ITEM 1. BUSINESS
Overview
Corporate Overview of NeuroOne Medical Technologies Corporation
We were originally incorporated as Original
Source Entertainment, Inc. under the laws of the State of Nevada on August 20, 2009. Prior to the closing of the Acquisition (as
defined below), we completed a series of steps contemplated by a Plan of Conversion pursuant to which we, among other things, changed
our name to NeuroOne Medical Technologies Corporation, increased our authorized number of shares of common stock from 45,000,000
to 100,000,000, increased our authorized number of shares of preferred stock from 5,000,000 to 10,000,000 and reincorporated in
Delaware. On July 20, 2017, we acquired NeuroOne, Inc. (the “
Acquisition
”). Immediately following the
closing of the Acquisition, the business of NeuroOne, Inc. became our sole focus. Unless otherwise stated or unless the context
otherwise requires, the description of our business set forth below is provided on a combined basis, taking into account our wholly-owned
subsidiary, NeuroOne, Inc.
Corporate Overview and History of NeuroOne,
Inc.
NeuroOne, Inc. was incorporated under the
laws of the State of Delaware on October 7, 2016. Its predecessor entity, NeuroOne LLC (the “
LLC
”), was
formed on December 13, 2013 and operated as a limited liability company until it was merged with and into NeuroOne, Inc. on October
27, 2016 with NeuroOne, Inc. as the surviving entity (the “
Merger
”). As a result of the Merger, all of
the properties, rights, privileges and powers of the LLC vested in NeuroOne, Inc., and all debts, liabilities and duties of the
LLC became the debts, liabilities and duties of NeuroOne, Inc., except for the license agreement (the “
WARF License
”)
with the Wisconsin Alumni Research Foundation (“
WARF
”) which was not legally transferred until May 2017.
The purposes of the Merger were to: change the jurisdiction of incorporation from Minnesota to Delaware; change the ownership of
the LLC’s underlying assets; and convert from a limited liability company to a corporation.
We are a medical technology company focused
on the development and commercialization of thin film electrode technology for cEEG and sEEG recording, brain stimulation and ablation
solutions for patients suffering from epilepsy, Parkinson’s disease, dystonia, essential tremors and other related brain
related disorders. Members of our management team have held senior leadership positions at a number of medical technology and biopharmaceutical
companies, including Boston Scientific, St. Jude Medical, Stryker Instruments, C.R. Bard, A-Med Systems, Sunshine Heart, Empi,
Don-Joy and PMT Corporation.
We are developing our cortical and sheet
and depth electrode technology to provide solutions for diagnosis through continuous electroencephalogram (cEEG) recording and
stereoelectroencephalography (sEEG) recording and treatment through brain stimulation and ablation, all in one product. A cEEG
is a continuous recording of the electrical activity of the brain that identifies the location of irregular brain activity, which
information is required for proper treatment. cEEG recording involves an invasive surgical procedure, referred to as a craniotomy.
sEEG involves a less invasive procedure whereby doctors place electrodes in targeted brain areas by drilling small holes through
the skull. Both methods of seizure diagnosis are used to identify areas of the brain where epileptic seizures originate in order
to precisely locate the seizure source for therapeutic treatment if possible.
Deep brain stimulation, or DBS, therapies
involve activating or inhibiting the brain with electricity that can be given directly by electrodes on the surface or implanted
deeper in the brain via depth electrodes. Introduced in 1987, this procedure involves implanting a power source referred to as
a neurostimulator, which sends electrical impulses through implanted depth electrodes, to specific targets in the brain for the
treatment of disorders such as Parkinson’s disease, essential tremor, dystonia, and chronic pain. Alzheimer’s is another
indication evaluating the effects of DBS. Unlike ablative technologies, the effects of DBS are reversible.
RF ablation is a procedure that uses radiofrequency
under the electrode contacts that is directed to the site of the brain tissue that is targeted for removal. The process involves
delivering energy to the contacts, thereby heating them and destroying the brain tissue. The ablation does not remove the tissue.
Rather, it is left in place and typically scar tissue forms in the place where the ablation occurs. This procedure is also known
as brain lesioning as it causes irreversible lesions.
Our cortical sheet electrode and depth
electrode technology has been tested over the years by both WARF, the owners of our licensed patents, and Mayo Clinic located in
Rochester, Minnesota, in both pre-clinical models as well as through an IRB approval at Mayo Clinic for clinical research. Regarding
our ablation electrode, the Cleveland Clinic has performed testing in bench top models and pre-clinical (or animal testing) modes.
These pre-clinical tests have demonstrated that the technology is capable of recording, ablation and acute stimulation, although
our technology remains in product development for all of the recording (or diagnostic) and therapeutic modalities so additional
trials will need to be completed prior to it being approved for sale by the FDA) for all of the recording (or diagnostic) and therapeutic
modalities.
Prior to commercialization of our technology,
we will have to obtain regulatory approval as discussed in”-Clinical Development and Regulatory Pathway” and “—Government
Regulation” below.
Our Market Opportunity
Epilepsy Market
We expect to initially target the diagnosis
and treatment of epilepsy. Epilepsy can be caused by a variety of conditions that affect a person’s brain, some of which
are: stroke, brain tumor, traumatic brain injury and central nervous system infections. According to the Centers for Disease Control
and Prevention (the “
CDC
”) and Citizens United for Research in Epilepsy (“
CURE
”),
there are approximately 3,000,000 patients annually suffering with epilepsy in the United States, with an additional 200,000 diagnosed
every year. They also estimate that epilepsy costs the United States $15.5 billion per year. We believe the European market is
similar. Approximately 720,000 of these patients are not receptive to pharmaceutical treatment and therefore are appropriate for
surgical treatment of this disorder. In addition to poor quality of life, epilepsy also is associated with fairly high mortality
rates, especially in children. CURE reported that Sudden Unexpected Death in Epilepsy accounts for 34% of all deaths in children.
Such deaths have increased by close to 100% from 2005 to 2015 according to the CDC. Despite the large market opportunity, it is
estimated that there are only 16,000 craniotomies performed for epilepsy cases each year in the United States with 18,000 performed
in Europe.
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These numbers represent an underpenetrated market due to the invasiveness of a full craniotomy required
just to perform the diagnostic procedure. After the diagnostic procedure, a second therapeutic procedure is required and at times
even a third surgery if the seizures persist. We believe patients are unwilling to proceed due to the long diagnostic times (one-four
weeks in the hospital with a craniotomy), infection rates and 50% rate of success in the diagnosis and treatment of the disorder.
As detailed above, after the diagnosis is completed, if successful, the patient must undergo an additional procedure to have the
affected area of brain tissue removed. The average cost for the diagnostic technology per procedure is $10,000, with ablation devices
costing $15,000 and brain stimulation devices costing $25,000 to $30,000. We believe our technology, once developed, will offer
an all in one solution with diagnostic and therapeutic capabilities.
We believe that many leading neurologists
believe that the limits of today’s current technologies are the reason the exact affected area of the brain causing epileptic
seizures is not well-determined. We expect our technology, which has been developed to date by physicians at WARF and Mayo Clinic,
will provide a number of advantages over the current commercially available technologies, including the following:
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Our proprietary thin film technology under development has a smaller footprint with many more electrodes.
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We expect that our technology will eventually be able to be implanted using a minimally invasive procedure utilizing a dime sized burr hole rather than a full craniotomy which is typically required to implant the currently available technology.
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Our technology may provide more accurate detection of irregular brain activity over currently available technology. In limited clinical testing, doctors at Mayo Clinic have documented pre-seizure activity (micro-seizures) during their clinical research with their patients using our cEEG technology.
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American Association of Neurological Surgeons National
Neurosurgical Procedural Statistics 2012.
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We expect our technology can ablate through
the electrodes as well as perform brain stimulation, allowing for diagnosis and treatment through the same product and in the same
procedure.
Parkinson’s Disease
The Parkinson’s Disease Foundation
estimates that as many as 1,000,000 patients in the United States live with Parkinson’s disease with an additional 60,000
patients diagnosed per year. Over 10,000,000 patients worldwide are living with Parkinson’s disease. There have not been
any drugs introduced that have been effective at treating Parkinson’s disease. The average onset is over 60 years old but
some people have been diagnosed as young as 40 years old. Parkinson’s is a disorder of the central nervous system caused
by loss of brain cells throughout various regions of the brain. It is attributed to the loss of dopamine production in the brain,
a messenger in the brain that allows for movement and coordination. There are no objective tests to diagnose Parkinson’s
disease, and misdiagnosis rates are still very high. Doctors look to find two or more signs to make a diagnosis, including balance
problems, rigidity and tremors that occur during rest. In 2011, the FDA approved the first imaging device called a DaTscan that
can capture images of the dopamine system in the brain. By itself, these scans cannot diagnose Parkinson’s but can help confirm
a doctor’s diagnosis. Parkinson’s disease is typically not fatal; however, complications caused by the symptoms of
Parkinson’s, such as difficulty swallowing causing food to travel to the lungs resulting in pulmonary issues or falls related
to loss of balance, can be fatal.
Today’s primary treatment for Parkinson’s
disease involves medications that have not proven to resolve symptoms but rather ease symptoms. Years ago, surgical procedures
such as thalamotomy and pallidotomy targeted certain parts of the brain and involved destroying the tissue. More recently, these
procedures have been replaced with DBS. A doctor evaluates the patient by reviewing the patient’s symptoms and medications
taken and administering detailed memory, thinking and imaging tests to determine if they are appropriate for DBS. According to
the Michael J. Fox Parkinson’s Disease Research Foundation website, patients that seem to do best with DBS are those that
have had the disease for at least four years and have benefited from taking medications prescribed to control the disease. In addition,
DBS seems to help with reducing the issues with motor functions such as tremors, stiffness and slowness but not for balance issues.
Doctors are evaluating treatment to other parts of the brain in an effort to address more symptoms to treat walking or balance
issues. In addition, research is being conducted to provide stimulation when the symptoms return as opposed to all of the time.
Essential Tremors
Essential tremors are thought to be due
to electrical irregularities in the brain that send abnormal signals to the muscles. It is a progressive condition that worsens
over time and is linked to genetic disorders that typically appear in people who are over 40. Essential tremors usually occur alone
and without any other neurological symptoms or signs. The tremors usually occur when the hands are raised and primarily affect
the hands. Muscles in the trunk, face and neck may also experience symptoms. Sometimes misdiagnosed as Parkinson’s disease,
essential tremors are an involuntary rhythmic shaking of the hands that is not present at rest. It is apparent during activities
such as drinking, writing and eating. Symptoms can worsen due to stress, anxiety, smoking, caffeine, fatigue, etc. Genetics Home
Reference estimates that as many as 10,000,000 people in the United States are affected by the disease. Treatments for the disease
include medical therapy, weighting the limbs and DBS. Patients need to eliminate any medications they are taking that cause tremors
as this can exacerbate the symptoms. For some patients, using wrist weights may ease symptoms allowing the patient to function.
Other patients may also use relaxation techniques as stress can increase symptoms. Medical therapy is also used to treat patients’
symptoms. Primidone is typically the first drug prescribed as it has had success in some situations for epilepsy. Botox is also
used at times to control head tremors. When these fail, surgery is the next alternative. A surgical procedure used years ago created
lesions in the ventral intermediate thalamus and was highly successful with treating essential tremors but is no longer commonly
used due to increased risk of developing speech problems. The latest therapy is DBS, which, unlike other therapies, is reversible
and programmable, helping to adjust the settings to maximize patient benefit. Similar to Parkinson’s disease, the ability
to detect this irregular brain activity before it causes a tremor is highly desirable.
Dystonia
Dystonia is a neurological condition recognized
as a motion disorder that involves over activity of a variety of different muscles simultaneously that work against each other.
It presents itself in a variety of symptoms but typically involves repetitive, patterned and often twisting involuntary muscle
contractions resembling tremors. According to the Dystonia Medical Research Foundation, over 300,000 people are affected in the
United States and Canada alone. Dystonia is the third most common problem seen in movement disorder clinics. Because it has many
different manifestations, it is often misdiagnosed. In addition, similar to Parkinson’s disease, there are no specific tests
that can positively diagnose dystonia. A doctor typically will evaluate patient and family history, potentially do genetic testing,
EEG testing, blood and urine tests. There are also many treatment options for patients but depend on the type of dystonia. Botox
and certain medications may be helpful or DBS may be used.
Artificial Intelligence
The brain consists of approximately 100
billion nerve cells, which are small wires that pass electrical signals to control all of its functions. There have been a number
of successful clinical trials in which small metal wires, known as electrodes, are implanted in the brain to correct nerve damage
using wireless communication between implanted wires to simulate functional nerve cells. In addition to correcting damaged nerve
cells, certain scientists have theorize that if millions of wires could be implanted in the brain, these electrodes could present
an opportunity to use artificial intelligence to create infrared sight, increase hearing or perfect memory recall. However, there
currently is no commercially available manufacturing platform capable of making thousands of wires that can be placed within or
on the brain and work reliably for the lifetime of a subject, and are soft enough to match the tissue of the brain, that avoid
damage to the brain.
Limitations of Currently Available Therapies
There are a limited number of currently
available products for diagnosis and treatment for people with neurological disorders such as epilepsy. Although the currently
available systems provide diagnosis and treatment for patients, they have certain inherent limitations and shortcomings that we
believe limit their use and validate the need for improved technology in the market. These limitations include:
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Lengthy diagnostic times:
Patients spend one to four weeks in the hospital waiting to have seizures that will allow doctors to determine where the seizures are occurring.
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Lower Accuracy:
Historically, clinical electrode manufacturers primarily provided electrodes that sample brain tissue at approximately centimeter spacial scales. Advances in digital EEG acquisition have made recordings at sub-millimeter spatial scales possible, but high-spatial resolution EEG has been slow to impact clinical practice. Existing, higher spatial scales increase the potential for missing data that may be critical in the removal of brain tissue causing the irregular activity.
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Need to perform a full craniotomy (invasiveness):
Currently available cortical electrode technology is placed through a craniotomy, which requires removing the top part of the cranium and is a very painful and invasive procedure. Procedural times for a craniotomy range from a minimum of four to eight hours. A variety of complications can occur when a full craniotomy is performed, including but not limited to: stroke, bleeding, infection, seizures, swelling of the brain (which may require a second craniotomy), nerve damage, which may cause muscle paralysis or weakness, cerebrospinal fluid (CSF) leak, which may require repair, loss of mental functions and permanent brain damage with associated disabilities. The invasiveness, procedural times and possible surgical complications have limited the growth of surgical treatment of epilepsy.
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Multiple technologies required for diagnosis and
treatment:
Currently, a patient undergoes a craniotomy for implantation of diagnostic film technologies. The patient then
waits in the hospital for one to four weeks waiting to have seizures that will allow doctors to pinpoint where the seizures are
occurring in the brain. After this is complete, a patient has to undergo another lengthy procedure to have the brain tissue removed
or undergo permanent implantation of depth electrodes for chronic stimulation. There is a need for an all in one technology that
can potentially allow for diagnosis and treatment concurrently and potentially offer real time treatment without the need for
surgery.
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Our Solution
As a result of the inherent limitations
and inconvenience of existing systems, we believe that there is a significant unmet need among people with neurological disorders
for cortical strip, grid and depth electrodes that provide diagnostic capabilities through cEEG and sEEG recording in addition
to therapeutic modalities, such as brain stimulation and ablation, offered as an all in one product. In comparison to currently
available technologies, we are currently developing our strip, grid and depth electrodes with the goal of providing the following
expected advantages:
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Reduced time for diagnosis:
If we are successful in identifying brain activity more quickly, in offering a minimally invasive procedure and developing an all in one solution, we expect our technology will reduce overall procedural times. While our pre-clinical and clinical experience to date is very limited, our cortical grid technology under development has, in some cases, demonstrated the ability to provide hi fidelity recordings that have allowed physicians to identify the affected brain tissue causing seizures in hours versus weeks. This represents the potential for meaningful cost savings for hospitals and patients and improved quality of life for patients.
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Improved accuracy of diagnostic technologies:
Because we believe our thin film technology will be capable of recording at higher fidelity than current technologies used in EEG recording, we believe our technology may be able to more precisely determine the brain tissue causing seizures. Additionally, in the limited clinical tests performed by Mayo Clinic with five patients to date, our technology under development has identified what clinicians refer to as pre-seizure activity (made possible by the ability to detect brain activity using sub-millimeter spatial scales). We believe our technology under development may be able to improve outcomes compared to using other therapeutic technologies regardless of whether we are able to offer an all in one diagnostic and therapeutic solution.
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Implantation via minimally invasive procedure with fewer post-procedure complications:
We are currently developing an approach to deliver the cortical electrodes, including minimizing the invasiveness of the procedure. We expect that patients who have qualified for this therapy will be more accepting of a minimally-invasive procedure. Such a procedure would potentially reduce the patient’s pain, bleeding and other adverse events associated with a full craniotomy. Our technology is expected to also have fewer wires, also referred to as tails, exiting the patient’s head, which can also reduce the potential for infections. Furthermore, the material we currently use in our cortical electrodes has shown in pre-clinical evaluations to cause less inflammation than current electrode substrates as it appears more compatible with brain tissue. As discussed under “Our Strategy” below, our technology under development, if approved, will be implanted via a full craniotomy until such time, if ever, as we are able to develop our minimally invasive procedure.
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All-in-one diagnostic and therapeutic technology solution:
Due to the expected high fidelity recording capabilities of our technology under development, we have received feedback from physicians that they will attempt to perform the diagnosis and treatment in a single procedure, thereby eliminating the need for a second surgical procedure, reducing the likelihood of patient infection and minimizing the diagnostic, procedural and hospital costs. As discussed under “Our Strategy” below, our initial product offering will offer diagnostic-only capabilities while we advance the development of our all in one approach.
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Our Strategy
Our goal is to be the global leader in
cEEG and sEEG recording, deep brain stimulation and ablation, owning the procedure from diagnosis through treatment. The key elements
of our strategy include:
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Introduce cortical strip and grid electrodes for the diagnosis of epilepsy in United States:
In the fourth quarter of 2018, we intend to complete the required testing to make a 510(k) device submission to the FDA for our cortical and strip electrodes for temporary (less than 30 day) use with recording, monitoring, and acute stimulation equipment for the recording, monitoring and stimulation of electrical signals on the surface of the brain. As described in more detail in “Government Regulation” below, if the FDA determines to accept our submission for substantive review, the FDA will aim to complete its review within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and clearance is never assured. If the FDA agrees that the device is substantially equivalent to a legally marketed predicate device, it will grant clearance to commercially market the device. Our initial product offering will be placed through traditional surgical means involving a craniotomy until such time, if any, that we launch our minimally invasive procedure. We believe, due to physician feedback, that our technology under development would represent a major improvement over existing cortical electrodes for the recording of brain activity. We are initially targeting epilepsy as we believe this is a clinical area of great need and a market that is underserved with a quick path to commercialization. We believe the largest and quickest-to-market geography for our cortical strip and grid technology under development is in the United States for a number of reasons, including the following: (i) many industry sources believe there is a large underserved U.S. market, (ii) healthy procedural reimbursement for centers and physicians, (iii) robust average selling prices, (iv) physician enthusiasm for our technology under development. We expect to hire direct experienced sales representatives to market our technology, if approved, in the United States.
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Launch depth electrodes for sEEG recording:
Given the reluctance of patients to undergo epilepsy surgery due to its invasiveness, a number of epilepsy centers have adopted the use of depth electrodes, which are placed by drilling small holes into the patient’s cranium, thereby avoiding a craniotomy. We believe our technology will offer advantages to current depth electrode technology and will enable us to offer a therapeutic solution using this technology in the future. As we develop our technology, we plan to release further information about the expected advantages of our technology over currently available therapies.
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Introduce minimally invasive delivery system for cortical electrodes:
Cortical electrodes generally require a craniotomy, which is a very invasive procedure that can cause patient complications. Because of this, many patients have opted to not have epilepsy surgery, instead accepting the consequences and risks associated with epilepsy. We intend to develop a procedure that may include a delivery system placed through a small circular incision in the skull for implantation of the cortical grid and strip electrodes. We believe this will increase patient willingness to accept the surgery and increase market penetration. Until we are able to develop this procedure, if at all, our initial product offering will be placed through traditional surgical means involving a craniotomy and may be less likely to be adopted by physicians and patients due to unwillingness of patients to undergo epilepsy surgery.
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Utilize these core technologies to develop all in one diagnostic and therapeutic solutions:
Patients currently undergo one surgical procedure for diagnosis (either to have a cortical electrode placed via a craniotomy or depth electrodes placed via holes drilled into the skull) and, hopefully after the brain recordings successfully indicate where the affected brain tissue is located, a second procedure or surgery is then required to treat the patient. There is strong physician interest in being able to perform both the diagnostic and therapeutic procedure concurrently. We are developing our technology with the goal of being able to offer this benefit although there can be no assurance that we will be able to do so. We are pursuing cortical grid, strip and depth electrode technology that can record brain activity (diagnose), ablate brain tissue and also provide both acute and long term stimulation. The technology has demonstrated these functions in acute and short term animal models; however, additional development is required to offer a device that has long term therapeutic application. These therapeutic technologies are expected to require more robust regulatory approvals for the United States, ranging from a 510(k) with human clinical data to pre-market approvals (“
PMAs
”). We will engage the FDA at the proper time to determine the most efficient clinical path.
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Gain approval for other brain or motor related disorders such as Parkinson’s with the therapeutic technologies developed for epilepsy:
While we are developing our technology for the diagnosis and treatment of epilepsy, we believe that our technology has strong application and utilization for other brain or motor related disorders such as Parkinson’s disease, dystonia, essential tremors and facial pain as these diseases are currently treated with DBS if medications are not effective. As previously mentioned, we are planning to offer electrodes that can be implanted for long term stimulation applications, but such use will require that we pursue additional approvals from the FDA and any international regulatory bodies where we seek to commercialize our technology.
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Explore partnerships with other companies that leverage our core technology:
Given that our technology enables, complements and/or competes with a number of companies that are in the market or attempting to enter the market with diagnostic or therapeutic technologies to treat brain related disorders, we believe there may be opportunities to establish mutually beneficial relationships. In addition, our technology may have application in cardiovascular, orthopedic and pain related indications that could benefit from a hi-fidelity thin film electrode product that can provide stimulation and/or ablation therapies.
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Investigate the potential applications associated with Artificial Intelligence:
We have been informed by some of our corporate advisors that the ability to offer scale-able electrode technology that can provide thousands of electrodes in the brain may be helpful in treating medical conditions that may benefit from using artificial intelligence. The Company has formed an advisory board that will provide guidance to the Company as we continue to explore the opportunities in this exciting field.
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Our Technology
Epilepsy Mapping and Monitoring
Epileptic seizures occur when the neurons
in the brain miscommunicate. This miscommunication typically results in involuntary muscle seizure activities and/or periods of
perceptual disconnect where the individual appears frozen. Modern medical science has advanced the treatment of epileptic seizures
by mapping the electrical communication activity of neurons and understanding their special orientation in the brain. This mapping
is accomplished by access to the cranium (through a craniotomy) and placing conductive contacts on the brain directly. The craniotomy
procedure is very invasive, traumatic to the surrounding tissue, results in high patient down time, and increases the risk of infection.
Our Technology
We seek to leverage scale-able technology
and produce ultra-thin, or paper-thin electrodes that allow for high-resolution and high-definition recordings, which would improve
mapping resolution and signal acquisition. If the Company is able to leverage scale-able technology, it would mean that our
technology would be able to incorporate smaller electrodes and thereby increase the number of electrodes on a given surface area.
We expect that this would increase the imaging resolution so that brain activity is displayed in greater definition. We also believe
that the electrodes’ unique thinness and flexibility will provide a less invasive approach to electrode placement. The electrodes
would be able to be placed through a small quarter size hole instead of by an invasive full craniotomy procedure.
The images under “Cortical Electrode,”
from bottom to top, are images of our cortical electrode strip, our grid electrode, and the grid electrode on the brain, respectively.
