product revenue of $40,000 in the third quarter of fiscal 2021. Collaboration revenue was delayed in the third quarter of fiscal 2022 due to the FDA decision compared to collaboration revenue of about $17,000 in the third quarter of fiscal 2021. Collaboration revenue is derived from the Zimmer Development Agreement and represents the portion of the upfront initial development fee payment that is eligible for revenue recognition as of June 30, 2022.

Our total operating expenses in the third quarter of fiscal 2022 were $2.8 million compared with $3 million in the prior year third quarter. R&D expense in the third quarter of fiscal 2022 was $1.2 million compared with $0.9 million in the same period of fiscal 2021.

SG&A expense in the third quarter of fiscal 2022 was $1.5 million, compared with $2.1 million in the prior year third quarter. Our net loss for the third quarter of fiscal 2022 was $2.8 million, compared with a net loss of $3.0 million in the third quarter of fiscal 2021.

As of June 30 of 2022, the company had cash of approximately $10.2 million compared to $6.9 million as of September 30, 2021, which is the end of the company’s most recent fiscal year. Company had no outstanding debt as of June 30, 2022.

That concludes my remarks. I’ll now pass it back to the operator to open up the call for questions and answers. Thank you.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Alex Nowak with Craig-Hallum Capital Group. Please proceed with your question.

Great. Good afternoon, everyone. I know the company was working on several sEEG biocom studies. Can you remind us the study that was used here just [ph] special 510(k) resubmission? And then what other animal studies is underway in the background?

Alex, the last part of your question cut-off. Could you repeat that?

Yes. Just the other animal studies that are underway in the background. What the new special 510(k) submission used for the animal study? And then what other animal studies are underway?

Yeah. Sure. So there was one study that we had to perform, and the FDA gave us an option of either redoing what’s called the exhaustive extraction test to meet this particular endpoint, or subacute toxicity. So the last time we performed the test, it was an exhaustive extraction. And this time we perform subacute toxicity, because subacute toxicity is really a pass/fail test. There’s no analysis that’s needed to be done. So that was one of the reasons why we chose that. And obviously, the FDA didn’t agree with our discussion on the exhaustive extraction. So it made no sense in my mind to redo that test.

And then subacute toxicity, because there is no data analysis, it provides the opportunity to submit under a special 510(k). Whereas if there’s any data analysis that needs to be done, and in the case of exhaustive extraction are just the number of pages of analysis for that test was 144 from what my memory serves, so it obviously required a lot more analysis, and a lot more review by FDA, so that’s the test we did with subacute toxicity. In terms of other biocompatibility tests, we’ve already met all the other requirements. The FDA didn’t have any outstanding requirements to perform any additional biocompatibility testing.

So when you look at all the testing that we’ve already done on the subdural electrodes, there isn’t a need for us to do to meet any other requirements in terms of biocompatibility.

Okay. I think you answered the question there. But the reason to do a special 510(k) at this time versus doing a normal 510(k), because the first time that was a special 510(k) they got moved to a normal, so just maybe speak to that rationale a little bit more?

You mean, why we submitted under a special?

Yes, especially when last time it went from special to normal anyway.

Yeah. So when the FDA – so number one, obviously, the rationale for wanting to submit under a special is, is that it’s a 30-day review period as opposed to a 90-day cycle under a traditional 510(k). But the FDA came back and said on the first one, there’s a substantial amount of analysis that’s required for exhaustive extraction. And we will not accept it under that, we need to submit it, or we need to transition it to a traditional 510(k). So technically the FDA has 15 days from the date of receipt, which the clock started today is the 11th August night [ph]. And the last time they notified us 8 days after the submission date that that they were converting it to a traditional 510(k).

So the FDA is not under any obligation to accept it as special 510(k), but doing a subacute toxicity test, because there is no data analysis like there is under exhaustive extraction provides us with a solid argument as to why it should be accepted under a special 510(k). And we did have a discussion with FDA.

Got it. Okay. That is helpful. And then maybe speak to the date, I mean, sounds like its pass/fail, I would assume it’s a pass for the resubmission, but maybe speak to what some of the commentary that FDA could push back against what the results for that study look like?

