UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended SeptemberJune 30, 20172020

-OR-

☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transactiontransition period from _________ to________to_________

Commission File Number: 000-54716

NeuroOne Medical Technologies Corporation

(Exact name of Registrant as specified in its charter)

Registrant’s Telephone Number, Including Area Code:952-237-7412952-426-1383

Not Applicable
(Former name, or former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the issuerregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of outstanding shares of the registrant’s common stock as of NovemberAugust 10, 20172020 was 7,864,994.22,052,294.

NEUROONE MEDICAL TECHNOLOGIES CORPORATION

FORM 10-Q

INDEX

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

NeuroOne Medical Technologies Corporation

Condensed Consolidated Balance Sheets

See accompanying notes to condensed consolidated financial statements

NeuroOne Medical Technologies Corporation

Condensed Consolidated Statements of Operations

(unaudited)

See accompanying notes to condensed consolidated financial statements

NeuroOne Medical Technologies Corporation

Condensed Consolidated Statements of Cash FlowsChanges in Stockholders’ Deficit

(unaudited)

See accompanying notes to condensed consolidated financial statements

NeuroOne Medical Technologies Corporation

Condensed Statements of Cash Flows

(unaudited)

See accompanying notes to condensed financial statements 

NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements (unaudited)

NOTE 1 – Description of Business and Basis of Presentation

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

NOTE 1 – Organization and Basis of Presentation

On July 20, 2017, NeuroOne Medical Technologies Corporation (the “Company” or “NeuroOne”), a Delaware Corporation, (the “Company”), through a wholly owned acquisition subsidiary, acquired 100% of the outstanding capital stock of NeuroOne, Inc. (“NeuroOne”) in a reverse triangular merger and reorganization pursuant to Section 368(a) of the Internal Revenue Code (the “Acquisition”). The Acquisition was accounted for as a capital transaction, or reverse recapitalization. NeuroOne was the accounting acquirer in this transaction. As such, the historical financial statements of NeuroOne and its predecessor NeuroOne LLC (the “LLC”) reflect operations of the Company for all periods presented prior to the date of Acquisition. NeuroOne, Inc. was formed on October 7, 2016 and acquired the LLC on October 27, 2016 (the “Merger”) as described more fully below. The accompanying condensed consolidated financial statements subsequent to the Acquisition include those of the Company, as well as those of its wholly owned subsidiary NeuroOne.

Subsequent to the Acquisition, the Company’s operating activities are the same as those of NeuroOne,is an early-stage medical technology company engaged in the development ofdeveloping comprehensive neuromodulation cEEG and sEEG monitoring, ablation, and brain stimulation solutions to diagnose and treat patients with epilepsy, Parkinson’s disease, dystonia, essential tremors, and other brain related disorders.

To date, the Company has recorded no commercial sales and has a limited expense history. The Company is currently raising capital to fund the development of its proprietary technology. The Company received 510(k) clearance from the FDA to market the initial device and expect to submit an application for 510(k) clearance for a second product by end of calendar year 2020.

The Company is based in Eden Prairie, Minnesota.

AcquisitionCOVID-19

The transactions contemplated by the agreement were consummated on July 20, 2017 (the “Closing”) and, pursuant to the terms of the agreement, (i) all outstanding shares of common stock of NeuroOne, par value $0.0001 per share (the “NeuroOne Shares”) were exchanged for shares of the Company’s common stock, par value $0.001 per share (the “Company Shares”) based on the exchange ratio of 17.0103706 Company Shares for every one NeuroOne Share (the “Exchange Ratio”), resulting in the Company issuing, on July 20, 2017, an aggregate of 6,291,994 Company Shares for all of the then-outstanding NeuroOne Shares, (ii) all outstanding options of NeuroOne were replaced with options to purchase Company Shares based on the Exchange Ratio, with corresponding adjustments to their respective exercise prices, pursuant to which the Company reserved 992,265 Company Shares for issuance upon the exercise of options, (iii) all warrants of NeuroOne, Inc. were replaced with warrants to purchase Company Shares and (iv) the Company assumed the outstanding convertible promissory notes of NeuroOne. NeuroOne options had been issued pursuant to the NeuroOne 2016 Equity Incentive Plan. Pursuant to the agreement, the Company assumed the NeuroOne 2016 Equity Incentive Plan upon the Closing.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

Pursuant toOn March 11, 2020, the Acquisition,World Health Organization declared the Company acquired 100%outbreak of NeuroOne Shares in exchange for the issuance of Company Shares and NeuroOne became the Company’s wholly-owned subsidiary. Also at the Closing, Mr. Samad (the majority owner of the Company prior to the Acquisition) tendered for cancellation 3,500,000 Company Shares held by him as part of the conditions to Closing.

At the time of Acquisition, the Company had authorized 100,000,000 shares of common stock with a par value of $0.001 and 10,000,000 shares of preferred stock with a par value of $0.001.

All issued and outstanding common stock share amounts, options for common stock and per share amounts contained in the condensed consolidated financial statements were retroactively adjusted to reflect the Exchange Ratio for all periods presented. The number of authorized shares for common and preferred stock and their respective par values per share as of December 31, 2016 reflect those of the Company prior to the Acquisition.

Merger

The LLC was formed on December 12, 2013 and operatednovel coronavirus (“COVID-19”) as a limited liability company until it was merged withglobal pandemic, which continues to spread throughout the United States and into NeuroOne on October 27, 2016 with NeuroOne asaround the surviving entity of the “Merger”. NeuroOne was formed on October 7, 2016 under different ownership than the LLC.world. As a result of the Merger, allCOVID-19 pandemic, the Company has experienced delays and disruptions in its pre-clinical and clinical trials, as well as interruptions in its manufacturing, supply chain, and research and development operations. The global outbreak of COVID-19 continues to rapidly evolve. In April 2020, given the impact of COVID-19 on the Company, the Company applied for and received loan funding of approximately $83,333 under the PPP. The Company may be required to repay any portion of the properties, rights, privileges, powersoutstanding principal that is not forgiven, along with accrued interest, and franchisesit cannot provide any assurance that it will be eligible for loan forgiveness, or that any amount of the LLC vested in NeuroOne,PPP loan will ultimately be forgiven.

The extent to which the COVID-19 pandemic may impact our business and all debts, liabilitiespre-clinical and dutiesclinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the LLC becamedisease, the debts, liabilities and duties of NeuroOne with the exceptionduration of the LLC’s license agreement with Wisconsin Alumni Research Foundationoutbreak, travel restrictions and social distancing in the U.S. and other countries, business closures or business disruptions and the effectiveness of actions taken in the U.S. and other countries to contain and treat the disease. The COVID-19 pandemic may also impact the Company’s ability to secure additional financing or its ability to up-list from its current OTC Market (“WARF”OTCQB”) which required WARF’s approval for transfer (See Note 4 – Commitments, and Contingencies). The purposemay result in further modifications to its debt agreements. Although the Company cannot estimate the length or gravity of the Merger was to change the jurisdiction of NeuroOne’s incorporation from Minnesota to Delaware, change the ownershipimpact of the LLC’s underlying assets,COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on the Company’s results of future operations, financial position, and to convert from a limited liability company to a corporation.liquidity in fiscal year 2020 and beyond.

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 Accounting Standards Codification (ASC) 805 –Business Combinations.

Basis of presentation

The accompanying condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the SEC.Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated financial statements may not include all disclosures required by U.S. GAAP; however, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto for the fiscal year ended December 31, 2016September 30, 2019 included in the NeuroOne CurrentAnnual Report on Form 8-K filed on July 20, 2017.10-K. The condensed balance sheet at December 31, 2016September 30, 2019 was derived from the audited financial statements of NeuroOne.the Company.

In December 2019, the Company’s wholly-owned subsidiary, NeuroOne Inc. was merged into NeuroOne Medical Technologies Corporation. The merger of the Company’s wholly owned subsidiary did not have a financial impact to the periods presented. Upon closing of the merger, the Company did not have any remaining entities that required consolidation for financial statement reporting purposes.

In the opinion of management, all adjustments, consisting of only normal recurring adjustments that are necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

NOTE 2 – Going Concern

The accompanying condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. The Company has incurred losses since inception and hadhas negative working capital, negative cash flows from operations, and an accumulated deficit of $3,699,438$30,312,639 as of SeptemberJune 30, 2017. Prior2020. The Company has not established a source of revenues to cover its operating costs, and as such, has been dependent on funding operations through the Merger, the LLC also incurred losses since its inceptionissuance of debt and had cumulative lossessale of $49,930 as of the date of the Merger.equity securities. The Company does not have adequate liquidity to fund its operations throughout fiscal 2018 without raising additional funds. These factors raise substantial doubt about its ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this condition. Management intends to continue to seek additional financing to fund operations. IfHowever, these actions are not solely within the Company is not able to raise additional working capital, it will have a material adverse effect on the operationscontrol of the Company and the development of its technology.