The images under “High Density Interconnect” are both images of our product that connects our electrodes to the head
box, which is a piece of hardware that connects to electrodes to acquire, amplify, display, store and archive electrophysiological
signals, and is integrated as part of our manufactured electrode product. The images under “Head Box” and “Signal
Monitoring and Mapping” are images of the device which processes information received through the high density interconnect,
and a sample output of data acquisition, respectively, neither of which is one of a Company product.
Our technology consists of three primary
types of cortical electrodes: grid electrodes, strip electrodes and dual-sided electrodes. These electrodes have a patented design
that utilizes proprietary processing and materials technology, which we believe will allow the electrodes to have improved features
over the current industry standard recording electrodes.
What sets our technology apart from others
is the integration of state of the art design leveraging the latest in flexible printed circuit technology. We believe our patented
designs will provide the surgeon a higher tactile perspective on electrode placement allowing for ultra-precise neuron recording.
We expect the benefits of our electrode designs to include the ability to detect better defined margins between healthy tissue
and resect-able tissue, less immune-response from the brain and surrounding tissue, better signal acquisition due to superior conformability
of the electrode over the brain, improved flexibility that physicians have requested, which we expect will enable a minimally invasive
approach and the electrodes unique thinness that is unmatched by current products being used.
The Future of Epilepsy Mapping
We seek to develop superior “scale-able”
technology for future product system iterations in higher density contact placement. This will open the doors to other brain related
disease recording procedures by providing hi-fidelity, more accurate diagnostic capabilities and also the ability to provide an
all in one therapy capable of diagnosis, ablation and/or stimulation. Beyond the brain, we believe our technology under development
has applications in other neurological signal recording disease states related to voluntary or involuntary motor neuron abnormalities,
understanding sensory neuro behavior (pain), limb prosthetics and degenerative muscle disease.
Clinical Development and Regulatory
Pathway
Clinical Experience, Future Development
and Clinical Trial Plans
Our technology under development has not
been approved for commercialization by any U.S. or foreign regulatory body. To date, the Company has performed a number of bench
top (which includes feasibility testing) and pre-clinical tests (which include animal testing of device placement, ergonomics,
performance, ease of use, and other tests required by FDA regulations). As described in “—Government Regulation”
below, the Company will be required to perform additional testing of its technology in connection with obtaining regulatory approvals.
In parallel with the development and testing
needed to launch our cortical strip and grid electrodes, we intend to expand our product offerings to include less invasive means
and all in one solutions, thus providing both patients and physicians better options to treat epilepsy and other brain related
disorders. While we expect to make modifications to this initial system, we believe that most of our future product development
initiatives will involve unique and transformational next generation technology that should drive further appeal of our products
with both physicians and patients.
We are utilizing a number of resources
to develop these technologies. We license three critical patents from WARF that are the foundation of the technology we are developing
and intend to commercialize and benefit from the thin film technology know-how of Mayo Clinic doctors through our license and development
agreement. WARF, Mayo Clinic and Cleveland Clinic have been responsible for all pre-clinical studies of our technology under development
to date. See “—WARF License” and “—Mayo Foundation for Medical Education and Research License and
Development Agreement” below.
Below we have summarized, for each component
of our technology under development, the current stage of development, the pre-clinical testing done to date by WARF or Mayo Clinic
on such component, if any, our plans for further testing or clinical trials and our expectations regarding the requirements for
regulatory approval and timing of regulatory submissions:
Technology
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Stage of Development and Pre-Clinical Testing to Date
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Additional Expected Steps for Regulatory Approval
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Cortical strip and grid electrodes for the diagnosis of epilepsy
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Company has finalized the design for the product and there are
no further expected changes to the device (“design freeze”).
Pre-clinical testing and clinical testing on the final design
has been conducted by Mayo Clinic and WARF (as described in “Mayo Clinic Studies” below).
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Additional pre-clinical electrical,
sterilization and packing testing is required prior to FDA 510(k) submission and scheduled to be completed by the
end of the fourth calendar quarter of 2018. Such additional testing will need to demonstrate sterilization validation
and adoption (validation of processes used to sterilize the device), which we estimate will require $25,000.
There may be continued clinical evaluation of the technology
under a pre-existing IRB research protocol approved by Mayo’s institutional review board, which will provide us with additional
clinical evidence that may assist with product acceptance and launch.
If testing in fourth calendar quarter of 2018 is successful, we expect
to file for FDA 510(k) marketing clearance in the fourth calendar quarter of 2018, with commercial launch planned to begin in the United
States in the first half of 2019 pending FDA 510(k) clearance and sufficient capital to hire sales representatives.
As described in “—Government Regulation”
below, FDA 510(k) clearance often takes longer than 90 days, and clearance is never assured. The FDA may require further information,
including clinical data which could delay the planned launch.
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Depth electrodes for recording (diagnostic) purposes
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No design freeze; currently there are two leading alternative
designs.
Bench top testing and pre-clinical tests (animal testing) were
conducted in the third quarter of 2018.
No clinical testing has been conducted to date.
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The Company is currently evaluating
two different designs for this product, and design freeze expected to be complete in the fourth calendar quarter of 2018. Additional
pre-clinical tests (including safety and performance tests) expected to occur on the final design in the fourth calendar quarter
of 2018. The tests will need to demonstrate: biocompatibility (including extractables/leachables (whether the product results
in any leaching of metals), and ease of implantation)), which we estimate will require $100,000;
Sterilization validation and adoption, which we estimate will
require $25,000 to complete; and
Electrical safety, which we estimate will require $60,000 to complete.
Pending the outcome of these tests, we expect to file for FDA
510(k) marketing clearance in the second calendar quarter of 2019.
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Minimally invasive cortical electrode delivery system
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No design freeze.
No pre-clinical testing or clinical testing has been conducted
to date.
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Pre-clinical testing is expected to
begin by the first calendar quarter of 2019, and regulatory requirements will continue to be evaluated as we develop the
design of this product.
The Mayo Clinic is conducting testing of its own device. In
the event the Mayo Clinic completes development of its own device prior to us, we may forego completing development of our device
and seek to enter into an arrangement with Mayo Clinic relating to its device (such as, for example, an acquisition/licensing,
or distribution agreement).
Otherwise, to complete development of our own device, testing will need to demonstrate design verification,
which we estimate will require $50,000.
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Depth electrode diagnostic and ablation devices
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No design freeze.
Pre-clinical testing, including benchtop and animal testing,
has been conducted on early designs.
No clinical testing has been conducted
to date.
The Company has partnered with the Cleveland Clinic to co-develop
the product.
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Additional pre-clinical testing at the
Cleveland Clinic is expected to begin in the fourth calendar quarter of 2018.
Once the design is finalized we will be required to conduct
additional pre-clinical testing, which may include additional benchtop or animal testing for safety and performance. Additionally,
the FDA may require that we conduct human clinical studies.
No FDA feedback has been sought or
received by us to date on the clinical process that may be required for an ablation indication, but we expect regulatory
clearance/approval will require a more robust clinical process, which could range from 510(k) clearance with human clinical
data to a PMA, depending on proposed indications for use. We expect that we will need to demonstrate design verification,
which we estimate will require $75,000 to complete, biocompatibility, which we estimate will require $100,000 to complete,
and sterilization validation and adoption, which we estimate will require $25,000 to complete. We may also need to
demonstrate electrical safety, which we estimate will require $60,000.
Future pre-clinical and clinical
testing requirements for regulatory clearance will continue to be evaluated as we develop the design of this product.
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Depth electrode chronic stimulation devices
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No design freeze.
No pre-clinical testing, or clinical testing has been conducted
to date.
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This device is in early development, and
we do not expect to begin conducting bench top nor pre-clinical testing until the fourth calendar quarter of 2019.
Following a design freeze, we will be required to conduct additional
pre-clinical testing, which may include additional benchtop or animal testing for safety and performance. Additionally, FDA-approved
human clinical studies will most likely be required.
No FDA feedback has been sought
or received by us to date on the clinical process that will be required for chronic stimulation, but we expect regulatory clearance/approval
for chronic stimulation may require a more robust clinical process, which could range from 510(k) clearance with human clinical
data to a PMA. Because we have not yet met with the FDA, we cannot yet determine what clinical data and testing
we will need to complete or what the testing will need to demonstrate. However, we believe, based on the experience of competitors
for similar technology, that we will need to conduct clinical trials, which we estimate will require approximately $1,000,000,
as well as demonstrate biocompatibility, which we estimate will require $100,000 to complete, and demonstrate sterilization validation
and adoption, which we estimate will require $25,000 to complete.
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Mayo Clinic Studies
Our cortical technology for the diagnosis
of epilepsy has been tested by doctors at Mayo Clinic in multiple pre-clinical tests conducted from 2012 to 2017. In pre-clinical
models, doctors examined the biological impact on mammalian brains. Polyimide substrate electrodes (NeuroOne technology) were implanted
on the pig’s brain for one week alongside standard competitive electrodes. The tissue underneath the two types of electrodes
was removed, fixed, stained, and examined for immunological responses. The results of a histological (evaluation of brain tissue
under a microscope) analysis showed reduced immunological reaction to prolonged polyimide substrate implants (NeuroOne technology)
compared to standard silicone substrate clinical electrodes. Electrophysiological recordings showed data obtained from polyimide
electrodes which showed the feasibility of high fidelity multi-scale electrophysiology while also displaying easier deployment
of polyimide electrodes (NeuroOne technology) through minimally invasive burr holes.
Additionally, doctors implanted our polyimide
thin film electrodes on five human patients who were undergoing surgery to remove brain tissue for drug resistant epilepsy. Electrophysiological
recordings from the polyimide thin film technology displayed in each of these patients demonstrated micro-seizure activity due
to the high fidelity multi-scale electrophysiology.
Conclusions reached by the physicians at
Mayo Clinic were that thin, flexible polyimide electrodes (NeuroOne technology) provided recordings similar to standard clinical
electrodes with reduced immunological response. In addition, the flexibility of polyimide electrodes may reduce pain and swelling
associated with implantation of the device, and the single wire exiting the skull may reduce infection risk. The ability to record
micro-seizure and single neuron brain activity may also provide additional useful clinical data.
In addition, our thin film cortical implant
technology has been tested by researchers at the University of Wisconsin-Madison in multiple pre-clinical animal studies conducted
from 2006 to 2016, which included mice, rats and primates. In these studies, our technology was able to record brain activity from
different areas of the brain, was implanted in a minimally invasive fashion, electrically provided brain stimulation and tissue
ablation, and had increased flexibility compared to existing commercially available technology, which allowed the grids to conform
more easily to the brain surface (and may have reduced pain and swelling, compared to less flexible devices).
Sales and Marketing
Based on the size and maturity of the U.S.
market, our initial commercial focus, if our technology is approved for commercialization for the diagnosis of epilepsy in the
United States, will be to invest in developing a direct sales force and infrastructure to support the launch of the product in
the United States and target what we estimate to be approximately 188 Level 4 epilepsy centers along with their respective epilepsy
teams comprised of neurologists, neurosurgeons and technicians in the United States who are clinically active.
In parallel, we have evaluated the opportunity
to commercialize our products in select European markets and have concluded that while there is a market for our technology in
Europe, the regulatory changes in the European Union will require a lengthy and costly approval pathway. At this time, we will
utilize our resources to remain focused on the opportunity in the United States but will reexamine international opportunities
at a later time. If our technology is approved for commercialization for the diagnosis of epilepsy in the United States, we will
look to educate neurologists, neurosurgeons and primary care physicians on the advantages to existing epilepsy approaches through
a variety of targeted marketing tools and social media.
Reimbursement
Coverage in the United States
Reimbursement from private third-party
healthcare payors and, to a lesser extent, Medicare will be an important element of our success. Although CMS and third-party payors
have adopted coverage policies for our targeted indications, there is no guarantee this will continue at the same levels or at
all in the future. Current Procedural Terminology, or CPT, is a medical code set that is used to report medical, surgical and diagnostic
procedures and services to entities such as physicians, health insurance companies and accreditation organizations.
Applicable diagnostic CPT codes for mapping
(diagnosing) the brain for diagnostic procedures are as follows:
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61531 Subdural implantation of strip electrodes through
one or more burr or trephine (saw) hole(s) for long-term seizure monitoring;
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61533 Craniotomy with elevation of bone flap: for subdural
implantation of an electrode array, for long term seizure monitoring;
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61535 Craniotomy with elevation of bone flap; for removal
of epidural or subdural electrode array, without excision of cerebral tissue (separate procedure); and
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61760 Stereotactic implantation of depth electrodes
into the cerebrum for long term seizure monitoring.
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Regarding ICD-10 codes, the International
Classification of Diseases, Tenth Edition (ICD-10) is a clinical cataloging system that went into effect for the U.S. healthcare
industry on October 1, 2015, after a series of lengthy delays. Accounting for modern advances in clinical treatment and medical devices,
ICD-10 codes offer many more classification options compared to those found in its predecessor, ICD-9. Within the healthcare industry,
providers, coders, IT professionals, insurance carriers, government agencies and others use ICD codes to properly note diseases
on health records, to track epidemiological trends and to assist in medical reimbursement decisions.
ICD-10 codes for epilepsy are as follows:
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G40.0 Localization-related (focal) (partial) idiopathic
epilepsy and epileptic syndromes with seizures of localized onset;
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G40.1 Localization-related (focal) (partial) symptomatic epilepsy and epileptic syndromes with simple partial seizures;
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G40.2 Localization-related (focal) (partial) symptomatic epilepsy and epileptic syndromes with complex partial seizures;
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G40.3 Generalized idiopathic epilepsy and epileptic syndromes;
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G40.A Absence epileptic syndrome;
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G40.4 Other generalized epilepsy and epileptic syndromes;
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G40.50 Epileptic seizures related to external causes, not intractable;
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G40.80 Other epilepsy; and
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G40.82 Epileptic spasms.
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We believe that many of the indications
we are pursuing with our technologies are currently reimbursed on a widespread basis by Medicare, Medicaid and private insurance
companies.
Medicare, Medicaid, health maintenance
organizations and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and
the level of reimbursement of new medical devices, and, as a result, their coverage policies may be restrictive, or they may not
cover or provide adequate payment for our products. In order to obtain reimbursement arrangements, we may have to agree to a net
sales price lower than the net sales price we might charge in other sales channels. Our revenue may be limited by the continuing
efforts of government and third-party payors to contain or reduce the costs of healthcare through various increasingly sophisticated
means, such as requiring prospective reimbursement and second opinions, purchasing in groups, or redesigning benefits. Our future
dependence on the commercial success of our technologies makes us particularly susceptible to any cost containment or reduction
efforts. Accordingly, unless government and other third-party payors provide adequate coverage and reimbursement for our products
and the related insertion and removal procedures, our financial performance may be limited.
Coverage Outside the United States
If we seek to commercialize in countries
outside the United States, coverage for epilepsy surgical procedures are available from certain governmental authorities, private
health insurance plans, and labor unions. Coverage systems in international markets vary significantly by country and, within some
countries, by region. If we seek to commercialize our technology, if approved, outside the United States, coverage approvals must
be obtained on a country-by-country, region-by-region or, in some instances, a case-by case basis. Based on our ongoing evaluation,
certain countries reimburse more highly than others.
We evaluated international opportunities
to market our technology under development. While we believe there is a market for our technology in Europe and other foreign jurisdictions,
we have determined not to seek to commercialize in any foreign jurisdictions due to time intensive approval processes, the lack
of certainty regarding approval, significant cost and the stringency of the regulatory approval process in Europe in particular,
among other factors.
Manufacturing, Supply and Quality Assurance
We currently outsource the supply and manufacture
of all components of our prototypes of our technology under development. We plan to continue with an outsourced manufacturing arrangement
for the foreseeable future. Our third-party manufacturers are recognized in their field for their competency to manufacture the
respective portions of our system and have quality systems established that meet FDA requirements. We believe the manufacturers
we currently utilize have sufficient capacity to meet our launch requirements if our technology under development is approved in
the future and are able to scale up their capacity relatively quickly with minimal capital investment. We believe that, as we increase
our demand in the future, our per-unit costs will decrease materially. We have also identified capable second source manufacturers
and suppliers in the event of disruption from any of our primary vendors.
Our suppliers meet the latest ISO 13485
certification, which includes design control requirements. As a medical device developer, the facilities of our sterilization and
other critical suppliers are subject to periodic inspection by the FDA and corresponding state and foreign agencies. We believe
that our quality systems and those of our suppliers are robust and achieve high product quality. We plan to audit our suppliers
periodically to ensure conformity with the specifications, policies and procedures for our devices.
Research and Development
Our research and development team, which
includes our Chief Development Officer who is a full-time employee, and two third party consultants who perform research and development
activities for us, is focused on the development of thin film cortical grid and strip electrodes and depth electrodes for recording,
ablation and chronic stimulation for brain related disorders. Our research and development expenses were $0.7 million for the year ended December 31, 2017 and $0.7 for the nine months ended September 30, 2018.
Competition
In the market for Epilepsy diagnosis, our
cortical strip, sheet and depth electrode technology will likely compete with Integra Life Science’s Integra Epilepsy Strip,
Grid and depth electrodes, which provide a similar function to our diagnostic technologies under development. These products are
well established in the marketplace and Integra has greater resources than us, which could allow them to innovate faster. Ad-Tech
Medical Instrument Corporation’s Epilepsy/LTM (subdural grid, strip and depth) electrodes, which have become the market leaders
for diagnostic mapping in epilepsy, and PMT Corporation’s Cortac Strips and grid electrodes and Depthalon depth electrodes
are used for recording brain activity similar to other competitive technologies. Today’s success rates for seizure free
post
-operative
conditions remain at 50%, which has limited patients’ willingness to undergo the currently highly invasive surgical procedure.
We will also compete against other companies in early stages of development of thin film technologies.
In the neuro-ablation market, we expect
to compete with Medtronic’s Visualase guided-laser ablation technology and Monteris Medical’s NeuroBlate technology,
which use MRI guided laser surgical ablation for use to ablate, necrotize or coagulate soft tissue through interstitial irradiation
or thermal therapy in medicine and surgery in the discipline of neurosurgery with 1064 nm lasers. Their website claims it is used
for ablation in the brain for soft tissue and tumors. We believe there are other laser-based systems in development that will compete
with these technologies.
In the neurostimulation market, we expect
to compete with NeuroPace’s RNS system approved for epilepsy, Medtronic’s Activa system approved for Parkinson’s
disease, Boston Scientific Vercise (indicated for Parkinson’s, dystonia and essential tremors), Abbott/St. Jude Medical’s
Infinity DBS system (approved for Parkinson’s disease and essential tremors), Liva Nova/Cyberonic’s VNS therapy intended
for patients suffering with epilepsy. We believe there are additional companies pursuing this high growth space although none are
expected to be commercially available in 2018 based on current reports. Although we will face potential competition from many different
sources, we believe that our technology, knowledge, experience and scientific resources will provide us with competitive advantages.
We expect the key competitive factors affecting the success of our cortical strip and sheet electrodes under development, if successfully
developed and approved, are likely to be: hi-fidelity recording that allows for detection of pre-seizure activity, ability to place
the devices minimally invasively, deliverability of cortical grid, strip and depth electrode technology, ability to offer grid,
strip and depth electrodes in various electrode shapes and sizes, potential reduction in infections and ability to record brain
activity both on the surface using cortical grid and strip technology and deeper into the brain using depth electrodes concurrently.
Many of the companies against which we
may compete in the future have significantly greater financial resources and expertise in research and development, manufacturing,
preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers
and acquisitions in the pharmaceutical, biotechnology and diagnostic industries may result in even more resources being concentrated
among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly
through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and
retaining qualified scientific and management personnel and establishing clinical trial sites and subject registration for clinical
trials, as well as in acquiring technologies complementary to, or necessary for, our development.
WARF License
We have an Exclusive Start-Up Company License
Agreement with WARF, pursuant to which WARF has granted us the WARF License, to make, use and sell, in the United States only,
products that employ certain licensed patents for a neural probe array or thin-film micro electrode array and method. In exchange
for the WARF License, we have agreed to pay WARF $55,000 (representing a license fee) upon the earliest to occur of the date we
cumulatively raise at least $3.0 million in financing, which threshold was recently met, the date of a change of control, or our
revenue reaching a specified threshold amount, and to pay $65,000 (representing reimbursement for costs incurred by WARF in maintaining
the licensed patents) upon the earliest to occur of the date that we cumulatively raise at least $5 million in financing, the date
of a change of control, or our revenue reaching a specified threshold amount.
The initial $55,000 payment was due on
May 3, 2018 and was paid April 22, 2018. We have also agreed to pay WARF a royalty equal to a single-digit percentage of our product
sales pursuant to the WARF License, with a minimum annual royalty payment of $50,000 for 2019, $100,000 for 2020 and $150,000 for
2021 and each calendar year thereafter that the WARF License is in effect. If we or any of our sublicenses contest the validity
of any licensed patent, the royalty rate will be doubled during the pendency of such contest and, if the contested patent is found
to be valid and would be infringed by us if not for the WARF License, the royalty rate will be tripled for the remaining term of
the WARF License.
We have agreed to diligently develop, manufacture,
market and sell products under the WARF License in the United States during the term of the agreement and, specifically, that we
would submit a business plan to WARF by February 1, 2018, which we submitted on January 18, 2018, and would file an application
for 510(k) marketing clearance with the FDA by February 1, 2019. WARF may terminate this license in the event that we fail to meet
these milestones on 30 days’ written notice, if we default on the payments of amounts due to WARF or fail to timely submit
development reports, actively pursue our development plan or breach any other covenant in the WARF License and fail to remedy such
default in 90 days or in the event of certain bankruptcy events involving us. WARF may also terminate the WARF License (i) on 90
days’ notice if we fail to have commercial sales of one or more FDA-approved products under the WARF License by March 31,
2019 or (ii) if, after royalties earned on sales begin to be paid, such earned royalties cease for more than four calendar quarters.
The WARF License otherwise expires by its terms on the date that no valid claims on the patents licensed thereunder remain. We
expect the latest expiration of a licensed patent to occur in 2030.
In addition, WARF reserves the right to
grant non-profit research institutions and government agencies non-exclusive licenses to practice and use the inventions of the
licensed patents for non-commercial research purposes, and we grant WARF a non-exclusive, sub licensable, royalty-free right and
license for non-commercial research purposes to use improvements to the licensed patents. In the event that we discontinue use
or commercialization of the licensed patents or improvements thereon, we must grant WARF an option to obtain a non-exclusive, sub-licensable
royalty-bearing license to use the improvements for commercial purposes.
See “Risk Factors”— We
depend on intellectual property licensed from Wisconsin Alumni Research Foundation for our technology under development, and the
termination of this license would harm our business” for additional information regarding the WARF License and our past breach
thereof.
Mayo Foundation for Medical Education
and Research License and Development Agreement
We have entered into the Mayo Development
Agreement with Mayo Foundation for Medical Education and Research (“
Mayo
”) to license worldwide (i) certain
know how for the development and commercialization of products, methods and processes related to flexible circuit thin film technology
for the recording of tissue and (ii) the products developed therefrom, and to partner with Mayo to assist the Company in the investigation,
research application, development and improvement of such technology. Mayo has agreed to assist us by providing access to certain
individuals at Mayo, or the Mayo Principal Investigators, in developing our cortical thin film flexible circuit technology, including
prototype development, animal testing, protocol development for human and animal use, abstract development and presentation and
access to and license of any intellectual property that the Mayo Principal Investigators develop relating to the procedure.
On May 25, 2017, prior to the closing of
the Acquisition, NeuroOne, Inc. issued Mayo 50,556 shares of common stock of NeuroOne, Inc. (the “
NeuroOne Shares
”),
pursuant to a subscription agreement, which shares were converted into 859,976 shares of the Company’s common stock (“
Common
Stock
”) at the closing of the Acquisition.
