This guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should all be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is currently evaluating the impact of the new guidance on its financial statements.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

NOTE 4 – Commitments and Contingencies

WARF License AgreementLegal

On October 1, 2014,

From time to time, the LLC entered into an exclusive start-up company license agreementCompany is subject to litigation and claims arising in the ordinary course of business.  In May 2017, NeuroOne received a letter from PMT Corporation (“PMT”), the former employer of Mark Christianson and Wade Fredrickson.  PMT claimed that these officers had breached their restrictive covenant obligations with PMT by virtue of their work for NeuroOne and such officer’s prior work during employment with the Wisconsin Alumni Research Foundation (“WARF”) for WARF’s neural probe arrayprior employer, that these officers had breached their confidentiality and thin film electrode technology (the “2014 WARF Agreement”). The LLC wasnon-disclosure obligations to make $110,000 in milestone payments depending on achievement of certain developmentPMT and approval milestones or within twelve months of signing the 2014 WARF Agreement. Additionally, if the LLC was successful in obtaining regulatory approval, the LLC was to pay royalties to WARF on a percentage of net sales of products of the licensed technology. Under the terms of the 2014 WARF Agreement, amounts that remained unpaid more than 30 days after they were due, accrued interest at 1 percent per month. Milestone payments due in 2015 were not made to WARF. From October 27, 2016 until the 2014 WARF Agreement was amended as described below, the LLC was in default under the 2014 WARF Agreement. In addition, the LLC was not able to transfer the rightsfederal and obligations under the 2014 WARF Agreement to NeuroOne at the time of the Merger (October 27, 2016) without the consent of WARF, which was received when the 2014 WARF Agreement was amended in February 2017 as described below. In connection with the Mergerstate law by misappropriating confidential and in accordance with ASC 805-50, NeuroOne estimated the fair value of consideration payable to WARFtrade secret information, and recorded an intangible asset of $90,000 with a corresponding accrued expense.

This agreement was subsequently amended in February 2017 (as so amended, the “2017 WARF Agreement”) whereby WARF consented to the transfer of the rights and obligations under the license agreement from the LLC to NeuroOne (which are now the Company’s rights and obligations, following the Acquisition). In the 2017 WARF Agreement, a contingent payment amount of $120,000 is due in the event that the Company completesis responsible for tortious interference with the contracts.  The letter demanded that Mr. Fredrickson (who resigned from the Company in June 2017), Mr. Christianson and NeuroOne cease and desist all competitive activities, that Mr. Fredrickson step down from his position and that Mr. Christianson and NeuroOne provide the former employer access to NeuroOne’s systems to demonstrate that it is not using trade secrets or proprietary information nor competing with the former employer.

On March 29, 2018, the Company was served with a qualified financing.complaint filed by PMT adding the Company, NeuroOne and Mr. Christianson to its existing lawsuit against Mr. Fredrickson.  In the lawsuit, PMT claims that Mr. Fredrickson and Mr. Christianson breached their non-competition, non-solicitation and non-disclosure obligations, breached their fiduciary duty obligations, were unjustly enriched, engaged in unfair competition, engaged in a civil conspiracy, tortiously interfered with PMT’s contracts and prospective economic advantage, and breached a covenant of good faith and fair dealing.  Against Mr. Fredrickson, PMT also alleges that he intentionally or negligently spoliated evidence, made negligent or fraudulent misrepresentations, misappropriated trade secrets in violation of Minnesota law, and committed the tort of conversion and statutory civil theft.  Against the Company and NeuroOne, PMT alleges that the Company and NeuroOne were unjustly enriched and engaged in unfair competition.  PMT asked the Court to impose a constructive trust over the shares held by Mr. Fredrickson and Mr. Christianson and to award compensatory damages, equitable relief, punitive damages, attorneys’ fees, costs and interest. 

On April 18, 2018, Mr. Christianson, the Company and NeuroOne, Inc. filed a motion for dismissal, which was heard by the Court on October 11, 2018. The motion for dismissal states that: the contract claims against Mr. Christianson fail because his agreement was not supported by consideration; the Minnesota Uniform Trade Secrets Act preempts plaintiff’s claims for unfair competition, civil conspiracy and unjust enrichment; plaintiff fails to state a claim regarding alleged breach of the duties of loyalty and good faith/fair dealing; plaintiff cannot legally obtain a constructive trust; plaintiff has insufficiently pled its tortious interference claims; and Plaintiff has not stated a claim for unfair competition. On January 7, 2019, the judge granted the motion for dismissal with respect to PMT’s claim for breach of the duty of good faith and fair dealing, and denied the motion for dismissal with respect to the other claims presented. The Company, is also obligated to pay royalties to WARF based on a percentage of net sales of products of licensed technology with minimum royalties of $50,000NeuroOne, Inc. and $100,000Mr. Christianson (who has not worked for calendar years 2019 and 2020, respectively, and $150,000 per year beginning in 2021 through the duration of the 2017 WARF Agreement. Subject to earlier termination, 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. The 2017 WARF Agreement is also subject to certain cancellation provisions with 90 days’ notice should the Company elect notPMT since February 2012) intend to continue to use the licensed technology.defend themselves vigorously.

The Company has agreed to diligently develop, manufacture, marketoutcome and sell products under the WARF License in the United States during the term of the agreement and, specifically, that the Company will submit a business plan to WARF by February 1, 2018 and file an application for 510(k) marketing clearance with the FDA by February 1, 2019. WARF may terminate the 2017 WARF Agreement in the event that the Company fails to meet these milestones on 30 days’ written notice, if the Company defaults on the payments of amounts due to WARF or fails to timely submit development reports, actively pursue the development plan or breaches any other covenant in the 2017 WARF Agreement and fails to remedy such default in 90 days or in the event of certain bankruptcy events involving the Company. WARF may also terminate this license (i) on 90 days’ notice if the Company fails to have commercial sales of one or more FDA-approved products under the 2017 WARF Agreement by March 31, 2019 or (ii) if, after royalties earned on sales begin to be paid, such earned royalties cease for more than four calendar quarters.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

Mayo Agreement

On October 3, 2014, the LLC entered into an exclusive license and development agreement with the Mayo Foundation for Medical Education and Research (“Mayo”)potential loss related to certain intellectual propertythis matter is unknown and development servicesno reserve has been accrued for thin film electrode technology (“2014 Mayo Agreement”). The LLC was to make milestone payments depending on achievement of certain development and approval milestones and sales targets, none of which were met as of December 31, 2015. Additionally, if the LLC was successful in obtaining regulatory approval, the LLC was to pay royalties to Mayo based on a percentage of net sales of products2018 and as of the licensed technology through the termissuance of the 2014 Mayo Agreement, set to expire May 25, 2037. Also, the LLC was obligated to issue common stock to Mayo if certain events occurred. Upon the LLC’s Merger with NeuroOne on October 27, 2016, the rights under the 2014 Mayo Agreement transferred to NeuroOne, and certain milestones were attained. Therefore, NeuroOne recorded $300 related to 10,000 shares of common stock issued to Mayo and $91,709 for the intellectual property. Milestone payments due under the 2014 Mayo Agreement and accrued were $91,709 as of September 30, 2017 and December 31, 2016. Under the terms of the 2014 Mayo Agreement, amounts that remained unpaid accrued interest at 2 percent above the prime rate. Milestone payments due in 2016 were not made to Mayo. As such, prior to the amendment of the 2014 Mayo Agreement in May 2017), NeuroOne was in default under the 2014 Mayo Agreement. Mayo and NeuroOne amended and restated the 2014 Mayo Agreement in May 2017 (as so amended and restated, the “2017 Mayo Agreement”). Pursuant to the 2017 Mayo Agreement, NeuroOne issued 50,556 shares of common stock to Mayo to settle the amount of common stock NeuroOne was previously obligated to issue under the 2014 Mayo Agreement and to amend the terms of the 2014 Mayo Agreement. NeuroOne recorded an additional $23,115 to intangible assets related to the fair value of the 2017 stock issuance to Mayo. As a part of the 2017 Mayo Agreement, as amended in November 2017, the $91,709 milestone payment is to be paid upon the earlier of a qualified financing or December 31, 2017.

these condensed consolidated financial statements.

Other

NeuroOne received a letter in May 2017 from the former employer of certain employees of NeuroOne, claiming that NeuroOne and those individuals have wrongfully used or disclosed alleged trade secrets of the former employer and that the individuals breached non-competition or non-solicitation agreements with such party. The Company and the individuals intend to vigorously defend against these claims, if litigation results.

NOTE 5 – Intangibles

Intangible assets consisted of the following at September 30, 2017:December 31, 2018:

Amortization expense was $4,264$5,311 and $13,368 for NeuroOne and the Company$4,265 for the three and nine months ended September 30,December 31, 2018 and 2017, respectively, and $1,941 and $5,823 for the LLC for the three and nine months ended September 30, 2016.respectively.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

NOTE 6 – Accrued Expenses

Accrued expenses consisted of the following at December 31, 2018 and September 30, 2017 and December 31, 2016:2018: 

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

NOTE 7 – Short-Term Promissory Notes and Unsecured Loan

Short-Term Promissory Notes

In August 2017, the Company’s Board of Directors authorized and the

The Company issued short-term unsecured and interest-free promissory notes (the “Short-Term Notes”) for aggregate gross proceeds of $253,000 priorin August 2017 which included free standing equity warrants. The Short-Term Notes were subsequently amended in November 2017 to extend the maturity date and increase the number of shares of Common Stock issuable upon exercise of the related warrants. The Short-Term Notes were also amended in March 2018 to become convertible, include new interest payment provisions and new conversion features and to provide for the issuance costs of $3,030 which were discounted froma replacement warrant (the “Replacement Warrant”) and an additional warrant (the “Additional Warrant”) described more fully below. Effective July 2, 2018, the Company entered into debt conversion agreements with each Short-Term Note subscriber to (i) convert the outstanding principal and accrued and unpaid interest (the “Outstanding Balance”) under the Short-Term Notes and are being amortized ratably to interest expense over the terminto shares of the Company’s common stock based on the Outstanding Balance divided by $1.80 per share (the “Short-Term Note Conversion Shares”); (ii) cancel and extinguish the Short-Term Notes. ForNotes; and (iii) amend and restate the threeReplacement Warrants and nine month period ended September 30, 2017, discount amortization chargedAdditional Warrants, as described more fully below, to interest expense relatedmake them immediately exercisable upon the conversion, at a per share exercise price equal to $1.80 per share. As consideration for the issuance costs was $733. The Short-Term Notes do not bear interest on principal and require the Company to repay the principal upon maturity on February 18, 2018.

In addition, upon maturity, under the provisionsearly conversion of the Short-Term Notes, the holders will receive 126,500Company issued each subscriber a new warrant (the “Short-Term Note Payment Warrants”), exercisable for up to the number of shares of common stock purchase warrants upon maturity withequal to the number of Short-Term Note Conversion Shares received by such subscriber; at a term of 5 years at anper share exercise price of $1.80 which will be immediatelyper share. The Short-Term Note Payment Warrants became exercisable upon issue. A portioncommencing on July 2, 2018, and expire on November 21, 2021.

The November 2017 amendment resulted in a substantial modification to the original Short-Term Notes whereby additional warrant coverage was added and the maturity date of the proceeds from the Short-Term Notes was allocated toextended. The Company recorded the warrants basedNovember 2017 Short-Term Note amendment under the provisions of extinguishment accounting. A loss on their relative fair value to the underlying Short-Term Notes. The proceeds allocated to the warrants were recorded as additional paid in capitalnote extinguishments in the accompanying condensed consolidated balance sheets and were discounted fromstatements of operations for the Short-Term Notesthree months ended December 31, 2017 was recorded in the amount of $61,496. The relative fair$144,577, which represented the difference between the face value of the warrants was based on the Black-Scholes method with the following assumptions: risk-free interest rate 1.77 percent; expected volatility 48 percent; expected life 5.5 years; and expected dividend yield 0 percent. The underlying stock price used in the analysis is on a non-marketable basis and is according to a separate 409A valuation analysis. The discount related to the warrants is being amortized to interest expense ratably over the term of the Short-Term Notes over the combined carrying values of the Short-Term Notes and warrants on the date of the amendment. The fair value increase of the Short-Term Notes and the warrants as amended over its adjusted carrying value at the time of the amendment was $117,280 which was recorded as additional paid-in capital. During the three months ended December 31, 2017, interest related to amortization of discounts associated with the separation of the equity warrants and issuance costs amounted to $14,868$21,627.

As noted above, the Short-Term Notes were converted into shares of common stock and were not outstanding during the three and nine month period ended September 30, 2017.December 31, 2018.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

Unsecured LoanLoans

NeuroOne

In December 2018, the Company received a $50,000 short-termgross proceeds from an unsecured loan in November 2016 from the placement agent for its convertiblerepresented by one promissory note financing (see Note 8 – Convertible Promissory Notesin the amount of $100,000 from a stockholder owning over 5% of the Company’s common stock. The loan is interest free and Warrant Agreements). NeuroOne incurred no fees or interest costs for this temporary loan and it was repaidrequires that the Company repay the principal in full on the earlier of the closing of an equity round of financing of the Company resulting in February 2017.more than $5 million in gross proceeds or December 12, 2019. In November 2018, the Company received cash gross proceeds from unsecured loans represented by two promissory notes in the amounts of $45,000 and $100,000 from a stockholder owning or a stockholder affiliated with stockholders owning over 5% of the Company’s common stock. The loans are interest free and require that the Company repay the principal in full on the earlier of the closing of an equity round of financing of the Company resulting in more than $5 million in gross proceeds or November 14, 2019.

On May 17, 2018, the Company received cash proceeds of $168,000 from unsecured loans, represented by two promissory notes from a stockholder owning or a stockholder affiliated with stockholders owning over 5% of the Company’s common stock. The loans are interest free and require that the Company repay the principal in full on the earlier to occur of (i) May 17, 2019 or (ii) the closing of an equity round of financing of the Company that raises more than $5 million in gross proceeds. The loans include customary events of default provisions.

On March 20, 2018, the Company received cash proceeds from an unsecured loan, represented by a promissory note, for $115,000 from a stockholder owning over 5% of the Company’s common stock. The loan is interest free and requires that the Company repay the principal in full on the earlier to occur of (i) March 20, 2019 or (ii) the closing of an equity round of financing of the Company that raises more than $3 million in gross proceeds. The loan includes customary events of default provisions.