Through September 30, 2017, the Company has completed both a $253,000 short-term promissory note financing and a $1,625,120 convertible promissory note financing of a planned $2.5 million subscription. The Company does not have adequate liquidity to fund its operations throughout fiscal 2017 without raising additional funds. Management believes that the currently available resources from the short-term promissory note and convertible promissory note financings combined with funds expected to be raised in the last quarter of fiscal 2017 will be sufficient to enable the Company to meet its operating plan through at least September 30, 2018. However, ifCompany. If the Company is unable to raise additional funds, or the Company’s anticipated operating results are not achieved, management believes planned expenditures may need to be reduced in order to extend the time period that existing resources can fund the Company’s operations. If management is unable to obtain the necessary capital, it may have a material adverse effect on the operations of the Company and the development of its technology, or the Company may have to cease operations.operations altogether.

NOTE 3 – Summary of Significant Accounting Policies

Management’s Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash. The Company’s cash is held by one financial institution in the United States. Amounts on deposit may at times exceed federally insured limits. Management believes that the financial institution is financially sound, and accordingly, minimal credit risk exists with respect to the financial institution. As of SeptemberJune 30, 2017,2020, the Company did not have deposits in excess of federally insured amounts.amounts by $3,601,479.

Common Stock Valuation

The Company has been utilizing pricing as quoted on the OTC Market as the basis for the fair value of the Company’s common stock since September 30, 2019. Prior to October 27, 2016,September 30, 2019, the LLC did not maintain a bank account. Any expenses incurred whileCompany utilized methodologies in accordance with the LLC was organized as a limited liability company were paid by the sole memberframework of the LLC.American Institute of Certified Public Accountants’ Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, to estimate the fair value of its common stock (the “AICPA Valuation Framework”). The valuation methodology included estimates and assumptions that required the Company’s judgment. These estimates and assumptions included a number of objective and subjective factors, including external market conditions affecting the biotechnology industry sector, and the likelihood of achieving a liquidity event, such as an offering or sale. Significant changes to the key assumptions used in the valuations would result in different fair values of common stock at each of those valuation dates.

The fair value the Company’s common stock is used as an input into the fair value determination of instruments recorded at fair value and stock option or other equity awards that the Company has issued.

NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements, continued (unaudited)

Fair Value of Financial Instruments

The Company’s accounting for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the condensed consolidated financial statements on a recurring or nonrecurring basis adheres to the Financial Accounting Standards Board (FASB)(“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

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

As of June 30, 2020 and September 30, 2017 and December 31, 2016,2019, the fair values of cash, prepaid, other assets, accounts payable and 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 promissoryconvertible notes outstanding during the three and the convertible promissory notes of the Company wasnine month period ended June 30, 2020 were based on amortized cost which was deemed to approximate fair value. Theboth the fair value of the warrant liability and premium conversion derivativeour common stock, discount associated with the convertible promissory notes was based onembedded redemption features, and cash flow models discounted at current implied market rates evidenced in recent arms-length transactions representing expected returns by market participants for similar instruments and are based on Level 3 inputs.

The estimated fair value of the convertible promissory notes of the Company that were outstanding during fiscal year ended June 30, 2019 were based on amortized cost which was deemed to approximate fair value. The fair value of the warrant liability and the premium conversion derivatives associated with the convertible promissory notes outstanding during fiscal 2019 were based on both the estimated fair value of our common stock and cash flow models discounted at the then current implied market rates evidenced in arms-length transactions representing expected returns by market participants for similar instruments during that period and were based on Level 3 inputs.

There were no transfers between fair value hierarchy levels during the three and nine month periodsmonths ended SeptemberJune 30, 2017.2020 and 2019.

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

The following table provides a roll-forward of the convertible notes, warrant liability and premium debt conversion derivativederivatives measured at fair value on a recurring basis using unobservable level 3 inputs for the nine monthsmonth periods ended SeptemberJune 30 2017:as follows:

There were no financial instruments measured on a fair value recurring basis during the nine month period ended September 30, 2016.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

Intellectual Property

NeuroOne and the LLC have

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

Property and Equipment

Property and equipment is recorded at cost and reduced by accumulated depreciation. Depreciation expense is recognized over the estimated useful lives of the assets using the straight-line method. The estimated useful life for equipment and furniture ranges from three to seven years and three years for software. Tangible assets acquired for research and development activities and that have alternative use are capitalized over the useful life of the acquired asset. Estimated useful lives are periodically reviewed, and, when appropriate, changes are made prospectively. Software purchased for internal use consists primarily of amounts paid for perpetual licenses to third-party software providers and installation costs. When certain events or changes in operating conditions occur, asset lives may be adjusted and an impairment assessment may be performed on the recoverability of the carrying amounts. Maintenance and repairs are charged directly to expense as incurred.

Impairment of Long-Lived Assets

The Company evaluates theirits long-lived assets, which consists entirelyconsist of licensed intellectual property and property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. The Company assesses the recoverability of long-lived assets by determining whether or not the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Through September 30, 2017, the Company has not impaired any long-lived assets.

Debt Issuance Costs

Debt issuance costs are recorded as a reduction of the short-termconvertible promissory notes and convertible promissory notes.when applicable. Amortization of debt issuance costs is calculated using the straight-line method over the term of respective short-term andthe convertible promissory notes, which approximates the effective interest method, and is recorded in interest expense in the accompanying condensed consolidated statements of operations.

Research and Development Costs

Research and development costs are charged to expense as incurred. Research and development expenses may compriseinclude 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 ASCAccounting Standards Codification (ASC) 730,Research and Development. Lastly, de minimis income from the sale of prototype products and related materials is offset against research and development expenses.

NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements, continued (unaudited)

Warrant Liability

The Company issued warrants to purchase equity securities in connection with the issuance or amendment of the convertible promissory notes (see Note 8 – Convertible Promissory Notes and Warrant Agreements).notes. The Company accounts for these warrants as a liability at fair value aswhen the number of shares wereis not fixed and determinable at the issuance date.determinable. Additionally, issuance costs associated with the warrantswarrant liability are expensed as incurred and reflected as interest expense in the accompanying condensed consolidated statements of operations. The Company will continue to adjustadjusts the liability for changes in fair value until the earlier of the exercise or expiration of the warrant,warrants for any period when pricing protections in future equity financings remain in place, 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 bewhen outstanding, is recognized as a component of interest expense in the condensed consolidated statements of operations.

Premium Debt Conversion DerivativeDerivatives

The Company evaluates 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. The Company records the fair value changes of a separated embedded derivative to interest expense at each reporting period. The Company issued convertible promissory notes that contained a 125% conversion premiumperiod in the event that a qualified financing occurscondensed statements of operations based on the fair value of its common stock and cash flow models discounted at a price under $2.25 per common share (see Note 8 – Convertible Promissory Notescurrent implied market rates evidenced in recent arms-length transactions representing expected returns by market participants for similar instruments and Warrant Agreements). 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 (see Note 13 – Subsequent Events). The Company determined that the redemption feature under the convertible promissory notes qualified as an embedded derivative and was separated from its debt host.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)are based on Level 3 inputs.

Income Taxes

For NeuroOne,the Company, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion ofor 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 on October 27, 2016. As such, it was a disregarded legal entity for income tax purposes. Accordingly, no provision for income taxes was included in the financial statements for the period from January 1, 2016 through October 26, 2016.

Net Loss Per Share

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

For NeuroOne,the Company, basic loss per share of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.

Diluted earnings or loss per share of common stock is computed similarly to basic earnings or loss per share except the weighted average shares outstanding are increased to include additional shares from the assumed exercise of any common stock equivalents, if dilutive. The Company’s stock options, convertible promissory notes, warrants, stock options and warrantsrestricted stock units while outstanding are considered common stock equivalents for this purpose. Diluted earnings is computed utilizing the treasury method for the warrants, stock options and warrants.restricted stock units. Diluted earnings with respect to the convertible promissory notes utilizingutilize the if-converted method was not applicable during the three and nine months ended September 30, 2017 as no conditions required for conversion had occurred during these periods.method. 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 monthsmonth periods ended SeptemberJune 30, 2017.2020 and 2019.

NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements, continued (unaudited)

The following potential common shares were not considered in the computation of diluted net loss per share as their effect would have been anti-dilutive for the three and nine month periods ended SeptemberJune 30, 2017:2020 and 2019:

Recent Accounting Pronouncements

In JanuaryFebruary 2016, the FASB issued ASU No. 2016-01,Financial Instruments — Overall: RecognitionAccounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) and Measurement of Financial Assets and Financial Liabilities. Thesubsequently amended the guidance affects the accounting for equity investments, financial liabilitiesrelating largely to transition considerations under the fair value optionstandard in January 2017 and July 2018. The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the presentationbalance sheet 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. The Company is currently evaluating the impact of the new guidance on its financial statements.