Whether or not any such technology,
product, method, process, device or delivery system is developed, we agreed, in consideration for Mayo’s efforts under
the Mayo Development Agreement, to pay Mayo a cash payment of approximately $92,000 on the earlier of September 30, 2017 or
the date we raise a minimum amount of financing. We did not make this payment by September 30, 2017 and breached this
provision of the Mayo Development Agreement. Mayo granted us an extension of this deadline to December 31, 2017, and we made
this payment within such extended deadline period.
Finally, we have agreed to pay Mayo a royalty
equal to a single-digit percentage of our product sales pursuant to the Mayo Development Agreement. Mayo may purchase any developed
products licensed under the Mayo Development Agreement at the best price offered by us to the end user in the prior year. The Mayo
Development Agreement generally will expire in October 2034, unless the Mayo know-how and improvements under the Mayo Development
Agreement remain in use, and the Mayo Development Agreement may be terminated by Mayo for cause or under certain circumstances.
For additional information regarding the
Mayo Development Agreement and our past breach thereof, see “Risk Factors—We depend on our partnership with Mayo Foundation
for Medical Education and Research to license certain know how for the development and commercialization of our technology. Termination
of this partnership would harm our business, and even if this partnership continues, it may not be successful.”
Intellectual Property
Protection of our intellectual property
is a strategic priority for our business. We rely on a combination of patents, trademarks, copyrights, trade secrets as well as
nondisclosure and assignment of invention agreements, material transfer agreements, confidentiality agreements and other measures
to protect our intellectual property and other proprietary rights.
Patents
As of November 30, 2018, our patent estate
consists of three issued United States patents licensed from WARF covering a neural probe array and thin-film micro electrode array
and method and two pending U. S. provisional patent applications filed by us on March 31, 2017 and October 26, 2017 covering
our applications and additional devices used during the diagnostic and therapeutic ablation and stimulation procedures. We also
filed a patent application on April 2, 2018, which was derived from the two provisional patents referenced above and are awaiting
a response from the U. S. and International Patent Offices. The licensed issued patents expire between 2025 and 2030, subject
to any patent extensions that may be available for such patents. If a patent or patents are issued on our pending patent application,
the resulting patent is projected to expire in 2038.
Our patent application may not result in
an issued patent, and any patents that have been issued or may be issued in the future may not protect the commercially important
aspects of our technology. Furthermore, the validity and enforceability of our issued patents may be challenged by third parties
and our patents could be invalidated or modified by the issuing governmental authority. Third parties may independently develop
technology that is not covered by our patents that is similar to, or competes with, our technology. In addition, our intellectual
property may be infringed or misappropriated by third parties, particularly in foreign countries where the laws and governmental
authorities may not protect our proprietary rights as effectively as those in the United States.
The medical device industry in general,
and the recording, ablation and neurostimulation sector of this industry in particular, are characterized by the existence of a
large number of patents and frequent litigation based on assertions of patent infringement. We are aware of numerous patents issued
to third parties that may relate to the technology used in our business, including the design and manufacture of electrodes and
pulse generators, as well as methods for device placement. Each of these patents contains multiple claims, any one of which may
be independently asserted against us. The owners of these patents may assert that the manufacture, use, sale or offer for sale
of our cortical strip and sheet electrodes infringe one or more claims of their patents. Furthermore, there may be additional patents
issued to third parties of which we are presently unaware that may relate to aspects of our technology that such third parties
could assert against us and materially and adversely affect our business. In addition, because patent applications can take many
years to issue, there may be patent applications that are currently pending and unknown to us, which may later result in issued
patents that third parties could assert against us and materially and adversely affect our business.
Any adverse determination in litigations,
post grant trial proceedings, including interference proceedings, at the Patent Office relating to intellectual property to which
we are or may become a party could subject us to significant liabilities to third parties or require us to seek licenses from third
parties, and result in the cancellation and/or invalidation of our intellectual property. Furthermore, if a court finds that we
have willfully infringed a third party’s intellectual property, we could be required to pay treble damages and/or attorney
fees for the prevailing party, in addition to other penalties. Although intellectual property disputes in the medical device area
are often settled through licensing or similar arrangements, costs associated with such arrangements can be substantial and often
require ongoing royalty payments. We may be unable to obtain necessary licenses on satisfactory terms, if at all. If we do not
obtain necessary licenses, we may not be able to redesign our products to avoid infringement; if we are able to redesign our products
to avoid infringement, we may not receive FDA approval in a timely manner. Adverse determinations in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products, which could have
a significant adverse impact on our business.
Trademarks
We have one pending U.S. trademark application
for the “NeuroOne
TM
” trademark. We were issued a notice of allowance from the U.S. Trademark and Patent
Office in December 2017 and will provide proof of use to the U.S. Trademark and Patent Office in the near future in order to establish
registration of the trademark. The trademark is subject to a 30 day period in which it can be contested by the public. If not contested,
the U.S. Trademark and Patent Office will issue the registered trademark for the “NeuroOne” name.
Trade Secrets
We also rely on trade secrets, technical
know-how and continuing innovation to develop and maintain our competitive position. We seek to protect such intellectual property
and proprietary information by generally requiring our employees, consultants, contractors, scientific collaborators and other
advisors to execute non-disclosure and assignment of invention agreements upon the commencement of their employment or engagement
as the case may be. Our agreements with our employees prohibit them from providing us with any intellectual property or proprietary
information of third parties. We also generally require confidentiality agreements or material transfer agreements with third parties
that receive or have access to our confidential information, data or other materials. Notwithstanding the foregoing, there can
be no assurance that our employees and third parties that have access to our confidential proprietary information will abide by
the terms of their agreements. Despite the measures that we take to protect our intellectual property and confidential information,
unauthorized third parties may copy aspects of our products or obtain and use our proprietary information.
Government Regulation
Our cortical strip, grid and depth electrodes
are a medical device subject to extensive and ongoing regulation by the FDA, the U.S. CMS, the European Commission, and regulatory
bodies in other countries. Regulations cover virtually every critical aspect of a medical device company’s business operations,
including research activities, product development, quality and risk management, contracting, reimbursement, medical communications,
and sales and marketing. In the United States, the Federal Food, Drug and Cosmetic Act, or FDCA, and the implementing regulations
of the FDA govern product design and development, pre-clinical and clinical testing, premarket clearance or approval, product manufacturing,
quality systems, import and export, product labeling, product storage, recalls and field safety corrective actions, advertising
and promotion, product sales and distribution, and post-market clinical surveillance. Our business is subject to federal, state,
local, and foreign regulations, such as ISO 13485, ISO 14971, FDA’s Quality System Regulation, or QSR, contained
in 21 CFR Part 820, and the European Commission’s Directive 93/42/EEC concerning medical devices and its amendments.
Regulatory Framework in the United
States
Device classification
The FDA characterizes medical devices into
one of three classes. Devices that are considered by the FDA to pose lower risk are classified as Class I or II. Class I
devices are subject to controls for labeling, pre-market notification and adherence to the FDA’s QSR. This pertains to manufacturers’
methods and documentation of the design, testing, production, control quality assurance, labeling, packaging, sterilization, storage
and shipping of products, but are usually exempt from premarket notification requirements. Class II devices are subject to
the same general controls but may be subject to special controls such as performance standards, post-market surveillance, FDA guidelines,
or particularized labeling, and may also require clinical testing prior to clearance or approval. Class III devices are those
for which insufficient information exists to assure safety and effectiveness solely through general or special controls, including
devices that support or sustain human life, are of substantial importance in preventing impairment of human health, or which present
a potential, unreasonable risk of illness or injury.
Some Class I and Class II devices
are exempted by regulation from the pre-market notification requirement under Section 510(k) of the FDCA, also referred to
as a 510(k) clearance, and the requirement of compliance with substantially all of the QSR. However, a pre-market approval, or
PMA application, is required for devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting
or certain implantable devices, or those that are “not substantially equivalent” either to a device previously cleared
through the 510(k) process or to a “preamendment” Class III device in commercial distribution before May 28,
1976 when PMA applications were not required. The PMA approval process is more comprehensive than the 510(k) clearance process
and typically takes several years to complete. Based on FDA definitions, we believe our diagnostic strip, grid and depth electrode
technology will be categorized by the FDA as a Class II device that does not require clinical testing and can be filed as a 510(k),
similar to existing competitive technology. The Company expects that indications for treating epilepsy, Parkinson’s and other
patients suffering from motor related neurological deficiencies via a permanent implant for chronic treatment will require a PMA
process to commercially distribute in the United States.
The 510(k) clearance process
Under the 510(k) clearance process, the
manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent”
to a legally marketed predicate device. A predicate device is a legally marketed device that is not subject to a PMA, i.e., a device
that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has
been reclassified from Class III to Class II or I, or a device that was previously found substantially equivalent through the 510(k)
process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device,
and either have the same technological characteristics as the predicate device or have different technological characteristics
and not raise different questions of safety or effectiveness than the predicate device. Clinical data is sometimes required to
support substantial equivalence.
After a 510(k) premarket notification is
submitted, the FDA determines whether to accept it for substantive review. If it lacks necessary information for substantive review,
the FDA will refuse to accept the 510(k) notification. If it is accepted for filing, the FDA begins a substantive review. By statute,
the FDA is required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical
matter, clearance often takes longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared
without clinical data, the FDA may require further information, including clinical data, to make a determination regarding substantial
equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent,
it will grant clearance to commercially market the device.
If the FDA determines that the device is
not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III,
the device sponsor must then fulfill the more rigorous premarketing requirements of the PMA approval process, or seek reclassification
of the device through the de novo process. The de novo classification process is an alternate pathway to classify medical devices
that are automatically classified into Class III but which are low to moderate risk. A manufacturer can submit a petition for direct
de novo review if the manufacturer is unable to identify an appropriate predicate device and the new device or new use of the device
presents a moderate or low risk. De novo classification may also be available after receipt of a “not substantially equivalent”
letter following submission of a 510(k) to FDA.
After a device receives 510(k) clearance,
any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in
its intended use, will require a new 510(k) clearance or, depending on the modification, could require a PMA application. The FDA
requires each manufacturer to determine whether the proposed change requires a new submission in the first instance, but the FDA
can review any such decision and disagree with a manufacturer’s determination. Many minor modifications are accomplished
by a letter-to-file in which the manufacture documents the change in an internal letter-to-file. The letter-to-file is in lieu
of submitting a new 510(k) to obtain clearance for such change. The FDA can always review these letters to file in an inspection.
If the FDA disagrees with a manufacturer’s determination regarding whether a new premarket submission is required for the
modification of an existing 510(k)-cleared device, the FDA can require the manufacturer to cease marketing and/or recall the modified
device until 510(k) clearance or approval of a PMA application is obtained. In addition, in these circumstances, the FDA can impose
significant regulatory fines or penalties for failure to submit the requisite application(s).
The PMA approval process
Following receipt of a PMA application,
the FDA conducts an administrative review to determine whether the application is sufficiently complete to permit a substantive
review. If it is not, the agency will refuse to file the PMA. If it is, the FDA will accept the application for filing and begin
the review. The FDA has 180 days to review a filed PMA application, although the review of an application more often occurs over
a significantly longer period of time. During this review period, the FDA may request additional information or clarification of
information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s
response to deficiencies communicated by the FDA.
Before approving or denying a PMA, an FDA
advisory committee may review the PMA at a public meeting and provide the FDA with the committee’s recommendation on whether
the FDA should approve the submission, approve it with specific conditions, or not approve it. The FDA is not bound by the recommendations
of an advisory committee, but it considers such recommendations carefully when making decisions.
Prior to approval of a PMA, the FDA may
conduct inspections of the clinical trial data and clinical trial sites, as well as inspections of the manufacturing facility and
processes. Overall, the FDA review of a PMA application generally takes between one and three years, but may take significantly
longer. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:
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the device may not be safe, effective, reliable or
accurate to the FDA’s satisfaction;
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the data from pre-clinical studies and clinical trials
may be insufficient to support approval;
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the manufacturing process or facilities may not meet
applicable requirements; and
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changes in FDA approval policies or adoption of new
regulations may require additional data.
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If an FDA evaluation of a PMA application
is favorable, the FDA will either issue an approval letter, or approvable letter, which usually contains a number of conditions
that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction
of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of a device, subject to the conditions
of approval and the limitations established in the approval letter. If the FDA’s evaluation of a PMA application or manufacturing
facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The FDA also may determine
that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years
while the trials are conducted and data is submitted in an amendment to the PMA. The PMA process can be expensive, uncertain and
lengthy and a number of devices for which FDA approval has been sought by other companies have never been approved by the FDA for
marketing.
New PMA applications or PMA supplements
may be required for modifications to the manufacturing process, labeling, device specifications, materials or design of a device
that has been approved through the PMA process. PMA supplements often require submission of the same type of information as an
initial PMA application, except that the supplement is limited to information needed to support any changes from the device covered
by the approved PMA application and may or may not require as extensive technical or clinical data or the convening of an advisory
panel.
Clinical Trials
Clinical trials are typically required
to support a PMA application and are sometimes required for a 510(k) clearance. These trials generally require submission of an
application for an IDE, to the FDA. The IDE application must be supported by appropriate data, such as animal and laboratory testing
results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE application
must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a non-significant risk
device and eligible for abbreviated IDE requirements. Generally, clinical trials for a significant risk device may begin once the
IDE application is approved by the FDA and the study protocol and informed consent are approved by appropriate institutional review
boards at the clinical trial sites. The FDA’s approval of an IDE allows clinical testing to go forward, but it does not bind
the FDA to accept the results of the trial as sufficient to prove the product’s safety and efficacy, even if the trial meets
its intended success criteria. All clinical trials must be conducted in accordance with the FDA’s IDE regulations that govern
investigational device labeling, prohibit promotion, and specify an array of recordkeeping, reporting and monitoring responsibilities
of study sponsors and study investigators. Clinical trials must further comply with the FDA’s regulations for institutional
review board approval and for informed consent and other human subject protections. Required records and reports are subject to
inspection by the FDA. The results of clinical testing may be unfavorable or, even if the intended safety and efficacy success
criteria are achieved, may not be considered sufficient for the FDA to grant approval or clearance of a product. Clinical trials
must be entered into the clinical trials registry at clinicaltrials.gov.
The commencement or completion of any clinical
trial may be delayed or halted, or be inadequate to support approval of a PMA application, for numerous reasons, including, but
not limited to, the following:
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the FDA or other regulatory authorities do not approve
a clinical trial protocol or a clinical trial, or place a clinical trial on hold;
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patients do not enroll in clinical trials at the rate
expected;
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patients, sponsor (NeuroOne) or study sites do not
comply with trial protocols;
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patient follow-up is not at the rate expected;
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patients experience adverse side effects;
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patients die during a clinical trial, even though their
death may not be related to the products that are part of our trial;
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institutional review boards and third-party clinical
investigators may delay or reject the trial protocol;
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third-party clinical investigators decline to participate
in a trial or do not perform a trial on the anticipated schedule or consistent with the clinical trial protocol, good clinical
practices or other FDA requirements;
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the sponsor (NeuroOne) or third-party organizations
do not perform data collection, monitoring and analysis in a timely or accurate manner or consistent with the clinical trial protocol
or investigational or statistical plans;
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third-party clinical investigators have significant
financial interests related to the sponsor (NeuroOne) or the study that the FDA deems to make the study results unreliable, or
the company or investigators fail to disclose such interests;
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regulatory inspections of our clinical trials or manufacturing
facilities, which may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials;
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changes in governmental regulations or administrative
actions;
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the interim or final results of the clinical trial
are inconclusive or unfavorable as to safety or efficacy; and
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the FDA concludes that our trial design is inadequate
to demonstrate safety and efficacy.
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International Regulation
International sales of medical devices
are subject to local government regulations, which may vary substantially from country to country. The time required to obtain
approval in another country may be longer or shorter than that required for FDA approval, and the requirements may differ. There
is a trend towards harmonization of quality system standards among the European Union, United States, Canada and various other
industrialized countries.
The primary regulatory body in Europe is
that of the European Union, the European Commission, which includes most of the major countries in Europe. Other countries, such
as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices.
The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling
and adverse event reporting for medical devices. Devices that comply with the requirements of these relevant directives will be
entitled to bear the CE conformity marking, indicating that the device conforms to the essential requirements of the applicable
directives and, accordingly, can be commercially distributed throughout Europe. The method of assessing conformity varies depending
on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third party assessment
by a “Notified Body.” This third-party assessment may consist of an audit of the manufacturer’s quality system
and specific testing of the manufacturer’s product. An assessment by a Notified Body of one country within the European Union
is required in order for a manufacturer to commercially distribute the product throughout the European Union. Additional local
requirements may apply on a country-by-country basis. Outside of the European Union, regulatory approval would need to be sought
on a country-by-country basis in order for us to market our products.
Medical devices in Europe are classified
into four primary categories. They are as follows:
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Invasive medical devices;
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Active medical devices; and
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Special Rules (including contraceptive, disinfectant, and radiological diagnostic medical devices).
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Devices are further segmented into the
classes noted below. In Vitro Diagnostic devices have their own classification scheme and while active implantable devices do not
follow the same classification system as provided by the Medical Device Directive, they are subject to similar requirements as
Class III devices:
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Class I – Provided non-sterile or do not have a measuring function (low risk);
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Class I – Provided sterile and/or have a measuring function (low/medium risk);
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Class IIa (medium risk);
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Class IIb (medium/high risk); and
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After a review of our technology, an international
regulatory consultant advised us that our strip, grid and depth electrode diagnostic technology is likely a Class III device (since
it comes into contact with the central nervous system) which will require a lengthy approval process as a design dossier including
clinical data will be required for approval.
Other Regulatory Requirements
Even after a device receives clearance
or approval and is placed in commercial distribution, numerous regulatory requirements apply. These include:
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establishment registration and device listing;
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QSR, which requires manufacturers, including third party manufacturers, to follow stringent design, testing, risk management, production, control, supplier/contractor selection, complaint handling, documentation and other quality assurance procedures during all aspects of the manufacturing process;
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labeling regulations that prohibit the promotion of products for uncleared, unapproved or “off-label” uses, and impose other restrictions on labeling, advertising and promotion;
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MDR regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur;
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voluntary and mandatory device recalls to address problems when a device is defective and could be a risk to health; and
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corrections and removals reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health.
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Also, the FDA may require us to conduct
post-market surveillance studies or establish and maintain a system for tracking our products through the chain of distribution
to the patient level. The FDA enforces regulatory requirements by conducting periodic, unannounced inspections and market surveillance.
Inspections may include the manufacturing facilities of our subcontractors.
Failure to comply with applicable regulatory
requirements can result in enforcement actions by the FDA and other regulatory agencies. These may include any of the following
sanctions or consequences:
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warning letters or untitled letters that require corrective action;
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fines and civil penalties;
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unanticipated expenditures;
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delays in approving or refusal to approve future products;
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FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries;
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suspension or withdrawal of FDA clearance or approval;
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product recall or seizure; interruption of production;
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operating restrictions;
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Our contract manufacturers, specification developers and
some suppliers of components or device accessories, also are required to manufacture our products in compliance with current good
manufacturing practice requirements set forth in the QSR. The QSR requires a quality system for the design, manufacture, packaging,
labeling, storage, installation and servicing of marketed devices, and it includes extensive requirements with respect to quality
management and organization, device design, buildings, equipment, purchase and handling of components or services, production and
process controls, packaging and labeling controls, device evaluation, distribution, installation, complaint handling, servicing,
and record keeping. The FDA evaluates compliance with the QSR through periodic unannounced inspections that may include the manufacturing
facilities of our subcontractors. If the FDA believes that any of our contract manufacturers or regulated suppliers are not in
compliance with these requirements, it can shut down such manufacturing operations, require recall of our products, refuse to approve
new marketing applications, institute legal proceedings to detain or seize products, enjoin future violations or assess civil and
criminal penalties against us or our officers or other employees.
Health Insurance Portability and
Accountability Act of 1996 (“HIPAA”) and Similar Foreign and State Laws and Regulations Affecting the Transmission,
Security and Privacy of Health Information
We may also be subject to data privacy
and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended by the
Health Information Technology for Economic and Clinical Health Act, or HITECH, and their respective implementing regulations, imposes
specified requirements relating to the privacy, security and transmission of individually identifiable health information. Among
other things, HITECH makes HIPAA’s security standards directly applicable to business associates, defined as service providers
of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service
for or on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties and gave state attorneys general
new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’
fees and costs associated with pursuing federal civil actions. In addition, many state laws govern the privacy and security of
health information in certain circumstances, many of which differ from HIPAA and each other in significant ways and may not have
the same effect.
Foreign data privacy regulations, such
as the EU Data Protection Directive (Directive 95/46/EC), the country-specific regulations that implement Directive 95/46/EC, and
the EU General Data Protection Regulation also govern the processing of personally identifiable data, and may be stricter than
U.S. laws.
Fraud and Abuse Laws
In addition to FDA restrictions, there
are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral
laws. Our relationships with healthcare providers and other third parties are subject to scrutiny under these laws. Violations
of these laws are punishable by criminal and civil sanctions, including, in some instances, imprisonment and exclusion from participation
in federal and state healthcare programs, including the Medicare, Medicaid and Veterans Administration health programs.
Federal Anti-Kickback and Self-Referral
Laws
The federal Anti-Kickback Statute prohibits
persons from knowingly and willfully soliciting, receiving, offering or providing remuneration (including any kickback, bribe or
rebate), directly or indirectly, overtly or covertly, to induce either the referral of an individual, or the furnishing, recommending,
or arranging of a good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid
or other federal healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value,
including such items as gifts, discounts, the furnishing of supplies or equipment, credit arrangements, waiver of payments and
providing anything at less than its fair market value. Although there are a number of statutory exceptions and regulatory safe
harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that
involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny
if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory
exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality
of the arrangement will be evaluated on a case-by-case basis based on a review of all its relevant facts and circumstances. Several
courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration
is to induce referrals of (or purchases, or recommendations related to) federal healthcare covered business, the Anti-Kickback
Statute has been implicated and potentially violated.
The penalties for violating the federal
Anti-Kickback Statute include imprisonment for up to five years, fines of up to $25,000 per violation and possible exclusion from
federal healthcare programs such as Medicare and Medicaid. Many states have adopted prohibitions similar to the federal Anti-Kickback
Statute, some of which do not have the same exceptions and apply to the referral of patients for healthcare services reimbursed
by any source, not only by the Medicare and Medicaid programs. Further, the Anti-Kickback Statute was amended by the Patient Protection
and Affordable Care Act (“
ACA
”). Specifically, as noted above, under the Anti-Kickback Statute, the government
must prove the defendant acted “knowingly” to prove a violation occurred. The ACA added a provision to clarify that
with respect to violations of the Anti-Kickback Statute, “a person need not have actual knowledge” of the statute or
specific intent to commit a violation of the statute. This change effectively overturns case law interpretations that set a higher
standard under which prosecutors had to prove the specific intent to violate the law. In addition, the ACA codified case law that
a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent
claim for purposes of the federal civil False Claims Act.
We plan to provide the initial training
to providers and patients necessary for appropriate use of our technology either through our own educators or by contracting with
outside educators that have completed an appropriate training course. Outside educators are reimbursed for their services at fair
market value.
Noncompliance with the federal Anti-Kickback
Statute could result in our exclusion from Medicare, Medicaid or other governmental programs, restrictions on our ability to operate
in certain jurisdictions, and civil and criminal penalties.
The federal Physician Self-Referral Prohibition,
commonly known as the “Stark Law,” prohibits a physician from ordering “designated health services,” including
durable medical equipment, for Medicare and Medicaid patients from entities with which the physician (or an immediate family member)
has a “financial relationship.” Financial relationships include both compensation arrangements and investment and ownership
interests. Violation of the Stark Law could result in denial of payment, disgorgement of reimbursements received under a noncompliant
arrangement, civil penalties, and exclusion from Medicare, Medicaid or other governmental programs. We believe that we have structured
our provider arrangements to comply with current Stark Law requirements.