NOTE 8 – Convertible Promissory Notes and Warrant Agreements

2016 Convertible Promissory Notes

In

From November 2016 and then amended into June 2017, the Company’s Board of Directors authorized the Company to issueissued convertible promissory notes (the “Convertible Notes”) in an aggregate principal amount of $1,625,120 and common stock purchase warrants (the “Warrants”) and entered into subscription agreements with subscribers. The Company amended the Convertible Notes in December 2016 and November 2017 and the Warrants in June 2017 and November 2017 to, among other things, change the terms of the underlying Warrants that included the removal of down round pricing protection.

On July 2, 2018, the Company entered into debt conversion agreements with each Convertible Note subscriber to (i) convert the Outstanding Balance under the Convertible Notes into shares of the Company’s common stock based on the Outstanding Balance divided by $1.80 per share (the “2016 Note Conversion Shares”); (ii) cancel and extinguish the Convertible Notes; and (iii) amend and restate the Warrants to make them immediately exercisable upon the conversion, at a per share exercise price equal to $1.80 per share. As consideration for aggregate gross proceedsthe early conversion of the Convertible Notes, the Company issued each subscriber an additional new warrant (the “2016 Note Payment Warrants”), exercisable for up to $2.5 million.the number of shares of common stock equal to the number of 2016 Note Conversion Shares received by such subscriber; at a per share exercise price of $1.80 per share. The 2016 Note Payment Warrants became exercisable commencing on July 2, 2018 and expire on November 21, 2021.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

The November 2017 amendment to the notes resulted in a substantial modification to the original Convertible Notes whereby the maturity date was extended and the terms associated with the Warrants were revised. The Company recorded the Convertible Note amendment under the provisions of extinguishment accounting. The fair value of the underlying Convertible Notes was $97,223 lower than the carrying value of the Convertible Notes on the date of the modification. The $97,223 difference was recorded as a discount to the debt with a gain on convertible note extinguishments in the accompanying condensed consolidated statements of operations for the three months ended December 31, 2017. The discount of $97,223 was then amortized from November 21, 2017 to December 31, 2017 totaling $15,756.

During the three months ended December 31, 2017, interest on the principal was $32,502 and interest related to amortization of discounts related to the bifurcation of premium derivative liability, separation of warrants, revaluation discounts and issuance costs amounted to $261,749. The fair value changes related to the underlying premium conversion derivative and warrant liability amounted to a benefit of ($108,641) and an expense of $272,059, respectively, during the three month period ended December 31, 2017.

As noted above, the Convertible Notes were converted into shares of September 30, common stock and not outstanding during the three month period ended December 31, 2018.

2017 Convertible Notes

From October 2017 to May 2018, the Company has issued $1,625,120convertible notes (the “2017 Convertible Notes”) in an aggregate principal amount of Convertible Notes and common stock purchase warrants to investors. The Convertible Notes are unsecured. The Convertible Notes$1,540,000 that bear interest at a fixed rate of 8 percent8% per annum and warrants to purchase shares of the Company’s capital stock (the “New Warrants”). The Company initially entered into a subscription agreement with certain accredited investors and closed the initial private placement of the 2017 Convertible Notes in October 2017. In December 2017, the Company and holders of a majority in aggregate principal amount of the 2017 Convertible Notes entered into an amended and restated subscription agreement to amend the terms of the 2017 Convertible Notes and New Warrants. On December 31, 2018, the 2017 Convertible Notes were amended again to extend the maturity date from December 31, 2018 to June 30, 2019. The amendment was accounted for as a troubled debt restructuring given the Company’s financial condition and given the concession granted by the lenders with regards to pushing out the maturity date to June 30, 2019 with no corresponding compensation paid for the extension. The future undiscounted cash flows of the of the 2017 Convertible Notes as amended exceeded their carrying value as of December 31, 2018. As such, no gain was recognized during the three months ended December 31, 2018 and no adjustments were made to the 2017 Convertible Note carrying value.

The 2017 Convertible Notes require the Company to repay the principal and accrued and unpaid interest thereon aton June 30, 2019 (the “2017 Convertible Notes Maturity Date”). If the earlier of November 21, 2017 or the consummation of the nextCompany consummates an equity or equity-linked round of financing resulting in more than $3.0$3 million in gross proceeds (a “Qualifiedbefore June 30, 2019 (the “2017 Convertible Notes Qualified Financing”). If a Qualified Financing occurs before November 21, 2017,, the outstanding principal and accrued and unpaid interest on the 2017 Convertible Notes shall automatically convertsconvert into the securities issued by the Company in the 2017 Convertible Notes Qualified Financing equal to the outstanding principal and accrued interest on the 2017 Convertible Notes divided by 80% of the price per share of the securities issued by the Company in the 2017 Convertible Notes Qualified Financing. The New Warrants also become exercisable upon a 2017 Convertible Notes Qualified Financing for an amount of shares equal to the number of shares received by the holder in the 2017 Convertible Notes Qualified Financing at the same price per share of the securities issued in the 2017 Convertible Notes Qualified Financing.

Prior to the December 2017 amendment, if the Company had raised more than $3,000,000 in an equity financing before October 4, 2022, the outstanding principal and accrued and unpaid interest on the 2017 Convertible Notes would have automatically converted into the securities issued by the Company in such financing based on the greater number of such securities resulting from either (i) the outstanding principal and accrued interest on the 2017 Convertible Notes divided by $1.80,$2.25 or (ii) the outstanding principal and accrued interest on the 2017 Convertible Notes multiplied by 1.25, divided by the price paid per security in such financing. The New Warrants would have also become exercisable in conjunction with the 2017 Convertible Notes Qualified Financing. If the Company fails to complete a Qualified Financing by November 21, 2017, the Convertible Notes will be immediately due and payable on such date.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

IfLastly, if a change of control transaction or initial public offering occurs prior to the earlier of a 2017 Convertible Notes Qualified Financing or the 2017 Convertible Notes Maturity Date, the 2017 Convertible Notes would, at the election of the holders of a majority of the outstanding principal of the 2017 Convertible Notes, either become payable on demand as of the closing date of such transaction, or become convertible into shares of common stock immediately prior to such transaction at a price per share equal to the lesser of (i) the per share value of the common stock as determined by the Company’s Board of Directors as if in connection with the granting of stock based compensation or in a private sale to a third party in an arms’ lengtharms-length transaction or (ii) at the per share consideration to be paid in such transaction. Change of control means a merger or consolidation with another entity in which the Company’s stockholders do not own more than 50 percent50% of the outstanding voting power of the surviving entity or the disposition of all or substantially all of the assetsCompany’s assets. The New Warrants also become exercisable upon a change of control transaction for an amount of shares equal to the Company.number of shares received by the holder upon conversion in connection with such transaction at the same price per share that the 2017 Convertible Notes converted in the change of control transaction.

The warrants granted holdersDecember 2017 amendment resulted in a substantial modification to the optionoriginal 2017 Convertible Notes whereby the maturity date was moved up to purchase either (i) if exercised after conversionDecember 2018 from October 2022 and the terms associated with the embedded features were revised as described previously. The Company recorded the 2017 Convertible Note amendment under the provisions of extinguishment accounting. The fair value of the underlying Convertible Notes was $294,615 higher than the carrying value of the Convertible Notes net of unamortized debt discount on the number of shares issuable upon the conversiondate of the modification. The $294,615 difference as well as legal costs associated with the amendment in the amount of $8,945 were recorded as a loss on convertible notes extinguishment totaling $303,560 in the accompanying condensed consolidated statements of operations for the three months ended December 31, 2017. After the modification, there remained a debt discount of $27,371 of which $6,574 and $1,286 was amortized during the three months ended December 31, 2018 and 2017, respectively. 

The 2017 Convertible Notes or (ii) if exercised prior tocontain a conversion discount in the event of thea 2017 Convertible Notes the number of shares of common stockQualified Financing to equal to the outstanding principal and accrued interest on the 2017 Convertible Note held by such warrant holderNotes divided by $1.80. The warrants were immediately exercisable on80% of the dateprice per share of issuance and expire on November 21, 2021. In June 2017, however,the securities issued by the Company amendedin the terms of the common stock purchase warrants under the2017 Convertible Notes to be exercisable only in the event of conversion of the outstanding principal and accrued interest on the related Convertible Notes.Qualified Financing. The amount of warrant shares to be issued are now fixed to the number of shares of common stock received by the holder of the Convertible Notes upon conversion of such holder’s Convertible Notes, and to an exercise price equal to the price at which the Convertible Notes convert into common shares.

The warrants were accounted for as a liability because there is no set exercise price. A Monte Carlo simulation model was used to estimate the aggregate fair value of the warrants as of September 30, 2017. Input assumptions used were as follows: risk-free interest rate 1.79 percent; expected volatility 50 percent; expected life 4.14 years; and expected dividend yield 0 percent. The underlying stock price used in the analysis is on a non-marketable basis and is according to a separate 409A valuation analysis. The convertible promissory note proceeds assigned to the warrants were $440,919 and $345,640 during the nine months ended September 30, 2017 and for the period from October 7, 2016 to December 31, 2016, respectively, which represented their fair value at issuance, and were discounted from the Convertible Notes and reflected as a warrant liability. The discount is being amortized to interest expense over the term of the Convertible Notes using the straight-line method which approximates the effective interest method. The amortization expense was $284,637 and $601,794 for the three and nine months ended September 30, 2017, respectively. The Company recorded the fair value changes of the warrant liability associated with the Convertible Notes to interest expense which amounted to $6,546 and $(12,707) for the three and nine months ended September 30, 2017, respectively.

At the time of their issuance, the Convertible Notes contained a 125% conversion premium in the event that a Qualified Financing occurs at a price under $2.25 per common share. The Company determined that the redemptionembedded feature under the Convertible Notes qualified as an embedded derivative and was separated from its debt host. The bifurcation of the embedded derivative from its debt host resulted in a discount to the 2017 Convertible Notes in the amount of $213,961 and $137,564$128,525 for the convertible debt issued during the ninethree months ended September 30,December 31, 2017; there were no issuances of 2017 andConvertible Notes during the period from October 7, 2016 tothree months ended December 31, 2016, respectively.2018. The discount is being amortized to interest expense over the term of the 2017 Convertible Notes using the straight-line method which approximates the effective interest method. The amortization expense was $133,367$62,158 and $266,848$3,815 for the three and nine month periodmonths ended September 30,December 31, 2018 and 2017, respectively. The embedded derivative wasis accounted for separately on a fair market value basis. The Company recorded the fair value changes of the premium debt conversion derivative associated with all of the 2017 Convertible Notes in the condensed consolidated statements of operations which amounted to an expense of $6,265 and $466 for the three months ended December 31, 2018 and 2017, respectively.

The New Warrants were deemed to be a free-standing instrument and were accounted for as a liability given the variable number of shares issuable in connection with a change of control conversion event. A Monte Carlo simulation model was used to estimate the aggregate fair value of the New Warrants. Input assumptions used were as follows: risk-free interest rate of 2.52% and 2.94% as of December 31, 2018 and September 30, 2018, respectively; expected volatility of 50% as of December 31, 2018 and September 30, 2018; expected life of 5.25 and 5.21 years as of December 31, 2018 and September 30, 2018, respectively; and expected dividend yield of 0% as of December 31, 2018 and September 30, 2018. The underlying stock price used in the analysis was on a non-marketable basis and was according to the market approach, considering both the traded price and forward multiples from guideline public companies, using allocation and marketability-discount methodologies. The 2017 Convertible Note proceeds assigned to the New Warrants were zero and $336,571 during the three month period ended December 31, 2018 and 2017, respectively, which represented their fair value at issuance and were discounted from the 2017 Convertible Notes and reflected as a warrant liability. The discount was being amortized to interest expense over the term of the 2017 Convertible Notes using the straight-line method which approximates the effective interest method. The amortization expense was $163,060 and $9,971 for the three month period ended December 31, 2018 and 2017, respectively. The Company also recorded the fair value changes of the warrant liability associated with all of the 2017 Convertible Notes in the condensed consolidated statements of operations which amounted to $15,406an expense of $6,689 and $90,212a benefit of ($1,337) for the three and nine months ended September 30,December 31, 2018 and 2017, respectively. 

In connection with the 2017 Convertible Notes, the Company incurred original cost of issuance in the amount of $8,133 which consisted of legal costs and was recorded as an issuance cost discount to the 2017 Convertible Notes, of which $1,431 and $157 was amortized to interest expense during the three months ended December 31, 2018 and 2017, respectively.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

In connection with the Convertible Notes, the Company incurred issuance costs in the amount of $151,915, which included (i) a placement agent cash fee, which was $113,610 for the Convertible Notes issued through June 19, 2017 (ii) the obligation to issue a warrant to the placement agent (the “placement agent warrant”) which will have an exercise price of $2.00 per share of common stock and had a total fair value of $4,855 at September 30, 2017 and (iii) legal expenses of $33,450. The placement agent warrant is issuable at the time the private placement transaction closes. The placement agent warrant will be immediately exercisable on the date of issuance and will expire five years following the date of issuance. The placement agent is to receive a placement agent warrant to purchase shares of common stock in an amount equal to 8 percent of the common stock (or common stock equivalents) purchased by investors in the private placement transaction. As of September 30, 2017 and December 31, 2016, the Company has an obligation to issue a placement agent warrant for the purchase of approximately 63,000 and 29,000 shares of common stock, respectively. The Company recorded an issuance cost discount to the Convertible Notes in the amount of $39,781 and $37,469 for the nine months ended September 30, 2017 and for the period from October 7, 2016 to December 31, 2016, respectively, of which $27,317 and $59,184 was amortized to interest expense during the three and nine months ended September 30, 2017, respectively. The balance of the issuance costs in the amount of zero and $38,119 was attributed to the common stock purchase warrants and was immediately recorded as interest expense upon issuance during the three and nine months ended September 30, 2017, respectively.

The placement agent is also entitled to receive warrants to purchase common stock in an amount equal to 10 percent of the common stock (common stock equivalents) purchased by certain investors in subsequent equity financing rounds (see Note 13 – Subsequent Events). Such warrants if issued will have an exercise price determined in relation to the pricing of the subsequent financing rounds and will be immediately exercisable once issued.