In May 2017, the FASB issueddisclosing key information about leasing arrangements. This 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 periodsfiscal years beginning after December 15, 2017. Early adoption is permitted.2018, including interim periods within those annual periods. The Company is currently evaluatingadopted the requirements of this new guidancestandard on October 1, 2019 and hasdid not yet determined itshave a material impact on the Company’s financial statements.statements of comprehensive loss or statements of cash flows for agreements in place as of the adoption date. As such, the Company did not restate comparative periods and did not recognize any cumulative adjustment to retained earnings on the date of the adoption. The Company elected the short-term lease expedient upon adoption of the standard. See NOTE 4 – Commitments and Contingencies with regard to a new operating lease that commenced after the adoption date on November 1, 2019.

In July 2017, the FASB issued ASU No. 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 this ASU 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. The Company is currently evaluatingadopted the requirements of this new guidance on October 1, 2019, and hasthe new guidance did not yet determined itshave an impact on the Company’s financial statements as of the adoption date.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). The new guidance modifies the disclosure requirements in Topic 820 as follows:

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 and does not expect that it will have a material impact on its financial statements.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued (unaudited)

(unaudited)

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) which amends the existing guidance relating to the accounting for income taxes. This ASU is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of accounting for income taxes and to improve the consistent application of GAAP for other areas of accounting for income taxes by clarifying and amending existing guidance. The ASU is effective for fiscal years beginning after December 15, 2020. The Company does not expect that the adoption of this new guidance will have a material impact on the Company’s financial statements.

NOTE 4 – Commitments and Contingencies

WARF License Agreementamendment

On October 1, 2014, the LLC

The Company entered into an exclusive start-up company license agreementAmended and Restated Exclusive Start-up Company License Agreement (the “WARF License”) with the Wisconsin Alumni Research Foundation (“WARF”) on January 21, 2020, which amended and restated in full the prior license agreement between WARF and NeuroOne, LLC, a predecessor of the Company, dated October 1, 2014, as amended on February 22, 2017, March 30, 2019 and September 18, 2019.

The WARF License grants to the Company an exclusive license to make, use and sell, in the United States only, products that employ certain licensed patents for WARF’sa neural probe array or thin-film micro electrode array and thin film electrode technology (the “2014 WARF Agreement”). The LLC was to make $110,000 in milestone payments depending on achievement of certain development 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 rights 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 Merger and in accordance with ASC 805-50, NeuroOne estimated the fair value of consideration payable to WARF 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 completes a qualified financing. 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 $50,000 and $100,000 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 not to continue to use the licensed technology.

method. The Company has agreed to diligently develop, manufacture, market and sell products underpay WARF a royalty equal to a single-digit percentage of its product sales pursuant to the WARF License, with a minimum annual royalty payment of $50,000 for 2020, $100,000 for 2021 and $150,000 for 2022 and each calendar year thereafter that the WARF License is in effect. If the United StatesCompany or any of its sublicensees contest the validity of any licensed patent, the royalty rate will be doubled during the pendency of such contest and, if the contested patent is found to be valid and would be infringed by the Company if not for the WARF License, the royalty rate will be tripled for the remaining term of the 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. License.

WARF may terminate the 2017 WARF Agreement in the event that the Company fails to meet these milestones on 30 days’ written notice,License 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 AgreementLicense and fails to remedy such default in 90ninety (90) days or in the event of certain bankruptcy events involving the Company. WARF may also terminate this license (i)the WARF License on 90ninety (90) days’ notice if the Company fails to have commercial sales of one or more FDA-approved products under the 2017 WARF AgreementLicense by March 31, 2019June 30, 2021. The WARF License otherwise expires by its terms (i) on the date that no valid claims on the patents licensed thereunder remain or (ii) if, after royalties earned on sales begin to be paid, such earned royalties ceaseupon the cessation for more than four (4) calendar quarters.quarters of the payment, once begun, of earned royalties under certain sections of the WARF License. The Company expects 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 the Company grants 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 the Company discontinues use or commercialization of the licensed patents or improvements thereon, the Company must grant WARF an option to obtain a non-exclusive, sub-licensable royalty-bearing license to use the improvements for commercial purposes.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

Mayo Agreement

Legal

PMT Litigation

From time to time, the Company 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 prior employer, that these officers had breached their confidentiality and non-disclosure obligations to PMT and federal and state law by misappropriating confidential and trade secret information, and that the Company is responsible for tortious interference with contracts. The letter, which purported to attach a noncompete agreement signed by Mr. Fredrickson, 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 Fourth Judicial District Court of the State of Minnesota. The complaint purported to attach Mr. Fredrickson’s noncompete agreement as Exhibit A. 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.

In April 2019, PMT served the Company, NeuroOne, Inc and Christianson with a proposed Second Amended Complaint, which included new claims against the Company and NeuroOne, Inc for tortious interference with contract and tortious interference with prospective business advantage and punitive damages against the Company, NeuroOne Inc. and Christianson. On June 28, 2019, the Company presented evidence indicating that PMT had participated in a fraud on the Court and sought an Order that PMT had waived the attorney client privilege.

On July 16, 2019, the defendants served PMT with a joint notice of motion for sanctions seeking a variety of sanctions for litigation misconduct including, but not limited to, dismissal of the case and an award of attorneys’ fees. The Company, NeuroOne Inc and Mr. Christianson further intend to move for summary judgment on all remaining claims asserted against them as well as for leave to assert counterclaims against PMT for abuse of process.

On August 30, 2019, the Hennepin County District Court heard dispositive motions in this case. The district court judge indicated some claims would likely be tried to a jury and encouraged the parties to settle.

On September 12, 2019, the district court heard NeuroOne’s motion for sanctions. The district court held the sanctions hearing on December 17, 2019 and December 18, 2019 and indicated that a ruling would be made in approximately 90 days. NeuroOne intends to continue to defend themselves vigorously.

The Court issued multiple rulings on the Company’s request for summary judgment and sanctions against PMT in April 2020.

On April 29, 2020, the district court granted the Company’s motion for sanctions. Additionally, the district court granted the Company’s motion for summary judgment in part with respect to the counts for Christianson’s breach of non-confidentiality agreement, Fredrickson’s breach of confidentiality covenants, and the creation of a constructive trust and denied the Company’s motion for summary judgment on all other counts. 

On August 24, 2020, defendants will move the Court to amend their counterclaims for abuse of process against PMT to add a claim for punitive damages.

Trial has been set for May 2021, but this may be delayed or impacted by COVID-19. The Company intends to continue to defend itself vigorously and to continue to aggressively prosecute its affirmative counterclaim against PMT.

NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements, continued (unaudited)

Facility Lease

On October 3, 2014,7, 2019, the LLCCompany entered into an exclusive licensea non-cancellable lease agreement (the “Lease”) with Biynah Cleveland, LLC, BIP Cleveland, LLC, and development agreement withEdenvale Investors (together, the Mayo Foundation for Medical Education and Research (“Mayo”“Landlord”) relatedpursuant to certain intellectual property and development services for thin film electrode technology (“2014 Mayo Agreement”which the Company has agreed to lease office space located at 7599 Anagram Drive, Eden Prairie, Minnesota (the “Premises”). 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 productsCompany took possession of the licensed technology throughPremises on November 1, 2019, with the term 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 $91,709Lease ending 65 months after such date, unless terminated earlier (the “Term”). The initial base rent for the intellectual property. Milestone payments due underPremises is $6,410 per month for the 2014 Mayo Agreement and accrued were $91,709 as of September 30, 2017 and December 31, 2016. Underfirst 17 months, increasing to $7,076 per month by the termsend of the 2014 Mayo Agreement, amounts that remained unpaid accrued interest at 2 percent aboveTerm. In addition, as long as the prime rate. Milestone payments due in 2016 wereCompany is 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 restatedLease, the 2014 Mayo AgreementCompany shall be entitled to an abatement of its base rent for the first 5 months. In addition, the Company will pay its pro rata share of the Landlord’s annual operating expenses associated with the premises, calculated as set forth in May 2017 (as so amended and restated, the “2017 Mayo Agreement”). PursuantLease of which the Company is entitled to an abatement of these operating expense for the first 3 months.

Prior to the 2017 Mayo Agreement, NeuroOne issued 50,556 shares of common stockOctober 2019 Lease, the Company entered into a non-cancellable facility lease for its operations and headquarters for an eleven month term beginning on December 1, 2018. The monthly rent under that lease was $4,763.

During the three month periods ended June 30, 2020 and 2019, rent expense associated with the facility leases amounted to Mayo to settle$25,861 and $14,289, respectively, and $73,727 and $33,341 during the amount of common stock NeuroOne was previously obligated to issue under the 2014 Mayo Agreementnine month periods ended June 30, 2020 and to amend the terms of the 2014 Mayo Agreement. NeuroOne recorded an additional $23,115 to intangible assets2019, respectively.  