Nevertheless, a determination of liability
under such laws could result in fines and penalties and restrictions on our ability to operate in these jurisdictions.
Additionally, as some of these laws are
still evolving, we lack definitive guidance as to the application of certain key aspects of these laws as they relate to our arrangements
with providers with respect to patient training. We cannot predict the final form that these regulations will take or the effect
that the final regulations will have on us. As a result, our provider and training arrangements may ultimately be found to be not
in compliance with applicable federal law.
Federal False Claims Act
The Federal False Claims Act provides,
in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly presented, or caused
to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used
a false record to get a claim approved. In addition, amendments in 1986 to the Federal False Claims Act have made it easier for
private parties to bring “qui tam” whistleblower lawsuits against companies under the Federal False Claims Act. Penalties
include fines ranging from $5,500 to $11,000 for each false claim, plus three times the amount of damages that the federal government
sustained because of the act of that person. Qui tam actions have increased significantly in recent years, causing greater numbers
of healthcare companies to have to defend a false claim action, pay fines or be excluded from Medicare, Medicaid or other federal
or state healthcare programs as a result of an investigation arising out of such action.
There are other federal anti-fraud laws
that prohibit, among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare
benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit
program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing
or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery
of or payment for healthcare benefits, items or services.
Additionally, HIPAA established two federal
crimes related to making false statements in relation to healthcare matters. The healthcare fraud statute prohibits knowingly and
willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is
a felony and may result in fines, imprisonment or exclusion from government sponsored programs. The false statements statute prohibits
knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent
statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute
is a felony and may result in fines or imprisonment.
Civil Monetary Penalties Law
In addition to the Anti-Kickback Statute
and the False Claims Act, the federal government has the authority to seek civil monetary penalties, or CMPs, assessments, and
exclusion against an individual or entity based on a wide variety of prohibited conduct. For example, the Civil Monetary Penalties
Law authorizes the imposition of substantial CMPs against an entity that engages in activities including, but not limited to: (1)
knowingly presenting or causing to be presented, a claim for services not provided as claimed or which is otherwise false or fraudulent
in any way; (2) knowingly giving or causing to be given false or misleading information reasonably expected to influence the decision
to discharge a patient; (3) offering or giving remuneration to any beneficiary of a federal health care program likely to influence
the receipt of reimbursable items or services; (4) arranging for reimbursable services with an entity which is excluded from participation
from a federal health care program; (5) knowingly or willfully soliciting or receiving remuneration for a referral of a federal
health care program beneficiary; or (6) using a payment intended for a federal health care program beneficiary for another use.
The government is authorized to seek different amounts of CMPs and assessments based on underlying violation. For false or fraudulent
claims, the government may seek a penalty of up to $10,000 for each item or service improperly claimed, and an assessment of up
to three times the amount improperly claimed. For kickback violations, the government may seek a penalty of up to $50,000 for each
improper act and damages of up to three times the amount of remuneration at issue.
State Fraud and Abuse Provisions
Many states have also adopted some form
of anti-kickback and anti-referral laws and a false claims act. We believe that we are in conformance to such laws. Nevertheless,
a determination of liability under such laws could result in fines and penalties and restrictions on our ability to operate in
these jurisdictions.
Physician Payment Sunshine Act
Transparency laws regarding payments or
other items of value provided to healthcare providers and teaching hospitals may also impact our business practices. The federal
Physician Payment Sunshine Act requires most medical device manufacturers to report annually to the Secretary of Human Health Services
financial arrangements, payments, or other transfers of value made by that entity to physicians and teaching hospitals. The payment
information is made publicly available in a searchable format on a CMS website. Over the next several years, we will need to dedicate
significant resources to establish and maintain systems and processes in order to comply with these regulations. Failure to comply
with the reporting requirements can result in significant civil monetary penalties. Similar laws have been enacted or are under
consideration in foreign jurisdictions.
U.S. Foreign Corrupt Practices Act
The FCPA prohibits U.S. corporations and
their representatives from offering, promising, authorizing or making corrupt payments, gifts or transfers to any foreign government
official, government staff member, political party or political candidate in an attempt to obtain or retain business abroad. The
FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring the
company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international
subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. Activities
that violate the FCPA, even if they occur wholly outside the United States, can result in criminal and civil fines, imprisonment,
disgorgement, oversight, and debarment from government contracts.
Employees
As of November 30, 2018, we had three employees,
all of whom are full-time, and all of whom are located in the United States, and we also retained the services of approximately seven
regular consultants. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We
consider our relationship with our employees to be good.
Facilities
On November 13, 2018, we entered into a
sublease agreement to sublease office space at 10901 Red Circle Drive, Suite 150, Minnetonka, Minnesota 54343, from December 1,
2018 through October 31, 2019.
Corporate Information
Our principal executive offices are located
at c/o David Rosa, 10901 Red Circle Drive, Suite 150, Minnetonka, Minnesota 54343, and our telephone number is 952-237-7412. Our
website address is
www.neurooneinc.com
.
ITEM 1A. RISK FACTORS
Our business, prospects,
financial condition or results of operations could be materially adversely affected by any of the risks and uncertainties set forth
below, as well as in any amendments or updates reflected in subsequent filings with the SEC. In assessing these risks, you should
also refer to other information contained in this Transition Report, including our financial statements and related notes.
Risks Related to Our Business
We have incurred
significant operating losses since inception and cannot assure you that we will ever achieve or sustain profitability.
We have incurred losses
since inception, and as of September 30, 2018 and December 31, 2017, we had an accumulated deficit of $10.5 million and $5.3 million,
respectively, primarily as a result of expenses incurred in connection with our general and administrative expenses associated
with our operations and from our research and development programs. We expect to continue to incur significant expenses and increasing
operating and net losses for the foreseeable future. To date, we have financed our operations primarily through debt and equity
financings, and 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 development activities.
To implement our business
strategy we need to, among other things, successfully complete the development, testing and 510(k) device submission to the FDA
for our cortical and strip electrodes for the diagnosis of epilepsy, successfully complete the development, testing and all required
steps for regulatory approval of our depth electrodes for sEEG recording in the U.S., develop and introduce a minimally invasive
delivery system for our cortical electrodes, develop an all-in-one diagnostic and therapeutic solution, successfully complete the
necessary testing and clinical trials required for regulatory approval of our technology for ablation and stimulation therapies,
gain approval for other brain or motor related disorders such as Parkinson’s with the therapeutic technologies developed
for epilepsy, convince physicians and patients that our technology, if approved, represents an improvement over existing diagnostic
or treatment options, hire direct experienced sales representatives to market our technology, if approved, in the United States,
evaluate international opportunities and initiate and successfully complete the approval processes in targeted geographies and
engage in beneficial partnerships that can leverage our core technology. We have never been profitable and do not expect to be
profitable in the foreseeable future. We expect our expenses to increase significantly as we pursue our objectives. The extent
of our future operating losses and the timing of profitability are highly uncertain, and we expect to continue incurring significant
expenses and operating losses over the next several years. Our prior losses have had, and will continue to have, an adverse effect
on our stockholders’ equity and working capital. Any additional operating losses may have an adverse effect on our stockholders’
equity, and we cannot assure you that we will ever be able to achieve profitability. Even if we achieve profitability, we may not
be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would
depress the value of our Company and could impair our ability to raise capital, expand our business, maintain our development efforts,
obtain regulatory approvals or continue our operations.
We are a development
stage company with a limited operating history, making it difficult for you to evaluate our business and your investment.
Our operating subsidiary,
NeuroOne, Inc. was incorporated on October 7, 2016, and our predecessor, the LLC, had very limited operations. We are an early-stage
medical technology company developing comprehensive neuromodulation cEEG and sEEG monitoring, ablation, and brain stimulation solutions
to diagnose and treat patients with epilepsy, Parkinson’s disease, essential tremors, and other brain related disorders.
Our cortical strip technology under development has only been used by Mayo in five patients for research purposes and has not been
tested in any clinical trials. Our operations are subject to all of the risks inherent in the establishment of a new business enterprise,
including but not limited to the absence of an operating history, lack of fully-developed or commercialized products, insufficient
capital, expected substantial and continual losses for the foreseeable future, limited experience in dealing with regulatory issues,
lack of manufacturing and marketing experience, need to rely on third parties for the development and commercialization of our
proposed products, a competitive environment characterized by well-established and well-capitalized competitors and reliance on
key personnel.
Since inception, we have
not established any revenues or operations that will provide financial stability in the long term, and there can be no assurance
that we will realize our plans on our projected timetable (or at all) in order to reach sustainable or profitable operations.
Investors are subject
to all the risks incident to the creation and development of a new business and each investor should be prepared to withstand a
complete loss of his, her or its investment. Furthermore, the accompanying financial statements have been prepared assuming that
we will continue as a going concern. We have not emerged from the development stage, and may be unable to raise further equity.
These factors raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Our Company has limited
experience in medical device development and may not be able to successfully develop any device or therapy. Our ability to become
profitable depends primarily on: our ability to develop our cortical strip, grid electrode and depth electrode technology, our
successful completion of all necessary pre-clinical testing and clinical trials on such technology, our ability to obtain approval
for such technology and, if approved, successfully commercialize such technology, our ongoing research and development efforts,
the timing and cost of clinical trials, our ability to identify personnel with the necessary skill sets or enter into favorable
alliances with third-parties who can provide substantial capabilities in clinical development, regulatory affairs, sales, marketing
and distribution and our ability to obtain and maintain necessary intellectual property rights to such technology. Our limited
experience in medical device development may make it more difficult for us to complete these tasks.
Even if we successfully
develop and market such technology, we may not generate sufficient or sustainable revenue to achieve or sustain profitability,
which could cause us to cease operations and cause you to lose all of your investment. Because we are subject to these risks, you
may have a difficult time evaluating our business and your investment in our Company.
Our ability to
continue our operations requires that we raise additional capital and our operations could be curtailed if we are unable to obtain
the additional funding as or when needed.
Upon the completion
of the audit of our financial statements for the nine months ended September 30, 2018 and the year ended December 31, 2017,
and management’s assessment of our ability to continue as a going concern, we concluded there was substantial doubt
about our ability to continue as a going concern. Our independent registered public accounting firm included an explanatory
paragraph in its report on our financial statements as of and for the nine months ended September 30, 2018 and as of and for
the year ended December 31, 2017, noting the existence of substantial doubt about our ability to continue as a going concern.
At September 30, 2018 and December 31, 2017, we had only $13,260 and $26,467, respectively, in cash deposits. Our
existing cash and cash equivalents will not be sufficient to fund our operating expenses through December 31, 2018. To
continue to fund operations, we will need to secure additional funding. We may obtain additional financing in the future
through the issuance of our Common Stock, through other equity or debt financings or through collaborations or partnerships
with other companies. We may not be able to raise additional capital on terms acceptable to us, or at all. Further, we may
not be able to modify terms of some of our existing debt that is coming due on December 31, 2018, and any failure to raise capital or to amend
existing debt that may be due as and when needed could compromise our ability to execute on our business plan, and we may be
forced to liquidate our assets. In such a scenario, the values we receive for our assets in liquidation or dissolution could
be significantly lower than the values reflected in our financial statements.
Our outstanding
notes require that we complete qualified financings by certain dates. If we are unable to, such notes become immediately due and
payable and we may not have sufficient cash to pay the principal and accrued and unpaid interest thereon.
The notes issued by us
provide that if we are unable to complete qualified financings by certain dates such notes will become immediately due and payable.
For a description of
our outstanding notes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity
and Capital Resources—Historical Capital Resources.” If we fail to complete a qualified financing pursuant to the terms
of the Series 3 Notes (as defined within Item 7 herein) by December 31, 2018, the Series 3 Notes will be immediately due and payable
on such date. As of September 30, 2018, the outstanding principal and accrued and unpaid interest on our outstanding Series 3 Notes
was $1,627,028. We may not have sufficient cash to pay the principal and accrued and unpaid interest thereon on such dates.
If our outstanding notes
become due and payable and we are unable to pay the principal and accrued and unpaid interest thereon, we may be unable to execute
our business plan and may be forced to liquidate our assets. In such a scenario, the values we receive for our assets in liquidation
or dissolution could be significantly lower than the values reflected in our financial statements.
We will need to
raise substantial additional funds in the future, and these funds may not be available on acceptable terms or at all. A failure
to obtain this necessary capital when needed could force us to delay, limit, scale back or cease some or all operations.
The continued growth
of our business, including the development, regulatory approval and commercialization of our cortical strip, grid electrode and
depth electrode technology, will significantly increase our expenses going forward. As a result, we will be required to seek substantial
additional funds in the future. Our future capital requirements will depend on many factors, including:
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the cost of developing our cortical strip, grid electrode
and depth electrode technology;
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obtaining and maintaining regulatory clearance or approval
for our cortical strip, grid electrode and depth electrode technology;
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the costs associated with commercializing our cortical
strip, grid electrode and depth electrode technology;
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any change in our development priorities;
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the revenue generated by sales of our cortical strip,
grid electrode and depth electrode technology, if approved;
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the costs associated with expanding our sales and marketing
infrastructure for commercialization of our cortical strip grid electrode and depth electrode technology, if approved;
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any change in our plans regarding the manner in which
we choose to commercialize any approved product in the United States or internationally;
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the cost of ongoing compliance with regulatory requirements;
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expenses we incur in connection with potential litigation
or governmental investigations;
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the costs to develop additional intellectual property;
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anticipated or unanticipated capital expenditures;
and
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unanticipated general and administrative expenses.
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As a result of these
and other factors, we do not know whether and the extent to which we may be required to raise additional capital. We may in the
future seek additional capital from public or private offerings of our capital stock, borrowings under credit lines or other sources.
We may not be able to
raise additional capital on terms acceptable to us, or at all. Any failure to raise additional capital could compromise our ability
to execute on our business plan, and we may be forced to liquidate our assets. In such a scenario, the values we receive for our
assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.
If we issue equity or
debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities
may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional funds
through collaborations, licensing, joint ventures, strategic alliances, partnership arrangements or other similar arrangements,
it may be necessary to relinquish valuable rights to our potential future products or proprietary technologies, or grant licenses
on terms that are not favorable to us.
Medical device
development involves a lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience delays
in completing, or ultimately be unable to complete, the development and commercialization of any product.
Before obtaining marketing
approval from regulatory authorities for the sale of our cortical strip, grid electrode and depth electrode technology under development
in the United States or elsewhere, we must complete all pre-clinical testing, clinical trials and other regulatory requirements
necessitated by the FDA and foreign regulatory bodies and demonstrate the performance and safety of our technology. Clinical testing
is expensive, difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. A failure
of one or more clinical trials can occur at any stage of testing. Further, the outcomes of completed clinical trials may not be
predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results.
Clinical data is often susceptible to varying interpretations and analyses, and many companies that have believed their products
performed satisfactorily in clinical trials have nonetheless failed to obtain marketing approval. We have limited resources to
complete the expensive process of medical device development, pre-clinical testing and clinical trials, putting us at a disadvantage,
particularly compared to some of our larger and established competitors, and we may not have sufficient resources to commercialize
our products under development in a timely fashion, if ever.
We may experience numerous
unforeseen events during or as a result of clinical trials that could delay or prevent our ability to receive marketing approval
or commercialize our products, including:
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regulators may not authorize us or our investigators
to commence a clinical trial or conduct a clinical trial at a prospective trial site;
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the failure to successfully complete pre-clinical testing
requirements required by the FDA and international organizations;
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we may experience delays in reaching, or fail to reach,
agreement on acceptable clinical trial contracts with third parties or clinical trial protocols with prospective trial sites,
the terms of which can be subject to extensive negotiation and may vary significantly among different trial sites;
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clinical trials of our cortical strip, grid electrode
and depth electrode technology may produce negative or inconclusive results, including failure to demonstrate statistical significance,
and we may decide, or regulators may require us, to conduct additional clinical trials or abandon our development programs;
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the number of people with brain related disorders required
for clinical trials may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or
people may drop out of these clinical trials or fail to return for post-treatment follow-up at a higher rate than we anticipate;
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our products may have undesirable side effects or other
unexpected characteristics, causing us or our investigators, regulators or institutional review boards to suspend or terminate
the trials;
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our third-party contractors conducting the clinical
trials may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
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regulators may require that we or our investigators
suspend or terminate clinical development for various reasons, including noncompliance with regulatory requirements or a finding
that the participants are being exposed to unacceptable health risks;
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the cost of clinical trials of our products may be
greater than we anticipate;
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the supply or quality of our products or other materials
necessary to conduct clinical trials of our products may be insufficient or inadequate; and
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delays from our suppliers and manufacturers could impact
clinical trial completion and impact revenue.
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If we are required to
conduct additional clinical trials or other testing of our cortical strip, grid electrode and depth electrode technology under
development beyond those that we contemplate, if we are unable to successfully complete clinical trials of our cortical strip,
grid electrode and depth electrode technology under development or other testing, if the results of these trials or tests are not
favorable or if there are safety concerns, we may:
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not obtain marketing approval at all;
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be delayed in obtaining marketing approval for our
cortical strip, grid electrode and depth electrode technology under development in a jurisdiction;
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be subject to additional post-marketing testing requirements;
or
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have our cortical strip, grid electrode and depth electrode
technology removed from the market after obtaining marketing approval.
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Our development costs
will also increase if we experience delays in testing or marketing approvals. We do not know whether any of our clinical trials
will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant clinical trial delays
also could allow our competitors to bring innovative products to market before we do and impair our ability to successfully commercialize
our products.
Changes in the
configuration of our cortical strip, grid electrode and depth electrode technology under development may result in additional costs
or delay.
As products are developed
through pre-clinical testing and clinical trials towards approval and commercialization, it is common that various aspects of the
development program, such as manufacturing methods and configuration, are altered along the way in an effort to optimize processes
and results. Any changes we make carry the risk that they will not achieve the intended objectives. Any of these changes could
cause our products to perform differently and affect the results of planned clinical trials or other future clinical trials conducted
with the altered device. Such changes may also require additional testing, regulatory notification or regulatory approval. This
could delay completion of pre-clinical testing or clinical trials, increase costs, delay approval of our future products and jeopardize
our ability to commence sales and generate revenue.
We have no products
that are approved for commercial sale. If we are unable to successfully develop, receive regulatory approval for and commercialize
our cortical strip, grid electrode and depth electrode technology under development, or if we experience significant delays in
doing so, our business will be harmed.
We have no products that
are approved for commercial sale. We initially plan to seek regulatory approval to commercialize our cortical strip, grid electrode
and depth electrode technology under development in the United States and we may seek approval to commercialize in select international
geographies. Our ability to generate revenue from our developed products, if any, will depend heavily on their successful development,
regulatory approval and eventual commercialization. The success of any products that we develop will depend on several factors,
including:
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FDA approval of our planned regulatory pathway (or
approval of foreign regulatory body if we seek approval in any jurisdiction outside the United States);
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successful completion of all necessary pre-clinical
testing and clinical trials;
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receipt of timely commercialization approvals from
applicable regulatory authorities;
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our ability to procure and maintain suppliers and manufacturers
of the components of our current cortical strip, grid electrode and depth electrode technology and future versions;
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launching commercial sales of our cortical strip, grid
electrode and depth electrode technology, if approved for marketing;
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market acceptance of our cortical strip, grid electrode
and depth electrode technology, if approved, by people with epilepsy, Parkinson’s disease, essential tremors and other brain
related disorders, the medical community and third-party payors;
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our ability to obtain extensive coverage and reimbursement
for our cortical strip, grid electrode and depth electrode technology and implantation procedures;
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our success in educating healthcare providers and people
with epilepsy, Parkinson’s disease, essential tremors and other brain related disorders about the benefits, administration
and use of our cortical strip, grid electrode and depth electrode technology and future versions;
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the prevalence and severity of adverse events;
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the perceived advantages, cost, safety, convenience
and accuracy of alternative therapies;
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obtaining and maintaining patent, trademark and trade
secret protection and regulatory exclusivity for our cortical strip, grid electrode and depth electrode technology and otherwise
protecting our rights in our intellectual property portfolio;
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maintaining compliance with regulatory requirements,
including current good manufacturing practices; and
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maintaining a continued acceptable performance and
safety profile of our cortical strip, grid electrode and depth electrode technology following approval.
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Whether regulatory approval
will be granted is unpredictable and depends upon numerous factors, including the substantial discretion of the regulatory authorities.
Our success in clinical trials will not guarantee regulatory approval. The FDA and, if we seek to commercialize in select international
geographies, other comparable foreign regulatory authorities may require that we conduct additional pre-clinical testing or clinical
trials, provide additional data, take additional manufacturing steps, or require other conditions before they will grant us approval.
If the FDA or other comparable foreign regulatory authorities require additional clinical trials or data, we would incur increased
costs and delays in the marketing approval process, which may require us to expend more resources than we have available. In addition,
the FDA or other comparable foreign regulatory authorities may not consider sufficient any additional required clinical trials,
data or information that we perform and complete or generate.
In cases where we are
successful in obtaining regulatory approval to market one or more of our products, our revenue will be dependent, in part, upon
the size of the markets in the territories for which we gain regulatory approval, the accepted price for the product, the ability
to obtain coverage and reimbursement, and whether we own the commercial rights for that territory. If the number of people we target
is not as significant as we estimate or the treatment population is narrowed by competition, physician choice or treatment guidelines,
we may not generate significant revenue from sales of such products, even if approved.
Approval or clearance
in the United States by the FDA or by a regulatory agency in another country does not guarantee approval by the regulatory authorities
in other countries or jurisdictions or ensure approval for the same conditions of use. In addition, clinical trials conducted in
one country may not be accepted by regulatory authorities in other countries. Approval processes vary among countries and can involve
additional product testing and validation and additional administrative review periods. It is possible that no product we develop
will ever obtain regulatory approval in the United States or any other jurisdiction, even if we expend substantial time and resources
seeking such approval. If we do not achieve one or more of these approvals in a timely manner or at all, we could experience significant
delays or an inability to fully commercialize any product and achieve profitability.
Both before and after
a product is commercially released, we will have ongoing responsibilities under U.S. and foreign regulations. We will also be subject
to periodic inspections by the FDA and comparable foreign authorities to determine compliance with regulatory requirements, such
as the Quality System Regulation, or QSR, of the FDA, medical device reporting regulations, vigilance in reporting of adverse events
and regulations regarding notification, corrections, and recalls. These inspections can result in observations or reports, warning
letters or other similar notices or forms of enforcement action. If the FDA or any comparable foreign authority concludes that
we are not in compliance with applicable laws or regulations, or that any of our products are ineffective or pose an unreasonable
health risk, such authority could ban these products, suspend or cancel our marketing authorizations, impose “stop-sale”
and “stop-import” orders, refuse to issue export certificates, detain or seize adulterated or misbranded products,
order a recall, repair, replacement, correction or refund of such products, or require us to notify health providers and others
that the products present unreasonable risks of substantial harm to the public health. Discovery of previously unknown problems
with our product’s design or manufacture may result in restrictions on use, restrictions placed on us or our suppliers, or
withdrawal of an existing regulatory clearance. The FDA or comparable foreign authorities may also impose operating restrictions,
enjoin and restrain certain violations of applicable law pertaining to medical devices, assess civil or criminal penalties against
our officers, employees or us, or recommend criminal prosecution of our Company. Adverse regulatory action may restrict us from
effectively marketing and selling our products. In addition, negative publicity and product liability claims resulting from any
adverse regulatory action could have a material adverse effect on our business, financial condition, and operating results.
Foreign governmental
regulations have become increasingly stringent and more extensive, and we may become subject to even more rigorous regulation by
foreign governmental authorities in the future. Penalties for a company’s noncompliance with foreign governmental regulation
could be severe, including revocation or suspension of a company’s business license and civil or criminal sanctions. In some
jurisdictions, such as Germany, a violation of law related to medical devices may also be considered to be a violation of unfair
competition law. In such cases, governmental authorities, our competitors and business or consumer associations may file lawsuits
to prohibit us from commercializing a product in such jurisdictions. Our competitors may also sue us for damages. Any domestic
or foreign governmental law or regulation imposed in the future may have a material adverse effect on our business, financial condition
and operating results.