Yeah. So it is pass/fail. And, I guess, without going blow by blow, we wouldn’t be submitting the 510(k), we wouldn’t have submitted anything if we didn’t pass the testing. So in terms of going through exactly what we passed, I mean, there’s a lot to it. But, ultimately, what you’re looking for here is to make sure that none of the animals, I believe there were roughly about 300 in this testing, there when exposed to the device over the course of 29 days, that there isn’t any toxicity associated with the device during that implantation period. So, the end results are very short. It was non-toxic, or there was some toxicity. And in our case, the independent lab substantiated that it was non-toxic, and there were no red flags that came out of it.

So trying to – I guess as to what the FDA might come back with, I haven’t been successful doing that in any company I’ve ever been in, to be honest with you. So in this case, I would say the same thing. I don’t know what they could come back with, especially since its pass/fail, but we’ll have to wait and see.

Okay. Understood. That makes sense. And then maybe expand on the latest with the Zimmer relationship, [that was delayed] [ph] milestone payment from them. So were there any amended deal terms other than the inclusion of the warrants? And then what’s the status of Zimmer’s commercialization plans? Obviously, they’re waiting on approval here, but I know, they’re also waiting on their own approval. So just any...

Yeah. So there wasn’t anything else in the deal terms with Zimmer, it was just what we reported the $3.5 million payment in exchange for the warrants. So that relationship, I said before that I’ve always – at least, I felt it was always a solid relationship. And, I think, they stepped that up with the transaction that we did. It was helpful for us, and I think look they’re – the way they look at it is they’re investing in a platform that they think could help develop growth. So helping us is also going to help them. So I think that’s the way both parties looked at it.

And as far as where they are, I don’t have any extensive information as to exactly when – they expect their drill bit to be cleared. I know that they’re waiting for FDA feedback that’s supposed to come in the next few weeks, and I think we’ll have a better idea, or they will have a better idea of when that might occur. The goal here, though, is we obviously want to commercialize before the end of the year. And, is there a possibility for that? The answer is for sure. The FDA accepts our submission under special 510(k). There’s no issues on the data that was the only thing left that we had not actually resolved with the FDA.

And, if Zimmer was able to get this clearance around the same time or maybe early Q4, then we should be in good shape to launch the product this year.

All right. Excellent. Appreciate the update. Thanks.

[Operator Instructions] Your next question comes from the line of Ben Haynor with Alliance Global Partners. Please proceed with your question.

Good afternoon, gentlemen, thanks for taking the questions, and congrats on the revised [ph] Zimmer agreement on the FDA submission. Just first off for me, can you – and also congrats on getting the OneRF feasibility are developing [where it’s at] [ph]. But can you talk about the sorts of testing that you’re going to be doing in upcoming months in the OneRF system and plan to provide updates to investors on that?

Yeah, maybe I’ll take the second question first. So we will keep people updated on the progress as to how that’s going. We were recently at RBC’s facility where they presented the finished prototypes to us, and then incorporated our electrode and our accessories to actually do benchtop testing. And these tests are done in egg-whites; it’s the traditional way of testing them. And what you do is, when you’re connected to the generator that creates the ablation, you put the electrode in the solution, and you initiate the device, you initiate ablation. And what you see is a nice lesion, which is basically egg-whites in a beaker. That’s the way we did the test when we started this project years ago at the Cleveland Clinic.

And but this was the first time we had finished prototypes of really the software and hardware as well as all the accessories and electrodes, and it really performed very, very well. In fact, I was expecting – I wasn’t expecting it to perform as well as it did. But, I’m thankful it did. So what type of testing are we going to be doing from here, we’ve already done animal testing, not with the actual finished prototype. But we have pieced together a system to demonstrate that it worked at Emory University a month ago.

We’re going to be redoing animal studies, as a way of making sure everything is still performing the way it needs to. We have an idea of what type of testing we need for FDA submission. We’ve already worked with consultants to determine that. And the determination has been that it doesn’t have to be in live animals. But it will be an animal study. And again, what you’re looking to do is demonstrate that you can create a lesion within a certain specified range that you want, as well as obviously safety data that you’re not harming, the device itself isn’t causing harm to the animal. So that’s what we expect to be doing.