Supplemental cash flow information related to the fair valueoperating lease was as follows: 

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

Maturity of the 2017 stock issuancelease liability was as follows: 

NeuroOne Medical Technologies Corporation
Notes 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.Condensed Financial Statements, continued (unaudited)

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 and Property and Equipment

Intangibles

Intangible assets consisted of the following at September 30, 2017:rollforward is as follows: 

Amortization expense was $4,264$5,579 and $13,368 for NeuroOne and the Company$5,311 for the three months ended June 30, 2020 and 2019, respectively, and $16,737 and $15,933 for the nine months ended SeptemberJune 30, 2017, respectively,2020 and $1,9412019, respectively.

Property and $5,823Equipment

Property and equipment held for use by category are presented in the LLCfollowing table:  

Depreciation expense was $7,298 and $694 for the three months ended June 30, 2020 and 2019, respectively, and $17,105 and $694 for the nine months ended SeptemberJune 30, 2016.2020 and 2019, respectively.

NOTE 6 –- Accrued Expenses and Other liabilities

Accrued Expenses

Accrued expenses consisted of the following at June 30, 2020 and September 30, 2017 and December 31, 2016: 2019:

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

NOTE 7 – Short-Term Promissory Notes and Unsecured LoanThe “other” category is primarily comprised of board fees.  

Short-Term Promissory NotesPaycheck Protection Program

The CARES Act, signed into law in March 2020, established the Paycheck Protection Program (“PPP”). The PPP authorizes over $600 billion in forgivable loans to small businesses. Loan amounts are forgiven to the extent proceeds are used to cover documented payroll, mortgage interest, rent, and utility costs over a 24 week measurement period following loan funding. There can be no assurance that this PPP loan will be forgiven. Loans have a maturity of 2 years and an interest rate of 1%. Prepayments may be made without penalty. In August 2017, the Company’s Board of Directors authorized andApril 2020, the Company issued short-term unsecured promissory notes (the “Short-Term Notes”) for aggregate gross proceedsreceived loan funding of $253,000 prior to issuance costs of $3,030 which were discounted from the Short-Term Notes and are being amortized ratably to interest expense over the term of the Short-Term Notes. For the three and nine month period ended September 30, 2017, discount amortization charged to interest expense related to 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,approximately $83,333 under the provisions of the Short-Term Notes, the holders will receive 126,500 common stock purchase warrants upon maturity with a term of 5 years at an exercise price of $1.80 which will be immediately exercisable upon issue. A portion of the proceeds from the Short-Term Notes was allocated to the warrants based on their relative fair value to the underlying Short-Term Notes. The proceeds allocated to the warrants were recorded as additional paidPPP. Interest in capital in the accompanying condensed consolidated balance sheets and were discounted from the Short-Term Notes in the amount of $61,496. The relative fair value of the warrants was based on the Black-Scholes methodconnection 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 which amounted to $14,868PPP was nominal during the three and nine month period ended SeptemberJune 30, 2017.2020.

Unsecured Loan

NeuroOne received a $50,000 short-term unsecured loan in November 2016 from the placement agent for its convertible promissory note financing (see Note 8 – Convertible Promissory Notes and Warrant Agreements). NeuroOne incurred no fees or interest costs for this temporary loan and it was repaid in full in February 2017.

NOTE 87 – Convertible Promissory Notes and Warrant Agreements

Paulson Convertible Note Offerings

Paulson 2019 Convertible Promissory NotesNote Financing 

In

On November 2016 and then amended in June 2017, the Company’s Board of Directors authorized1, 2019, the Company entered into a subscription agreement with certain accredited investors, pursuant to which the Company, in a private placement (the “2019 Paulson Private Placement”), agreed to issue and sell to the investors 13% convertible promissory notes (the “Convertible(each, a “2019 Paulson Note” and collectively, the “2019 Paulson Notes”) and warrants (each, a “2019 Paulson Warrant” and collectively, the “2019 Paulson Warrants”) to purchase shares of the Company’s common stock purchase warrantsstock.

The initial closing of the 2019 Paulson Private Placement was consummated on November 1, 2019, and, on that date and through December 3, 2019, the Company issued the 2019 Paulson Notes in an aggregate principal amount of $3,234,800 to the subscribers for aggregate gross proceeds of up to $2.5 million.equalling the principal amount. The 2019 Paulson Private Placement terminated on December 3, 2019.

As of September 30, 2017,On April 24, 2020, the Company has issued $1,625,120and holders of Convertiblea majority in aggregate principal amount of the 2019 Paulson Notes and common stock purchase warrantsentered into an amendment to investors. the 2019 Paulson Notes (the “Second 2019 Paulson Notes Amendment”) to, among other things:

NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements, continued (unaudited)

The Convertible Notes are unsecured. The Convertible2019 Paulson Notes bear interest at a fixed rate of 8 percent13% per annum and requireoriginally required the Company to repay the principal and accrued and unpaid interest thereon on November 1, 2020. Interest on principal amounted to $41,494 and $195,638 during the three and nine month periods ended June 30, 2020, respectively, and was recorded under the net valuation change of instruments measured at fair value in the earliercondensed statements of November 21, 2017 oroperations.

The Second 2019 Paulson Notes Amendment was accounted for as a note extinguishment for accounting purposes given the consummationsubstantive change in the optional redemption feature’s conversion formula. The fair value change in the 2019 Paulson Notes associated with the extinguishment was recorded as a loss on notes extinguishment in the accompanying condensed statements of operations in the next equity or equity-linked roundamount of financing resulting$2,017,847 during the three and nine month periods ended June 30, 2020. Lastly, in more than $3.0 millionconnection with the Second 2019 Paulson Notes Amendment, legal costs in gross proceeds (a “Qualified Financing”). Ifthe amount of $1,943 were incurred and recorded as a Qualified Financing occurs before November 21, 2017,component of interest in the accompanying condensed statements of operations.

Prior to the Second 2019 Paulson Notes Amendment, the subscriber had the option to convert the outstanding principal and accrued and unpaid interest onof such subscriber’s 2019 Paulson Note (the “Outstanding Balance”) into common stock in an amount equal to the ConvertibleOutstanding Balance divided by the ten day volume weighted average closing price (“VWAP”) of the common stock prior to conversion at no discount. As referenced above, the Second 2019 Paulson Notes automatically convertsAmendment provides for the ten day VWAP of the common stock under the optional conversion option to be discounted at 40%.

In addition, if the Company raises more than $3,000,000 in an equity financing (the “2019 Qualified Financing”) before the maturity date, each subscriber shall have the option to convert the Outstanding Balance into the securities issued by the Company in such financing based on2019 Qualified Financing in an amount equal to (i) the greater numberOutstanding Balance divided by (ii) the lower of 0.6 multiplied by (A) the actual per share price of securities resulting from either the outstanding principal and accrued interest on the Convertible Notes divided by $1.80, or the outstanding principal and accrued interest on the Convertible Notes multiplied by 1.25, dividedissued by the price paid per securityCompany in the 2019 Qualified Financing or (B) the ten day VWAP of the common stock prior to the first closing of a 2019 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)

If a change of control transaction or initial public offering occurs prior to a 2019 Qualified Financing or the Convertiblematurity date, the 2019 Paulson Notes would at the election of the holders of a majority of the outstanding principal of the 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 the per share value 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’ length transaction, or 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 assets of the Company.Company’s assets.

The warrants granted holdersCompany elected to account for the 2019 Paulson Notes on a fair value basis under ASC 825 to comprehensively value and streamline the accounting for the embedded conversion options. The fair value of the 2019 Paulson Notes was significantly higher than the proceeds received as of each of the respective issuance dates given the significant redemption discount associated with the 2019 Qualified Financing provision. The excess of fair value over proceeds at issuance amounted to $1,831,940 and was recorded to interest expense in the condensed statements of operations during the nine month period ended June 30, 2020. Subsequent to issuance, the fair value change of the 2019 Paulson Notes amounted to a reduction of $(1,344,852) and $(1,250,994) during the three and nine month periods ended June 30, 2020, respectively, and was recorded under the net valuation change of instruments measured at fair value in the condensed statements of operations.