NOTE 9 – Investment Banker FeeDefined Contribution Plan

Investment Banker Fee

NeuroOne paidThe Company adopted a $50,000 non-refundable fee401(k) defined contribution plan (the “401K Plan”) on January 1, 2017, which was amended and restated on March 1, 2018 (the “Restatement”), for all employees over age 21. Employees can defer up to an investment banker100% of their compensation through payroll withholdings into the 401K Plan subject to federal law limits. The Company began matching in December 2016the fourth quarter of 2017 on deferrals at 100% of deferrals up to raise equity financing. This fee is reflected3% of one’s contributions and 50% on deferrals over 3%, but not exceeding 5% of one’s contributions up through the Restatement. The Company’s matching contributions to employee deferrals became discretionary after the Restatement. The Company may also make discretionary profit sharing contributions under the 401K Plan in NeuroOne’sthe future, but it has not done so through December 31, 2016 balance sheet as2018.

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 prepaid expense. NeuroOne subsequently concluded thatsix year period beginning on the investment bankersecond 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 amount of matching contributions made during the three month period ended December 31, 2018 and 2017 was not expected to raise any equitya benefit reduction of $(4,359) and therefore expensed the fee in March 2017.$27,000, respectively.

NOTE 10 – Stock-Based Compensation

NeuroOne formally adopted an equity incentive plan (“During the 2016 Plan”) on October 27, 2016 whichthree month periods ended December 31, 2018 and 2017, stock-based services expense related to stock-based awards amounted to $118,980 and zero, respectively, and was subsequently adopted byincluded in general and administrative costs in the Company upon completionaccompanying condensed consolidated statements of operations.

Stock Options

During the Acquisition. In addition,three month period ended December 31, 2018, under the Company adopted a 2017 Equity Incentive Plan (the “2017 Plan”) on April 17, 2017. The 2016 and 2017 Plans provide for, the issuance of restricted shares andCompany granted 175,000 stock options to employees, directors, and consultantsits scientific advisory board members where vesting commences on January 1, 2019 over a 36 month period based on a time of service vesting condition. The grant date fair value of the Company. The Company reserved 2,292,265 shares of common stock (as adjusted forscientific advisory board member grants was $1.14 per share. No stock-based expense related to the exchange ratio in connection with the Acquisition) for issuance under the 2016 and 2017 Plans on a combined basis. The Company began granting stock options and restricted stock awards in the second quarter of 2017. Duringscientific advisory board grants was recognized during the three and nine-monthmonth period ended September 30, 2017, zero and 365,716 stock options for shares of common stockDecember 31, 2018. There were granted, respectively, to directors and consultants at a weighted average exercise price of $0.035 per share. Theno stock options granted during the ninethree month period ended September 30, 2017 had a weighted average grant date fair valueDecember 31, 2017. Lastly, there were no restricted stock award grants during any of $0.014 per share with various vestingthe periods and expire in ten years. In addition, the Company issued zero and 215,453 shares of restricted common stock with performance vesting conditions from the 2016 Plan during the three and nine month period ended September 30, 2017, respectively. All performance vesting conditions for the restricted common stock were met as of September 30, 2017. Compensation expense associated with restricted common stock shares was $7,220.presented.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

Stock-based compensation expense was included in general and administrative and research and development costs as follows in the accompanying condensed statements of operations:

The weighted-average assumptions used in the Black-Scholes option-pricing model are as follows for the stock options granted during the three and nine month periodsperiod ended September 30, 2017:December 31, 2018:

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

See other stock-based awards section below for stock-based award grants committed, but not formally issued as of December 31, 2018.

During the three and nine months ended September 30,December 31, 2018 and 2017, 42,525 and 365,716there was no vesting of formally issued stock options vested, respectively, and zero and 215,453or restricted stock awards vested, respectively. The weighted average fair value per share of options vesting during the three and nine months ended September 30, 2017 was $0.014.awards. No stock options were forfeited during the three and nine months ended September 30,December 31, 2018 and 2017. As of September 30, 2017, 1,711,096December 31, 2018, 1,533,596 shares were available for future issuance on a combined basis under the 2016 Equity Incentive Plan and 2017 Plans.Plan.

Unrecognized stock-based compensation was $0.2 million as of December 31, 2018. All of the unrecognized compensation cost related to the scientific advisory board grants. The unrecognized share-based expense is expected to be recognized over a weighted average period of 2.9 years.

Other Stock-Based Awards

250,000 shares of common stock were reserved in February 2018 as a result of a consulting agreement for investor relations services executed in February 2018. Under the agreement, 50,000 shares of common stock were awarded during the three month period ended December 31, 2018 on a time-based vesting condition that was met in November 2018. The compensation expense related to the vested common shares was included in the total stock-based services expense referenced above which totaled $115,000 for the three month period ended December 31, 2018. The expense was based on the fair value of the underlying common stock at the point of vesting which was $2.30 per share. The underlying stock price used in the analysis was on a non-marketable basis and was according to the market approach, considering both the traded price and forward multiples from guideline public companies, using allocation and marketability-discount methodologies. As of November 2018, all shares under the February 2018 share reserve were issued, but were not eligible for issuance under either of the 2016 or 2017 Plans as the consulting contract was not with an individual.

As of December 31, 2018, the Company had a formal obligation to issue future common stock options relating to a consulting agreement. The estimated liability associated with the vested portions of these awards was recorded in accrued expenses in the accompanying condensed consolidated balance sheets as of December 31, 2018. The corresponding stock-based services expense related to the stock-based award liability amounted to $3,980 during the three months ended December 31, 2018 and was included in general and administrative expense in the accompanying condensed consolidated statements of operations. There was no unrecognizedcorresponding stock-based services expense during the three month period ended December 31, 2017.

The number of option shares and pricing under the consulting agreement will not be set until the occurrence of the award date which is defined as the earlier to occur of a public offering, qualified financing, or June 30, 2019. The number of option shares under the agreement is based on a $3,000 monthly compensation cost for stock options and restrictedamount divided by the fair value of the underlying common stock on the award date. The exercise price will also be set at the fair value of the underlying common stock on the award date. The liability associated with the unissued options was based on an option share equivalent estimate that reflects the portion of the award where performance vesting conditions have been met as of September 30, 2017.December 31, 2018 and was based on the fair value of the Company’s common stock on December 31, 2018 as the award date has not occurred. The common stock fair value on December 31, 2018 was $2.20 per share and was determined based on a non-marketable basis and was according to the market approach, considering both the traded price and forward multiples from guideline public companies, using allocation and marketability-discount methodologies. The total accrued liability for this award at December 31, 2018 was $15,133.

The weighted-average assumptions used in the Black-Scholes option-pricing model are as follows for the stock- option liability during the three month period ended December 31, 2018:

Upon the issuance of all of the unissued options associated with the stock-based award liabilities, the estimated number of shares available for future issuance as of December 31, 2018 would be reduced from 1,533,596 shares to 1,518,596 shares as a result of the potential stock option issuance under the second consulting agreement.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

NOTE 11 – Income Taxes

The effective tax rate for the three and nine months ended September 30,December 31, 2018 and 2017 was zero percent. As a result of the analysis of all available evidence as of December 31, 2018 and September 30, 2017 and December 31, 2016,2018, the Company recorded a full valuation allowance on its net deferred tax assets. Consequently, the Company reported no income tax benefit during the three and nine month periodsmonths ended September 30,December 31, 2018 and 2017. 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.

The LLC operated as a single-member LLC from formation on December 12, 2013 until it was merged into NeuroOne on October 27, 2016. As such, the LLC was a disregarded legal entity for income tax purposes. Accordingly, no provision for income taxes was included in the financial statements for the three or nine month periods ended September 30, 2016.

NOTE 12 – Stockholders’/Member Deficit

2018 Private Placement

From July 9, 2018 through November 30, 2018 (the final closing), the Company entered into subscription agreements (each, a “Purchase Agreement”) with certain accredited investors (the “Purchasers”), pursuant to which the Company, in a private placement (the “2018 Private Placement”), agreed to issue and sell to the Purchasers units (each, a “Unit”), each consisting of (i) 1 share (each, a “Share”) of common stock and (ii) a warrant to purchase 1 share of common stock at an initial exercise price of $3.00 per share (the “2018 Warrants”). The initial closing of the 2018 Private Placement was consummated on July 9, 2018. As of the termination of the 2018 Private Placement on December 12, 2018, the Company had issued and sold an aggregate of 615,200 Units at a price of $2.50 per Unit to the Purchasers, for total gross proceeds to the Company of $1,538,000 before deducting offering expenses (170,000 Units were sold during the three months ended December 31, 2018).

Under the Purchase Agreement, the Company agreed to use the net proceeds from the 2018 Private Placement to pay the outstanding principal and accrued interest on its 2017 Convertible Notes if such notes did not convert prior to maturity, to pay the principal on its unsecured term loans, for research and development, clinical studies, legal fees and sales and marketing expenses, as well as working capital and general corporate purposes. The Company granted the Purchasers indemnification rights with respect to its representations, warranties and agreements under the Purchase Agreement.

The 2018 Warrants are exercisable beginning on the date of issuance and will expire on July 9, 2023, five years from the date of the first closing. The 2018 Warrants were accounted for as free standing equity instruments and classified as additional paid-in capital in the accompanying condensed consolidated balance sheets based on their relative fair value to the underlying common shares issued. The fair value of the 2018 Warrants issued during the three months ended December 31, 2018 was $144,005 and was based on the Black-Scholes pricing model. Input assumptions used were as follows on a weighted average basis: a risk-free interest rate of 2.85%; expected volatility of 49.8%; expected life of 4.62 years; and expected dividend yield of 0%. The underlying stock price used in the analysis was on a non-marketable basis and was according to the market approach, considering both the traded price and forward multiples from guideline public companies, using allocation and marketability-discount methodologies.  

In June 2017,connection with the purchase price owed by2018 Private Placement, the seven individualsCompany recorded issuance costs in the amount of $59,694 during the three month period ended December 31, 2018. The issuance costs included commissions to the brokers equal to 10% of the gross proceeds from the sale of the Units that qualify for the founders’commission which amounted to $42,500. In addition to the brokers’ commission, the issuance costs included the estimated value of the 5-year warrants to be issued to the brokers to purchase an amount of common stock equal to 10% of the total amount of qualifying Shares sold in the 2018 Private Placement at an exercise price of $3.45 per share upon the close of the 2018 Private Placement. A commission liability increase in the amount of $9,854 was recorded during the three months ended December 31, 2018 related to the 50,520 broker warrants issuable upon the close of the 2018 Private Placement. Lastly, third party legal costs in the amount $7,340 comprised the balance of the issuance costs incurred during the three months ended December 31, 2018. See Note 13 – Subsequent Events for changes in the commission structure under the 2018 Private Placement.

In connection with the 2018 Private Placement, the Company entered into registration rights agreements with each of the Purchasers pursuant to which the Company agreed to file a registration statement with the SEC covering the resale of the shares of NeuroOne under their respective subscription agreements totaling $9,051 was forgiven by NeuroOne priorcommon stock sold in the 2018 Private Placement and the shares of common stock issuable upon exercise of the 2018 Warrants. The Company agreed to file such registration statement within 75 days of the Acquisition.final closing of the 2018 Private Placement. Each registration rights agreement included customary indemnification rights in connection with the registration statement.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

2019 Private Placement

On December 12, 2018, the Board of Directors of the Company terminated the 2018 Private Placement. On December 28, 2018 and December 31, 2018, the Company entered into Subscription Agreements (each, a “2019 Purchase Agreement”) with certain accredited investors (the “New Purchasers”), pursuant to which the Company, in a new private placement (the “2019 Private Placement”), agreed to issue and sell Units (the “2019 Units”) to the New Purchasers. The initial closing of the 2019 Private Placement was consummated on December 28, 2018.

On December 28, 2018 and December 31, 2018, the Company issued and sold an aggregate of 160,000 2019 Units at $2.50 per Unit to the New Purchasers, for total gross proceeds to the Company of approximately $400,000 before deducting offering expenses.

In connection with the 2019 Private Placement, the Company has agreed to issue and sell to accredited investors up to a maximum of 4,000,000 2019 Units (the “Maximum Offering”) at a price of $2.50 per 2019 Unit for total gross proceeds to the Company of up to $10,000,000. The Maximum Offering may be increased by the Company in its sole discretion, without notice. If the Company issues the Maximum Offering amount, 4,000,000 shares of common stock would be issuable upon exercise of the warrants (the “2019 Warrants”). Under the 2019 Purchase Agreement, the Company has agreed to use the net proceeds from the 2019 Private Placement to pay the outstanding principal and accrued interest on its convertible promissory notes if such notes do not convert prior to maturity, to pay the principal on its unsecured term loans, for research and development, clinical studies, legal fees and sales and marketing expenses, as well as working capital and general corporate purposes. The Company has granted the New Purchasers indemnification rights with respect to its representations, warranties and agreements under the 2019 Purchase Agreement.

The 2019 Warrants are exercisable beginning on the date of issuance and will expire on December 28, 2023, five years from the date of the first closing of the 2019 Private Placement. Prior to expiration, subject to the terms and conditions set forth in the 2019 Warrants, the holders may exercise the 2019 Warrants for shares of common stock by providing notice to the Company and paying the $3.00 per share exercise price for each share so exercised. The fair value of the 2019 Warrants issued during the three months ended December 31, 2018 was $134,048 and was based on the Black-Scholes pricing model. Input assumptions used were on a weighted average basis as follows: a risk-free interest rate of 2.53%; expected volatility of 49.8%; expected life of 5.0 years; and expected dividend yield of 0%. The underlying stock price used in the analysis was on a non-marketable basis and was according to the market approach, considering both the traded price and forward multiples from guideline public companies, using allocation and marketability-discount methodologies.  