Depending on the cost
and market opportunity, we may never seek approval to commercialize our cortical strip, grid electrode and depth electrode technology
in the European Union. We anticipate the cost to seek approval to commercialize in the European Union will be significantly greater
than the cost to seek approval to commercialize in the United States. This is because we believe commercial approval by the corresponding
Notified Body in the European Union and the European Economic Area, or EEA, even for diagnostic purposes, will require human clinical
trials, which we do not believe will be required for regulatory approval by the FDA in the United States in order to seek approval
of the use of our technology for diagnostic purposes.
Our success depends
on our ability to continue to develop, commercialize and gain market acceptance for our product under development, our cortical
strip, grid electrode and depth electrode technology.
Our current business
strategy is highly dependent on developing and commercially launching one product, our cortical strip, grid electrode and depth
electrode technology, and achieving and maintaining market acceptance. In order for us to sell cortical strip, grid electrode and
depth electrode technology to people with epilepsy, Parkinson’s disease, essential tremors and other brain related disorders,
we must convince them, their caregivers and healthcare providers that cortical strip, grid electrode and depth electrode technology
is an attractive alternative to competitive products for neuromodulation cEEG and sEEG recording, ablation, and brain stimulation.
Market acceptance and adoption of our cortical strip, grid electrode and depth electrode technology depends on educating people
with epilepsy, Parkinson’s disease, essential tremors and other brain related disorders, as well as their caregivers and
healthcare providers, and other perceived benefits of our cortical strip, grid electrode and depth electrode technology as compared
to competitive products. We may face challenges convincing physicians, many of whom have extensive experience with competitors’
products and established relationships with other companies, to appreciate the benefits of our cortical strip, grid electrode and
depth electrode technology and, in particular, its ability to successfully diagnose and treat epilepsy, Parkinson’s disease,
and other brain related disorders in a way that is superior to and differentiated from currently available technology, and adopt
it for treatment of their patients.
Achieving and maintaining
market acceptance of cortical strip, grid electrode and depth electrode technology could be negatively impacted by many factors,
including:
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the failure of our cortical strip, grid electrode and
depth electrode technology to achieve wide acceptance among people with epilepsy, Parkinson’s disease, essential tremors
and other brain related disorders, their caregivers, healthcare providers, third-party payors and key opinion leaders in the community;
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lack of evidence supporting the performance criteria
or other perceived benefits of our cortical strip, grid electrode and depth electrode technology over competitive products or
other currently available technology;
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perceived risks associated with the use of our cortical
strip, grid electrode and depth electrode technology or similar products or technologies generally;
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the introduction of competitive products and the rate
of acceptance of those products as compared to our cortical strip, grid electrode and depth electrode technology;
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adverse results of clinical trials relating to our
cortical strip, grid electrode and depth electrode technology or similar competitive products; and
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loss of regulatory approval for our cortical strip,
grid electrode and depth electrode technology, adverse publicity or other adverse events including any product liability lawsuits.
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In addition, our cortical
strip, grid electrode and depth electrode technology may be perceived by people with epilepsy, Parkinson’s disease, essential
tremors and other brain related disorders, their caregivers or healthcare providers to be more complicated or less effective than
current technology, and people may be unwilling to change their current regimens.
Moreover, we believe
that healthcare providers tend to be slow to change their medical treatment practices because of perceived liability risks arising
from the use of new products and the uncertainty of third-party reimbursement. Accordingly, healthcare providers may not recommend
our cortical strip, grid electrode and depth electrode technology until, if ever, there is sufficient evidence to convince them
to alter the treatment methods they typically recommend, such as receiving recommendations from prominent healthcare providers
or other key opinion leaders in the community.
If we are not successful
in convincing people with epilepsy, Parkinson’s disease, essential tremors and other brain related disorders of the benefits
of our cortical strip, grid electrode and depth electrode technology, or if we are unable to achieve the support of caregivers
and healthcare providers or widespread market acceptance for our cortical strip, grid electrode and depth electrode technology,
then our sales potential, strategic objectives and profitability could be negatively impacted, which would adversely affect our
business, financial condition and operating results.
We may fail to
obtain regulatory approvals to market our products in the United States or in other countries.
Before we can market
or sell a new regulated product in the United States, we must obtain either clearance under Section 510(k) of the FDCA or approval
of a PMA application from the FDA, unless an exemption from pre-market review applies. In the 510(k) clearance process, the FDA
must determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate”
device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing.
Clinical data is sometimes required to support substantial equivalence. The PMA pathway requires an applicant to demonstrate the
safety and effectiveness of the device based, in part, on extensive data, including, but not limited to, technical, preclinical,
clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the
greatest risk, such as life-sustaining, life-supporting or implantable devices. Both the 510(k) and PMA processes can be expensive
and lengthy and require the payment of significant fees, unless exempt. The FDA’s 510(k) clearance process usually takes
from three to 12 months, but may last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k)
clearance process and generally takes from one to three years, or even longer, from the time the application is submitted to the
FDA until an approval is obtained. The process of obtaining regulatory clearances or approvals to market a medical device can be
costly and time-consuming, and we may not be able to obtain these clearances or approvals on a timely basis, if at all.
Even if we obtain clearance
or approval by the FDA, said clearance or approval by the FDA does not ensure approval or certification by regulatory authorities
in other countries or jurisdictions, and approval or certification by one foreign regulatory authority does not ensure approval
or certification by regulatory authorities in other foreign countries or by the FDA. The foreign regulatory approval or certification
process may include all of the risks associated with obtaining FDA clearance or approval. We may not obtain foreign regulatory
approvals on a timely basis, if at all. We may not be able to file for regulatory approvals or certifications and may not receive
necessary approvals to commercialize our products in any market. If we fail to receive necessary approvals or certifications to
commercialize our products in foreign jurisdictions on a timely basis, or at all, our business, results of operations and financial
condition could be adversely affected.
Failure to secure
or retain coverage or adequate reimbursement for our cortical strip, grid electrode and depth electrode technology or future versions
thereof, including the implantation procedures, by third-party payors could adversely affect our business, financial condition
and operating results.
We plan to derive nearly
all of our revenue from sales of our cortical strip, grid electrode and depth electrode technology under development, if approved,
in the United States and potentially select international geographies and expect to do so for the next several years. We anticipate
a substantial portion of the purchase price of our cortical strip, grid electrode and depth electrode technology will be paid for
by third-party payors, including private insurance companies, preferred provider organizations and other managed care providers.
Patients who receive treatment for their medical conditions and their healthcare providers generally rely on third-party payors
to reimburse all or part of the costs associated with their medical treatment, including healthcare providers’ services.
Coverage and adequate reimbursement from third-party payors, including governmental healthcare programs, such as Medicare and Medicaid,
and commercial payors, is critical to new product acceptance. Future sales of our cortical strip, grid electrode and depth electrode
technology will be limited unless people with epilepsy, Parkinson’s disease, essential tremors and other brain related disorders
can rely on third-party payors to pay for all or part of the cost to purchase our cortical strip, grid electrode and depth electrode
technology. Access to adequate coverage and reimbursement for our cortical strip, grid electrode and depth electrode technology
by third-party payors is essential to the acceptance of our products by people with epilepsy, Parkinson’s disease, essential
tremors and other brain related disorders.
In the United States,
a third-party payor’s decision to provide coverage for our products does not imply that an adequate reimbursement rate will
be obtained. Further, one third-party payor’s decision to cover our products does not assure that other payors will also
provide coverage for the products or will provide coverage at an adequate reimbursement rate. Healthcare providers may choose not
to order a product unless third-party payors pay a substantial portion of the product. Within and outside the United States, reimbursement
is obtained from a variety of sources, including government-sponsored and private health insurance plans. These third-party payors
determine whether to provide coverage and reimbursement for specific products and procedures. Coverage determinations and reimbursement
levels of both our products and the healthcare provider’s performance of the insertion and removal procedures are critical
to the commercial success of our product, and if we are not able to secure positive coverage determinations and reimbursement levels
for our products or the insertion and removal procedures, our business would be materially adversely affected.
In addition, there may
be significant delays in obtaining reimbursement, and coverage may be more limited than the purposes for which the product is cleared
by the FDA or other foreign regulatory authorities. Moreover, eligibility for reimbursement does not imply that any product will
be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution.
Payment rates may vary according to the use of the product and the clinical setting in which it is used, may be based on payments
allowed for lower cost products that are already reimbursed, and may be incorporated into existing payments for other services.
Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or third-party
payors and by any future relaxation of laws that presently restrict imports of products from countries where they may be sold at
lower prices than in the United States.
Because there is generally
no separate reimbursement for medical devices and other supplies used in such procedures, including our cortical strip, grid electrode
and depth electrode technology, and because we believe that our cortical strip, grid electrode and depth electrode technology,
if approved, would be adequately described by existing DRG and ICD-9 codes for epilepsy surgery, some of our target customers may
be unwilling to adopt our cortical strip, grid electrode and depth electrode technology over more established or lower cost therapeutic
alternatives already available or subsequently become available. Further, any decline in the amount payors are willing to reimburse
our customers for procedures using our cortical strip, grid electrode and depth electrode technology could make it difficult for
new customers to adopt our cortical strip, grid electrode and depth electrode technology and could create additional pricing pressure
for us, which could adversely affect our ability to invest in and grow our business.
Third-party payors, whether
foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare
costs. In addition, in the United States, no uniform policy of coverage and reimbursement for medical device products and services
exists among third-party payors. Therefore, coverage and reimbursement for medical device products and services can differ significantly
from payor to payor. In addition, payors continually review new technologies for possible coverage and can, without notice, deny
coverage for these new products and procedures. As a result, the coverage determination process is often a time-consuming and costly
process that will require us to provide scientific and clinical support for the use of our products to each payor separately, with
no assurance that coverage and adequate reimbursement will be obtained, or maintained if obtained.
Reimbursement systems
in international markets vary significantly by country and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. In many international markets, a product must be approved for reimbursement before it can
be approved for sale in that country. Further, many international markets have government-managed healthcare systems that control
reimbursement for new devices and procedures. In most markets there are private insurance systems as well as government-managed
systems. If sufficient coverage and reimbursement is not available for our any product we develop, in either the United States
or internationally, the demand for our products and our revenues will be adversely affected.
Reimbursement by
Medicare is highly regulated and subject to change.
The Medicare program
is administered by the Centers for Medicare and Medicaid Services, or CMS, which imposes extensive and detailed requirements on
medical services providers, including, but not limited to, rules that govern how we structure our relationships with physicians,
and how and where we provide our solutions. Our failure to comply with applicable Medicare rules could result in discontinuing
the ability for physicians to receive reimbursement as they will likely utilize our cortical strip, grid electrode and depth electrode
technology under the Medicare payment program, civil monetary penalties, and/or criminal penalties, any of which could have a material
adverse effect on our business and revenues.
The impact of the
Patient Protection and Affordable Care Act remains uncertain.
In 2010, significant
reforms to the health care system were adopted as law in the United States. The law includes provisions that, among other things,
reduce or limit Medicare reimbursement, require all individuals to have health insurance (with limited exceptions) and impose increased
taxes. These factors, in turn, could result in reduced demand for our products, if approved, and increased downward pricing pressure.
Because other parts of the 2010 health care law remain subject to implementation, the long-term impact on us is uncertain. The
new law or any future legislation could reduce medical procedure volumes, lower reimbursement for our products, and impact the
demand for our products or the prices at which we sell our products.
In addition, some of
the provisions of the ACA have yet to be implemented, and there have been legal and political challenges to certain aspects of
the ACA. Since January 2017, President Trump has signed executive orders and other directives designed to delay, circumvent, or
loosen certain requirements mandated by the ACA. Concurrently, Congress has considered legislation that would repeal or repeal
and replace all or part of the ACA. While Congress has not passed repeal legislation, the Tax Cuts and Jobs Act of 2017 (H.R.
1) (the “
Tax Act
”) includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility
payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that
is commonly referred to as the “individual mandate.” Congress may consider other legislation to repeal or replace
elements of the ACA. We continue to evaluate the effect that the ACA and its possible repeal and replacement has on our business
but expect that the ACA, as currently enacted or as it may be amended in the future, and other healthcare reform measures that
may be adopted in the future could have a material adverse effect on our industry generally and on our ability to successfully
commercialize our cortical strip, grid electrode and depth electrode technology, if approved. In addition to the ACA, there will
continue to be proposals by legislators at both the federal and state levels, regulators and third party payors to keep healthcare
costs down while expanding individual healthcare benefits.
Accordingly, while it
is too early to understand and predict the ultimate impact of the ACA on our business, the legislation and resulting regulations
could have a material adverse effect on our business, cash flows, financial condition and results of operations.
If our competitors
are better able to develop and market products for the diagnosis and treatment of epilepsy, Parkinson’s disease, essential
tremors and other brain related disorders that are safer, more effective, less costly, easier to use or otherwise more attractive
than our cortical strip, grid electrode and depth electrode technology, our business will be adversely impacted.
The medical device industry
is highly competitive and subject to technological change. Our success depends, in part, upon our ability to establish a competitive
position in the market for the diagnosis and treatment of epilepsy, Parkinson’s disease, essential tremors and other brain
related disorders by securing broad market acceptance of our cortical strip, grid electrode and depth electrode technology under
development. Any product we develop that achieves regulatory clearance or approval will have to compete for market acceptance and
market share. If developed as anticipated, we believe that the primary competitive factors of our cortical strip, grid electrode
and depth electrode technology under development will be: reduced infections, ability to record additional brain activity, minimally
invasive surgical procedure, ease of use and cost effectiveness. We face significant competition in the United States and internationally,
which we believe will intensify. For example, our major competitors (i) in the market for diagnosis are PMT Corporation, Ad-Tec
Medical and Integra Lifesciences, (ii) in the market for neuro-ablation are Medtronic and Monteris Medical and (iii) in the market
for neurostimulation are Medtronic, Boston Scientific, NeuroPace Biotronik and Abbott. Each of the foregoing competitors has systems
approved in the United States and certain foreign jurisdictions and has been established for several years. We face a particular
challenge overcoming the long-standing practices by some physicians of using the existing technology of our larger, more established
competitors. Physicians may be reluctant to try new products from a source with which they are less familiar. If these physicians
do not try and subsequently adopt our product, then our revenue growth will slow or decline.
In addition to these
major competitors, we may also face competition from other emerging competitors or smaller companies with active development programs
that may emerge in the future.
Many of the companies
developing or marketing competing products enjoy several advantages over us, including:
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more experienced sales forces;
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greater name recognition;
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more established sales and marketing programs and distribution networks;
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earlier regulatory approval in the United States or foreign jurisdictions;
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long established relationships with physicians and hospitals;
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significant patent portfolios, including issued U.S. and foreign patents and pending patent applications,
as well as the resources to enforce patents against us or any of our third-party suppliers and distributors;
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the ability to acquire and integrate our competitors and/or their technology;
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demonstrated ability to develop product enhancements and new product offerings;
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established history of product reliability, safety and durability;
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the ability to offer rebates or bundle multiple product offerings to offer greater discounts or
incentives;
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greater financial and human resources for product development, sales, and marketing; and
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greater experience in and resources for conducting research and development, clinical studies,
manufacturing, preparing regulatory submissions, obtaining regulatory clearance or approval for products and marketing approved
products.
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Our competitors may develop
and patent processes or products earlier than us, obtain patents that may apply to us at any time, obtain regulatory clearance
or approvals for competing products more rapidly than us or develop more effective or less expensive products or technologies that
render our technology or products obsolete or less competitive. Furthermore, the frequent introduction by competitors of products
that are, or claim to be, superior to our products may create market confusion that may make it difficult to differentiate the
benefits of our products over competitive products. In addition, the entry of multiple new products may lead some of our competitors
to employ pricing strategies that could adversely affect the pricing of any product we may develop and commercialize. We also face
fierce competition in recruiting and retaining qualified sales, scientific, and management personnel, establishing clinical trial
sites and enrolling patients in clinical studies. If our competitors are more successful than us in these matters, our business
may be harmed.
The size and future
growth in the market for our cortical strip, grid electrode and depth electrode technology under development has not been established
with precision and may be smaller than we estimate, possibly materially. If our estimates and projections overestimate the size
of this market, our sales growth may be adversely affected.
Our estimates of the
size and future growth in the market for our cortical strip, grid electrode and depth electrode technology under development, including
the number of people with epilepsy, Parkinson’s disease, essential tremors and other brain related disorders who may benefit
from and be amenable to using cortical strip, grid electrode and depth electrode technology for diagnosis and treatment, is based
on a number of internal and third-party studies, reports and estimates. In addition, our internal estimates are based in large
part on current treatment patterns by healthcare providers using current generation technology and our belief is that the incidence
of epilepsy, Parkinson’s disease, essential tremors and other brain related disorders in the United States and worldwide
is increasing. While we believe these factors have historically provided and may continue to provide us with effective tools in
estimating the total market for cortical strip, grid electrode and depth electrode technology, these estimates may not be correct
and the conditions supporting our estimates may change at any time, thereby reducing the predictive accuracy of these underlying
factors. The actual incidence of brain related disorders, and the actual demand for our products or competitive products, could
differ materially from our projections if our assumptions are incorrect. As a result, our estimates of the size and future growth
in the market for cortical strip, grid electrode and depth electrode technology may prove to be incorrect. If the actual number
of people with brain related disorders who would benefit from cortical strip, grid electrode and depth electrode technology and
the size and future growth in the market for cortical strip, grid electrode and depth electrode technology is smaller than we have
estimated, it may impair our projected sales growth and have an adverse impact on our business.
We depend on intellectual
property licensed from Wisconsin Alumni Research Foundation for our technology under development, and the termination of this license
would harm our business.
WARF has granted us the
WARF License, to make, use and sell, in the United States only, products that employ certain licensed patents for a neural probe
array or thin-film micro electrode array and method. See “Business — WARF License” for additional information
regarding our license agreement with WARF.
We have agreed to diligently
develop, manufacture, market and sell products under the WARF License in the United States during the term of the agreement and,
specifically, that we would submit a business plan to WARF by February 1, 2018, which we submitted on January 18, 2018 and file
an application for 510(k) marketing clearance with the FDA by February 1, 2019. WARF may terminate this license in the event that
we fail to meet these milestones on 30 days’ written notice, if we default on the payments of amounts due to WARF or fail
to timely submit development reports, actively pursue our development plan or breach any other covenant in the WARF License and
fail to remedy such default in 90 days or in the event of certain bankruptcy events involving us. WARF may also terminate this
license (i) on 90 days’ notice if we fail to have commercial sales of one or more FDA-approved products under the WARF License
by March 31, 2019 or (ii) if, after royalties earned on sales begin to be paid, such earned royalties cease for more than four
calendar quarters. The WARF License otherwise expires by its terms on the date that no valid claims on the patents licensed thereunder
remain.
Disputes may arise between
us and WARF regarding intellectual property subject to this agreement, including with respect to: the scope of rights granted under
the WARF License and other interpretation-related issues; whether and the extent to which our technology and processes infringe
on intellectual property of WARF that is not subject to the WARF License; the amount and timing of milestones and royalty payments;
the rights of WARF under the license; our right to sublicense; and the ownership of inventions and know-how resulting from the
WARF License. For example, if we or any of our sublicenses for any reason contest the validity of any patent licensed under the
WARF License, the royalty rate will be doubled during the pendency of such contest and, if the contested patent is found to be
valid and would be infringed by us if not for the WARF License, the royalty rate will be tripled for the remaining term of the
WARF License.
Any disputes with WARF
may prevent or impair our ability to maintain our current licensing arrangement. We depend on the intellectual property licensed
from WARF to develop our cortical strip, grid electrode and depth electrode technology. We cannot assure you that we will be able
to meet the milestones or commercialize a product under the WARF License by the dates required. In fact, the original license agreement
entered into with WARF in 2014 required that we meet certain earlier milestones than set forth above and make certain payments
to WARF. We failed to do so and were in default under the original license agreement. Furthermore, the LLC was not able to transfer
the rights and obligations under the 2014 WARF Agreement to us at the time of the Merger without the consent of WARF. As a result,
in February 2017, we signed an amendment to the WARF License which, among other things, modified and removed certain previous milestones
and provided WARF’s consent to such transfer. Because of this past breach, WARF may be less likely to waive future defaults
or breaches or further amend the WARF License in the future, to the extent we request any waiver or amendment. See “Note
4—Commitments and Contingencies” to the financial statements included in this Transition Report.
Termination of our license
could result in the loss of significant rights and would harm our ability to further develop our cortical strip, grid electrode
and depth electrode technology. In addition, WARF reserves the right to grant non-profit research institutions and government agencies
non-exclusive licenses to practice and use the inventions of the licensed patents for non-commercial research purposes, and we
grant WARF a non-exclusive, sub licensable, royalty-free right and license for non-commercial research purposes to use improvements
to the licensed patents. In the event that we discontinue use or commercialization of the licensed patents or improvements thereon,
we must grant WARF an option to obtain a non-exclusive, sub-licensable royalty-bearing license to use the improvements for commercial
purposes. Such rights, if exercised by WARF, could harm our ability to develop and commercialize our cortical strip, grid electrode
and depth electrode technology.
We depend on our
partnership with Mayo Foundation for Medical Education and Research to license certain know how for the development and commercialization
of our technology. Termination of this partnership would harm our business, and even if this partnership continues, it may not
be successful.
We have entered into
the Mayo Development Agreement to (i) exclusively license worldwide certain Mayo improvements for the development and commercialization
of products, methods and processes related to flexible circuit technology for the recording and stimulation of tissue and (ii)
license, on a non-exclusive basis, worldwide Mayo thin film electrode technology know-how for the development and commercialization
of products, methods and processes related to flexible circuit technology for the recording and stimulation of tissue. Mayo has
agreed to assist the Company by providing access to the Mayo Principal Investigators in developing a minimally invasive device/delivery
system and procedure for a minimally invasive approach for the implantation of any flexible circuit technology developed by the
Company, including prototype development, animal testing, protocol development for human and animal use, abstract development and
presentation and access to and license of any intellectual property that the Mayo Principal Investigators develop relating to the
procedure. See “Business—Mayo Foundation for Medical Education and Research License and Development Agreement”
for additional information regarding our agreement with Mayo.
The Mayo Development
Agreement generally will expire in October 2034, unless the Mayo know-how and improvements under the Mayo Development Agreement
remain in use, and the Mayo Development Agreement may be terminated by Mayo for cause or under certain circumstances. Mayo and
the Company may not be successful in their efforts to develop any product, method, process, device, delivery system or minimally
invasive approach by such expiration date or termination, if at all. If no such minimally invasive device or delivery system and
procedure for minimally invasive approach is developed, the Company may never receive regulatory approval of its cortical strip,
grid electrode and depth electrode technology under development or the market may never accept such technology, if approved.
Disputes may arise between
us and Mayo regarding intellectual property subject to the Mayo Development Agreement or other matters, including with respect
to: the scope of rights granted under the agreement and other interpretation-related issues; the amount and timing of payments;
the rights and obligations of Mayo under the license agreement; and the ownership of inventions and know-how resulting from the
joint creation or use of intellectual property by Mayo and us.
Any disputes with Mayo
may prevent or impair our ability to maintain our current arrangement. We depend on the intellectual property licensed from and
development assistance from Mayo to develop our cortical strip, grid electrode and depth electrode technology. We cannot assure
you that we will be able to continue to comply with the Mayo Development Agreement. In fact, the original license and development
agreement entered into with Mayo in 2014 required that, upon the Merger with the LLC, we make certain payments and issue shares
of common stock to Mayo, which we failed to do at such time. We signed the Mayo Development Agreement in May 2017, which, among
other things, modified or removed certain provisions of the original agreement, including those we breached. In addition, pursuant
to the Mayo Development Agreement signed in May 2017, we agreed to pay Mayo a cash payment of approximately $92,000 on the earlier
of September 30, 2017 or the date we raise a minimum amount of financing. We did not make this payment by September 30, 2017 and
breached this provision of the Mayo Development Agreement. Mayo granted us an extension of this deadline to December 31, 2017,
and we made this payment within such extended deadline. Because of our past breach, Mayo may be less likely to waive future defaults
or breaches or further amend the Mayo Development Agreement in the future, to the extent we request any waiver or amendment. Termination
of the Mayo Development Agreement could result in the loss of significant rights and would harm our ability to further develop
our technology.