And then what the other piece that we’re waiting on is components, final components, which are on order, don’t expect them in for another couple of months. Now, this is more of the fun that everybody’s experienced with supply chain delays. But the good news here is that, we’re building the units for design verification, final testing, and then submission to FDA. And that’s kind of how we’ve come to our timeline. But the really hard work in terms of development, we feel very good is behind us. It’s now fine-tuning things, making sure the software is working, the way it need to there’s no glitches. So, I would say, it’s more fine-tuning then development that’s left with the project.

Okay. And then that fine-tuning, I mean, is that getting them into the hands of KOLs and such? Or is it mostly just dialing it in from kind of a technical standpoint?

No. It’s getting it in the hands of KOLs. We’ve actually been sharing our progress with the advisory board that we have. And, in addition, some parties have come to us just because of word of mouth of the system. But, yeah, we will be using the advisory board that we have, and some new physicians as well, to actually give feedback. I mean, they’ve already been working with us closely for quite a while now. So they already know, how the system functions, what the graphic user interface looks like. And really the feedback we’ve been getting is that, this system is quite easy to use, because – obviously, you don’t want to develop a product that’s only going to apply to the top 1% customers. And in this case, at least early indications are that we’ve developed something that’s pretty easy for everyone to use.

Okay. That’s helpful. And then could you maybe provide a little bit or share a little bit more on the bullet point you have in there for the targeted milestones on partnering with a research organization to develop the electrode for a new clinical indication? I mean, is that something that – it’s kind of in your existing wheelhouse or something an application that’s completely different?

So it’s an application that’s different for all the things that we’ve talked about meaning spinal cord stem, meaning tissue ablation, recording for epilepsy tumors. So this is a different application. And the only reason why I don’t mention the institution’s name, and really the application is, as you can probably appreciate, getting contract signed and the paperwork, the amount of time it takes to get paperwork signed in these institutions, it’s not trivial. So we’re still working through – both groups’ lawyers to come to an agreement on what both parties are going to do, but it’s going to be exciting. We have a few things that we’re working on that we’re not ready to talk about yet. But, I think, we will be in the next quarter or two that are different from everything that I’ve talked to you about today. I wish I could be talking more.

Okay. Could you maybe share where the – this is a situation where the research organization or organizations, if there’s more stuff you’re working on, how kind of seeing the technology and approached you with potential applications or something that you’re kind of jointly thinking about? Or are you approaching them?

So it’s been really both. So the relationship started probably a couple of years ago, where we approached them. But we probably weren’t far enough along yet to really do anything. And then, we kind of moved on to other things, obviously, trying to get our sEEG cleared through FDA. And our focus really remained on that as well as the ablation program. But more recently, what we’re seeing is – and in this particular case, them coming to us to say, hey, we’d like to work with you, here’s what we’re trying to accomplish. We think you have the technology to do this, will you work with us? And that’s kind of initially with us, but recently, it’s been them and other parties as well.

Okay, interesting. Stay tuned for that. And lastly, for me, just curious on the every Evo sEEG case, how that go, any feedback there, color there?

Yeah, there’s – you’re not going to get a lot of feedback other than the device is giving the images that high quality images, there’s no apparent issues with it. And the reason for that, Ben is, it’s not being placed using a robot or any sort of stereotactic frame, because it’s a craniotomy has already been done. So they’re not passing the electrodes through bone. It’s just being used during the procedure to completely map the brain. So there – in these cases, the neurosurgeons are using both cortical electrodes as well as 1 or 2 sEEG electrodes, so that they’re able to map deep within the brain, as well. So it’s not getting a fair test. But, one of the things I always worry about, especially when – you have equipment that has connections that’s electrical base, is that you’re not getting shorts, that you’re getting the images, that you expect to get, and those are the boxes that we’re checking now.

But, the true test will be when the Zimmer robot is used to place these devices and you’re going through the skull and you’re using your anchor bolts, you’re not having to do that. In these procedures that are taking 3, 4 hours, maybe 5 hours to do.

Okay. That makes sense. Thanks for all the color, guys, and congrats on the progress. That’s it for me.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Dave Rosa for closing remarks.

Well, thanks, operator. I just want to thank everyone for spending late afternoon, listening to our progress, look forward to really updating all of you as we continue to make progress really across all platforms. Have a good evening.

This concludes today’s conference. You may disconnect your lines at this time. Thank you all for your participation.