In connection with the 2019 Private Placement, the Company recorded issuance costs in the amount of $89,622 as of December 31, 2018. In connection with the 2019 Private Placement, Paulson Investment Company, LLC (“Paulson”) will receive a cash commission equal to 12% of the gross proceeds from the sale of the 2019 Units. In addition to the brokers’ commission, the Company will issue 5-year warrants to Paulson to purchase an amount of Common Stock equal to 10% of the total amount of Shares sold in the 2019 Private Placement at an exercise price of $2.75 per share. The issuance costs included commissions to the broker equal to 12% of the gross proceeds from the sale of the 2019 Units and related expenses that amounted to $73,000. In addition to the broker’s commission, the issuance costs included the estimated value of the 5-year warrants to be issued to the broker to purchase an amount of common stock equal to 10% of the total amount of Shares sold in the 2019 Private Placement, at an exercise price of $2.75 per share, upon the close of the 2019 Private Placement. A liability in the amount of $13,875 was recorded as of December 31, 2018 related to the 16,000 broker warrants issuable as of December 31, 2018 under the 2019 Private Placement. Lastly, third party legal costs in the amount $2,747 comprised the balance of the issuance costs incurred as of December 31, 2018. See Note 13 – Subsequent Events for subsequent 2019 Unit issuances and changes in the commission structure under the 2019 Private Placement.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

In connection with the 2019 Private Placement, the Company entered into a registration rights agreement with each of the New Purchasers, each dated as of the respective closing dates (each, a “Registration Rights Agreement”), pursuant to which the Company has agreed to file a registration statement with the SEC covering the resale of the shares of common stock sold in the 2019 Private Placement and the shares of common stock issuable upon exercise of the 2019 Warrants. The Company has agreed to file such registration statement within 75 days of the final closing of the 2019 Private Placement. Each Registration Rights Agreement includes customary indemnification rights in connection with the registration statement.

Warrant Activity and Summary

The following table summarizes warrant activity during the three month period ended December 31, 2018:

As of December 31, 2018, 66,520 warrants are committed to be issued related to the 2018 and 2019 Private Placements at an exercise price of $3.45 and $2.75 per share, respectively.

NOTE 13 – Subsequent Events

On October 4, 2017,2019 Private Placement – Subsequent Issuances and Broker Compensation Change

The Company issued 2019 Units for aggregate gross proceeds of $295,000 from January 1, 2019 through February 12, 2019.  See Note 12 – Stockholders Deficit for more information on the 2019 Units.

In February 2019, the Company entered into a Subscription Agreementamended its engagement letter with HRA Capital (“HRA”), acting through its affiliate, Corinthian Partners, LLC, each of which are affiliates of one of the Company’s greater than 5% stockholders. Pursuant to the original agreement (prior to the amendment), the Company agreed to pay HRA 10% of the gross proceeds (the “Subscription Agreement”“HRA Fee”) with certain accredited investors (the “Subscribers”), pursuant to whichreceived by the Company in asubsequent private placement transactions from investors with whom HRA or Corinthian Partners, LLC had material contact with for purposes of the engagement letter (the “Private Placement”“Prospects”), provided such compensation would only be paid in connection with private placement transactions that closed within 12 months of the expiration of the engagement letter (the “Tail Period”). The Company agreed to issue and sell to the Subscribers 8% convertible promissory notes (each, a “Note” and collectively, the “2017 Convertible Notes”) andHRA warrants (the “New Warrants”) to purchase shares of the Company’s capital stock.

The initial closing of the Private Placement was consummated on October 4, 2017, and, on that date, the Company issued Notes in an aggregate principal amount of $150,000 to the Subscribers. Between November 2, 2017 and November 7, 2017, the Company entered into Subscription Agreements with additional Subscribers, and issued Notes in a principal amount of $215,000 to those Subscribers. The Company may conduct any number of additional closings so long as the final closing occurs on or before the five-month anniversary of the initial closing date and the amount does not exceed $1,000,000 or a higher amount determined by the Board of Directors.

The 2017 Convertible Notes bear interest at a fixed rate of 8% per annum and require the Company to repay the principal and accrued and unpaid interest thereon on October 4, 2022 (the “Maturity Date”). If the Company raises more than $3,000,000 in an equity financing before the Maturity Date (the “Qualified Financing”), the outstanding principal and accrued and unpaid interest on the 2017 Convertible Notes shall automatically convert into the securities issued by the Company in such financing based on the greater number of such securities resulting from either (i) the outstanding principal and accrued interest on the 2017 Convertible Notes divided by $2.25 or (ii) the outstanding principal and accrued interest on the Notes multiplied by 1.25, divided by the price paid per security in such financing. If a change of control transaction occurs prior to the earlier of a Qualified Financing or the Maturity Date, the 2017 Convertible Notes would, at the election of the holders of a majority of the outstanding principal of the 2017 Convertible Notes, either become payable on demand as of the closing date of such transaction or become convertible into shares ofCommon Stock (or common stock immediately prior to such transaction at a price per share equal to the lesser of (i) the per share value of the common stock as determined by our Board of Directors as if in connection with the granting of stock based compensation or in a private sale to a third party in an arms’ length transaction or (ii) at the per share consideration to be paid in such transaction (the date of any such conversion of the 2017 Convertible Notes pursuant to this paragraph, is referred to herein as the “Conversion Date”). Change of control means a merger or consolidation with another entity in which our stockholders do not own more than 50% of the outstanding voting power of the surviving entity or the disposition of all or substantially all of the Company’s assets.

Each New Warrant grants the holder the option to purchase the number of shares of capital stock of the Company issuable upon the conversion of the 2017 Convertible Notes held by such holder at a per share exercise price equal to the price at which the 2017 Convertible Notes converted. The New Warrants are exercisable commencing on the Conversion Date and expire on the five year anniversary of the Conversion Date. The exercise price and number of the shares of our common stock issuable upon exercising the New Warrants will be subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described therein.

The placement agent is also entitled to receive a warrant to purchase common stockequivalents) in an amount equal to 10 percent10% of the common stock (common stock equivalents)shares purchased by certain investors in subsequent equity financing rounds. Such warrant, if issued will have an exercise price determined in relation toProspects during the pricing of the subsequent financing and will be immediately exercisable once issued.Tail Period (“HRA Warrants”).

In such subsequent equity financing rounds,February 2019, the placement agentCompany and HRA agreed (i) to extend the Tail Period until June 30, 2019, (ii) to modify the HRA Fee so that HRA is also entitled to receive a cash fee equal to 10 percent8% of the gross proceeds received by the Company from Prospects in all subsequent private placement transactions and (iii) to modify the HRA Warrants so that they are exercisable to purchase shares of Common Stock (or common stock equivalents) in an amount equal to 8% of the shares of Common Stock purchased by Prospects in subsequent private placements (collectively, the “HRA Amendments”). Upon issuance, the HRA Warrants will be immediately exercisable and expire five years from the closing of the related transaction.

The cash commission and broker’s commission to be received by Paulson were not impacted by the changes to the agreement between the Company and HRA.

2018 Private Placement – Broker Compensation Change

In connection with the 2018 Private Placement, the Company agreed to pay the brokers a cash commission equal to 10% of the gross proceeds from the sale of the Units sold to investors by such brokers. In addition to the brokers’ commission, the Company agreed to issue 5-year warrants to the brokers to purchase an amount of Common Stock equal to 10% of the total amount of capitalshares sold by such brokers in the 2018 Private Placement, at an exercise price of $3.45 per share.

Notwithstanding the Company’s agreement to pay to brokers the 10% cash commission and issue warrants for 10% of the shares sold in the 2018 Private Placement, the HRA Amendments modified the broker commission arrangements with respect to HRA. HRA was the only broker in the 2018 Private Placement.Pursuant to the Company’s engagement letter with HRA (acting through the registered broker-dealer, Corinthian Partners, LLC), as amended in February 2019 by the HRA Amendments, the Company agreed to pay HRA a cash fee equal to 8% of the gross proceeds received by the Company as well as a cashfrom Prospects in the 2018 Private Placement and to issue warrants exercisable to purchase shares of Common Stock (or common stock equivalents) in an amount representing a non-accountable expense allowance equal to 3%8% of the aggregate gross proceeds raised in such financing.

Subscription Agreements

Pursuant to the Subscription Agreements, the Company is entitled to receive noticeshares of Common Stock purchased by Prospects in the event a holder elects to sell or receives a bona fide offer for any portion of the 2017 Convertible Notes or New Warrants, and the right to purchase the 2017 Convertible Notes or New Warrants on the same terms as the proposed sale or bona fide offer, as applicable, as long as the Company exercises that right within 15 days of receiving written notice. The Company has granted the Subscribers indemnification rights with respect to its representations, warranties, covenants and agreements under the Subscription Agreements.

2018 Private Placement. 

NeuroOne Medical Technologies Corporation

Form 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes included in Part I “Financial Information”, Item I “Financial Statements” of this Quarterly Report on Form 10-Q (the “Report”) and the audited financial statements and related footnotes included in our CurrentTransition Report on Form 8-K, filed on July 20, 2017 and our Current Report on Form 8-K/A, filed on August 14, 2017.10-KT for the nine month transition period ended September 30, 2018.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give current expectations or forecasts of future events or our future financial or operating performance. We may, in some cases, use words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, and similar expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements.

These forward-looking statements reflect our management’s beliefs and views with respect to future events, are based on estimates and assumptions as of the date of this reportReport and are subject to risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those in these forward-looking statements. We discuss many of these risks in greater detail under Part I, Item 1A “Risk Factors” in our Transition Report on Form 10-KT for the nine month transition period ended September 30, 2018 and subsequent reports filed with or furnished to the Securities and Exchange Commission (the “SEC”). Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

You should read the following discussion and analysis of financial condition and results of operations of NeuroOne Medical Technologies Corporation together with our financial statements and the related notes included elsewhere in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Any forward-looking statement made by us in this reportReport speaks only as of the date hereof or as of the date specified herein. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable laws or regulations.

Overview

We were originally incorporated in the State of Nevadaare a medical technology company focused on August 20, 2009 as Original Source Entertainment, Inc. (“OSE”). OSE was originally formed to license songs to the television and movie industry. From our inception and prior to the acquisition of NeuroOne, Inc. on July 20, 2017 (the “Acquisition”), as described more fully below, our operations have been primarily limited to organizational, start-up, and capital formation activities. Upon completion of the Acquisition, more fully described below, our operations consist of the development and commercialization of comprehensive neuromodulation cEEGthin film electrode technology for continuous electroencephalogram (cEEG) and sEEG monitoring, ablation, andstereoelectroencephalography (sEEG) recording, brain stimulation and ablation solutions to diagnose and treatfor patients withsuffering from epilepsy, Parkinson’s disease, dystonia, essential tremors and other related brain related disorders. Our cortical stripAdditionally, we are investigating the potential applications of our technology under development has only been used by Mayo in five patients for research purposes and has not been tested in any clinical trials.associated with artificial intelligence. We are based in Eden Prairie,Minnetonka, Minnesota.

NeuroOne Medical Technologies Corporation

Form 10-Q

The Acquisition was accounted for as a capital transaction, or reverse recapitalization. As a result, the financial information contained in the Report reflect solely the operations of NeuroOne, Inc. (“NeuroOne”) and its predecessor NeuroOne LLC (the “LLC”).

We had very limited resources prior to our convertible promissory note (the “Convertible Notes”) and warrant financings commencing in November 2016. To date, our primary activities have been limited to, and our limited resources have been dedicated to, performing business and financial planning, raising capital, recruiting personnel, negotiating with business partners and the licensors of our intellectual property and conducting research and development activities. Our cortical strip, grid electrode and depth electrode technology is still under development, we do not yet have regulatory approval in any jurisdiction to sell any products and to date, we have not generated any revenue.

We have incurred losses since inception. As of September 30 2017,December 31, 2018, we had an accumulated deficit of $3,699,438,$11.8 million, primarily as a result of expenses incurred in connection with our research and development programs, and from general and administrative expenses associated with our operations. The LLC, prioroperations and interest expense related to the merger with NeuroOne, also incurred losses since its inception and had cumulative losses of $49,930 as of the date of the October 26, 2016 merger.our debt. We expect to continue to incur significant expenses and increasing operating and net losses for the foreseeable future.

NeuroOne Medical Technologies Corporation

Form 10-Q

We do not expect to generate revenue from product sales unless and until we obtain marketing authorization to sell our cortical strip, grid electrode and depth electrode technology from applicable regulatory authorities.

Our primary source of cash to date has been proceeds from the issuances of short-term promissory notes (the “Short-Term Notes”), Convertible Noteswith warrants and common stock purchasewith warrants (the “Warrants”). From November 2016 to September 2017,and unsecured loans. See “—Liquidity and Capital Resources—Historical Capital Resources” below.

At December 31, 2018, we issued Short-Term Notes (in aggregate principal amount of $253,000)had $0.4 million in cash deposits. Our existing cash and Warrants resulting in net proceeds of $249,970, and Convertible Notes (in aggregate principal amount of $1,625,120) and Warrants, for aggregate net proceeds of $1,511,510cash equivalents will not be sufficient to fund our operations.

On October 4, 2017, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain accredited investors (the “Subscribers”), pursuant to which we,operating expenses in a private placement (the “Private Placement”), agreed to issue and sell to the Subscribers 8% convertible promissory notes (each, a “Note” and collectively, (the “2017 Convertible Notes”) and warrants (the “New Warrants”) to purchase shares of our common stock.

The initial closing of the Private Placement was consummated on October 4, 2017, and, on that date, we issued Notes (in an aggregate principal amount of $150,000) to the Subscribers. Between November 2, 2017 and November 7, 2017, the Company entered into Subscription Agreements under the Private Placement with additional Subscribers, and issued Notes (in an aggregate principal amount of $215,000) to those Subscribers. We may conduct any number of additional closings so long as the final closing occurs on or before the five-month anniversary of the initial closing date and the amount does not exceed $1,000,000 or a higher amount determined by our Board of Directors.

fiscal 2019. We need to obtain substantial additional funding in connection with our continuing operations through public or private equity or debt financings or other sources, which may include collaborations with third parties. However, we may be unable to raise additional funds when needed on favorable terms or at all. Our failure to raise such capital as and when needed would have a negative impact on our financial condition and our ability to develop and commercialize our cortical strip, grid electrode and depth electrode technology and future products and our ability to pursue our business strategy. See “–“—Liquidity and Capital Requirements”Resources—Funding Requirements and Outlook” below.