We do not have
the sales and marketing personnel necessary to sell any products we may develop, if approved for commercialization. Even if we
have our cortical strip, grid electrode and depth electrode technology approved for commercial sale, if we are unable to establish
a sales and marketing infrastructure, we may not be successful in commercializing our cortical strip, grid electrode and depth
electrode technology in the United States.
We are an early stage
development company with limited resources. Even if we had products available for sale, which we currently do not, we have not
secured sales and marketing staff at this early stage of operations to sell products. To achieve commercial success in the United
States for our cortical strip, grid electrode and depth electrode technology, we will need to establish and expand our sales and
marketing infrastructure to drive adoption of our products, which will include a team of educators that will train healthcare providers
and people with brain related disorders on the benefits and use of our cortical strip, grid electrode and depth electrode technology.
There is significant competition for sales personnel experienced in relevant medical device sales. We expect that we will face
significant challenges as we recruit and subsequently grow our sales and marketing infrastructure. If we are unable to attract
and retain sufficient, and skilled, sales and marketing representatives, our sales could be adversely affected. If one of our sales
or marketing representatives were to depart and be retained by one of our competitors, they could help competitors solicit business
from customers, which could further harm our sales. In addition, if our sales and marketing representatives or educators fail to
achieve their objectives or if we are not able to recruit and retain a network of educators, we may not be able to successfully
train healthcare providers on the use of our cortical strip, grid electrode and depth electrode technology, which could delay new
sales and harm our reputation.
As we increase our sales
and marketing expenditures with respect to our cortical strip, grid electrode and depth electrode technology under development,
if approved, or future versions thereof, we will need to hire, train, retain and motivate skilled sales and marketing representatives
with significant industry-specific knowledge in various areas. Our success will depend largely on the competitive landscape for
our products and the ability of our sales personnel to obtain access to healthcare providers and persuade those healthcare providers
to recommend our cortical strip, grid electrode and depth electrode technology. Recently hired sales representatives require training
and take time to achieve full productivity. If we fail to train new hires adequately, or if we experience high turnover in our
sales force in the future, we cannot be certain that new hires will become as productive as may be necessary to maintain or increase
our sales. In addition, the expansion of our sales and marketing personnel will place significant burdens on our management team.
If approved for sale,
we anticipate that we will derive nearly all of our U.S. revenue from the sales of our cortical strip, grid electrode and depth
electrode technology or future versions thereof. As a result, our financial condition and operating results will be highly dependent
on the ability of our sales representatives to adequately promote, market and sell our cortical strip, grid electrode and depth
electrode technology and the ability of our educators to train healthcare providers on the use of our cortical strip, grid electrode
and depth electrode technology. If we are unable to establish and expand our sales and marketing capabilities, we may not be able
to effectively commercialize our existing or planned products, or enhance the strength of our brand, either of which could impair
our projected sales growth and have an adverse impact on our business.
We will depend
on a limited number of third-party suppliers for the components of our cortical strip, grid electrode and depth electrode technology
under development and the loss of any of these suppliers, or their inability to provide us with an adequate supply of materials,
could harm our business.
We will rely on third-party
suppliers to supply and manufacture the components of our cortical strip, grid electrode and depth electrode technology. For our
business strategy to be successful, our suppliers must be able to provide us with components in sufficient quantities, in compliance
with regulatory requirements and quality control standards, in accordance with agreed upon specifications, at acceptable costs
and on a timely basis. Future increases in sales of our cortical strip and sheet electrode technology, if approved, whether expected
or unanticipated, could strain the ability of our suppliers to deliver an increasingly large supply of components and our cortical
strip, grid electrode and depth electrode technology in a manner that meets these various requirements.
We will likely use a
small number of suppliers of components for our products. Depending on a limited number of suppliers exposes us to risks, including
limited control over pricing, availability, quality and delivery schedules. We may not have long-term supply agreements with our
suppliers and, in many cases, we may make our purchases on a purchase order basis. Our ability to purchase adequate quantities
of components or our products may be limited and we may not be able to convince suppliers to make components and products available
to us. Additionally, our suppliers may encounter problems that limit their ability to supply components or manufacture products
for us, including financial difficulties, damage to their manufacturing equipment or facilities, or product discontinuations. As
a result, there is a risk that certain components could be discontinued and no longer available to us. We may be required to make
significant “last time” purchases of component inventory that is being discontinued by the supplier to ensure supply
continuity. If we fail to obtain sufficient quantities of high quality components to meet demand for our products in a timely manner
or on terms acceptable to us, we would have to seek alternative sources of supply. Because of factors such as the proprietary nature
of our products, our quality control standards and regulatory requirements, we may not be able to quickly engage additional or
replacement suppliers for some of our critical components. Failure of any supplier to deliver components at the level our business
requires could disrupt the manufacturing of our products and, if approved, limit our ability to meet our sales commitments, which
could harm our reputation and adversely affect our business.
Furthermore, vandalism,
terrorism or a natural or other disaster, such as an earthquake, fire or flood, could damage or destroy equipment or our inventory
of component supplies or finished products, cause substantial delays in development or our operations, result in the loss of key
information, and cause us to incur additional expenses. We do not currently have insurance to cover such losses or expenses and,
once we obtain such insurance, it may not cover our losses in any particular case. In addition, regardless of the level of insurance
coverage, damage to our or our suppliers’ facilities could harm our business, financial condition and operating results.
We may also have difficulty
obtaining similar components from other suppliers that are acceptable to the FDA or other regulatory agencies, and the failure
of any supplier to comply with strictly enforced regulatory requirements could expose us to regulatory action including warning
letters, product recalls, and termination of distribution, product seizures or civil penalties. It could also require us to cease
using the components, seek alternative components or technologies and modify our products to incorporate alternative components
or technologies, which could result in a requirement to seek additional regulatory approvals. Any disruption of this nature or
increased expenses could harm our development, approval or commercialization efforts and adversely affect our operating results.
We plan to contract
with third parties for the manufacture of our cortical strip, grid electrode and depth electrode technology under development and
expect to continue to do so for clinical trials and commercialization. Risks associated with the manufacturing of our products
could reduce our gross margins and negatively affect our operating results.
We currently rely, and
expect to continue to rely, on third parties for the manufacture of our cortical strip, grid electrode and depth electrode technology
during development, for clinical testing, as well as for commercial manufacture if our cortical strip, grid electrode and depth
electrode technology receives regulatory approval. Therefore, our business strategy depends on our third-party manufacturers’
ability to manufacture our cortical strip, grid electrode and depth electrode technology and future generations thereof in sufficient
quantities and on a timely basis so as to meet consumer demand, while adhering to product quality standards, complying with regulatory
requirements and managing manufacturing costs. To date, we have only had an initial supply of our product manufactured. As a result,
we currently have limited data and experience regarding the quality, reliability and timeliness of our third-party manufacturers.
We are subject to numerous
risks relating to the manufacturing capabilities of our third-party manufacturers, including:
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quality or reliability defects;
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inability to secure product components in a timely manner, in sufficient quantities or on commercially
reasonable terms;
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failure to increase production to meet demand;
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inability to modify production lines to enable us to efficiently produce future products or implement
changes in current products in response to regulatory requirements;
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difficulty identifying and qualifying alternative manufacturers in a timely manner;
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inability to manufacture product components cost-effectively;
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inability to establish agreements with future third-party manufacturers or to do so on acceptable
terms; or
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potential damage to or destruction of our manufacturers’ equipment or facilities.
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These risks are likely
to be exacerbated by our limited experience with our cortical strip, grid electrode and depth electrode technology and its manufacturing
process. As demand for our products increases, our third-party suppliers will need to invest additional resources to purchase components,
hire and train employees, and enhance their manufacturing processes. If our manufacturers fail to increase production capacity
efficiently, our sales may not increase in line with our expectations and our operating margins could fluctuate or decline. In
addition, manufacturing any future versions of our cortical strip, grid electrode and depth electrode technology may require the
modification of production lines, the identification of new manufacturers for specific components, or the development of new manufacturing
technologies. It may not be possible for us to manufacture these products at a cost or in quantities sufficient to make any future
versions of our cortical strip, grid electrode and depth electrode technology commercially viable.
If we or our third-party
suppliers or manufacturers fail to comply with the FDA’s good manufacturing practice regulations, this could impair our ability
to market our products in a cost-effective and timely manner.
We and our third-party
suppliers are required to comply with the FDA’s QSR, which covers the methods and documentation of the design, testing, production,
control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. The FDA audits compliance
with the QSR through periodic announced and unannounced inspections of manufacturing and other facilities. The FDA may impose inspections
or audits at any time. If we or our suppliers or manufacturers have significant non-compliance issues or if any corrective action
plan that we or our suppliers propose in response to observed deficiencies is not sufficient, the FDA could take enforcement action
against us. Any of the foregoing actions could impair our reputation, business, financial condition and operating results.
Various factors
outside our direct control may adversely affect manufacturing, sterilization and distribution of our products.
The manufacture, sterilization
and distribution of our products is challenging. Changes that our suppliers may make outside the purview of our direct control
can have an impact on our processes, quality of our products and the successful delivery of products to our customers. Necessary
materials for our product under development may not be available from our third-party suppliers in a timely fashion or at all.
Mistakes and mishandling are not uncommon and can affect supply and delivery. Some of these risks include:
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failure to complete sterilization on time or in compliance with the required regulatory standards;
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transportation and import and export risk;
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delays in analytical results or failure of analytical techniques that we will depend on for quality
control and release of products;
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natural disasters, labor disputes, financial distress, raw material availability, issues with facilities
and equipment or other forms of disruption to business operations affecting our manufacturers or suppliers; and
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latent defects that may become apparent after products have been released and that may result in
a recall of such products.
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If any of these risks
were to materialize, our ability to develop products, conduct clinical trials or provide our products to customers on a timely
basis, if approved, would be adversely impacted.
Potential complications
from our cortical strip, grid electrode and depth electrode technology may come to light or may not be revealed by our clinical
experience.
Based on our industry
experience and the experience of the physicians that use products similar to our cortical strip, grid electrode and depth electrode
technology, complications from use of our cortical strip, grid electrode and depth electrode technology may include post-operative
hemorrhage, infection, brain inflammation, brain tissue necrosis, inability to accurately localize the epileptogenic focus (the
area of the cerebral cortex responsible for causing epileptic seizures), neurologic deficit (abnormal function of a body area due
to weaker function of the brain, spinal cord, muscles or nerves, such as abnormal reflexes, inability to speak and decreased sensation)
and extra axial fluid collections (fluid that occurs in the brain after surgery). If these or unanticipated complications or side-effects
result from the use of our cortical strip, grid electrode and depth electrode technology, our product development may be delayed,
we may not be able to obtain regulatory approval for any product, we could be subject to liability and, even if approved, our technology
would not be widely adopted. Additionally, we have no clinical experience with use of our cortical strip, grid electrode and depth
electrode technology. We cannot assure you that use, even for a limited time, would not result in unanticipated complications,
even after the device is removed.
Undetected errors
or defects in our cortical strip, grid electrode and depth electrode technology under development or future versions thereof could
harm our reputation, decrease the market acceptance of our cortical strip, grid electrode and depth electrode technology or expose
us to product liability claims.
Our cortical strip, grid
electrode and depth electrode technology may contain undetected errors or defects. Disruptions or other performance problems with
our cortical strip, grid electrode and depth electrode technology may delay development, prevent regulatory approval or harm our
reputation. If that occurs, we may incur significant costs, the attention of our key personnel could be diverted or other significant
customer relations problems may arise. We may also be subject to warranty and liability claims for damages related to errors or
defects in our cortical strip and sheet electrode technology or future versions thereof. A material liability claim or other occurrence
that harms our reputation or decreases market acceptance of our cortical strip, grid electrode and depth electrode technology could
harm our business and operating results. This risk exists even if a device is cleared or approved for commercial sale and manufactured
in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority. Our products are designed to affect,
and any future products will be designed to affect, important bodily functions and processes. Any side effects, manufacturing defects,
misuse or abuse associated with our cortical strip, grid electrode and depth electrode technology or future versions thereof could
result in patient injury or death. The medical device industry has historically been subject to extensive litigation over product
liability claims, and we cannot offer any assurance that we will not face product liability lawsuits.
The sale and use of our
cortical strip, grid electrode and depth electrode technology or future versions thereof could lead to the filing of product liability
claims if someone were to allege that our cortical strip, grid electrode and depth electrode technology or one of our products
contained a design or manufacturing defect. A product liability claim could result in substantial damages and be costly and time
consuming to defend, either of which could materially harm our business or financial condition. Product liability claims may be
brought against us by patients, healthcare providers or others selling or otherwise coming into contact with our products, among
others. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities and
reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:
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distraction of management’s attention from our primary business;
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the inability to commercialize our cortical strip, grid electrode and depth electrode technology;
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damage to our business reputation;
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product recalls or withdrawals from the market;
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withdrawal of clinical trial participants;
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substantial monetary awards to patients or other claimants; or
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Product liability lawsuits
and claims, safety alerts or product recalls, with or without merit, could cause us to incur substantial costs, delay our product
development efforts, place a significant strain on our financial resources, divert the attention of management from our core business,
harm our reputation, increase our product liability insurance rates, once we obtain such insurance, or prevent us from securing
such insurance coverage in the future and adversely affect our ability to attract and retain customers, if approved, any of which
could harm our business, financial condition and operating results.
We do not currently maintain
any product liability insurance and do not anticipate obtaining product liability insurance until we commence clinical trials.
Once we obtain such insurance, we cannot assure you that such insurance would adequately protect our assets from the financial
impact of defending a product liability claim. Even if any product liability loss is covered by an insurance policy, these policies
typically have substantial deductibles for which we are responsible. Product liability claims in excess of applicable insurance
coverage would negatively impact our business, financial condition and operating results. Insurance coverage varies in cost and
can be difficult to obtain, and we cannot guarantee that we will be able to obtain insurance coverage in the future on terms acceptable
to us or at all.
If there are significant
disruptions in our information technology systems, our business, financial condition and operating results could be adversely affected.
The efficient operation
of our business depends on our information technology systems. We rely on our information technology systems to effectively manage
product development tasks, research and development data and accounting and financial functions. We expect in the future we will
rely on our information technology systems for inventory management and technical support functions, if and once implemented. Our
information technology systems are vulnerable to damage or interruption from earthquakes, fires, floods and other natural disasters,
terrorist attacks, attacks by computer viruses or hackers, power losses, and computer system or data network failures. In addition,
our data management application and a variety of our software systems are hosted by third-party service providers whose security
and information technology systems are subject to similar risks, which could be subject to computer viruses or hacker attacks or
other failures. If our or our third-party service provider’s security systems are breached or fail, unauthorized persons
may be able to obtain access to sensitive data.
To the extent that any
disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure
of confidential or proprietary information, we could incur liability, and the failure of our or our service providers’ information
technology systems or our transmitter’s software to perform as we anticipate or our failure to effectively implement new
information technology systems could disrupt our entire operation or adversely affect our products and could delay our product
development, clinical trial or commercialization efforts, result in increased overhead costs and damage our reputation, all of
which could negatively affect our business, financial condition and operating results.
We may enter into
collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships with third-parties that may not
result in the development of commercially viable products or the generation of significant future revenues.
In the ordinary course
of our business, we may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances, partnerships
or other arrangements to develop products and to pursue new markets. Proposing, negotiating and implementing collaborations, in-licensing
arrangements, joint ventures, strategic alliances or partnerships may be a lengthy and complex process. Other companies, including
those with substantially greater financial, marketing, sales, technology or other business resources, may compete with us for these
opportunities or arrangements. We may not identify, secure, or complete any such transactions or arrangements in a timely manner,
on a cost-effective basis, on acceptable terms or at all. We have limited institutional knowledge and experience with respect to
these business development activities, and we may also not realize the anticipated benefits of any such transaction or arrangement.
In particular, these collaborations may not result in the development of products that achieve commercial success or result in
significant revenues and could be terminated prior to developing any products.
Additionally, we may
not be in a position to exercise sole decision making authority regarding the transaction or arrangement, which could create the
potential risk of creating impasses on decisions, and our future collaborators may have economic or business interests or goals
that are, or that may become, inconsistent with our business interests or goals. It is possible that conflicts may arise with our
collaborators, such as conflicts concerning the achievement of performance milestones, or the interpretation of significant terms
under any agreement, such as those related to financial obligations or the ownership or control of intellectual property developed
during the collaboration. If any conflicts arise with any future collaborators, they may act in their self-interest, which may
be adverse to our best interest, and they may breach their obligations to us. In addition, we may have limited control over the
amount and timing of resources that any future collaborators devote to our or their future products. Disputes between us and our
collaborators may result in litigation or arbitration which would increase our expenses and divert the attention of our management.
Further, these transactions and arrangements will be contractual in nature and will generally be terminable under the terms of
the applicable agreements and, in such event, we may not continue to have rights to the products relating to such transaction or
arrangement or may need to purchase such rights at a premium.
If we enter into in-bound
intellectual property license agreements, we may not be able to fully protect the licensed intellectual property rights or maintain
those licenses. Future licensors could retain the right to prosecute and defend the intellectual property rights licensed to us,
in which case we would depend on the ability of our licensors to obtain, maintain and enforce intellectual property protection
for the licensed intellectual property. These licensors may determine not to pursue litigation against other companies or may pursue
such litigation less aggressively than we would. Further, entering into such license agreements could impose various diligence,
commercialization, royalty or other obligations on us. Future licensors may allege that we have breached our license agreement
with them, and accordingly seek to terminate our license, which could adversely affect our competitive business position and harm
our business prospects.
We may seek to
grow our business through acquisitions of complementary products or technologies, and the failure to manage acquisitions, or the
failure to integrate them with our existing business, could harm our business, financial condition and operating results.
From time to time, we
may consider opportunities to acquire other companies, products or technologies that may enhance our product platform or technology,
expand the breadth of our markets or customer base, or advance our business strategies. Potential acquisitions involve numerous
risks, including:
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problems assimilating the acquired products or technologies;
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issues maintaining uniform standards, procedures, controls and policies;
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unanticipated costs associated with acquisitions;
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diversion of management’s attention from our existing business;
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risks associated with entering new markets in which we have limited or no experience;
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increased legal and accounting costs relating to the acquisitions or compliance with regulatory
matters; and
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unanticipated or undisclosed liabilities of any target.
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We have no current commitments
with respect to any acquisition. We do not know if we will be able to identify acquisitions we deem suitable, whether we will be
able to successfully complete any such acquisitions on favorable terms or at all, or whether we will be able to successfully integrate
any acquired products or technologies. Our potential inability to integrate any acquired products or technologies effectively may
adversely affect our business, operating results and financial condition.
Our future success
depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.
We are highly dependent
on the management, research and development, clinical, financial and business development expertise of David Rosa, Mark Christianson
and Thomas Bachinski, as well as our Physician Advisory Board and Artificial Intelligence Advisory Board members. Although we have
an employment agreement with David Rosa, he (and each of our other key employees) may terminate his employment with us at any time
and will continue to be able to do so. We do not maintain “key person” insurance for any of our executives or employees.
Recruiting and retaining
qualified scientific and clinical personnel will also be critical to our success. The loss of the services of our executive officers
or other key employees could impede the achievement of our research, development and commercialization objectives and seriously
harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may
be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth
of skills and experience required to successfully develop, gain regulatory approval of and commercialize our products. Competition
to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable
terms given the competition among numerous medical device companies for similar personnel, many of which have greater financial
and other resources dedicated to attracting and retaining personnel. We also experience competition for the hiring of scientific
and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including
scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our
consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts
with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel,
our ability to pursue our growth strategy will be limited.
Prolonged negative
economic conditions could adversely affect us, our customers and third-party partners, manufactures or suppliers, if any, which
could harm our financial condition.
We are subject to the
risks arising from adverse changes in general economic and market conditions. Uncertainty about future economic conditions could
negatively impact our existing and potential customers, adversely affect the financial ability of health insurers to pay claims,
adversely impact our expenses and ability to obtain financing of our operations, and cause delays or other problems with key suppliers.
Healthcare spending in
Europe and the United States has been, and is expected to continue to be, under significant pressure and there are many initiatives
to reduce healthcare costs. As a result, we believe that some insurers are scrutinizing insurance claims more rigorously and delaying
or denying coverage and reimbursement more often. Because the sale, if approved, of our cortical strip, grid electrode and depth
electrode technology under development will generally depend on the availability of third-party coverage and reimbursement, any
delay or decline in coverage and reimbursement will adversely affect our sales.
Risks Related to our
Intellectual Property
Our ability to
protect our intellectual property and proprietary technology is uncertain.
We rely primarily on
patent, trademark and trade secret laws, as well as confidentiality and non-disclosure agreements, to protect our proprietary technologies.
Our patent estate consists of three issued United States patents licensed from WARF relating to a neural probe array and thin-film
micro electrode array and method, and two pending U.S. provisional patent applications filed by us relating to a wide variety of
concepts, ranging from accessories for brain surgery to ablation and stimulation concepts for both cortical and depth electrodes.
The licensed issued patents expire between 2025 and 2030, subject to any patent extensions that may be available for such patents.
If a patent is issued on our pending patent application, the resulting patent is projected to expire in 2038. We continue to review
new technological developments in order to make decisions about what additional filings would be the most appropriate for us. We
also plan to seek patent protection for our proprietary technology in select countries internationally. We also have one pending
U.S. trademark application and one pending foreign trademark application, as well as one foreign trademark registration. We have
applied for patent protection relating to certain existing and proposed products and processes. Currently, several of our issued
U.S. patents licensed from WARF as well as our pending U.S. patent application relate to our cortical and depth electrode technologies
and are therefore important to the functionality of our products. If we fail to timely file a patent application in any jurisdiction,
we may be precluded from doing so at a later date. Furthermore, we cannot assure you that any patent application will be approved
in a timely manner or at all. The rights granted to us under our patents, and the rights we are seeking to have granted in our
pending patent applications, may not be meaningful or provide us with any commercial advantage. In addition, those rights could
be opposed, contested or circumvented by our competitors, or be declared invalid or unenforceable in judicial or administrative
proceedings. The failure of our patents to adequately protect our technology might make it easier for our competitors to offer
the same or similar products or technologies. Even if we are successful in receiving patent protection for certain products and
processes, our competitors may be able to design around our patents or develop products that provide outcomes which are comparable
to ours without infringing on our intellectual property rights. Due to differences between foreign and U.S. patent laws, our patented
intellectual property rights may not receive the same degree of protection in foreign countries as they would in the United States.
Even if patents are granted outside the United States, effective enforcement in those countries may not be available.
We rely on our trademarks
and trade names to distinguish our products from the products of our competitors, and have registered or applied to register many
of these trademarks. For example, we have one pending application in the United States for the “NeuroOne” trademark.
We cannot assure you that our trademark applications will be approved in a timely manner or at all. Third parties also may oppose
our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully
challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to
devote additional resources to marketing new brands. Further, we cannot assure you that competitors will not infringe upon our
trademarks, or that we will have adequate resources to enforce our trademarks.
We also rely on trade
secrets, know-how and technology, which are not protectable by patents, to maintain our competitive position. We try to protect
this information by entering into confidentiality agreements and intellectual property assignment agreements with our officers,
employees, temporary employees and consultants regarding our intellectual property and proprietary technology. In the event of
unauthorized use or disclosure or other breaches of those agreements, we may not be provided with meaningful protection for our
trade secrets or other proprietary information. In addition, our trade secrets may otherwise become known or be independently discovered
by competitors. To the extent that our commercial partners, collaborators, employees and consultants use intellectual property
owned by others in their work for us, disputes may arise as to the rights in the related or resulting know-how and inventions.