Each 2019 Paulson Warrant grants the holder the option to purchase either (i) if exercised after conversion of the Convertible Notes, the number of shares issuable upon the conversion of the Convertible Notes, or (ii) if exercised prior to conversion of the Convertible Notes, the number of shares of common stock equal to (i) 0.5 multiplied by (ii) the principal amount of such subscriber’s 2019 Paulson Notes divided by 1.87, with an exercise price per share equal to $1.87. As of the final closing on December 3, 2019, the Company issued 2019 Paulson Warrants exercisable for 864,913 shares of common stock in connection with all closings of the 2019 Paulson Private Placement. The 2019 Paulson Warrants are immediately exercisable and expire on November 1, 2022. The exercise price is subject to adjustment in the event of any stock dividends or splits, reverse stock split, recapitalization, reorganization or similar transaction, as described therein. The 2019 Paulson warrants were deemed to be a free-standing instrument and were accounted for as equity. Given that the fair value of the 2019 Paulson Notes exceeded the proceeds received at issuance, there was no value attributed to the 2019 Paulson Warrants in the condensed financial statements.

NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements, continued (unaudited)

In connection with the 2019 Private Placement, Paulson Investment Company, LLC (“Paulson”) received a cash commission equal to 12% of the gross proceeds from the sale of the 2019 Paulson Notes, and 10-year warrants to purchase an amount of Common Stock equal to 259,476 shares of common stock at an exercise price equal to $1.87 per share (the “Broker Warrants”). The issuance costs incurred during the three and nine months ended June 30, 2020 in connection with the 2019 Paulson Private Placement were zero and $865,567, respectively. Issuance costs included cash commissions equal to $388,176 and legal and third party fees in the amount of $57,756. In addition, issuance costs included the value of the Broker Warrants in the amount of $419,635. The issuance costs were recorded as a component of interest in the accompanying condensed statements of operations.

Between January 1, 2020 and June 25, 2020, certain holders of the 2019 Paulson Notes elected to convert outstanding principal and accrued and unpaid interest in the amount of $2,838,724 into 2,176,119 shares of common stock.

Paulson 2020 Convertible Note Financing 

On April 30, 2020, the Company entered into a subscription agreement with certain accredited investors, pursuant to which the Company, in a private placement (the “2020 Paulson Private Placement”), agreed to issue and sell to the investors 13% convertible promissory notes (each, a “2020 Paulson Note” and collectively, the “2020 Paulson Notes”) and warrants (each, a “2020 Paulson Warrant” and collectively, the “2020 Paulson Warrants”) to purchase shares of the Company’s common stock. 

Between May 1, 2020 and June 30, 2020, the Company issued 2020 Paulson Notes in an aggregate principal amount of $5,122,700 to the Subscribers. The 2020 Paulson Private Placement was terminated on June 30, 2020.

The 2020 Paulson Notes bear interest at a fixed rate of 13% per annum and require the Company to repay the principal and accrued and unpaid interest thereon on the Convertible Note held by such warrant holder divided by $1.80. The warrants were immediately exercisableearlier of December 31, 2020 or a change of control transaction. Interest on principal amounted to $60,050 during the three and nine month periods ended June 30, 2020 and was recorded under the net valuation change of instruments measured at fair value in the condensed statements of operations.

If the Company raises more than $5,000,000 in an equity financing before the maturity date (the “2020 Qualified Financing”), without any action on the date of issuance and expire on November 21, 2021. In June 2017, however, the Company amended the termspart of the common stock purchase warrants under the Convertible Notes to be exercisable only in the event of conversionSubscribers, all of the outstanding principal and accrued and unpaid interest of the Notes (the “Outstanding Balance”) shall convert into that number of shares of the securities issued by the Company in the closing on the related Convertible Notes. The amountdate a 2020 Qualified Financing occurs equal to: (i) the Outstanding Balance divided by (ii) the lower of warrant0.6 multiplied by (A) the actual per share price of the securities issued by the Company in the closing on the date a 2020 Qualified Financing occurs and (B) the volume weighted average price of the common stock for ten (10) trading days immediately preceding the 2020 Qualified Financing.

If the Company announces a transaction between the Company and any other company (or an affiliate of any such company) that is included in the S&P 500 Health Care Index as published from time to time by S&P Dow Jones Indices LLC that includes an investment or upfront payments resulting in gross proceeds to the Company of at least $2,000,000 upon the execution of such transaction or definitive agreement, and provides for terms of collaboration, manufacturing, distribution, licensing or supply of the Company’s products (a “Strategic Transaction”) before the maturity date, without any action on the part of the subscribers, the Outstanding Balance shall be converted into that number of shares of common stock equal to: (i) the Outstanding Balance divided by (ii) the lower of 0.6 multiplied by (A) the VWAP of the common stock for the ten (10) trading days immediately preceding the first announcement of the Strategic Transaction or (B) closing price of the common stock on the day preceding the first announcement by the Company of a Strategic Transaction.

At any time, at the sole election of the holder of such 2020 Paulson Note, all or a portion of the Outstanding Balance may be converted into that number of shares of common stock equal to: (i) the Outstanding Balance elected by the holder to be issued are now fixedconverted divided by (ii) an amount equal to 0.6 multiplied by the volume weighted average price of the common stock for the ten (10) trading days immediately preceding the date of conversion.

NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements, continued (unaudited)

If a change of control transaction occurs prior to the conversion of the 2020 Paulson Notes or the maturity date, the 2020 Paulson Notes would become payable on demand as of the closing date of 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% of the outstanding voting power of the surviving entity or the disposition of all or substantially all of the Company’s assets.

The Company elected to account for the 2020 Paulson Notes on a fair value basis under ASC 825 to comprehensively value and streamline the accounting for the embedded conversion options. The fair value of the 2020 Paulson Notes was significantly higher than the proceeds received as of each of the respective issuance dates given the significant redemption discount associated with the redemption provisions. The excess of fair value over proceeds at issuance amounted to $3,784,918 and was recorded to interest expense in the condensed statements of operations during the three and nine month periods ended June 30, 2020. Subsequent to issuance, the fair value change of the 2020 Paulson Notes amounted to an increase of $75,309 during the three and nine month periods ended June 30, 2020 and was recorded under the net valuation change of instruments measured at fair value in the condensed statements of operations.

Each 2020 Paulson Warrant grants the holder the option to purchase the number of shares of common stock receivedequal to (i) 0.5 multiplied by (ii) the holderprincipal amount of such subscriber’s 2020 Paulson Notes divided by 1.87, with an exercise price per share equal to $1.87. The 2020 Paulson Warrants are immediately exercisable and expire on April 30, 2023. The exercise price is subject to adjustment in the event of any stock dividends or splits, reverse stock split, recapitalization, reorganization or similar transaction. The Company issued 2020 Paulson Warrants exercisable for 1,369,690 shares of common stock in connection with all closings of the Convertible2020 Paulson Private Placement through June 30, 2020. The 2020 Paulson warrants were deemed to be a free-standing instrument and were accounted for as equity. Given that the fair value of the 2020 Paulson Notes upon conversionexceeded the proceeds received at issuance, there was no value attributed to the 2020 Paulson Warrants in the condensed financial statements.

In connection with the 2020 Paulson Private Placement, Paulson received a cash commission equal to 12% of such holder’s Convertiblethe gross proceeds from the sale of the 2020 Paulson Notes and received 7-year warrants to purchase an amount of common stock equal to 410,911 (“Broker Warrants”). The Broker Warrants have an exercise price equal to $1.87 per share. The issuance costs incurred during the price at whichthree and nine months ended June 30, 2020 in connection with the Convertible Notes convert into common shares.2020 Paulson Private Placement were $962,402. Issuance costs included cash commissions equal to $633,725 and legal and third party fees in the amount of $51,640. In addition, issuance costs included the value of the Broker Warrants in the amount of $277,037. The issuance costs were recorded as a component of interest in the accompanying condensed statements of operations.

Between May 4, 2020 and June 30, 2020, certain Subscribers elected to convert $1,870,352 of the outstanding principal and interest of such Subscribers’ 2020 Paulson Notes into 2,034,343 shares of common stock (123,914 shares of common stock were not formally issued until July 2020). In July 2020, the balance of the 2020 Paulson Notes were converted into common stock upon the announcement of a Strategic Transaction. See NOTE 12 – Subsequent Events.

2017 Convertible Notes

From October 2017 to May 2018, the Company issued convertible notes (the “2017 Convertible Notes”) in an aggregate principal amount of $1,540,000 that bear interest at a fixed rate of 8% per annum and warrants to purchase shares of the Company’s capital stock (the “2017 Warrants”).

On February 28, 2019, the 2017 Convertible Notes were converted into 839,179 shares of common stock and 839,179 common stock purchase warrants with an exercise term of approximately 4.8 years and an exercise price $3.00 per share. In addition, the previously issued 2017 Warrants became immediately exercisable for 839,179 shares of common stock. The warrants wereconversion was accounted for as a liability because there is no set exercise price. A Monte Carlo simulation model was used to estimatedebt extinguishment given the aggregatebifurcation of the embedded premium debt conversion feature. The fair value of the newly issued common shares and warrants associated with the 2017 Convertible Notes conversion relative to the carrying value of the debt and fair value of warrant liability and premium derivative liability on the conversion date was $553,447 and was recorded 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 useda loss on note extinguishment 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 termaccompanying condensed statements of the Convertible Notes using the straight-line method which approximates the effective interest method. The amortization expense was $284,637 and $601,794operations for the three and nine months ended SeptemberJune 30, 2017, respectively. The Company recorded the fair value changes of the warrant liability associated with the Convertible 2019.

NeuroOne Medical Technologies Corporation
Notes to interest expense which amounted to $6,546 and $(12,707) for the three and nine months ended September 30, 2017, respectively.Condensed Financial Statements, continued (unaudited)

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 redemption 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 Convertible Notes in the amount of $213,961 and $137,564 during the nine months ended September 30, 2017 and during the period from October 7, 2016 to December 31, 2016, respectively. 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 $133,367 and $266,848 forDuring the three and nine month periodperiods ended SeptemberJune 30, 2017,2019, interest on the principal was zero and $51,333, respectively, 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 zero and $233,224, respectively. The embedded derivative was accounted for separately on a fair market value basis. The Company recorded the fair value changes ofrelated to the underlying premium debt conversion derivative associated with the Convertible Notes to interest expense whichand warrant liability amounted to $15,406an expense of zero and $90,212 for the three and nine months ended September 30, 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$129,763 during the three and nine monthsmonth periods ended SeptemberJune 30, 2019, respectively.

As noted above, the 2017 respectively. The balanceConvertible Notes were converted into shares 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 issuancenot outstanding during the three and nine monthsmonth periods ended SeptemberJune 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.2020.

NOTE 98 – Investment Banker FeeDefined Contribution Plan

Investment Banker FeeThe Company has a 401(k) defined contribution plan (the “401K Plan”) for all employees over age 21. Employees can defer up to 100% of their compensation through payroll withholdings into the 401K Plan subject to federal law limits. The Company matches 100% of deferrals up to 3% of one’s contributions. The Company’s matching contributions to employee deferrals are discretionary. The Company may also make discretionary profit sharing contributions under the 401K Plan in the future, but it has not done so through June 30, 2020.

NeuroOne paid

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 $50,000 non-refundable fee tonine year period beginning on the second anniversary of an investment banker in December 2016 to raise equity financing. This fee is reflected in NeuroOne’s December 31, 2016 balance sheet asemployee’s date of hire. Discretionary profit sharing contributions vest over a prepaid expense. NeuroOne subsequently concluded thatfive year period beginning on the investment bankerfirst anniversary of an employee’s date of hire. No matching contributions were made during the three and nine month periods ended June 30, 2020. During the nine month period ended June 30, 2019, there was not expected to raise any equity and therefore expenseda benefit reduction adjustment of $(4,359) given an overpayment. There were no matching contributions during the fee in March 2017.three month period ended June 30, 2019.

NOTE 109 – Stock-Based Compensation

NeuroOne formally adopted an equity incentive plan (“the 2016 Plan”) on October 27, 2016 which was subsequently adopted by the Company upon completion of the Acquisition. In addition, 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 and stock options to employees, directors, and consultants of the Company. The Company reserved 2,292,265 shares of common stock (as adjusted for 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. During the three and nine-month period ended September 30, 2017, zero and 365,716 stock options for shares of common stock were granted, respectively, to directors and consultants at a weighted average exercise price of $0.035 per share. The stock options granted during the nine month period ended September 30, 2017 had a weighted average grant date fair value of $0.014 per share with various vesting 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.

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 costsexpenses as follows in the accompanying condensed statements of operations:

Stock Options

During the three month period ended June 30, 2020 and 2019, under the 2017 Equity Incentive Plan (the “2017 Plan”), the Company granted 144,175 and 350,119 stock options, respectively, to its employees, consultants and scientific advisory board members. During the nine month periods ended June 30, 2020 and 2019, under the 2017 Plan, the Company granted 964,175 and 675,667 stock options, respectively, to its employees, consultants and scientific advisory board members. Vesting generally occurs over an immediate to 48 month period based on a time of service condition although vesting acceleration is provided under one grant in the event that certain milestones are met. The grant date fair value of the grants issued during the three month periods ended June 30, 2020 and 2019 was $0.73 and $1.13 per share, respectively. The grant date fair value of the grants issued during the nine month periods ended June 30, 2020 and 2019 was $1.01 and $1.13 per share, respectively. The total expense for the three months ended June 30, 2020 and 2019 related to stock options was $103,998 and $224,866, respectively. The total expense for the nine month periods ended June 30, 2020 and 2019 related to stock options was $630,887 and $271,520, respectively. The total number of stock options outstanding as of June 30, 2020 and September 30, 2019 was 1,438,485 and 845,840, respectively.

NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements, continued (unaudited)

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 periods ended SeptemberJune 30, 2017:2020 and 2019:

During the three and nine monthsmonth periods ended SeptemberJune 30, 2017, 42,5252020, 52,488 and 365,716475,182 stock options vested, respectively, and zero222,633 and 215,453 restricted262,308 stock awardsoptions vested respectively. The weighted average fair value per share of options vesting during the three and nine months ended SeptemberJune 30, 2017 was $0.014. No2019, respectively. During the three and nine month periods ended June 30, 2020, 27,182 and 294,985 stock options were forfeited, respectively, and no options were forfeited during the three and nine monthsmonth periods ended SeptemberJune 30, 2017. 2019.

Restricted Stock Units

During the three and nine month periods ended June 30, 2020, 67,113 and 234,964 restricted stock units (“RSUs”) were granted, respectively. During the three and nine month periods ended June 30, 2019, 42,018 RSUs were granted. During the three and nine month periods ended June 30, 2020, 20,962 and 154,234 RSUs vested, respectively. The total expense for the three and nine month period ended June 30, 2020 related to the RSU’s was $38,535 and $352,929, respectively. The total expense for the three and nine month period ended June 30, 2019 related to the RSU’s was $7,222. The number of RSUs forfeited during the three and nine month periods ended June 30, 2020 was zero and 7,003, respectively. No RSUs were forfeited during the three and nine month periods ended June 30, 2019.

Other Stock-Based Awards

2020 Activity

In October 2019, two consulting agreements were executed whereby up to 115,000 shares of common stock were issued as of June 30, 2020 of which 102,500 shares of common stock were vested as of June 30, 2020 under these agreements. On April 22, 2020, the Company entered into an amendment (the “Amendment”) to one of the consulting agreements. Pursuant to the Amendment, the Company issued an additional 35,000 shares in exchange for consulting services of which 14,000 shares of common stock were vested as of June 30, 2020 under the Amendment. Vesting was based on a time-based vesting condition ranging over a three to nine month period commencing upon the execution of the consulting agreements.

In February 2020, an additional consulting agreement was executed whereby up to 90,000 shares of common stock were issuable of which 76,500 shares of common stock were issued and vested as of June 30, 2020 under this agreement. On May 21, 2020, 66,583 shares of common stock were issued as compensation to a former 2019 Paulson Note holder related to a prior 2019 Paulson Note conversion and release of liability.

Compensation expense related to the stock awards granted under the consulting agreements and to the former 2019 Paulson Note holder referenced above amounted to $241,150 and $519,325 for the three and nine month periods ended June 30, 2020, respectively, and was included in the total stock-based expense. The expense was based on the fair value of the underlying common stock at the point of vesting which ranged from $1.51 to $2.65 per share.

2019 Activity

In February 2018, 250,000 shares of common stock were reserved as a result of a consulting agreement for investor relations services executed in February 2018. Under the agreement, zero and 50,000 shares of common stock were awarded during the three and nine month period ended June 30, 2019, respectively, 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 expense referenced above which totaled zero and $115,000 for the three and nine month periods ended June 30, 2019, respectively. 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. 

NeuroOne Medical Technologies Corporation
Notes to Condensed Financial Statements, continued (unaudited)

As of SeptemberJune 30, 2017, 1,711,0962019, the Company had formal obligation to issue future common stock options relating to several consulting agreements. The corresponding stock-based compensation expense related to the stock-based award liabilities amounted to zero and $27,543 during the three and nine month periods ended June 30, 2019, respectively, and was included in general and administrative expense in the accompanying condensed statements of operations.

General

As of June 30, 2020, 1,879,400 shares were available for future issuance on a combined basis under the 2016 Equity Incentive Plan and 2017 Plans.

There was no unrecognizedPlan. Unrecognized stock-based compensation cost for stock options and restricted common stockwas $0.9 million as of SeptemberJune 30, 2017.2020. The unrecognized share-based expense is expected to be recognized over a weighted average period of 2.4 years.

NOTE 1110 – Income Taxes

The effective tax rate for the three and nine months ended SeptemberJune 30, 20172020 and 2019 was zero percent. As a result of the analysis of all available evidence as of June 30, 2020 and September 30, 2017 and December 31, 2016,2019, 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 SeptemberJune 30, 2017.2020 and 2019. 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. However, the Company is continuing to assess the impact of the CARES Act.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes modifications to the limitation on business interest expense and net operating loss provisions, and provides a payment delay of employer payroll taxes during 2020 after the date of enactment. The CARES Act is not expected to have a material impact on the Company’s financial statements.

NOTE 11 – Stockholders’ Deficit

Common Stock Offering

On October 23, 2019, the Company entered into Securities Purchase Agreements with certain accredited investors, pursuant to which the Company, in a private placement, has issued and sold 141,666 shares of the Company’s common stock to the accredited investors at a price of $1.80 per share, for gross proceeds amounting to $255,000.

In connection with the private placement, the Company has agreed to issue and sell to accredited investors up to a maximum of 555,555 shares for total gross proceeds to the Company of up to $1,000,000. The Company intends to use the net proceeds from this private placement for funding operations or working capital and general corporate purposes. The Company filed a registration statement with the SEC covering the resale of the shares of common stock sold in the private placement on August 11, 2020.

2019 Private Placement

From December 28, 2018 through July 1, 2019, 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 Unit Private Placement”), agreed to issue and sell Units (the “2019 Units”), each consisting of (i) 1 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 “2019 Warrants”), to the New Purchasers. 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 Unit Private Placement.

The LLC operated as a single-member LLC from formationinitial closing of the 2019 Unit Private Placement was consummated on December 12, 2013 until it was merged into NeuroOne on October 27, 2016. As such,28, 2018. The Company issued and sold an aggregate of 2,338,179 of the LLC was a disregarded legal entity2019 Units at $2.50 per Unit to the New Purchasers, for income tax purposes. Accordingly, no provision for income taxes was included intotal gross proceeds to the financial statements forCompany of approximately $5,845,448 before deducting offering expenses (388,200 and 2,292,179 of the 2019 Units were sold during the three orand nine month periods ended SeptemberJune 30, 2016.2019, respectively). In connection with the 2019 Unit Private Placement, the Company recorded issuance costs in the amount of $1,150,359 ($117,393 and $929,821 recorded during the three and nine month periods ended June 30, 2019, respectively). The 2019 Unit Private Placement was terminated on July 1, 2019.

NOTE 12 – Stockholders’/Member Deficit2018 Private Placement

In June 2017,From July 9, 2018 through November 30, 2018 (the final closing), the purchase price owed by the seven individuals for the founders’ shares of NeuroOne under their respectiveCompany entered into subscription agreements totaling $9,051 was forgiven by NeuroOne prior(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 Acquisition.Purchasers units (each, a “2018 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 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 balance sheets based on their relative fair value to the underlying common shares issued. The initial closing of the 2018 Private Placement was consummated on July 9, 2018 and was terminated on December 12, 2018.

NeuroOne Medical Technologies Corporation

Notes to Condensed Consolidated Financial Statements, continued (unaudited)

(unaudited)

As of the termination of the 2018 Private Placement on December 12, 2018, the Company had issued and sold an aggregate of 615,200 of the 2018 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 (zero and 170,000 of the 2018 Units were sold during the three and nine month periods ended June 30, 2019, respectively). In connection with the 2018 Private Placement, the Company recorded issuance costs in the amount of $173,067 (a reduction adjustment of $(18,052) and a cost of $17,614 recorded during the three and nine month periods ended June 30, 2019, respectively).

Warrant Activity and Summary

The following table summarizes warrant activity during the nine month period ended June 30, 2020:

NOTE 1312 – Subsequent Events

Conversion of 2020 Paulson Notes 

Between July 1, 2020 and July 22, 2020, certain Subscribers elected to convert $1,720,001 of the outstanding principal and interest of such Subscribers’ 2020 Paulson Notes into 1,977,991 shares of Common Stock, and on July 23, 2020, the remaining $1,613,961 of the outstanding principal and interest of the 2020 Paulson Notes were automatically converted into 1,605,532 shares of Common Stock following the announcement of a Strategic Transaction (as discussed below under –Zimmer Development Agreement).

2020 Common Stock Offering

On October 4, 2017,July 28, 2020, the Company entered into Securities Purchase Agreements with an accredited investor in a Subscriptionprivate placement, pursuant to which the Company agreed to issue and sell 75,000 shares to such investor, at $1.80 per share.

Zimmer Development Agreement 

On July 20, 2020, the Company entered into an exclusive development and distribution agreement (the “Subscription“Development Agreement”) with certain accredited investors (the “Subscribers”Zimmer, Inc. (“Zimmer”), pursuant to which the Company in a private placementgranted Zimmer exclusive global rights to distribute NeuroOne’s strip and grid cortical electrodes (the “Private Placement”), agreed to issue and sell to the Subscribers 8% convertible promissory notes (each, a “Note” and collectively, the “2017 Convertible Notes”“Strip/Grid Products”) and warrantselectrode cable assembly products (the “New Warrants”“Electrode Cable Assembly Products”) 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,. Additionally, the Company issued Notes in an aggregate principal amount of $150,000granted Zimmer the exclusive right and license 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 issueddistribute certain depth electrodes developed by the Company in such financing based on(“SEEG Products”, and together with the greaterStrip/Grid Products and Electrode Cable Assembly Products, the “Products”). The parties have agreed to collaborate with respect to development activities under the Development Agreement through a joint development committee composed of an equal number of such securities resulting from either (i)representatives of Zimmer and the outstanding principalCompany.

Under the terms of the Development Agreement, the Company will be responsible for all costs and accrued interest onexpenses related to developing the 2017 Convertible Notes divided by $2.25 or (ii)Products, and the outstanding principalCompany will be responsible for all costs 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 priorexpenses related to the earlier of a Qualified Financing or the Maturity Date, the 2017 Convertible Notes would, at the electioncommercialization of the holders ofProducts. In addition to the Development Agreement, Zimmer and the Company have entered into a majorityManufacturing and Supply Agreement (the “MS Agreement”) and a supplier quality agreement (the “Quality Agreement”) with respect to the manufacturing and supply 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 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.Products.

Each New Warrant grants

Except as otherwise provided in the holder the option to purchase the number of shares of capital stock ofDevelopment Agreement, 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 subjectresponsible for performing all development activities, including non-clinical and clinical studies directed at obtaining regulatory approval of each Product. Zimmer has agreed to adjustmentuse commercially reasonable efforts to promote, market and sell each Product following the “Product Availability Date” (as defined in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described therein.Development Agreement) for such Product.

The placement agent is also entitled to receive a warrant 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. Such warrant, if issued will have an exercise price determined in relation to the pricing of the subsequent financing and will be immediately exercisable once issued.

In such subsequent equity financing rounds, the placement agent is also entitled to receive a cash fee equal to 10 percent of the total amount of capital received by the Company, as well as a cash amount representing a non-accountable expense allowance equal to 3% of the aggregate gross proceeds raised in such financing.

Subscription Agreements

Pursuant to the Subscription Agreements,Development Agreement, Zimmer made an upfront payment of $2.0 million to the Company, is entitledthe announcement of which triggered the automatic conversion of the Company’s 2020 Paulson Notes pursuant to receivetheir terms. Additionally, in order to maintain the exclusivity of its distribution license for the SEEG Products, Zimmer must pay an additional fee to the Company within 60 days following the Product Availability Date for the SEEG Products.

The Development Agreement will expire on the tenth anniversary of the date of the first commercial sale of the last of the Products to achieve a first commercial sale, unless terminated earlier pursuant to its terms. Either party may terminate the Development Agreement (x) with written notice infor the eventother party’s material breach following a holder electscure period or (y) if the other party becomes subject to sell or receives a bona fide offercertain insolvency proceedings. In addition, Zimmer may terminate the Development Agreement for any portionreason with 90 days’ written notice, and the Company may terminate the Development Agreement if Zimmer acquires or directly or indirectly owns a controlling interest in certain competitors 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 asCompany.

Issuance of Stock Options

On August 11, 2020, the Company exercises that right within 15 days of receiving written notice. The Company has granted the Subscribers indemnification rights with respect40,000 stock options to its representations, warranties, covenants and agreements under the Subscription Agreements.

two consultants in exchange for consulting services.

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 CurrentAnnual 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-K for the year ended September 30, 2019.

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 Annual Report on Form 10-K for the year ended September 30, 2019 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, 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 isare 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.revenue from commercial sales.

We have incurred losses since inception. As of SeptemberJune 30, 2017,2020, we had an accumulated deficit of $3,699,438,$30.3 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, fair value adjustments and loss on extinguishments 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.

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.NeuroOne Medical Technologies Corporation
Form 10-Q

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

At June 30, 2020, we issued Short-Term Notes (in aggregate principal amount of $253,000)had $3.8 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, in a private placement (the “Private Placement”), agreed to issue and sell tooperating expenses through 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 closingend of the Private Placement was consummated on October 4, 2017, and, on that date, we issued Notes (in an aggregate principal amounttwelve month period following the issuance 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.

this Form 10-Q. 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.

AcquisitionRecent Developments

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 LLCZimmer Development Agreement 

On July 20, 2020, the Company entered into an exclusive development and distribution agreement (the “Development Agreement”) with Zimmer, Inc. (“Zimmer”), pursuant to which the Company granted Zimmer exclusive global rights to distribute NeuroOne’s strip and grid cortical electrodes (the “Strip/Grid Products”) and electrode cable assembly products (the “Electrode Cable Assembly Products”). Additionally, the Company granted Zimmer the exclusive right and license to distribute certain depth electrodes developed by the Company (“SEEG Products”, and together with the Strip/Grid Products and Electrode Cable Assembly Products, the “Products”). The LLC was formedparties have agreed to collaborate with respect to development activities under the Development Agreement through a joint development committee composed of an equal number of representatives of Zimmer and the Company.

Under the terms of the Development Agreement, the Company will be responsible for all costs and expenses related to developing the Products, and the Company will be responsible for all costs and expenses related to the commercialization of the Products. In addition to the Development Agreement, Zimmer and the Company have entered into a Manufacturing and Supply Agreement (the “MS Agreement”) and a supplier quality agreement (the “Quality Agreement”) with respect to the manufacturing and supply of the Products.

Except as otherwise provided in the Development Agreement, the Company will be responsible for performing all development activities, including non-clinical and clinical studies directed at obtaining regulatory approval of each Product. Zimmer has agreed to use commercially reasonable efforts to promote, market and sell each Product following the “Product Availability Date” (as defined in the Development Agreement) for such Product.

Pursuant to the Development Agreement, Zimmer made an upfront payment of $2.0 million to the Company, the announcement of which triggered the automatic conversion of the Company’s 2020 Notes pursuant to their terms. Additionally, in order to maintain the exclusivity of its distribution license for the SEEG Products, Zimmer must pay an additional fee to the Company within 60 days following the Product Availability Date for the SEEG Products.

The Development Agreement will expire on December 12, 2013the tenth anniversary of the date of the first commercial sale of the last of the Products to achieve a first commercial sale, unless terminated earlier pursuant to its terms. Either party may terminate the Development Agreement (x) with written notice for the other party’s material breach following a cure period or (y) if the other party becomes subject to certain insolvency proceedings. In addition, Zimmer may terminate the Development Agreement for any reason with 90 days’ written notice, and operatedthe Company may terminate the Development Agreement if Zimmer acquires or directly or indirectly owns a controlling interest in certain competitors of the Company.

COVID-19

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a limited liability company until it was merged withglobal pandemic, which continues to spread throughout the United States and into NeuroOne on October 27, 2016 with NeuroOne asaround the surviving entity of the merger. NeuroOne was formed on October 7, 2016 under different ownership than the LLC.world. As a result of the merger, allCOVID-19 pandemic, the Company has experienced delays and disruptions in our pre-clinical and clinical trials, as well as interruptions in our manufacturing, supply chain, and research and development operations. The global outbreak of COVID-19 continues to rapidly evolve. In April 2020, given the impact of COVID-19 on the Company, the Company applied for and received loan funding of approximately $83,333 under the PPP.

The extent to which the COVID-19 pandemic may impact our business and pre-clinical and clinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the properties, rights, privileges, powers and franchisesdisease, the duration of the LLC vestedoutbreak, travel restrictions and social distancing in NeuroOne,the U.S. and all debts, liabilitiesother countries, business closures or business disruptions and dutiesthe effectiveness of actions taken in the U.S. and other countries to contain and treat the disease. The COVID-19 pandemic may also impact our ability to secure additional financing or our ability to up-list from our current OTC Market (“OTCQB”), and may result in further modifications to our debt agreements. Although the Company cannot estimate the length or gravity of the LLC became the debts, liabilities and duties of NeuroOne with the exceptionimpact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on the Company’s license agreement with Wisconsin Alumni Research Foundation (“WARF”) which required WARF’s approval for transfer. The purposeresults 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,future operations, financial position, and to convert from a limited liability company to a corporation.liquidity in fiscal year 2020.

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 certain regulatory approval,approvals, 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.  Lastly, de minimis income from the sale of prototype products and related materials are offset against research and development expenses.

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 preclinicalpre-clinical testing and clinical trials and will depend on the duration, costs and timing to complete our preclinicalpre-clinical programs and clinical trials.

NeuroOne Medical Technologies Corporation

Form 10-Q

Interest Expense

Interest expense primarily consists of amortized discount costs and interest costs as applicable related to our Short-Term2019 Paulson Notes, 2020 Paulson Notes and Convertiblethe Series 3 Notes and interest costs related to the Convertible Notes we issued between November 2016 and September 2017. The Convertible Notes bear interest at a fixed rate of 8% per annum, compounding annually.while outstanding as described further below.

Interest expense also includesNet valuation change of instruments measured at fair value

The net valuation change of instruments measured at fair value include the change in the fair value of the 2019 Paulson Notes, 2020 Paulson Notes, warrant liability and the premium conversion derivativederivatives during the particular period. The change in fair value ofperiod these instruments are outstanding.

Loss on note extinguishment

Loss on note extinguishment includes the warrant liabilityloss associated with debt instrument modifications and premium conversion derivative results from 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 connection 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.conversions accounted for as debt extinguishments. 

NeuroOne Medical Technologies Corporation
Form 10-Q

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 SeptemberJune 30, 20172020 and 20162019

The following table sets forth the results of operations of NeuroOne and the LLC for the three-monthsthree months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.

General and administrative expenses

General and administrative expenses were $622,141$1.1 million for the three months ended SeptemberJune 30, 2017,2020, compared to $1,941$1.4 million for the three months ended SeptemberJune 30, 2016.2019. The increasedecrease was primarily due to a net decrease in legal and accounting fees of $0.2 million, employee related expenses of approximately $0.1 million and other operational related costs of $0.1 million, on a net basis, offset in part by an increase in salary-related expensesstock-based compensation costs of $331,539 for additional staffing to support the increased level of commercialization and development activities and legal and accounting expenses of $290,602 primarily related to the Acquisition.$0.1 million.

NeuroOne Medical Technologies Corporation

Form 10-Q

Research and development expenses

Research and development expenses were $271,651$0.4 million for the three months ended SeptemberJune 30, 2017, compared to $0 for the three months ended September 30, 2016. The increase was2020 and 2019 and primarily due to an increase inincluded salary-related expenses, inclusive of stock-based compensation expense of $ 64,945,consulting services and materials associated with research and development materials and supplies to support the increased level of development activities.

 Interest expense

Interest expense for the three months ended SeptemberJune 30, 20172020 and 2019 was $515,377 consisting of$4.7 million and zero, respectively. Interest in the current 2020 period was attributed to non-cash interest expense of $32,503, fair market value adjustments of the warrantin connection with our 2020 Paulson Notes and derivative liabilities of $21,953, and amortization of debt discount costs of $460,921a nominal amount related to the Short-Term2019 Paulson Notes, both described further below. Interest expense was comprised of issuance costs of $1.0 million and day-one interest at issuance of $3.8 million representing the amount by which fair value exceeded the 2020 Paulson Note proceeds. Interest on principal in connection with the 2019 Paulson Notes and Convertible Notes.2020 Paulson Notes is included in the net valuation change of instruments measured at fair value line item. During the three months ended June 30, 2019, no interest expense was incurred as there was no debt outstanding.

Net valuation change of instruments measured at fair value:

The net valuation change of instruments measured at fair value for the 2019 Paulson Notes and 2020 Paulson Notes for the three months ended June 30, 2020 was a benefit of $(1.3) million. The change was due to fluctuations in our common stock fair value, the number of potential shares of common stock issuable upon conversion of the 2019 Paulson Notes and 2020 Paulson Notes and due to the accretion of interest on principal. There was no net valuation change of instruments measured at fair value during the three months ended June 30, 2019.

Loss on note extinguishment

Non-cash loss on note extinguishment for the three months ended June 30, 2020 was $2.0 million. The 2019 Paulson notes were amended on April 24, 2020 to add a 40% discount to the optional conversion feature and to extend the maturity date by six months. The April 2020 amendment was accounted for as a note extinguishment given the significant modification made to the optional conversion feature. There were no outstanding Short-Term Notes and Convertible Notes innote extinguishments during the prior year. The interest expense in the comparable prior year period related to interest on the Mayo intellectual milestone payments owed.three months ended June 30, 2019.

NeuroOne Medical Technologies Corporation
Form 10-Q

Comparison of the Nine Months Ended Septembermonths ended June 30, 20172020 and 20162019

The following table sets forth the results of operations of NeuroOne, and the LLC for the nine months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.