Acquisition

On July 20, 2017, we entered into a merger agreement with NeuroOne and OSOK Acquisition Company to acquire NeuroOne. The transactions contemplated by the merger agreement were consummated on July 20, 2017 and, pursuant to the terms of the merger agreement, (i) all outstanding NeuroOne Shares were exchanged for Company Shares based on the Exchange Ratio of 17.0103706 Company Shares for every one NeuroOne Share, (ii) all NeuroOne Options were replaced with options (“Company Options”) based on the Exchange Ratio, with corresponding adjustments to their respective exercise prices, (iii) all NeuroOne Warrants were replaced with Company Warrants and (iv) we assumed the outstanding Convertible Notes of NeuroOne. Accordingly, we acquired 100% of NeuroOne, Inc. in exchange for the issuance of shares of our common stock and NeuroOne became our wholly-owned subsidiary. Our sole business is the business of NeuroOne. Our management’s discussion and analysis below is based on the financial results of NeuroOne. Except as otherwise indicated herein, all share and per share information in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section gives retroactive effect to the exchange of NeuroOne Shares, NeuroOne Options and NeuroOne Warrants for Company Shares, Company Options and Company Warrants, respectively, in the Acquisition, as well as the corresponding exercise price adjustments for such Company Options.

Predecessor NeuroOne, Inc. and NeuroOne LLC

The LLC was formed on December 12, 2013 and operated as a limited liability company until it was merged with and into NeuroOne on October 27, 2016 with NeuroOne as the surviving entity of the merger. NeuroOne was formed on October 7, 2016 under different ownership than the LLC. As a result of the merger, all of the properties, rights, privileges, powers and franchises of the LLC vested in NeuroOne, and all debts, liabilities and duties of the LLC became the debts, liabilities and duties of NeuroOne with the exception of the Company’s license agreement with Wisconsin Alumni Research Foundation (“WARF”) which required WARF’s approval for transfer. The purpose of the merger was to change the jurisdiction of NeuroOne’s incorporation from Minnesota to Delaware, change the ownership of the LLC’s underlying assets, and to convert from a limited liability company to a corporation.

NeuroOne Medical Technologies Corporation

Form 10-Q

NeuroOne and the LLC were not entities under common control. As the LLC did not have an integrated set of activities that contained the required complement of inputs, processes and outputs to be considered a business, the Merger was accounted for as an asset acquisition as prescribed under ASC 805 –Business Combinations. As such, the activities of NeuroOne and the LLC were not combined and are shown separately in the accompanying financial statements included in this Report.

Financial Overview

Revenue

To date, we have not generated any revenue. We do not expect to generate revenue unless or until we develop, obtain regulatory approval for and commercialize our cortical strip, grid electrode and depth electrode technology. If we fail to complete the development of our cortical strip, grid electrode and depth electrode technology, or any other product candidate we may pursue in the future, in a timely manner, or fail to obtain regulatory approval, we may never be able to generate any revenue.

General and Administrative

General and administrative expenses consist primarily of personnel-related costs including stock-based compensation for personnel in functions not directly associated with research and development activities. Other significant costs include legal fees relating to corporate matters, intellectual property costs, professional fees for consultants assisting with regulatory, clinical, product development, and financial matters and product costs. We anticipate that our general and administrative expenses will significantly increase in the future to support our continued research and development activities, potential commercialization of our cortical strip, grid electrode and depth electrode technology, if approved, and the increased costs of operating as a public company. These increases will include increased costs related to the hiring of additional personnel and fees for legal and professional services, as well as other public-company related costs.

Research and Development

Research and development expenses consist of expenses incurred in performing research and development activities in developing our cortical strip, grid electrode and depth electrode technology. Research and development expenses include compensation and benefits for research and development employees including stock-based compensation, overhead expenses, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, costs related to regulatory operations, fees paid to consultants and other outside expenses. Research and development costs are expensed as incurred and costs incurred by third parties are expensed as the contracted work is performed.

We expect our research and development expenses to significantly increase over the next several years as we develop our cortical strip, grid electrode and depth electrode technology and conduct preclinical testing and clinical trials and will depend on the duration, costs and timing to complete our preclinical programs and clinical trials.

NeuroOne Medical Technologies Corporation

Form 10-Q

Interest Expense

Interest expense primarily consists of amortized discount costs related to our Short-Term Notes and Convertible Notes and interest costs related to the Convertibleour Series 1 Notes we issued between November 2016(as defined below), Series 2 Notes (as defined below) and September 2017.Series 3 Notes (as defined below) while outstanding. The ConvertibleSeries 1 Notes, Series 2 Notes, and Series 3 Notes bear interest at a fixed rate of 8% per annum compounding annually.while outstanding.

Interest expense also includesNet change in fair value for the warrant liability and premium conversion derivatives

The net change in fair value for the warrant liability and premium conversion derivatives include the change in the fair value of warrant liability and the premium conversion derivativederivatives during the particular period. The change in fair value ofperiod while the warrant liability and the premium conversion derivative results fromderivatives are outstanding.

Loss on note extinguishments, net

Loss on note extinguishments, net includes the marking to market at the end of every reporting period of the fair value related to the warrants and premium conversion derivative to purchase shares of common stock issued in connectiongain or loss associated with the issuance of the Convertible Notes. The fair value of the warrant liability will fluctuate based on the change in the price of our common stock in the public markets until these warrants are exercised or expire.debt instrument modifications accounted for as debt extinguishments. 

Results of Operations

For comparison purposes, the results of operations for NeuroOne for the three and nine month periods ended September 30, 2017 is compared to the operating results for the LLC for the three and nine month periods ended September 30, 2016

Comparison of the Three Months Ended September 30,December 31, 2018 and 2017 and 2016

The following table sets forth the results of operations of NeuroOne and the LLC for the three-months ended September 30,December 31, 2018 and 2017, and 2016, respectively.

General and administrative expenses

General and administrative expenses were $622,141$0.9 million for the three months ended September 30, 2017,December 31, 2018, compared to $1,941$0.5 million for the three months ended September 30, 2016.December 31, 2017. The increase was primarily due to an increase in salary-related expensesstock-based compensation associated with a consulting contract of $331,539 for additional staffing$0.1 million related to support the increased level of commercialization fund raising,and development activities andto legal andcosts, accounting expenses and board of $290,602director fees of $0.3 million in the aggregate primarily related to the Acquisition.increased public company related costs.

NeuroOne Medical Technologies Corporation

Form 10-Q

Research and development expenses

Research and development expenses were $271,651 for the three months ended September 30, 2017, comparedremained relatively unchanged period over period which was $0.2 million during both quarterly periods ending December 31, 2018 and 2017. The activity during both quarterly periods was attributed to $0 for the three months ended September 30, 2016. The increase wassupporting development activities, which primarily due to an increase inincluded salary-related expenses inclusive of stock-based compensation expense of $ 64,945, and developmentcosts related to consulting services, materials and supplies to support the increased level of development activities.supplies.

 Interest expense

Interest expense, for the three months ended September 30, 2017December 31, 2018 was $515,377$0.3 million consisting of non-cash interest expense of $32,503, fair market value adjustments of the warrant and derivative liabilities of $21,953,$31,000 and amortization of debt discount costs of $460,921$0.2 million related to the Short-TermSeries 3 Notes described further below. Interest expense for the three months ended December 31, 2017 was $0.3 million consisting of interest expense of $40,000 and amortization of debt issuance costs of $0.3 million related to the Series 1 Notes, Series 2 Notes and Convertible Notes. There were no outstanding Short-TermSeries 3 Notes and Convertible Notes in the prior year. The interest expense in the comparable prior year period related to interest on the Mayo intellectual milestone payments owed.described further below.

Comparison of the Nine Months Ended September 30, 2017 and 2016

The following table sets forth the results of operations of NeuroOne, and the LLCNet change in fair value for the nine months ended September 30, 2017warrant liability and 2016, respectively.premium conversion derivatives

General and administrative expenses

General and administrative expenses were $1,798,131The net change in fair value for the ninewarrant liability and premium conversion derivatives for the three months ended September 30,December 31, 2018 and 2017 comparedwas $13,000 and $0.2 million, respectively. The change is due primarily to $6,009 forfluctuations in our common stock fair value and the nine months ended September 30, 2016. The increase was primarily due to an increase in salary-related expensesnumber of $927,587 for additional staffing, inclusivepotential shares of stock-based compensationcommon stock issuable upon conversion of $2,065, to support the increased level of commercializationunderlying Series 1 Notes, Series 2 Notes and development activities, legal and accounting expenses of $820,544 and investment banker fees of $50,000.Series 3 Notes while outstanding.

Research and development expensesLoss on note extinguishments, net

Research and development expenses were $500,408 for the nine months ended September 30, 2017, compared to $0 for the nine months ended September 30, 2016. The increase was primarily due to an increase in salary-related expenses, inclusive of stock-based compensation of $74,729, and development materials and supplies to support the increased level of development activities.

Interest expense

Interest expense for the nine months ended September 30, 2017 was $1,134,529, consisting of interest expense of $76,359, fair market value adjustments of the warrant and derivative liabilities of $77,505, amortization of debt discount costs of $943,427 and warrant issuance costs of $38,119 related to the Short-Term Notes and Convertible Notes offset by an $881 interest credit adjustment related to Mayo intellectual milestone payments. There were no outstanding Short-Termdebt modifications during the three month period ended December 31, 2018 that were accounted for as a debt extinguishment.

Non-cash loss on note extinguishments, net for the three months ended December 31, 2017 was $0.4 million. The Series 1 Notes and ConvertibleSeries 2 Notes were amended in November 2017 and the Series 3 Notes were amended in December 2017. The amendment for the Series 1 Notes extended the maturity date by approximately eight months and revised certain warrant and other provisions. The amendment for the Series 2 Notes added additional warrant coverage and extended the maturity date by approximately five months. The amendment for the Series 3 Notes accelerated the maturity date from October 2022 to December 2018 and revised certain formulaic provisions contained in the prior year. The interest expenseunderlying embedded conversion features. As a result of the modifications made to the Series 1 Notes, Series 2 Notes and Series 3 Notes as discussed in this paragraph, we accounted for the comparable prior year period related to interest on the Mayo intellectual milestone payments owed.amendments as a note extinguishment.

NeuroOne Medical Technologies Corporation

Form 10-Q

Liquidity and Capital Resources

Historical Capital Resources

As of September 30, 2017,December 31, 2018, our principal source of liquidity consisted of cash deposits of $70,029.$0.4 million. We have not generated any revenue, and we anticipate that we will continue to incur losses for the foreseeable future. We anticipate that our expenses will increase substantially as we develop our cortical strip, grid electrode and depth electrode technology and pursue pre-clinical testing and clinical trials, seek regulatory approvals, contract to manufacture any products, establish our own sales, marketing and distribution infrastructure to commercialize our cortical strip, grid electrode and depth electrode technology under development, if approved, hire additional staff, add operational, financial and management systems and continue to operate as a public company.

Our primary sourcessource of cash since inception, haveto date has been short-term financing instruments and associated warrants in the amount of $303,000, and proceeds from the issuanceissuances of notes with warrants, common stock with warrants and unsecured loans, the terms of which are further described below. See “—Funding Requirements and Outlook” below for the outstanding balances on our convertible notes.

2019 Private Placement

On December 12, 2018, the Board of Directors of the ConvertibleCompany terminated the 2018 Private Placement (as defined below). On December 28, 2018, the Company entered into Subscription Agreements (each, a “2019 Purchase Agreement”) with certain accredited investors (the “New Purchasers”), pursuant to which the Company, in a private placement (the “2019 Private Placement”), agreed to issue and sell to the New Purchasers units (each, a “Unit”), each consisting of (i) one share (each, a “Share”) of our Common Stock, and (ii) a warrant to purchase one share of Common Stock at an initial exercise price of $3.00 per share (the “2019 Warrants”). The initial closing of the 2019 Private Placement was consummated on December 28, 2018 (the “New First Closing”).

NeuroOne Medical Technologies Corporation

Form 10-Q

From December 28, 2018 through February 12, 2019, the Company issued and sold an aggregate of 278,000 Units to the New Purchasers, for total gross proceeds to the Company of approximately $695,000 before deducting offering expenses. In connection with the 2019 Private Placement, the Company has agreed to issue and sell to accredited investors up to a maximum of 4,000,000 Units (the “Maximum Offering”) at a price of $2.50 per Unit for total gross proceeds to the Company of up to $10,000,000. The Maximum Offering may be increased by the Company in its sole discretion, without notice. If the Company issues the Maximum Offering amount, 4,000,000 shares of Common Stock would be issuable upon exercise of the 2019 Warrants. Under the 2019 Purchase Agreement, the Company has agreed to use the net proceeds from the 2019 Private Placement to pay the outstanding principal and accrued interest on its convertible promissory notes if such notes do not convert prior to maturity, to pay the principal on its unsecured term loans, for research and development, clinical studies, legal fees and sales and marketing expenses, as well as working capital and general corporate purposes. The Company has granted the New Purchasers indemnification rights with respect to its representations, warranties and agreements under the 2019 Purchase Agreement.

In connection with the 2019 Private Placement, the Company entered into a Registration Rights Agreement with each of the New Purchasers, each dated as of the New Purchasers’ respective closing dates (each, a “New Registration Rights Agreement”), pursuant to which the Company agreed to file a registration statement with the SEC covering the resale of the shares of Common Stock sold in the 2019 Private Placement and the shares of Common Stock issuable upon exercise of the 2019 Warrants. The Company has agreed to file such registration statement within 75 days of the final closing of the 2019 Private Placement. Each New Registration Rights Agreement includes customary indemnification rights in connection with the registration statement.

The 2019 Warrants are exercisable beginning on the date of issuance and will expire on December 28, 2023, five years from the date of the New First Closing. Prior to expiration, subject to the terms and conditions set forth in the 2019 Warrants, the holders may exercise the 2019 Warrants for shares of Common Stock by providing notice to the Company and paying the $3.00 per share exercise price for each share so exercised.

In connection with the 2019 Private Placement, Paulson Investment Company, LLC (“Paulson”) will receive a cash commission equal to 12% of the gross proceeds from the sale of Units sold by Paulson. In addition to the brokers’ commission, the Company will issue 5-year warrants to Paulson to purchase an amount of Common Stock equal to 10% of the total amount of Shares sold by Paulson in the 2019 Private Placement at an exercise price of $2.75 per share. In connection with 2019 Private Placement, HRA Capital, an affiliate of one of our greater than 5% beneficial owners of our Common Stock, will receive a cash commission equal to 8% of the gross proceeds from the sale of Units sold by HRA. In addition, the Company will issue 5-year warrants to HRA to purchase an amount of Common Stock equal to 8% of the Shares sold by HRA at an exercise price of $3.00 per share. See Note 13 – Subsequent Events for more information on HRA’s commission.

2018 Private Placement

From July 9, 2018 through November 30, 2018 (the final closing), the Company entered into subscription agreements (each, a “Purchase Agreement”) with certain accredited investors (the “Purchasers”), pursuant to which the Company, in a private placement (the “2018 Private Placement”), agreed to issue and sell to the Purchasers Units each consisting of (i) one Share, and (ii) a warrant to purchase one share of Common Stock at an initial exercise price of $3.00 per share (the “2018 Warrants”). The initial closing of the 2018 Private Placement was consummated on July 9, 2018 (the “First Closing”), and through the termination of the 2018 Private Placement, we issued and sold an aggregate of 615,200 Units to the Purchasers, for total gross proceeds to us of $1,538,000 before deducting offering expenses.

Under the Purchase Agreement, the Company had agreed to use the net proceeds from the 2018 Private Placement to pay the outstanding principal and accrued interest on our Series 3 Notes if such notes did not convert prior to maturity, to pay the principal on its unsecured term loans, for research and development, clinical studies, legal fees and sales and marketing expenses, as well as working capital and general corporate purposes. The Company granted the Purchasers indemnification rights with respect to its representations, warranties and agreements under the Purchase Agreement.

NeuroOne Medical Technologies Corporation

Form 10-Q

In connection with the 2018 Private Placement, the Company entered into registration rights agreements with each of the Purchasers pursuant to which the Company agreed to file a registration statement with the SEC covering the resale of the shares of Common Stock sold in the 2018 Private Placement and the shares of Common Stock issuable upon exercise of the 2018 Warrants. The Company agreed to file such registration statement within 75 days of the final closing of the 2018 Private Placement. Each registration rights agreement included customary indemnification rights in connection with the registration statement.

The 2018 Warrants are exercisable beginning on the date of issuance and will expire on July 9, 2023, five years from the date of the First Closing. Prior to expiration, subject to the terms and conditions set forth in the 2018 Warrants, the holders of such 2018 Warrants may exercise the 2018 Warrants for shares of Common Stock by providing notice to the Company and paying the exercise price per share for each share so exercised.

In connection with the 2018 Private Placement, the brokers received a cash commission equal to 8% of the eligible gross proceeds from the sale of the Units. In addition to the brokers’ commission, we will issue 5-year warrants to the brokers to purchase an amount of Common Stock equal to 8% of the total amount of qualifying Shares sold in the 2018 Private Placement at an exercise price of $3.45 per share. See Note 13 – Subsequent Events for more information on HRA’s commission.

Series 3 Notes and Warrants. Warrants

From November 2016October 2017 to June 2017, weMay 2018, the Company issued Convertible Notes (inconvertible notes (the “Series 3 Notes”) in an aggregate principal amount of $1,625,120) and warrants for aggregate net proceeds of $1,511,510.

The Convertible Notes$1.5 million that bear interest at a fixed rate of 8% per annum and warrants to purchase shares of the Company’s capital stock (the “Series 3 Warrants”). The Company initially entered into a subscription agreement with certain accredited investors and closed an initial private placement of the Series 3 Notes in October 2017. In December 2017 and December 2018, the Company and holders of a majority in aggregate principal amount of the Series 3 Notes entered into an amended and restated subscription agreement to amend the terms of the Series 3 Notes and Series 3 Warrants (the “Series 3 Amendments”). The Series 3 Notes, as amended, require us to repay the principal and accrued and unpaid interest thereon at June 30, 2019.

If the earlier of November 21, 2017 or the consummation of the nextCompany consummates an equity or equity-linked round of financing resulting in more than $3 million in gross proceeds. If such a financing occursproceeds before November 21, 2017,June 30, 2019 (the “Series 3 Qualified Financing”), the outstanding principal and accrued and unpaid interest on the ConvertibleSeries 3 Notes shall automatically convert into the securities issued by us in such financing based on the greater number of such securities resulting from either (i)Series 3 Qualified Financing equal to the outstanding principal and accrued interest on the ConvertibleSeries 3 Notes divided by $1.80 or (ii) the outstanding principal and accrued interest on the Convertible Notes multiplied by 1.25, divided by80% of the price paid per securityshare of the securities issued by us in such financing.the Series 3 Qualified Financing. As of the date of this Report, we have sold $2.2 million of the $3 million target. If a changeChange of control transaction or initial public offeringControl (as defined below) occurs prior to suchthe earlier of a financing,Series 3 Qualified Financing or June 30, 2019, the ConvertibleSeries 3 Notes would, at the election of the holders of a majority of the outstanding principal amount of the ConvertibleSeries 3 Notes, either become payable on demand as of the closing date of such transactionthe Change of Control or become convertible into shares of common stockCommon Stock immediately prior to such transactionthe Change of Control at a price per share equal to the lesser of (i) the per share value of the Common Stock as determined by our Board of Directors as if in connection with the granting of stock basedstock-based compensation or in a private sale to a third party in an arms’ lengtharms-length transaction or (ii) at the per share consideration to be paid in such transaction.the Change of controlControl (the date of any such conversion of the Series 3 Notes in connection with a Change of Control or Series 3 Qualified Financing, is referred to herein as the “Series 3 Conversion Date”). Change of Control means a merger or consolidation with another entity in which our stockholders do not own more than 50% of the outstanding voting power of the surviving entity or the disposition of all or substantially all of our assets. The Convertible Notes are unsecured. If we fail to complete a qualified equity financingSeries 3 Qualified Financing by November 21, 2017,June 30, 2019, the ConvertibleSeries 3 Notes will be immediately due and payable on such date. We may seek to amend the Convertible Notes in order to extend the maturity date of the Convertible Notes, however, we may be unable to enter into such amendments.

Each Warrant grantsPrior to the holderSeries 3 Amendments, if the option to purchaseCompany raised more than $3 million in an equity financing before October 4, 2022, the outstanding principal and accrued and unpaid interest on the Series 3 Notes would have automatically converted into the securities issued by the Company in such financing based on the greater number of shares issuable upon the conversion of the Note held by such holder. The terms of the Warrants were amended in June 2017 to be exercisable only in the event of conversion ofsecurities resulting from either (i) the outstanding principal and accrued interest on the related Convertible Notes. Prior to such amendment,Series 3 Notes divided by $2.25 or (ii) the Warrants were immediately exercisable into common stockoutstanding principal and accrued interest on the number of shares were not fixed and determinable at the issuance date. No Warrants were exercised prior to the amendment. The Warrants have been accounted for as a liability at fair value. Following such amendment, the amount of warrant shares to be issued are now fixed to the number of shares of common stock to be receivedSeries 3 Notes multiplied by 1.25, divided by the holder upon conversion ofprice paid per security in such holder’s Convertible Note, and to an exercise price equal to the price at which the Convertible Notes convert into common shares. However, the warrants still have price protections that result in the accounting for these Warrants as a liability at fair value.financing.

In connection with the private placement of Convertible Notes and Warrants, we paid the placement agent a cash fee of $113,610 (8% of the gross proceeds received to date from certain Note and Warrant investors) and are obligated to issue to the placement agent a Warrant to purchase shares of common stock (or common stock equivalents) in an amount equal to 8% of the common stock purchased by certain investors in the private placement, which Warrant is expected to have an exercise price of $2.00 per share of Company common stock.

NeuroOne Medical Technologies Corporation

Form 10-Q

The Warrants (other thanEach Series 3 Warrant grants the placement agent Warrant), afterholder the amendment in June 2017, are exercisable followingoption to purchase shares of our capital stock equal to the number of shares of capital stock of the Company received by the holder upon conversion of the ConvertibleSeries 3 Notes at a per share exercise price equal to (i) the actual per share price of the securities issued in the Series 3 Qualified Financing if the Series 3 Notes convert in connection with such a qualified financing or (ii) the price at which the Series 3 Notes converted if they converted in connection with a Change of Control. The Series 3 Warrants are exercisable commencing on the Series 3 Conversion Date and expireexpiring on November 21, 2021.the five year anniversary of that date. The exercise price and number of the shares of our commoncapital stock issuable upon exercising the Series 3 Warrants will be subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization, business combination or similar transaction, as described therein.

Series 2 Notes and Warrants

In addition,August 2017, the Company entered into a subscription agreement and issued interest free promissory notes in an aggregate principal amount of $253,000 to certain accredited investors. In November 2017, the Company and each subscriber amended the notes to extend the maturity date from February 18, 2018 to July 31, 2018 and to increase warrant coverage. In March 2018, the Company and each subscriber entered into a written consent to again amend and restate the promissory notes (as amended, the “Series 2 Notes”) and to amend the subscription agreement to replace the form of warrant agreement annexed to the subscription agreement (the “Replacement Warrant”) and to provide for the issuance of an additional warrant (the “Additional Warrant”). In March 2018, the Company issued and delivered the Series 2 Notes, the Replacement Warrants and the Additional Warrants to the subscribers. Effective as of July 2, 2018, the Company amended the Series 2 Notes by entering into debt conversion agreements with each subscriber to (i) convert the outstanding principal and accrued and unpaid interest under the Series 2 Notes into shares of Common Stock based on the outstanding balance divided by $1.80 per share (the “Series 2 Conversion Shares”); (ii) cancel and extinguish the Series 2 Notes; and (iii) amend and restate the Replacement Warrants and Additional Warrants to make them immediately exercisable upon conversion, at a per share exercise price equal to $1.80 per share. As consideration for the early conversion of the Series 2 Notes, the Company issued each subscriber a new warrant (the “Series 2 Payment Warrants”), exercisable for up to the number of shares of Common Stock equal to the number of Series 2 Conversion Shares received by such subscriber; at a per share exercise price of $1.80 per share. The Series 2 Payment Warrants were exercisable commencing on July 2, 2018 and expire on November 21, 2021. The Replacement Warrants and Additional Warrants became immediately exercisable upon the July 2, 2018 conversion date, at a per share exercise price equal to $1.80 per share and will expire on November 21, 2021.

The exercise price and number of the shares issuable upon exercising the Series 2 Payment Warrants, (but not those issued to the placement agent) isReplacement Warrants and Additional Warrants are subject to reductionadjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described therein. The Series 2 Notes were converted into 144,053 shares of Common Stock and warrants exercisable for 477,856 shares of Common Stock were issued as a result of the exercise price if we subsequently issue common stock or equivalents at an effective price less than the current exercise price of such Warrants. The placement agent Warrants will be immediately exercisableSeries 2 Notes conversion and expire five years from the date of issuance. The placement agent Warrant is issuable upon the closing of the Convertible Note and Warrant financing.extinguishment.

We also received cash gross proceeds from short-term financings consisting of an unsecured loan for $50,000 inSeries 1 Notes and Warrants

From November 2016 and $253,000 upon issuance ofto June 2017, the Short-Term NotesCompany issued convertible promissory notes in August 2017. We incurred no fees or interest costs related to the unsecured loan and repaid it in full in February 2017. With regard to the Short-Term Notes, additional warrants in thean aggregate principal amount of 126,500 warrant shares will be issuable upon maturity in February 2018, and no additional$1.6 million that bear interest costs or fees are expected to be incurred in connection with the Short-Term Notes.

On October 4, 2017, we entered into the Subscription Agreement and executedat a Private Placement agreeing to issue and sell to the Subscribers,fixed rate of 8% convertible promissory notesper annum and warrants to purchase shares of our common stock (2017 Convertible Notes).the Company’s capital stock. In June 2017 and November 2017, the terms of such notes (as amended, the “Series 1 Notes”) and warrants (as amended, the “Series 1 Warrants”) were amended.

Effective as of July 2, 2018, the Company amended the Series 1 Notes by entering into debt conversion agreements with each Series 1 Note subscriber to (i) convert the outstanding principal and accrued and unpaid interest under the Series 1 Notes into shares of the Company’s Common Stock based on the outstanding balance divided by $1.80 per share (the “Series 1 Conversion Shares”); (ii) cancel and extinguish the Series 1 Notes; and (iii) amend and restate the Series 1 Warrants to make them immediately exercisable upon conversion, at a per share exercise price equal to $1.80 per share. As consideration for the early conversion of the Series 1 Notes, the Company issued each subscriber a new warrant (the “Series 1 Payment Warrants”), exercisable for up to the number of shares of Common Stock equal to the number of Series 1 Conversion Shares received by such subscriber; at a per share exercise price of $1.80 per share. The Series 1 Payment Warrants are exercisable commencing on July 2, 2018, and expire on November 21, 2021. The Series 1 Warrants became immediately exercisable upon the July 2, 2018 conversion date, at a per share exercise price equal to $1.80 per share, and will expire on November 21, 2021.

NeuroOne Medical Technologies Corporation

Form 10-Q

The initial closingexercise price and number of the Private Placement was consummatedshares issuable upon exercising the Series 1 Payment Warrants and original Series 1 Warrants are subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described therein. The Series 1 Notes were converted into 1,002,258 shares of Common Stock and warrants exercisable for 2,004,516 shares of Common Stock were issued on October 4, 2017, and, on that date, we issued Notes in an aggregate principal amount of $150,000 to the Subscribers. Between NovemberJuly 2, 2017 and November 7, 2017, the Company entered into Subscription Agreements with additional Subscribers, and issued Notes in2018 as a principal amount of $215,000 to those Subscribers. We may conduct any number of additional closings so long as the final closing occurs on or before the five-month anniversaryresult of the initial closing dateSeries 1 Notes conversion and the amount does not exceed $1,000,000 or a higher amount determined by our Board of Directors.extinguishment.

The placement agent underSeries 1 Notes, prior to the Private Placement is also entitledJuly 2, 2018 conversion and extinguishment, required us to receive a warrant to purchase common stock in an amount equal to 10 percentrepay the principal and accrued and unpaid interest thereon at the earlier of July 31, 2018, or the consummation of the common stock (common stock equivalents) purchasednext equity or equity-linked round of financing resulting in more than $3 million in gross proceeds.

Unsecured Loans

In December 2018, the Company received gross proceeds from an unsecured loan represented by one promissory note in the Subscribers. Such warrant, if issued will have an exercise price determined in relation to the pricingamount of $100,000 from a stockholder owning over 5% of the subsequentCompany’s common stock. The loan is interest free and requires that the Company repay the principal in full on the earlier of the closing of an equity round of financing of the Company resulting in more than $5 million in gross proceeds or December 12, 2019. In November 2018, the Company received cash gross proceeds from unsecured loans represented by two promissory notes in the amounts of $45,000 and will be immediately exercisable once issued.$100,000 from a stockholder owning or a stockholder affiliated with stockholders owning over 5% of the Company’s common stock. The loans are interest free and require that the Company repay the principal in full on the earlier of the closing of an equity round of financing of the Company resulting in more than $5 million in gross proceeds or November 14, 2019.

In May 17, 2018, the Company received cash proceeds of $168,000 from unsecured loans, represented by two promissory notes from a stockholder owning or a stockholder affiliated with stockholders owning over 5% of the Company’s common stock. The loans are interest free and require that the Company repay the principal in full on the earlier to occur of (i) May 17, 2019 or (ii) the closing of an equity round of financing of the Company that raises more than $5 million in gross proceeds. The loans include customary events of default provisions.

On March 20, 2018, the Company received cash proceeds from an unsecured loan, represented by a promissory note, for $115,000 from a stockholder owning over 5% of the Company’s common stock. The loan is interest free and requires that the Company repay the principal in full on the earlier to occur of (i) March 20, 2019 or (ii) the closing of an equity round of financing of the Company that raises more than $3 million in gross proceeds. The loan includes customary events of default provisions.

Funding Requirements and Outlook

We have no current source of revenue to sustain our present activities, and we do not expect to generate revenue until, and unless, the FDA or other regulatory authorities approve our cortical strip, grid electrode and depth electrode technology under development and we successfully commercialize our cortical strip, grid electrode and depth electrode technology. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity and debt financings as well as collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third-party partners, we may have to relinquish valuable rights to our technologies, future revenue streams or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or through collaborations, strategic alliances or licensing arrangements when needed, we may be required to delay, limit, reduce or terminate our product development, future commercialization efforts, or grant rights to develop and market our cortical strip, grid electrode and depth electrode technology that we would otherwise prefer to develop and market ourselves.

NeuroOne Medical Technologies Corporation

Form 10-Q

Our independent registered public accounting firm included an explanatory paragraph in its report on NeuroOne’sour financial statements as of and for the yearsnine months ended September 30, 2018 and for the year ended December 31, 2015 and 2016,2017, noting the existence of substantial doubt about our ability to continue as a going concern. This uncertainty arose from management’s review of our results of operations and financial condition and its conclusion that, based on our operating plans, we did not have sufficient existing working capital to sustain operations through December 31, 2017.fund our operating expenses.

As of September 30, 2017,December 31, 2018, the outstanding principal and accrued and unpaid interest on the Convertible Notes totaled $1,705,834 and the outstanding principal on the Short-TermSeries 3 Notes was $253,000.$1,657,828. If we fail to complete an equity financingthe Series 3 Qualified Financing by November 21, 2017,June 30, 2019, the ConvertibleSeries 3 Notes will be immediately due and payable on such date, and we willmay not have sufficient cash to pay the principal and accrued and unpaid interest thereon. In addition, the Short-Term Notes mature on February 18, 2018 and we may not have sufficient cash to pay the principal thereon.

We have agreements with WARFthe Wisconsin Alumni Research Foundation (“WARF”) and the Mayo Foundation for Medical Education and Research (“Mayo”) that require us to make certain milestone and royalty payments.

We have entered into an Exclusive Start-Up CompanyUnder the WARF License Agreement with WARF (the “WARF License”) pursuant to which WARF has granted us an exclusive license, or the WARF 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. In exchange for the license,, we have agreed to pay WARF a one-time fee of $120,000$55,000 (representing a license feefee) upon the earliest to occur of the date we cumulatively raise at least $3 million in financing, which threshold was met, the date of a change of control, or our revenue reaching a specified threshold amount, and to pay $65,000 (representing reimbursement for costs incurred by WARF in maintaining the licensed patents) upon the earliest to occur of certain events related to the Company raising a minimum amountdate we cumulatively raise at least $5 million in financing, the date of financing, a change of control, or our revenue reaching a specified threshold amount. The initial $55,000 payment was paid in April 2018. The $65,000 reimbursement milestone was paid in February 2019. We have also 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 2019, $100,000 for 2020 and $150,000 for 2021 and each calendar year thereafter that the WARF License is in effect. If we or any of our sublicenses contest the validity of any licensed patent, the royalty rate will be doubled during the pendency of such contest and, if the contested patent is found to be valid and would be infringed by us if not for the WARF License, the royalty rate will be tripled for the remaining term of the WARF License.

We have agreed to diligently develop, manufacture, marketUnder the Amended and sell products under the WARF License in the United States during the term of the agreement and, specifically, that we will submit a business plan to WARF by February 1, 2018 and file an application for 510(k) marketing clearance with the FDA by February 1, 2019. WARF may terminate this license in the event that we fail to meet these milestones 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 WARFRestated License and fail to remedy such default in 90 days or in the event of certain bankruptcy events involving us. WARF may also terminate this license (i) on 90 days’ notice if we fail to have commercial sales of one or more FDA-approved products under the WARF License by March 31, 2019 or (ii) if, after royalties earned on sales begin to be paid, such earned royalties cease for more than four calendar quarters. The WARF License otherwise expires by its terms on the date that no valid claims on the patents licensed thereunder remain. We expect the latest expiration of a licensed patent to occur in 2030.

In addition, WARF reserves the right to grant non-profit research institutions and government agencies non-exclusive licenses to practice and use the inventions of the licensed patents for non-commercial research purposes, and we grant WARF a non-exclusive, sub licensable, royalty-free right and license for non-commercial research purposes to use improvements to the licensed patents. In the event that we discontinue use or commercialization of the licensed patents or improvements thereon, we must grant WARF an option to obtain a non-exclusive, sub-licensable royalty-bearing license to use the improvements for commercial purposes.

We have entered into a license and development agreementDevelopment Agreement with Mayo (the “Mayo Development Agreement”) with the Mayo Foundation for Medical Education and Research (“Mayo”) with to license worldwide (i) certain know how for the development and commercialization of products, methods and processes related to flexible circuit thin film technology for the recording of tissue and (ii) the products developed therefrom, and to partner with Mayo to assist the Company in the investigation, research application, development and improvement of such technology. Mayo has agreed to assist us by providing access to certain individuals at Mayo, or the Mayo Principal Investigators, in developing our cortical thin film flexible circuit technology, including prototype development, animal testing, protocol development for human and animal use, abstract development and presentation and access to and license of any intellectual property that the Mayo Principal Investigators develop relating to the procedure.

Whether or not any such technology, product, method, process, device or delivery system is developed, we agreed, in consideration for Mayo’s efforts under the Mayo Development Agreement, as amended, to pay Mayo a cash payment of approximately $92,000 on the earlier of December 31, 2017 or the date we raise a minimum amount of financing, and on May 25, 2017, prior to the closing of the Acquisition, NeuroOne, Inc. issued Mayo 50,556 shares of NeuroOne, Inc. common stock pursuant to a Subscription Agreement. Finally,, we have agreed to pay Mayo a royalty equal to a single-digit percentage of our product sales pursuant to the Mayo Development Agreement. Mayo may purchase any developed products licensed under the Mayo Development Agreement at the best price offered by us to the end user in the prior year. The Mayo Development Agreement generally will expire in October 2034, unless the Mayo know-how and improvements under the Mayo Development Agreement remain in use, and the Mayo Development Agreement may be terminated by Mayo for cause or under certain circumstances.

NeuroOne Medical Technologies Corporation

Form 10-QNothing further is due until we start selling our products.

Because of our past breach of each ofRefer to the Company’s Transition Report on Form 10-KT for the nine month transition period ended September 30, 2018 with regard to: “Item 1—Business—WARF License,” “Business—Mayo Foundation for Medical Education and Research License and the Mayo Development Agreement, WARF and Mayo may be less likely to waive future defaults or breaches or further amend the agreements in the future, to the extent we request any waiver or amendment. For more information, see “Risk” “Item 1A—Risk Factors—Risks Relating to our Business”— in Part II, Item 1A in this Report. Our Business—We depend on intellectual property licensed from Wisconsin Alumni Research Foundation for our technology under development, and the termination of this license would harm our businessbusiness” and we“Item 1A—Risk Factors—We depend on our partnership with Mayo Foundation for Medical Education and Research to license certain know how for the development and commercialization of our technology. Termination of this partnership would harm our business, and even if this partnership continues, it may not be successful.”

Our existing cash and cash equivalents will not be sufficient to fund our operating expenses throughout our fiscal 2017.year ending September 30, 2019. To continue to fund operations, we will need to secure additional funding and modify terms of some of our existing debt.funding. We may obtain additional financing in the future through the issuance of our common stock,Common Stock and securities convertible into our Common Stock, through other equity or debt financings or through collaborations or partnerships with other companies. We may not be able to raise additional capital on terms acceptable to us, or at all. Further, we may not be able to pay off or modify terms of some of our existing debt that may comecoming due  in June 30, 2019, and any failure to raise capital or to amend existing debt that may be due as and when needed could compromise our ability to execute on our business plan.

The development of our cortical strip, grid electrode and depth electrode technology is subject to numerous uncertainties, and we have based these estimates on assumptions that may prove to be substantially different than we currently anticipate and could use our cash resources sooner than we expect. Additionally, the process of developing medical devices is costly, and the timing of progress in pre-clinical tests and clinical trials is uncertain. Our ability to successfully transition to profitability will be dependent upon achieving FDA approval and then a level of product sales adequate to support our cost structure. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities.

NeuroOne Medical Technologies Corporation

Form 10-Q

Cash Flows

The following is a summary of cash flows for each of the periods set forth below.

NeuroOne Medical Technologies Corporation

Form 10-Q

Net cash used in operating activities

Net cash used in operating activities was $1,509,669$0.7 million for the ninethree months ended September 30, 2017,December 31, 2018, which consisted of a net loss of $3,433,068$1.4 million partially offset primarily by non-cash interest, stock-based compensation for non-employee services, amortization related to intangible assets, note discount amortization, warrant issuance costs and revaluation of premium debt conversion derivative on the Convertible Notesderivatives and warrant liabilities, totaling $1,234,623approximately $0.4 million in the aggregate,aggregate. Net loss was also offset by a net change of $0.3 million in our net operating assets and liabilities. The change in operating assets and liabilities was primarily attributable to an increase in our accounts payable, accrued expenses of $642,099, and prepaid expenses of $46,677.associated with fluctuations in our operating activities.

Net cash used in operating activities was $0$0.6 million for the ninethree months ended September 30, 2016. December 31, 2017, which consisted of a net loss of $1.6 million partially offset by non-cash interest, amortization related to intangible assets, note discount amortization, revaluation of premium debt conversion derivatives and warrant liabilities and note extinguishments, totaling approximately $0.9 million in the aggregate, and by an increase in accrued expenses of approximately $0.2 million.

Net cash used by investing activities

There was limited activityno cash used for investing activities during the nine month periodthree months ended September 30, 2016.December 31, 2018. Net cash used by investing activities was $0.1 million for the three months ended December 31, 2017 and consisted of the payment owed under the terms of the Mayo Development Agreement for the purchase of a patent license for research and development.

Net cash provided by financing activities

Net cash provided by financing activities was $1,057,481$1.0 million for the ninethree months ended September 30,December 31, 2018, which consisted of net proceeds received upon the issuance of the Units in the 2019 and 2018 Private Placements, in the amount of approximately $0.8 million in the aggregate, and proceeds from unsecured loans and advances in the amount of $0.3 million during the three month period.

Net cash provided by financing activities was $0.6 million for the three months ended December 31, 2017, which consisted of $1,107,481$0.6 million in net proceeds received upon the issuance of the Short-TermSeries 3 Notes Convertible Notes and Series 3 Warrants during the nine month period partially offset by the $50,000 repayment of a short-term unsecured loan.quarter.

We had no cash provided by financing activities in the nine months ended September 30, 2016.

NeuroOne Medical Technologies Corporation

Form 10-Q

Critical Accounting Policies

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements which have beenare prepared in accordance with U.S. generally accepted accounting principles. These accounting principles generally accepted in the United States of America, or GAAP. The preparation of these consolidated financial statements requiresrequire us to make estimates and judgments and assumptions that can affect the reported amounts of assets and liabilities disclosure of contingent assets and liabilities as of the datesdate of the balance sheets andfinancial statements as well as the reported amounts of revenue and expensesexpense during the reporting periods. In accordance with GAAP,periods presented. We believe that the estimates and judgments upon which we baserely are reasonably based upon information available to us at the time that we make these estimates and judgments. To the extent that there are material differences between these estimates and actual results, our financial results will be affected. The accounting policies that reflect our more significant estimates on historical experience and on various other assumptions thatjudgments and which we believe are reasonable under the circumstances at the time such estimatesmost critical to aid in fully understanding and evaluating our reported financial results are made. Actual results may differ materially fromdescribed in Note 3 — “Summary of Significant Accounting Policies” to our estimates and judgments under different assumptions or conditions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in ourcondensed consolidated financial statements prospectively from the date of the changeincluded in estimate.“Part 1, Item 1 – Financial Statements” in this Report.

While our significant accounting policies are more fully described inDuring the notesthree months ended December 31, 2018, there were no material changes to our consolidated financial statements appearing elsewhere in this Report, we believe the following are the critical accounting policies usedor estimates disclosed in the preparation of our consolidated financial statements that require significant estimates“Management’s Discussion and judgments.

Fair ValueAnalysis of Financial Instruments

We accountCondition and Results of Operations” included in our Transition Report on Form 10-KT 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 adhering 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:

NeuroOne Medical Technologies Corporation

Form 10-Q

As of September 30, 2017 and December 31, 2016, the fair values of cash, other assets, accounts payable, accrued expenses and the unsecured loan approximated their carrying values because of the short-term nature of these assets or liabilities. The estimated fair value of the short-term promissory notes and convertible promissory notes was based on amortized cost which was deemed to approximate fair value. The fair value of the warrant liability and the premium conversion derivative associated with the convertible promissory notes was based on cash flow models discounted at current implied market rates evidenced in recent arms-length transactions representing expected returns by market participants for similar instruments which were based on Level 3 inputs. There were no transfers between fair value hierarchy levels during the nine-monthnine month transition period ended September 30, 2017, or during the year ended December 31, 2016.

Intellectual Property

We entered into two licensing agreements with major research institutions, which allow for access to certain patented technology and know-how. Milestone payments under those agreements are capitalized and amortized to general and administrative expense over the expected useful life of the acquired technology.2018.

Impairment of Long-Lived Assets

We evaluate long-lived assets, which consists entirely of licensed intellectual property for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. We assess 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. Through September 30, 2017, we had not impaired any long-lived assets.

Debt Issuance Costs

Debt issuance costs are recorded as a reduction of the short-term promissory notes and convertible promissory notes. Amortization of debt issuance costs is calculated using the straight-line method over the term of the short-term promissory notes and convertible promissory notes, which approximates the effective interest method, and is recorded in interest expense in the statement of operations.

Research and Development Costs

Research and development costs are charged to expense as incurred. Research and development expenses may comprise costs incurred in performing research and development activities, including clinical trial costs, manufacturing costs for both clinical and pre-clinical materials as well as other contracted services, license fees, and other external costs. Nonrefundable 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.Recent Accounting Pronouncements

Warrant Liability

We issued warrantsRefer to purchase equity securities in connection with the issuanceNote 3— “Summary of the convertible promissory notes. We account for these warrants as a liability at fair value for each reporting period as the number of shares were not fixed and determinable at the issuance date for the warrants associated with the convertible promissory notes. Additionally, issuance costs associated with the warrants are expensed as incurred and reflected as interest expense in the accompanyingSignificant Accounting Policies” to our condensed consolidated statement of operations. We will continue to adjust the warrant liability for changes in fair value until the earlier of the exercise or expiration of the warrants, or until such time, if any, as the number of shares to be exercised becomes fixed, at which point the warrants will be classified in stockholders’ (deficit) equity provided that there are sufficient authorized and unissued shares of common stock to settle the warrants and redeem any other contracts that may require settlement in shares of common stock. Any future change in fair value of the warrant liability will be recognized as a component of interest expense in the consolidated statement of operations.

NeuroOne Medical Technologies Corporation

Form 10-Q

Premium Debt Conversion Derivative

We evaluate all conversion and redemption features contained in a debt instrument to determine if there are any embedded derivatives that require separation from the host debt instrument. An embedded derivative that requires separation is bifurcated from its host debt instrument and a corresponding discount to the host debt instrument is recorded. The discount is amortized and recorded to interest expense over the term of the host debt instrument using the straight line method which approximates the effective interest method. The separated embedded derivative is accounted for separately on a fair market value basis. We record the fair value changes of a separated embedded derivative to interest expense at each reporting period. We issued Convertible Notes that contained a 125% conversion premium in the event that a qualified financing occurs at a price under $2.25 per common share. We also issued 2017 Convertible Notes that contained a 125% conversion premium in the event that a qualified financing occurs at a price under $2.8125 per common share. We determined that the redemption feature under the respective notes qualified as an embedded derivative and was separated from its debt host.

Income Taxes

For NeuroOne, 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 of all of the deferred tax asset will not be realized.

The LLC operated as a single-member LLC from formation on December 12, 2013 until it was merged into NeuroOne, Inc. on October 27, 2016. As such, it was a disregarded legal entity for income tax purposes. Accordingly, no provision for income taxes wasstatements included in the financial statements“Part 1, Item 1 – Financial Statements” in this Report for the period from January 1, 2016 through October 26, 2016.

Net Loss Per Share

Basic earnings or loss per sharea discussion 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. Our stock options, Convertible Notes and warrants are considered common stock equivalents for this purpose. Diluted earnings is computed utilizing the treasury method for the stock options and warrants. Diluted earnings with respect to the Convertible Notes utilizing the if-converted method was not applicable during the three and nine month periods ended September 30, 2017 as no conditions required for conversion had occurred during this period. 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 and nine month periods ended September 30, 2017.

The LLC was a single-member LLC for which no units were outstanding. Accordingly, earnings per share is not presented for the LLC.

NeuroOne Medical Technologies Corporation

Form 10-Q

Fair Value of Common Stock on Grant Dates

Prior to the Acquisition, we were a private company with no active public market for our common stock. Therefore, we have historically periodically determined for financial reporting purposes the estimated per share fair value of our common stock at various dates using contemporaneous valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, also known as the Practice Aid. We performed these contemporaneous valuations on an as-needed basis. In conducting the contemporaneous valuations, we considered all objective and subjective factors that we believed to be relevant for each valuation conducted, including our best estimate of our business condition, prospects and operating performance at each valuation date.

Common Stock Valuation Methodology

The contemporaneous valuations that we conducted were prepared in accordance with the guidelines in the Practice Aid, which prescribes several valuation approaches for setting the value of an enterprise, such as the asset, market and income approaches, and various methodologies for allocating the value of an enterprise to its common stock. In determining the fair value of the common stock underlying the stock options granted, our Board of Directors has historically considered, among other things, the most recent estimate of fair value provided by an independent third-party valuation specialist and our assessment of additional objective and subjective factors to determine the common stock fair market value each valuation date. The following factors, among others, were considered:

There are significant judgments and estimates inherent in the determination of fair value of our common stock, including the contemporaneous valuations. These judgments and estimates include assumptions regarding our future operating performance, and the determination of the appropriate valuation methods. If we had made different assumptions, our stock-based compensation expense, net loss and net loss per common share could have been significantly different.

In each of our contemporaneous valuations, we generally used the asset and market approaches to derive an estimated enterprise value. The asset approach establishes value based on the cost of reproducing or replacing the property, less economic depreciation due to physical deterioration, and functional or economic obsolescence, if present and measurable. The particular market approach utilizes the option pricing method, or OPM, backsolve method to determine our enterprise value. Under this method, an implied equity value of the company is derived from recent transactions involving the Company’s securities in arms-length transactions. Under the option pricing method, shares are valued by creating a series of hypothetical call options using exercise prices based on the liquidation preferences and conversion terms of each equity class. The values of the multiple classes of equity are inferred by analyzing these options and determining the option value attributable to each respective security. We applied a discount to the valuations due to the lack of marketability of the ordinary shares at the time of issuance. We calculated the discount for lack of marketability and applied it as appropriate to each allocation.

Recent Accounting Pronouncements

In January 2016, the FASBrecently issued ASU No. 2016-01, Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The guidance is effective in the first quarter of fiscal 2018 for public entities and for all other entities in the first quarter of fiscal 2019. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. We are currently evaluating the impact of the new guidance on our financial statements.

In May 2017, the FASB issued ASU 2017-09,Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2016-09), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the requirements of this new guidance and has not yet determined its impact on our financial statements.

NeuroOne Medical Technologies Corporation

Form 10-Q

In July 2017, the FASB issued ASU No. 2017-11 (“ASU 2017-11”),Earnings Per Share, Distinguishing Liabilities from Equity and Derivatives and Hedging, which changes the accounting and earnings per share for certain instruments with down round features. The amendments in ASU 2017-11 should be applied using a cumulative-effect adjustment as of the beginning of the fiscal year or retrospective adjustment to each period presented and is effective for annual periods beginning after December 15, 2018 for public business entities and after December 15, 2019 for all other entities, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the requirements of this new guidance and has not yet determined its impact on our financial statements.pronouncements.

Off Balance Sheet Arrangements

None.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable for smaller reporting companies.

Item 4. Controls and Procedures

During the three months ended September 30, 2017,December 31, 2018, there were no changes in our internal controls over financial reporting (as defined in Rule 13a- 15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act, of 1934, as amended, as of September 30, 2017.December 31, 2018. Based on this evaluation, our chief executive officer and principal financial officer have concluded such controls and procedures to be ineffective as of September 30, 2017December 31, 2018 to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

As of September 30, 2017,December 31, 2018, disclosure controls and procedures were not effective due to the previously identified material weaknesses disclosed in the risk factors within the Current Report on Form 8-K filed on July 20, 2017, described below.weaknesses. The material weaknesses relatedstem primarily from our small size and include the inability to ineffective internal(i) maintain effective controls over accounting for non-routine and/or complex debt and equity transactions and (ii) maintain effective controls over the accounting closingfinancial statement close and financial reporting process, pertaining to certain stockaccounting for routine transactions and complicated convertible debt instruments; insufficient internal personnel resources and technical accounting and reporting expertise within the Company’s financial closing and reporting functions; and due to our small size, the Company’s inability to maintain effective internal controls to assure properan overall lack of segregation of duties asresulting from the same employee was responsible for initiating and recording transactions.limited number of employees we have.

We intend to recruit additional professionals with the requisite experience and skillset to address these material weaknesses, as our business conditions warrant. However, we do not currently have adequate cash resources to invest in these additional resources. Accordingly, our remediation plans may be delayed. Although we believe that these corrective steps, when taken, will enable management to conclude that the internal controls over our financial reporting are effective when the staff is in place and trained, we cannot provide assurance that these steps will be sufficient. We may be required to expend additional resources to identify, assess and correct any additional weaknesses in internal control.

NeuroOne Medical Technologies Corporation

Form 10-Q

PART II -– OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we arethe Company is subject to litigation and claims arising in the ordinary course of business.  Other than the letter received by NeuroOne, Inc. inIn May 2017, NeuroOne received a letter from PMT, the former employer of Mark Christianson and Wade Fredrickson claiming, among other things, certain breachesFredrickson.  PMT claimed that these officers had breached their restrictive covenant obligations with PMT by virtue of non-competition obligationstheir work for NeuroOne and such officer’s prior work during employment with the prior employer, that these officers had breached their confidentiality and non-disclosure obligations to such prior employerPMT and federal and state law by virtuemisappropriating confidential and trade secret information, and that the Company is responsible for tortious interference with the contracts.  The letter demanded that Mr. Fredrickson (who resigned from the Company in June 2017), Mr. Christianson and NeuroOne cease and desist all competitive activities, that Mr. Fredrickson step down from his position and that Mr. Christianson and NeuroOne provide the former employer access to NeuroOne’s systems to demonstrate that it is not using trade secrets or proprietary information nor competing with the former employer.

On March 29, 2018, the Company was served with a complaint filed by PMT adding the Company, NeuroOne and Mr. Christianson to its existing lawsuit against Mr. Fredrickson.  In the lawsuit, PMT claims that Mr. Fredrickson and Mr. Christianson breached their non-competition, non-solicitation and non-disclosure obligations, breached their fiduciary duty obligations, were unjustly enriched, engaged in unfair competition, engaged in a civil conspiracy, tortiously interfered with PMT’s contracts and prospective economic advantage, and breached a covenant of such officers’ workgood faith and fair dealing.  Against Mr. Fredrickson, PMT also alleges that he intentionally or negligently spoliated evidence, made negligent or fraudulent misrepresentations, misappropriated trade secrets in violation of Minnesota law, and committed the tort of conversion and statutory civil theft.  Against the Company and NeuroOne, PMT alleges that the Company and NeuroOne were unjustly enriched and engaged in unfair competition.  PMT asked the Court to impose a constructive trust over the shares held by Mr. Fredrickson and Mr. Christianson and to award compensatory damages, equitable relief, punitive damages, attorneys’ fees, costs and interest. 

On April 18, 2018, Mr. Christianson, the Company and NeuroOne, Inc. filed a motion for dismissal, which was heard by the Court on October 11, 2018. The motion for dismissal states that: the contract claims against Mr. Christianson fail because his agreement was not supported by consideration; the Minnesota Uniform Trade Secrets Act preempts plaintiff’s claims for unfair competition, civil conspiracy and unjust enrichment; plaintiff fails to state a claim regarding alleged breach of the duties of loyalty and good faith/fair dealing; plaintiff cannot legally obtain a constructive trust; plaintiff has insufficiently pled its tortious interference claims; and Plaintiff has not stated a claim for unfair competition. On January 7, 2019, the judge granted the motion for dismissal with respect to PMT’s claim for breach of the duty of good faith and fair dealing, and denied the motion for dismissal with respect to the other claims presented. The Company, NeuroOne, Inc., and Mr. Christianson (who has not worked for PMT since February 2012) intend to continue to defend themselves vigorously.  

We have no insurance coverage to protect against any losses we are not currentlymay experience due to this claim. Furthermore, Mr. Christianson is a partykey officer and the loss of his services would be detrimental to any material legal proceedingsour operations and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results or financial condition. See our Current Report on Form 8-K, filed on July 20 (the “Acquisition 8-K”) and our Current Report on Form 8-K, filed on August 14, 2017 for additional information.prospects.

Item 1A.  Risk Factors

Factors thatIn addition to the other information set forth elsewhere in this Report, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” of the Company’s Transition Report on Form 10-KT for the nine month transition period ended September 30, 2018. Those factors, if they were to occur, could cause our actual results to differ materially from those expressed in our forward-looking statements in this Quarterly Report, on Form 10-Qand materially adversely affect our financial condition or future results. Although we are not aware of any ofother factors that we currently anticipate will cause our forward-looking statements to differ materially from our future actual results, or materially affect the Company’s financial condition or future results, additional risks described in our Acquisition 8-K. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factorsand uncertainties not presentlycurrently known to us or that we currently deem to be immaterial may also impairmight materially adversely affect our actual business, financial condition and/or results of operations. As of the date of this Quarterly Report on operating results.

NeuroOne Medical Technologies Corporation

Form 10-Q there have been no material changes to the risk factors disclosed in our Acquisition 8-K.  We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

SeeAll unregistered issuances of securities during the disclosures under “Item 3.02 Unregistered Sales of Equity Securities”period covered by this Report have been previously disclosed in our Acquisition 8-K and in our Current Reportthe Company’s current reports on Form 8-K, filed on August 23, 2017.8-K.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Mine Safety Disclosures

Not applicable to our Company.

Item 5.  Other Information

None.

NeuroOne Medical Technologies Corporation

Form 10-Q

Item 6.  Exhibits

NeuroOne Medical Technologies Corporation

Form 10-Q

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: NovemberFebruary 14, 20172019

NeuroOne Medical Technologies Corporation 

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