If any of our trade secrets, know-how or other technologies not protected by a patent were to be disclosed to or independently
developed by a competitor, our business, financial condition and results of operations could be materially adversely affected.
If a competitor infringes
upon one of our patents, trademarks or other intellectual property rights, enforcing those patents, trademarks and other rights
may be difficult and time-consuming. Patent law relating to the scope of claims in the industry in which we operate is subject
to rapid change and constant evolution and, consequently, patent positions in our industry can be uncertain. Even if successful,
litigation to defend our patents and trademarks against challenges or to enforce our intellectual property rights could be expensive
and time consuming and could divert management’s attention from managing our business. Moreover, we may not have sufficient
resources or desire to defend our patents or trademarks against challenges or to enforce our intellectual property rights. Litigation
also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing.
Additionally, we may provoke third-parties to assert claims against us. We may not prevail in any lawsuits that we initiate and
the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events may harm
our business, financial condition and operating results.
We may not be able
to establish or strengthen our brand.
We believe that establishing
and strengthening our brand is critical to achieving widespread acceptance of our cortical strip, grid electrode and depth electrode
technology. Promoting and positioning our brand will depend largely on the success of our marketing efforts and our ability to
provide physicians with a reliable product for successful treatment of brain-related disorders. Additionally, we believe the quality
and reliability of our product is critical to building physician support in the United States, and any negative publicity regarding
the quality or reliability of our cortical strip, grid electrode and depth electrode technology could significantly damage our
reputation in the market. Further, given the established nature of our competitors, it is likely that our future marketing efforts
will require us to incur significant additional expenses. These brand promotion activities may not yield increased sales and, even
if they do, any sales increases may not offset the expenses we incur to promote our brand. If we fail to successfully promote and
maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, our cortical
strip, grid electrode and depth electrode technology may not be accepted by physicians, which would adversely affect our business,
results of operations and financial condition.
The medical device
industry is characterized by patent litigation, and we could become subject to litigation that could be costly, result in the diversion
of management’s time and efforts, stop our development and commercialization measures or require us to pay damages.
Our success will depend
in part on not infringing the patents or violating the other proprietary rights of third-parties. Significant litigation regarding
patent rights exists in our industry. Our competitors in both the United States and abroad, many of which have substantially greater
resources and have made substantial investments in competing technologies, may have applied for or obtained or may in the future
apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make and sell our products. The
large number of patents, the rapid rate of new patent issuances, and the complexities of the technology involved increase the risk
of patent litigation.
In the future, we could
receive communications from various industry participants alleging our infringement of their intellectual property rights. Any
potential intellectual property litigation could force us to do one or more of the following:
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stop selling our products or using technology that contains the allegedly infringing intellectual
property;
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incur significant legal expenses;
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pay substantial damages to the party whose intellectual property rights we are allegedly infringing;
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redesign those products that contain the allegedly infringing intellectual property; or
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attempt to obtain a license to the relevant intellectual property from third-parties, which may
not be available on reasonable terms or at all, and if available, may be non-exclusive, thereby giving our competitors access to
the same technology.
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Patent litigation can
involve complex factual and legal questions, and its outcome is uncertain. Any litigation or claim against us, even those without
merit, may cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention
of management from our core business and harm our reputation. Further, as the number of participants in the neurostimulation market
increases, the possibility of intellectual property infringement claims against us increases.
We may be subject
to damages resulting from claims that we, or our employees, have wrongfully used or disclosed alleged trade secrets of our competitors
or are in breach of non-competition or non-solicitation agreements with our competitors.
Some of our current or
future employees may have previously been employed at other medical device companies, including those that are our direct competitors
or could potentially be our direct competitors. We may be subject to claims that we, or our employees, have inadvertently or otherwise
used or disclosed trade secrets or other proprietary information of these former employers or competitors. In addition, we may
in the future be subject to allegations that we caused an employee to breach the terms of his or her non-competition or non-solicitation
agreement. Litigation may be necessary to defend against these claims.
In May 2017, NeuroOne, Inc. received a
letter from 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, Inc. 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 the contracts. The letter demanded that Mr. Fredrickson (who resigned from the Company in June 2017),
Mr. Christianson and NeuroOne, Inc. cease and desist all competitive activities, that Mr. Fredrickson step down from his position
and that Mr. Christianson and NeuroOne, Inc. provide the former employer access to NeuroOne, Inc.’s systems to demonstrate
that it is not using trade secrets or proprietary information nor competing with the former employer.
On March 29, 2018, we were served with
a complaint filed by PMT adding the Company, NeuroOne, Inc. and Mark Christianson to its existing lawsuit against Wade Fredrickson.
In the lawsuit, PMT claims that Mr. Fredrickson and Mr. Christianson breached their non-competition, non-solicitation and non-disclosure
obligations, breached their fiduciary duty obligations, were unjustly enriched, engaged in unfair competition, engaged in a civil
conspiracy, tortiously interfered with PMT’s contracts and prospective economic advantage, and breached a covenant of good
faith and fair dealing. Against Mr. Fredrickson, PMT also alleges that he intentionally or negligently spoliated evidence, made
negligent or fraudulent misrepresentations, misappropriated trade secrets in violation of Minnesota law, and committed the tort
of conversion and statutory civil theft. Against the Company and NeuroOne, Inc., PMT alleges that the Company and NeuroOne, Inc.
were unjustly enriched and engaged in unfair competition. PMT asks 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. The Company, NeuroOne, Inc. and Mr. Christianson (who has not worked for PMT since 2012) intend to defend
themselves vigorously.
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. We expect a ruling on
the motion within 90 days of that date. 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.
Even if we successfully
defend against these claims, litigation could cause us to incur substantial costs, and could place a significant strain on our
financial resources, divert the attention of management from our core business and harm our reputation. If our defense to those
claims fails, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. There can
be no assurance that this type of litigation will not occur, and any future litigation or the threat thereof may adversely affect
our ability to hire additional employees. A loss of key personnel or their work product could hamper or prevent our ability to
develop or commercialize our cortical strip, grid electrode and depth electrode technology or future versions thereof, which could
have an adverse effect on our business, financial condition and operating results.
We are subject
to the patent laws of countries other than the United States, which may not offer the same level of patent protection and whose
rules could seriously affect how we draft, file, prosecute and maintain patents, trademarks and patent and trademark applications.
Many countries, including
certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third
parties (for example, the patent owner has failed to “work” the invention in that country, or the third party has patented
improvements). In addition, many countries limit the enforceability of patents against government agencies or government contractors.
In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. Moreover,
the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patent
and other intellectual property protection which makes it difficult to stop infringement.
We cannot be certain
that the patent or trademark offices of countries outside the United States will not implement new rules that increase costs for
drafting, filing, prosecuting and maintaining patents, trademarks and patent and trademark applications or that any such new rules
will not restrict our ability to file for patent protection. For example, we may elect not to seek patent protection in some jurisdictions
in order to save costs. We may be forced to abandon or return the rights to specific patents due to a lack of financial resources.
Intellectual property
rights do not necessarily address all potential threats to our competitive advantage.
The degree of future
protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and
may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:
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others may be able to make devices that are the same as or similar to our cortical strip, grid
electrode and depth electrode technology but that are not covered by the claims of the patents that we own;
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we or any collaborators might not have been the first to make the inventions covered by the issued
patents or pending patent applications that we own;
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we might not have been the first to file patent applications covering certain of our inventions;
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others may independently develop similar or alternative technologies or duplicate any of our technologies
without infringing our intellectual property rights;
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it is possible that our pending patent applications will not lead to issued patents;
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issued patents that we own may not provide us with any competitive advantages, or may be held invalid
or unenforceable as a result of legal challenges;
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we might enforce our patent rights or defend a challenge to our issued patents or pending application,
putting the patents and patent applications at risk of being invalidated or interpreted narrowly;
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our competitors might conduct research and development activities in the United States and other
countries that provide a safe harbor from patent infringement claims for certain research and development activities, as well as
in countries where we do not have patent rights, and then use the information learned from such activities to develop competitive
products for sale in our major commercial markets; and
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we may not develop additional proprietary technologies that are patentable.
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Risks Related to our
Legal and Regulatory Environment
Our products and
operations are subject to extensive governmental regulation, and failure to comply with applicable requirements could cause our
business to suffer.
The medical device industry
is regulated extensively by governmental authorities, principally the FDA and corresponding state regulatory agencies in the United
States and the European Commission and corresponding Notified Body in the European Union and the EEA. The regulations are very
complex and are subject to rapid change and varying interpretations. Regulatory restrictions or changes could limit our ability
to carry on or expand our operations or result in higher than anticipated costs or lower than anticipated sales. These governmental
authorities enforce laws and regulations that are meant to assure product safety and effectiveness, including the regulation of,
among other things:
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product design and development;
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pre-clinical studies and clinical trials;
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establishment registration and product listing;
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labeling, content and language of instructions for use and storage;
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marketing, manufacturing, sales and distribution;
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pre-market clearance or approval;
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servicing and post-market surveillance;
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record-keeping procedures;
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product import and export;
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advertising and promotion; and
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recalls and field safety corrective actions.
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The regulations to which
we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions
on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated revenues.
Failure to comply with
applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as fines, civil
penalties, injunctions, warning letters, recalls of products, delays in the introduction of products into the market, refusal of
the regulatory agency or other regulators to grant future clearances or approvals, and the suspension or withdrawal of existing
approvals by such regulatory agencies. Any of these sanctions could result in higher than anticipated costs or lower than anticipated
sales and harm our reputation, business, financial condition and operating results.
The FDA regulatory
clearance process is expensive, time-consuming and uncertain, and the failure to obtain and maintain required regulatory clearances
and approvals could prevent us from commercializing our cortical strip, grid electrode and depth electrode technology under development
and future versions thereof.
Our products and operations
are subject to extensive and rigorous regulation by the FDA under the Federal Food, Drug, and Cosmetic Act, or FFDCA, and its implementing
regulations, guidance, and standards. The FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping,
promotion, distribution, and production of medical devices in the United States to ensure that medical products distributed domestically
are safe and effective for their intended uses. The FDA also regulates the export of medical devices manufactured in the United
States to international markets. Any violations of these laws and regulations could result in a material adverse effect on our
business, financial condition and results of operations. In addition, if there is a change in law, regulation or judicial interpretation,
we may be required to change our business practices, which could have a material adverse effect on our business, financial condition
and results of operations.
Under the FFDCA, medical
devices are classified into one of three classes—Class I, Class II or Class III—depending on the degree
of risk associated with each medical device and the extent of control needed to ensure safety and effectiveness.
Class I devices
are those for which safety and effectiveness can be assured by adherence to FDA’s “general controls” for medical
devices, which include compliance with the applicable portions of the QSR facility registration and product listing, reporting
of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials. Some
Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below.
Class II devices
are subject to FDA’s general controls, and any other “special controls” deemed necessary by FDA to ensure the
safety and effectiveness of the device. Premarket review and clearance by the FDA for Class II devices is accomplished through
the 510(k) premarket notification procedure, though certain Class II devices are exempt from this premarket review process.
When a 510(k) is required, the manufacturer must submit to the FDA a premarket notification submission demonstrating that the device
is “substantially equivalent” to a legally marketed device, which in some cases may require submission of clinical
data. A legally marketed device is defined by statute to mean a device that was legally marketed prior to May 28, 1976, the date
upon which the Medical Device Amendments of 1976 were enacted, or another commercially available, similar device that was cleared
through the 510(k) process. Unless a specific exemption applies, 510(k) premarket notification submissions are subject to
user fees. If the FDA determines that the device, or its intended use, is not substantially equivalent to a legally marketed device,
the FDA will place the device, or the particular use of the device, into Class III, and the device sponsor must then fulfill
much more rigorous premarketing requirements in the form of a premarket approval, or PMA.
A Class III device
includes devices deemed by the FDA to pose the greatest risk such as life-supporting or life-sustaining devices, or implantable
devices, in addition to a device that has a new intended use or utilizes advanced technology that is not substantially equivalent
to that of a legally marketed device. The safety and effectiveness of Class III devices cannot be assured solely by general
and special controls. These devices almost always require formal clinical studies to demonstrate safety and effectiveness. Submission
and FDA approval of a PMA application is required before marketing of a Class III device can proceed.
We believe our cortical
strip, grid electrode and depth electrode technology under development will be a Class II medical device. The FDA has not made
any determination about whether our specific technology is a Class II medical device. While such a determination is not necessary
in order for us to list a device with the FDA and bring that device to the U.S. market, we may decide to get clarification from
the FDA prior to introducing a product into the market. From time to time, the FDA may disagree with the classification and require
us to apply for approval as a Class III medical device. In the event that the FDA determines that our technology should be classified
as Class III, we could be precluded from marketing the devices for clinical use within the United States for months, years or longer,
depending on the specific change in the classification. Reclassification of our technology as Class III could significantly increase
our regulatory costs, including the timing and expense associated with required clinical trials and other costs.
If the FDA requires us
to go through more costly, lengthy and uncertain PMA process for our cortical strip, grid electrode and depth electrode technology,
future products or modifications to existing products than we had expected, we may be less likely to receive approval for our cortical
strip, grid electrode and depth electrode technology or such approval may take longer and be more costly.
The FDA can delay, limit
or deny clearance or approval of a device for many reasons, including:
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we may not be able to demonstrate that our products are safe and effective for their intended users;
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the data from our clinical trials may be insufficient to support clearance or approval; and
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the manufacturing process or facilities we use may not meet applicable requirements.
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When FDA approval of
a device requires human clinical trials, and if the device presents a “significant risk” to human health, the device
sponsor is required to file an investigational device exemption, or IDE, application with the FDA and obtain IDE approval prior
to commencing the human clinical trial. If the device is considered a “non-significant risk,” IDE submission to FDA
is not required. Instead, only approval from the Institutional Review Board, or IRB, overseeing the investigation at each clinical
trial site is required. Human clinical studies are generally required in connection with approval of Class III devices and
may be required for Class I and II devices. The FDA or the IRB at each institution at which a clinical trial is being performed
may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable
health risk. We believe that we will need to complete human clinical trials and submit an application for an IDE in order to seek
approval to use of our cortical strip, grid electrode and depth electrode technology for stimulation and ablation but not for diagnostic
purposes. Because any IDE, if required, must be cleared by the FDA prior to the start of a clinical investigation, this requirement
may delay our product development or clinical trial efforts. Any delay in, or failure to receive or maintain, clearance or approval
for our products under development could prevent us from generating revenue from these products or achieving profitability.
In addition, the FDA
may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions
which may prevent or delay approval or clearance of our products under development or impact our ability to modify our currently
cleared or approved products on a timely basis.
After the FDA permits
a device to enter commercial distribution, numerous regulatory requirements apply. These include: compliance with the QSR, which
requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during
the manufacturing process; labeling regulations; the FDA’s general prohibition against promoting products for unapproved
or “off-label” uses; the reports of Corrections and Removals regulation, which requires manufacturers to report recalls
and field actions to the FDA if initiated to reduce a risk of health posed by the device or to remedy a violation of the Federal
Food, Drug and Cosmetic Act; and the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if
their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute
to a death or serious injury if it were to reoccur. Manufacturers are also required to register and list their devices with the
FDA, based on which the FDA will conduct inspections to ensure continued compliance with applicable regulatory requirements.
The FDA has broad post-market
and regulatory and enforcement powers. Failure to comply with the applicable U.S. medical device regulatory requirements could
result in, among other things, warning letters; fines; injunctions; consent decrees; civil penalties; repairs, replacements or
refunds; recalls, corrections or seizures of products; total or partial suspension of production; the FDA’s refusal to grant
future premarket clearances or approvals; withdrawals or suspensions of current product applications; and criminal prosecution.
Regulatory enforcement or inquiries, or other increased scrutiny on us, could dissuade some people with brain related disorders
from using our products and adversely affect our reputation and the perceived accuracy and safety of our products. If any of these
events were to occur, they could have a material adverse effect on our business, financial condition and results of operations.
International sales are
subject to regulatory requirements in the countries in which our products are sold. The regulatory review process varies from country
to country and may in some cases require the submission of clinical data. In addition, the FDA must be notified of, or approve
the export to certain countries of devices that require a PMA, and are not yet approved in the United States.
A recall of our
products, or the discovery of serious safety issues with our products, could have a significant negative impact on us.
The FDA has the authority
to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture or in
the event that a product poses an unacceptable risk to health. Our third-party suppliers may, under their own initiative, recall
a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our third-party
distributors, if any, could occur as a result of an unacceptable risk to health, component failures, manufacturing errors, design
or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources
and have an adverse effect on our reputation, financial condition and operating results, which could impair our ability to produce
our products in a cost-effective and timely manner.
Further, under the FDA’s
medical device reporting regulations, we are required to report to the FDA any incident in which our product may have caused or
contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely
cause or contribute to death or serious injury. Repeated product malfunctions may result in a voluntary or involuntary product
recall, which could divert managerial and financial resources, impair our ability to manufacture our products in a cost-effective
and timely manner and have an adverse effect on our reputation, financial condition and operating results.
Any adverse event involving
our products could result in future voluntary corrective actions, such as recalls or customer notifications, or regulatory agency
action, which could include inspection, mandatory recall or other enforcement action. Any corrective action, whether voluntary
or involuntary, will require the dedication of our time and capital, distract management from operating our business and may harm
our reputation and financial results.
We will be subject
to the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-corruption and anti-money-laundering laws, as well
as export control laws, customs laws, sanctions laws and other laws governing our future global operations. If we fail to comply
with these laws, we could be subject to civil or criminal penalties, other remedial measures and legal expenses, which could adversely
affect our business, results of operations and financial condition.
Our future global operations
will expose us to trade and economic sanctions and other restrictions imposed by the United States, the European Union and other
governments and organizations. The U.S. Departments of Justice, Commerce, State and Treasury and other federal agencies and authorities
have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for violations
of economic sanctions laws, export control laws, the U.S. Foreign Corrupt Practices Act, or the FCPA, and other federal statutes
and regulations, including those established by the Office of Foreign Assets Control, or OFAC. In addition, the U.K. Bribery Act
of 2010, or the Bribery Act, prohibits both domestic and international bribery, as well as bribery across both private and public
sectors. An organization that “fails to prevent bribery” by anyone associated with the organization can be charged
under the Bribery Act unless the organization can establish the defense of having implemented “adequate procedures”
to prevent bribery. Under these laws and regulations, as well as other anti-corruption laws, anti-money-laundering laws, export
control laws, customs laws, sanctions laws and other laws governing our operations, various government agencies may require export
licenses, may seek to impose modifications to business practices, including cessation of business activities in sanctioned countries
or with sanctioned persons or entities and modifications to compliance programs, which may increase compliance costs, and may subject
us to fines, penalties and other sanctions. A violation of these laws or regulations could adversely impact our business, results
of operations and financial condition.
We will implement and
maintain policies and procedures designed to ensure compliance by us, and our directors, officers, employees, representatives,
third-party distributors, if any, consultants and agents with the FCPA, OFAC restrictions, the Bribery Act and other export control,
anticorruption, anti-money-laundering and anti-terrorism laws and regulations. We cannot assure you, however, that our policies
and procedures will be sufficient or that directors, officers, employees, representatives, third-party distributors, if any, consultants
and agents have not engaged and will not engage in conduct for which we may be held responsible, nor can we assure you that our
business partners have not engaged and will not engage in conduct that could materially affect their ability to perform their contractual
obligations to us or even result in our being held liable for such conduct. Violations of the FCPA, OFAC restrictions, the Bribery
Act or other export control, anti-corruption, anti-money-laundering and anti-terrorism laws or regulations may result in severe
criminal or civil sanctions, and we may be subject to other liabilities, which could have a material adverse effect on our business,
financial condition, cash flows and results of operations.
We are subject
to additional federal, state and foreign laws and regulations relating to our healthcare business; our failure to comply with those
laws could have an adverse impact on our business.
Although we will not
provide healthcare services, submit claims for third-party reimbursement, or receive payments directly from government health insurance
programs or other third-party payors for our cortical strip, grid electrode and depth electrode technology, we are subject to healthcare
fraud and abuse regulation and enforcement by federal, state and foreign governments, which could adversely impact our business.
Healthcare fraud and abuse and health information privacy and security laws potentially applicable to our operations include, but
are not limited to:
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the federal Anti-Kickback Statute, which will apply to our marketing practices, educational programs,
pricing policies and relationships with healthcare providers, by prohibiting, among other things, soliciting, receiving, offering
or providing remuneration intended to induce the purchase or recommendation of an item or service reimbursable under a federal
healthcare program, such as the Medicare or Medicaid programs. A person or entity does not need to have actual knowledge of this
statute or specific intent to violate it to have committed a violation;
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federal civil and criminal false claims laws and civil monetary penalty laws, including civil whistleblower
or qui tam actions that prohibit, among other things, knowingly presenting, or causing to be presented, claims for payment or approval
to the federal government that are false or fraudulent, knowingly making a false statement material to an obligation to pay or
transmit money or property to the federal government or knowingly concealing or knowingly and improperly avoiding or decreasing
an obligation to pay or transmit money or property to the federal government. The government may assert that a claim including
items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes
of the false claims statutes;
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HIPAA, and its implementing regulations, which created federal criminal laws that prohibit, among
other things, executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters.
A person or entity does not need to have actual knowledge of these statutes or specific intent to violate them;
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of
2009, and their implementing regulations, also imposes certain regulatory and contractual requirements regarding the privacy, security
and transmission of individually identifiable health information;
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federal “sunshine” requirements imposed by the ACA on device manufacturers regarding
any “transfer of value” made or distributed to physicians and teaching hospitals. Failure to submit required information
may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million per
year for “knowing failures”), for all payments, transfers of value or ownership or investment interests that are not
timely, accurately, and completely reported in an annual submission. Manufacturers must submit reports by the 90th day of
each subsequent calendar year;
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federal consumer protection and unfair competition laws, which broadly regulate marketplace activities
and activities that potentially harm consumers;
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state law equivalents of each of the above federal laws, such as anti-kickback and false claims
laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require
device companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated
by the federal government or otherwise restrict payments that may be made to healthcare providers; state laws that require device
manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers
or marketing expenditures; and state laws governing the privacy and security of certain health information, many of which differ
from each other in significant ways and often are not preempted by HIPAA; and
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foreign data privacy regulations, such as the EU Data Protection Directive (Directive 95/46/EC),
and the country-specific regulations that implement Directive 95/46/EC, which impose strict obligations and restrictions on
the ability to collect, analyze and transfer personal data, including health data from clinical trials and adverse event reporting,
and may be stricter than U.S. laws.
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The risk of our being
found in violation of these laws and regulations is increased by the fact that the scope and enforcement of these laws is uncertain,
many of them have not been fully interpreted by the regulatory authorities or the courts, their provisions are open to a variety
of interpretations, or they vary country by country. We are unable to predict what additional federal, state or foreign legislation
or regulatory initiatives may be enacted in the future regarding our business or the healthcare industry in general, or what effect
such legislation or regulations may have on us. Federal, state or foreign governments may (i) impose additional restrictions
or adopt interpretations of existing laws that could have a material adverse effect on us or (ii) challenge our current or
future activities under these laws. Any of these challenges could impact our reputation, business, financial condition and operating
results.
If our operations are
found to be in violation of any of the laws described above or any other governmental regulations that apply to us now or in the
future, we may be subject to penalties, including civil and criminal penalties, damages, fines, disgorgement of profits, exclusion
from governmental health care programs, and the curtailment or restructuring of our operations, any of which could adversely affect
our ability to operate our business and our financial results. Any federal, state or foreign regulatory review to which we may
become subject, regardless of the outcome, would be costly and time-consuming.
For example, to enforce
compliance with the federal laws, the U.S. Department of Justice, or DOJ, has recently increased its scrutiny of interactions between
healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements
in the healthcare industry. Dealing with investigations can be time and resource consuming and can divert management’s attention
from our core business. Additionally, if we settle an investigation with law enforcement or other regulatory agencies, we may be
forced to agree to additional onerous compliance and reporting requirements as part of a consent decree or corporate integrity
agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.
We may be liable
if the FDA or another regulatory agency concludes that we have engaged in the off-label promotion of our products.
Our promotional materials
and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the promotion
of the off-label use of our products. Healthcare providers may use our products, if approved, off-label, as the FDA does not restrict
or regulate a physician’s choice of treatment within the practice of medicine. However, if the FDA determines that our promotional
materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials
or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction,
seizure, civil fine and criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might
take action if they consider our promotional or training materials to constitute promotion of an unapproved use, which could result
in significant fines or penalties. Although we intend to train our marketing and direct sales force to not promote our products
for uses outside of their cleared uses and our policy will be to refrain from statements that could be considered off-label promotion
of our products, the FDA or another regulatory agency could disagree and conclude that we have engaged in off-label promotion.
In addition, the off-label use of our products may increase the risk of product liability claims. Product liability claims are
expensive to defend and could result in substantial damage awards against us and harm our reputation.
Further, if we seek commercial
approval in Europe, the advertising and promotion of our products is subject to the laws of EEA Member States implementing Directive 93/42/EEC
concerning medical devices, Directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on
unfair commercial practices, as well as other EEA Member State legislation governing the advertising and promotion of medical devices.
A new Medical Device Regulation (2017/745) that replaced Directive 93/42/EEC was published in 2017, with a three year implementation
period, which will impose significant additional premarket and post-market certification requirements on medical devices marketed
in the EU. EEA Member State legislation may also restrict or impose limitations on our ability to advertise our products directly
to the general public. In addition, voluntary EU and national codes of conduct provide guidelines on the advertising and promotion
of our products to the general public and may impose limitations on our promotional activities with healthcare providers harming
our business, operating results and financial condition.
Legislative or
regulatory healthcare reforms may make it more difficult and costly for us to obtain regulatory clearance or approval of our products.
Recent political, economic
and regulatory influences are subjecting the healthcare industry to fundamental changes. The sales of our products depend in part
on the availability of coverage and reimbursement from third-party payors such as government health administration authorities,
private health insurers, health maintenance organizations and other healthcare-related organizations. Both the federal and state
governments in the United States continue to propose and pass new legislation and regulations designed to contain or reduce the
cost of healthcare. This legislation and regulation may result in decreased reimbursement for medical devices, which may further
exacerbate industry-wide pressure to reduce the prices charged for medical devices. This could harm our ability to market our products
and generate sales.
In addition, FDA regulations
and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products.
Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times
of our products. Delays in receipt of or failure to receive regulatory clearances or approvals for our products would harm our
business, financial condition and operating results.
While one often stated
goal of healthcare reform is to expand coverage to more individuals, it also involves increased government price controls, additional
regulatory mandates and other measures designed to constrain medical costs. For example, the ACA was enacted in March 2010. The
ACA substantially changes the way healthcare is financed by both governmental and private insurers, encourages improvements in
the quality of healthcare items and services and significantly impacts the medical device industries. Among other things, the ACA:
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establishes a new Patient-Centered Outcomes Research Institute to oversee, identify priorities
in and conduct comparative clinical effectiveness research;
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implements payment system reforms including value-based payment programs, increased funding for
comparative effectiveness research, reduced hospital payments for avoidable readmissions and hospital acquired conditions, and
pilot programs to evaluate alternative payment methodologies that promote care coordination (such as bundled physician and hospital
payments); and
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creates an independent payment advisory board that will submit recommendations to reduce Medicare
spending if projected Medicare spending exceeds a specified growth rate.
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At this time, we cannot
predict which, if any, additional healthcare reform proposals will be adopted, when they may be adopted or what impact they, or
the ACA, may have on our business and operations, and any of these impacts may be adverse on our operating results and financial
condition. Our financial performance may be adversely affected by medical device tax provisions in the healthcare reform laws.
The ACA imposes, among
other things, an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United
States beginning in 2013. Due to subsequent legislative amendments, the excise tax has been suspended from January 1, 2016 to December
31, 2019, and, absent further legislative action, will be reinstated starting January 1, 2020. We do not believe that our cortical
strip, grid electrode and depth electrode technology under development is currently subject to this tax based on the retail exemption
under applicable Treasury Regulations. However, the availability of this exemption is subject to interpretation by the Internal
Revenue Service, or IRS, and the IRS may disagree with our analysis. In addition, future products that we manufacture, produce
or import may be subject to this tax. The financial impact this tax may have on our business is unclear and there can be no assurance
that our business will not be materially adversely affected by it.
Tax matters, including
the changes in corporate tax rates, disagreements with taxing authorities and imposition of new taxes could impact our results
of operations and financial condition.
We are subject to income
and other taxes in the U.S. and our operations, plans and results are affected by tax and other initiatives. On December 22, 2017,
the Tax Act was signed into law by President Trump. The Tax Act contains significant changes to corporate taxation, including reduction
of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense
to 30% of earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current
year taxable income and elimination of net operating loss carrybacks, one-time taxation of offshore earnings at reduced rates regardless
of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate
deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many
business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the
new federal tax law is uncertain and our business and financial condition could be adversely affected. While the new federal
tax law did not extend the moratorium on the medical device excise tax, the reinstatement of which could negatively impact our
operating results as we begin full commercialization of our platforms in the United States, the moratorium was subsequently extended
until 2020. It is also unknown if and to what extent various states will conform to the newly enacted federal tax law. The impact
of this tax reform on holders of our Common Stock is likewise uncertain and could be adverse. We urge you to consult with
your legal and tax advisors with respect to this legislation and the potential tax consequences of investing in our Common Stock.
The decrease in the corporate tax rate will result in changes in the valuation of our deferred tax assets and liabilities. Any
such change in valuation could have a material impact on our income tax expense and deferred tax balances.
We are also subject to
regular reviews, examinations, and audits by the Internal Revenue Service and other taxing authorities with respect to our taxes.
Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could
face additional tax liability, including interest and penalties. There can be no assurance that payment of such additional amounts
upon final adjudication of any disputes will not have a material impact on our results of operations and financial position.
We also need to comply
with new, evolving or revised tax laws and regulations. The enactment of or increases in tariffs, or other changes in the application
or interpretation of the Tax Act, or on specific products that we sell or with which our products compete, may have an adverse
effect on our business or on our results of operations.
Risks Related to our
Common Stock
An active and visible
public trading market for our Common Stock may not develop.
We do not currently have
an active or visible trading market. We cannot predict whether an active market for our Common Stock will ever develop in the future.
In the absence of an active trading market:
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Investors may have difficulty buying and selling or obtaining market quotations;
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Trading of our Common Stock may be extremely sporadic;
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Market visibility for shares of our Common Stock may be limited; and
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A lack of visibility for shares of our Common Stock may have a depressive effect on the market
price for shares of our Common Stock.
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Our Common Stock is quoted
over-the-counter on a market operated by OTC Markets Group, Inc. These markets are relatively unorganized, inter-dealer, over-the-counter
markets that provide significantly less liquidity than NASDAQ or the NYSE MKT. No assurances can be given that our Common Stock,
even if quoted on such markets, will ever actively trade on such markets, much less a senior market like NASDAQ or NYSE MKT. In
this event, there would be a highly illiquid market for our Common Stock and you may be unable to dispose of your Common Stock
at desirable prices or at all. Moreover, there is a risk that our Common Stock could be delisted from its current tier of the OTC
Market, in which case our stock may be quoted on markets even more illiquid.
The price of our
Common Stock might fluctuate significantly, and you could lose all or part of your investment.
Volatility in the market
price of our Common Stock may prevent you from being able to sell your shares of our Common Stock at or above the price you paid
for your shares. The trading price of our Common Stock may be volatile and subject to wide price fluctuations in response to various
factors, including:
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actual or anticipated fluctuations in our quarterly financial and operating results;
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our progress toward developing our cortical strip and sheet electrode technology;
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the commencement, enrollment and results of our future clinical trials;
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adverse results from, delays in or termination of our clinical trials;
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adverse regulatory decisions, including failure to receive regulatory approval;
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publication of research reports about us or our industry or positive or negative recommendations
or withdrawal of research coverage by securities analysts, if any;
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perceptions about the market acceptance of our products and the recognition of our brand;
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adverse publicity about our products or industry in general;
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overall performance of the equity markets;
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introduction of products, or announcements of significant contracts, licenses or acquisitions,
by us or our competitors;
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legislative, political or regulatory developments;
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additions or departures of key personnel;
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threatened or actual litigation and government investigations;
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third-party promotional activities, which are subject to ongoing regulatory obligations;
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sale of shares of our Common Stock by us or members of our management; and
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general economic conditions.
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These and other factors
might cause the market price of our Common Stock to fluctuate substantially, which may negatively affect the liquidity of our Common
Stock. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility
has had a significant impact on the market price of securities issued by many companies across many industries. The changes frequently
appear to occur without regard to the operating performance of the affected companies. Accordingly, the price of our Common Stock
could fluctuate based upon factors that have little or nothing to do with our Company, and these fluctuations could materially
reduce our share price.
Securities class action
litigation has often been instituted against companies following periods of volatility in the overall market and in the market
price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our
management’s attention and resources, and harm our business, operating results and financial condition.
Concentration of
ownership of our Common Stock among our existing executive officers, directors and principal stockholders may prevent new investors
from influencing significant corporate decisions.
As of November 30, 2018,
our executive officers, directors and current beneficial owners of 5% or more of our Common Stock and their respective affiliates,
in the aggregate, beneficially own approximately 79.9% of our outstanding Common Stock. As a result, these persons, acting together,
would be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors,
any merger, consolidation, sale of all or substantially all of our assets, or other significant corporate transactions.
Some of these persons
or entities may have interests different than yours. For example, they may be more interested in selling our Company to an acquirer
than other investors, or they may want us to pursue strategies that deviate from the interests of other stockholders.
Our management
has identified certain internal control deficiencies, which management believes constitute material weaknesses. Our failure to
establish and maintain an effective system of internal controls could result in material misstatements of our financial statements
or cause us to fail to meet our reporting obligations or fail to prevent fraud in which case, our stockholders could lose confidence
in our financial reporting, which would harm our business and could negatively impact the price of our stock.
Prior to the Acquisition,
NeuroOne, Inc. was a private company with limited accounting personnel and other resources with which to address our internal controls
and procedures. We review and update our internal controls, disclosure controls and procedures, and corporate governance policies
as our Company continues to evolve. In addition, in connection with the Acquisition and becoming a company required to file reports
with the SEC, we are required to comply with the internal control evaluation and certification requirements of Section 404
of the Sarbanes-Oxley Act of 2002 (“
SOX
”) and management is required to report annually on our internal
control over financial reporting. Our independent registered public accounting firm will not be required to formally attest to
the effectiveness of our internal control over financial reporting pursuant to Section 404 of SOX until the date we are no
longer a “smaller reporting company” as defined by applicable SEC rules. We will remain a “smaller reporting
company” as long as (i) our public float remains less than $250 million or (ii) our annual revenues are less than $100 million
and we either have no public float, or our public float is less than $700 million.
During the audits for the periods ended September 30, 2018 and December 31, 2017, it was determined that our internal
control over financial reporting is not effective. Such shortcoming could have an adverse effect on our business and
financial results. This reporting requirement could also make it more difficult or more costly for us to obtain certain types
of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar coverage. Any system of internal controls, however
well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply
with regulation concerning control and procedures could have a material effect on our business, results of operation and
financial condition. Any of these events could result in an adverse reaction in the financial marketplace due to a loss of
investor confidence in the reliability of our financial statements, which ultimately could negatively affect the market price
of our shares, increase the volatility of our stock price and adversely affect our ability to raise additional funding. The
effect of these events could also make it more difficult for us to attract and retain qualified persons to serve on our Board
and as executive officers.
Our management’s
evaluation of the effectiveness of our internal controls over financial reporting as of September 30, 2018 concluded that our controls
were not effective, due to material weaknesses resulting from an ineffective overall control environment. The material weaknesses
stem primarily from our small size and include the inability to (i) maintain effective controls over accounting for non-routine
and/or complex debt and equity transactions and (ii) maintain effective controls over the financial statement close and reporting
process, accounting for routine transactions and segregation of duties.
Management believes there
is a reasonable possibility that these control deficiencies, if uncorrected, could result in material misstatements in the annual
or interim financial statements that would not be prevented or detected in a timely manner. Accordingly, we have determined that
these control deficiencies constitute material weaknesses. Subject to limitations on liquidity, the Company is planning to take
steps to remediate these material weaknesses.
We will need to evaluate
our existing internal controls over financial reporting against the criteria set forth in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. During the course of our ongoing evaluation
of the internal controls, we may identify other areas requiring improvement, and may have to design enhanced processes and controls
to address issues identified through this review. Remediating any deficiencies, significant deficiencies or material weaknesses
that we or our independent registered public accounting firm may identify may require us to incur significant costs and expend
significant time and management resources. We cannot assure you that any of the measures we implement to remedy any such deficiencies
will effectively mitigate or remedy such deficiencies. The existence of one or more material weaknesses could affect the accuracy
and timing of our financial reporting. Investors could lose confidence in our financial reports, and the value of our Common Stock
may be harmed, if our internal controls over financial reporting are found not to be effective by management or by an independent
registered public accounting firm or if we make disclosure of existing or potential material weaknesses in those controls.
Even if we conclude that
our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because
of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure
to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results
or cause us to fail to meet our future reporting obligations.
Our reporting obligations
as a public company will place a significant strain on our management, operational and financial resources and systems for the
foreseeable future. If we fail to timely achieve and maintain the adequacy of our internal control over financial reporting, we
may not be able to produce reliable financial reports or help prevent fraud. Our failure to achieve and maintain effective internal
control over financial reporting could prevent us from filing our periodic reports on a timely basis which could result in the
loss of investor confidence in the reliability of our financial statements, harm our business and negatively impact the trading
price of our Common Stock.
We intend to issue
more shares to raise capital, which will result in substantial dilution.
Our certificate of incorporation
authorizes the issuance of a maximum of 100,000,000 shares of Common Stock and 10,000,000 shares of preferred stock. Any additional
financings effected by us may result in the issuance of additional securities without stockholder approval and the substantial
dilution in the percentage of Common Stock held by our then existing stockholders. Moreover, the Common Stock issued in any such
transaction may be valued on an arbitrary or non-arm’s-length basis by our management, resulting in an additional reduction
in the percentage of Common Stock held by our current stockholders. Our Board has the power to issue any or all of such authorized
but unissued shares without stockholder approval. To the extent that additional shares of Common Stock are issued in connection
with a financing, dilution to the interests of our stockholders will occur and the rights of the holder of Common Stock might be
materially and adversely affected.
As of September 30,
2018, we had outstanding warrants to purchase an aggregate of 2,927,572 shares of Common Stock at a weighted average
exercise price of $1.98 per share, options to purchase an aggregate of 368,216 shares of Common Stock at a weighted average
exercise price of $0.07 per share, and notes and warrants convertible into or exercisable for shares of our Common Stock. As
of September 30, 2018, the principal and accrued and unpaid interest on our outstanding convertible promissory notes is
approximately $1,627,028. For a description of our outstanding convertible promissory notes and warrants and information
about the number of shares of Common Stock for which they are convertible or exercisable, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources—Historical Capital Resources.” To the extent these outstanding options or warrants are exercised or the
convertible promissory notes are converted, there will be further dilution to holders of our Common Stock.
Anti-takeover provisions
in the Company’s certificate of incorporation and bylaws may prevent or frustrate attempts by stockholders to change the
Board or current management and could make a third-party acquisition of the Company difficult.
The Company’s certificate
of incorporation and bylaws contain provisions that may discourage, delay or prevent a merger, acquisition or other change in control
that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their
shares. For example, our certificate of incorporation permits the Board without stockholder approval to issue up to 10,000,000
shares of preferred stock and to fix the designation, power, preferences, and rights of those shares. Furthermore, our Board has
the ability to increase the size of the Board and fill the newly created vacancies without stockholder approval. These provisions
could limit the price that investors might be willing to pay in the future for shares of the Common Stock.
We are a smaller
reporting company, and the reduced reporting requirements applicable to smaller reporting companies may make our Common Stock less
attractive to investors.
We are a “smaller
reporting company” as defined in Section 12 of the Exchange Act. For as long as we continue to be a smaller reporting company,
we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are
not smaller reporting companies, including not being required to comply with the auditor attestation requirements of SOX, reduced
disclosure obligations regarding executive compensation in our annual and periodic reports and proxy statements, and exemptions
from the requirements of holding nonbinding advisory votes on executive compensation, and stockholder approval of any golden parachute
payments not previously approved. We will remain a “smaller reporting company” as long as (i) our public float remains
less than $250 million or (ii) our annual revenues are less than $100 million and we either have no public float, or our public
float is less than $700 million. Public float is measured as of the last business day of our most recently-completed second fiscal
quarter, and annual revenues are as of the most recently completed fiscal year for which audited financial statements are available.
We cannot predict if investors will find our Common Stock less attractive because we may rely on these exemptions. If some investors
find our Common Stock less attractive as a result, there may be a less active trading market for our Common Stock and our stock
price may be more volatile.
Our Common Stock
is subject to the “penny stock” rules of the SEC, which makes transactions in our stock cumbersome and may reduce the
value of an investment in our stock.
The SEC has adopted regulations
which generally define a “penny stock” as an equity security that has a market price of less than $5.00 per share,
subject to specific exemptions. The SEC’s penny stock rules require a broker-dealer, before a transaction in a penny stock
not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks
and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations
for the penny stock, the compensation of the broker-dealer and the salesperson in the transaction, and monthly account statements
showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally
require that before a transaction in a penny stock occurs, the broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the purchaser’s agreement to the transaction. These rules
may restrict the ability of brokers-dealers to sell our Common Stock and may affect the ability of investors to sell their shares,
until our Common Stock no longer is considered a penny stock.
The market for
penny stocks has experienced numerous frauds and abuses, which could adversely impact investors in our stock.
OTC Market securities
are frequent targets of fraud or market manipulation, both because of their generally low prices and because reporting requirements
are less stringent than those of the stock exchanges such as NASDAQ and The New York Stock Exchange. Patterns of fraud and abuse
include:
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Control of the market for the security by one or a few broker-dealers that are often related to
the promoter or issuer;
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Manipulation of prices through prearranged matching of purchases and sales and false and misleading
press releases;
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“Boiler room” practices involving high pressure sales tactics and unrealistic price
projections by inexperienced sales persons;
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Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
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Wholesale dumping of the same securities by promoters and broker-dealers after prices have been
manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
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We have not paid
dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value
of our stock.
We have never declared
or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Accordingly,
you may have to sell some or all of your shares of our Common Stock in order to generate cash flow from your investment. You may
not receive a gain on your investment when you sell shares and you may lose the entire amount of the investment.
We expect to incur
increased costs and demands upon management as a result of being a public company.
As a public company in
the United States, we expect to incur significant additional legal, accounting and other costs. These additional costs could negatively
affect our financial results. In addition, changing laws, regulations and standards relating to corporate governance and public
disclosure, including regulations implemented by the SEC and the stock exchange on which we may list our Common Stock, may increase
legal and financial compliance costs and make some activities more time-consuming. These laws, regulations and standards are subject
to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by
regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this
investment may result in increased general and administrative expenses and a diversion of management’s time and attention
from revenue-generating activities to compliance activities. If, notwithstanding our efforts to comply with new laws, regulations
and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
Failure to comply with
these rules might also make it more difficult for us to obtain some types of insurance, including director and officer liability
insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the
same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons
to serve on our Board, on committees of our Board or as members of senior management.
A significant portion
of our total outstanding shares are restricted from immediate resale but may be sold into the market in the future. This could
cause the market price of our Common Stock to drop significantly, even if our business is doing well.
Sales of a substantial
number of shares of our Common Stock in the public market could occur at any time. If our stockholders sell, or the market perceives
that our stockholders intend to sell substantial amounts of our Common Stock in the public market, the market price of our Common
Stock could decline significantly.
Certain shares of our
outstanding Common Stock are freely tradable without restriction by stockholders who are not our affiliates. However, we have shares
of Common Stock that are restricted under securities laws but will be able to be resold in the future. We also intend to register
all shares of Common Stock that we have issued in our 2018 Private Placement, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.” Once we register these shares, they can
be freely sold in the public market.
Furthermore, shares issued
pursuant to awards under our equity incentive plans and registered under a registration statement on Form S-8 will be available
for sale in the public market subject to vesting arrangements and exercise of options and the restrictions of Rule 144 in
the case of our affiliates.
If securities or
industry analysts do not publish research or reports, or publish unfavorable research or reports, about us, our business or our
market, our stock price and trading volume could decline.
The trading market for
our Common Stock will be influenced by the research and reports that securities or industry analysts publish about us and our business.
Securities or industry analysts may elect not to provide coverage of our Common Stock, and such lack of coverage may adversely
affect the market price of our Common Stock. In the event we do not secure additional securities or industry analyst coverage,
we will not have any control over the analysts or the content and opinions included in their reports. The price of our stock could
decline if one or more securities or industry analysts downgrade our stock or issue other unfavorable commentary or research. If
one or more securities or industry analysts ceases coverage of our Company or fails to publish reports on us regularly, demand
for our stock could decrease, which in turn could cause our stock price or trading volume to decline.
Risks Related to the
Acquisition
We may be subject
to unknown risks as a result of our completed acquisition by Original Source Entertainment, Inc.
Original Source Entertainment,
Inc., which was renamed NeuroOne Medical Technologies Corporation in connection with the Acquisition, was formed to license songs
to the television and movie industry and has generated very little revenues. Prior to the Acquisition, its operations have been
primarily limited to organizational, start-up, and capital formation activities, with no employees other than the former officers.
On February 5, 2014, the board of directors of Original Source Entertainment, Inc. authorized the spin-off of Original Source Music,
Inc., a wholly-owned subsidiary which then held all of our operations and assets, to our stockholders of record as of February
25, 2014. Under the terms of the spin-off, the common stock, par value $0.001 per share, of Original Source Music, Inc. was distributed
on a pro-rata basis to each holder of our Common Stock on the February 25, 2014 record date without any consideration or action
on the part of such holders, and the holders of our Common Stock as of the February 25, 2014 record date became owners of 100%
of the common stock of Original Source Music, Inc. The spin-off of Original Source Music, Inc. was effective as of May 13, 2016,
due to the satisfactory resolution of all comments from the SEC to the Registration Statement on Form 10 of Original Source Music,
Inc. and the Form 10’s effectiveness. Therefore, upon the spinoff of Original Source Music, which held all of our operations
and assets at the time, on May 13, 2016, Original Source Entertainment, Inc. ceased having a specific business plan and purpose.
In connection with the
Acquisition, the liabilities existing in Original Source Entertainment, Inc. at the time of the Acquisition were cancelled or paid
by a related party, as required by the Merger Agreement with NeuroOne, Inc. and OSOK Acquisition Company (the
“Merger
Agreement”
). Despite this requirement and the representations and warranties of Original Source Entertainment, Inc.
in the Merger Agreement, there may be unknown liabilities, or liabilities that were known but believed to be immaterial, related
to the business of Original Source Entertainment, Inc. that may become material liabilities we are subject to in the future. If
we are subject to material liability as a result of the conduct of Original Source Entertainment, Inc., we may have limited recourse
for such liabilities, which could have a material impact on our business and stock price.
Because we were
engaged in a transaction that can be generally characterized as a “reverse merger,” we may not be able to attract the
attention of major brokerage firms.
Additional
risks may exist since we were engaged in a transaction that can be generally characterized as a “reverse merger.” Securities
analysts of major brokerage firms may not provide coverage of the Company since there is little incentive to brokerage firms to
recommend the purchase of the Common Stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings.