NeuroOne Medical Technologies Corporation

Ladies and gentlemen, thank you for standing by and welcome to the NeuroOne Medical Technologies Corporation second quarter of fiscal 2022 earnings conference call. Today's call will be conducted by the company's chief executive officer, Dave Rosa, and its chief financial officer, Ron McClurg. Before I turn the call over to Mr. Rosa, I'd like to remind you that this conference call will include forward-looking statements within the meeting of U.S. federal security laws with respect to future operations, financial results, events, trends, and performance, which are based on management's beliefs and assumptions as of today's call or other specified date. Forward-looking statements may involve known and unknown risks, uncertainties, and other factors which may cause actual results to differ materially from those expressed or implied by such statements. See our earnings release and SEC filings for information regarding specific risks and uncertainties that could cause actual results to differ. Except as required by law, we undertake no obligation to update such forward-looking statements. With that said, I'll turn the call over to Dave Rosa, CEO of NeuroOne. Dave?

Thanks, Operator, and thank you to everyone attending our call this afternoon. During and since the second fiscal quarter, we remain focused on advancing our thin-film electrode platform technology with respect to both diagnostic and therapeutic applications. In addition, we made progress on reducing product costs and ensuring the ability to meet Zimmer Biomet's expected product demand by initiating the process to qualify additional manufacturing sources. Let's begin with diagnostic applications. Although the FDA did not provide clearance in March 2022 to increase the duration of use from less than 24 hours to less than 30 days for our EVO-SEG product line, We feel strongly that we met the ISO 10993 standard part 12 and part 18 requirements for biological evaluation of medical devices. As such, the company filed an appeal with the FDA in March 2022 regarding their decision. On April 14th, the FDA held an official call with the company to hear our appeal. Dr. William Wustenberg, a renowned biocompatibility expert, who provided the data analysis for our FDA submission, explained the scientific rationale to the FDA as to why the company believed it met the criteria that I earlier referenced. The FDA had no questions regarding Dr. Wustenberg's presentation and informed us that a decision would be made on our appeal by May 14th or 30 days from the date of the call. We are currently awaiting this decision. As previously disclosed, we immediately initiated a parallel path by commencing additional biocompatibility tests on the Evo SCEG product line in the event we are not successful in our appeal. Given the length of the test and time required for the testing firm to complete the final report, we would expect to get that final report in mid-August and file our 510K submission thereafter, if needed. We remain extremely confident that the product will again successfully pass the biocompatibility testing as the EVO cortical and SCEG products have 100% of the time passed all biocompatibility testing for their intended use. We also remain confident that the design and materials used for the electrodes are sufficient given we have clearances from FDA for both our Evo cortical line for less than 30 days diagnostic use and an FDA clearance for less than 24-hour use for diagnostic purposes for our Evo SCEG product line. If and when FDA clearance for less than 30-day use is received, the company will begin to fulfill stocking orders that have been placed by Zimmer Biomet, our distribution partner for the Evo SCEG family product line. Just last week, both Zimmer and NeuroOne were also approached by an account to use the Evo SCEG device for intraoperative use and ECOG diagnostic procedures, which would be for less than 24-hour use. This may give us the opportunity to obtain clinical experience with the electrode in the near future. The company also participated in a physician advisory board meeting hosted by Zimmer Biomed gained feedback from neurosurgeons on the EVO-SCEG electrode and accessories required for the procedure. We remain encouraged by the positive feedback we received at this meeting from the neurosurgeons that attended. The company is continuously exploring opportunities to leverage the unique low profile of our electrodes to support cutting edge research around the U.S. As part of this effort, we also recently displayed our EVO electrode product line at the University of Minnesota Neuromodulation Symposium, where leading researchers and collaborators were gathered with a unique focus on psychiatry and neuromodulation. We also presented at the Gordon Research Conference 2022 Neuroelectronic Interfaces Meeting. The company also took steps to qualify a second source to manufacture electrodes for both the EVO cortical and SEEG product lines in order to reduce supply risk for the expected demand from Zimmer Biomed. This is critical as we have continually heard from physicians that product supply and back orders are prevalent with respect to both cortical and SEEG electrodes. This obviously causes delays in both diagnosis and treatment for patients. Another area the company has been evaluating are opportunities for reducing costs. We are currently completing the validation of a new cable assembly manufacturer, which will help significantly reduce costs for this component. In terms of product enhancements, we also expect to release our third-generation connector, which is lighter, smaller, and less expensive in the second half of this year. Additionally, the company is working to extend shelf life for both the EVO cortical and SCEG product lines. This will provide significant value to our customers in managing inventory and put much less pressure on our supply chain. Now moving to our combined diagnostic and therapeutic ablation electrode program. We are pleased to report that the project remains on schedule. We continue to receive encouraging physician feedback regarding the potential ability to improve the way epilepsy and potentially other neurological conditions are treated today by eliminating second hospitalization and surgery. RBC Medical Innovations, our hardware and software partner, remains on track to deliver prototypes of the RF generator in calendar Q3 of this year. The company is currently progressing with the development of accessories required for use with the system Following the completion of the RF generator prototypes, development of the accessories, and additional preclinical testing, we expect to submit a 510K application in the first calendar quarter of 2023 for FDA clearance. Now let's move to our chronic use electrode development. Last quarter, we announced the successful completion of accelerated five-year testing which demonstrated reliable recording without any issues associated with fluid permeation. We then released the successful results of our accelerated five-year stimulation testing in March, which was quite exciting as electrode durability up to five years' use has been a great challenge for the thin film industry. While we have more development and manufacturing work to do, we remain encouraged by these early results. Our initial focus with our Chronic stimulation program remains with spinal cord stimulation, the treatment of chronic back pain due to failed back surgeries. We are also in discussions with a prominent research institution regarding the development of a specialized electrode that would capitalize on the thin film features for a few exciting applications in Parkinson's disease, potentially certain psychiatric disorders. We will provide additional information as this progresses. In January, we announced the appointment of Chad Wilhelmi as Vice President of Quality Control and Regulatory Affairs. We continue to strengthen the talent level within the company with the appointment of Dr. Maria Vemera, an industry-recognized expert with ThinFilm electrode technology. She will help drive the development process for our spinal cord stimulation program. During the quarter, the company was also featured on the Clayman Countdown, nationally syndicated financial program airing on the Fox Business Network. We also presented at the Roth Capital Partners Investment Banking Conference and the Oppenheimer Virtual Healthcare Conference. In closing, the company remains confident in the current design and test results of the Evo SCEG product line and have a plan in place no matter the outcome of our FDA appeal meeting. Most importantly, we are more confident than ever about the value and differentiators our products will bring to their respective markets. I'm also pleased in our progress to reduce costs, decrease supply chain risk, and development progress with our ablation program, chronic use electrodes, and new connector. We remain enthusiastic and confident as we continue to address both our short-term and long-term company objectives. Thank you for your time and attention. I would now like to turn it over to Ron McClurg for a review of fiscal first quarter, sorry, second quarter financial results. Ron. Thank you, Dave.

Product revenue was $37,000 in the second quarter of fiscal 2022 compared to product revenue of $18,000 in the second quarter of fiscal 21. Collaboration revenue was delayed in the second quarter of fiscal 2022 due to the FDA decision compared to collaboration revenue of $20,000 in the second quarter of fiscal 2021. Collaboration revenue in the prior year was derived from the Zimmer Development Agreement and represented the portion of the upfront initial development fee payment that was eligible for revenue recognition as of March 31st. The total operating expenses in the second quarter of fiscal 2022 were $3 million compared to $2.4 million in the same period of the prior year. R&D expenses in the second quarter were $1.8 million compared with $1.3 million in the same period of fiscal 2021. SG&A expense in the second quarter of fiscal 2022 was $1.2 million compared with $1.1 million in the prior year period. Our net loss was $3.1 million for the second quarter of fiscal 2022, compared to a net loss of $2.4 million in the second quarter of fiscal 2021. As of March 31st, 2022, the company had cash of $12.9 million, compared to $16.2 million at December 31st and $6.9 million at September 30th, 2021, our fiscal year end. Once again, the company had no debt outstanding at March 31st, 2022. That concludes my remarks. I'll now pass it back to the operator to open up the call for questions and answers. Thank you.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment, please, while we poll for questions. Our first question comes from Alec Nowak with Craig Hallam. Please proceed with your question.

Great. Good afternoon, everyone. This is Connor on for Alex. You know, I guess, first of all, I'd be interested to hear, you know, just kind of updated conversations with Zimmer and the agreement. You know, are they experiencing any sort of, you know, delays on their side? You know, I know you mentioned the meeting with the neurosurgeons. You know, so just any more color on the Zimmer piece at this point.

Yeah, so Zimmer obviously is part of our agreement with them was that they would provide the bulk of the accessories that are needed to use this device with their robots. Um, that is not yet done. Um, so yes, they, um, they are still not yet done with all the accessories. Um, uh, you know, the feedback that we've gotten from them is that things are progressing. Feedback during, uh, the meeting, uh, with physicians was positive regarding their accessories. Now, but we're really talking about when I say accessories, uh, drill, a drill bit, cottery device, uh, you know, a ruler that's used inside the brain. So, You know, we're not discussing, you know, projects that typically have long timelines, especially given that most of these accessories are really in their wheelhouse. So, but no, they're not finished, you know, with all the accessories either.

Sure. Okay. And then I guess just thinking about this year, you know, regardless of what happens with the FDA decision here coming up shortly, You know, you're planning this other study just in case. I believe it was the subacute toxicity testing. You know, I guess thinking about that, how should we think about costs trending throughout the year? Just any detail there would be helpful too.

Yeah, Ron, you want to take that?

Sure. Most of the costs that we're incurring at this point in time are related to our ongoing projects and product development. Specifically, we have switched our focus in the development side to the combination device that Dave mentioned earlier, the RF ablation device, and then also working on some of those longer-term products, which would be the electrodes that would be used for chronic use, both in recording as well as in stimulation. We have incurred some additional costs during primarily the second quarter, the most recent one, as it relates to additional testing and components that were needed for the testing. And those were, as I said, reflected in our fiscal second quarter results. At this point in time, there will be not a material increase in any costs related to that testing. most of that has been accounted for at this point. Okay. Sure. That's helpful. All right.

That's it for me at this point. I'll hop back in the queue. Thanks.

Thank you.

Thank you. Our next question comes from Ben Hainer with Alliance Global Partners. Please proceed with your question.

Good afternoon, gentlemen. Thanks for taking the questions. I was just wondering if you could provide any more color on the appeal call with the FDA and You mentioned that they didn't ask any questions, but did they give you any kind of, I don't know, feedback is the right word, but information on the initial rejection or anything on that front?

Yeah, so thanks for the question, Ben, too. So, FDA, in most of the meetings, in a wide variety of topics that I've attended with them, there's usually not a tremendous amount of dialogue. Keep in mind, this was a one-hour meeting. That's part of the official appeal process. You get an hour to state your case. You know, the FDA had, I think it was the final count was 14 individuals. So it's, I think, you know, kind of limiting for them as well to ask questions, but You know, our presentation probably took about 20, 25 minutes, and the point person at FDA that was really running the meeting at the end of our presentation did reach out to his team to see if there was any questions on the rationale that Dr. Wustenberg provided, and there were none. And that was really the extent of the call. But I think it was really well laid out by Dr. Wustenberg. So I'm not sure that FDA would have had, you know, a lot of questions on it. We did provide the presentation a few days in advance, so the FDA did have the ability to at least, you know, review the material. This wasn't the first time they were seeing it. But that was really the bulk of the discussion other than them informing us you know, as to when they would get back to us.

Okay. It kind of seems like a bit of an odd situation. I'm not asking any questions, but it's understandable why it works that way. And then, you know, just if you do come back and say, you know, continue doing the test that's about compatibility tests that you've already commenced, you know, when you resubmit that, if you have to, I mean, is there really any change to the submission aside from the biocompatibility tests that would need to take place?

No. So that was, you know, when you look at the questions that FDA had in the latest submission, really what their issue was was with this particular test. So there wasn't, you know, anything in addition to that. you know, that would cause us to redo anything or, you know, have to perform anything that we – any testing that we hadn't performed before. Okay.

Okay. Got it. And then, you know, just given your activities with Dimmer, you know, you guys going out and qualifying new suppliers, the fact that you've got the first order in inventory and ready to ship – You know, it doesn't seem like Zimmer's any less gung-ho about the product than they have. I mean, is that a fair characterization?

In my opinion, yes. You know, I think, you know, just the mere fact that they invited us to, you know, to their meeting, you know, that they had with this advisory board, you know, all the signs that we see from them is that, they're still engaged with this program, they're still excited, and they haven't given us any reason to think otherwise.

Okay, great. And then maybe any more color on how the spinal cord stim development's going and anything you could share about Dr. Romero's background that would be relevant.

Yeah, so about her background, she's got a wealth of experience with polyimid materials. So that's the materials that we're using today. She's also very familiar with our, we'll call it our new design without giving too much away. And we really needed to provide some additional resources. You know, I think litmus tests for us with this five-year testing and our comfort level to say, okay, yes, we really think that these devices, you know, will have the durability that we need. And, you know, after seeing the results, you know, we went out and, you know, felt that we really needed to have a specific person focus on this from a development standpoint. She's got great manufacturing experience, great thin film experience. You know, if you did a Google search of her, you'd see her – you know, as an author in some of the papers. So my time with her has been short since she's relatively new with the company. But, you know, I'm really shocked at how advanced she is and even some of the ideas she has for, you know, making this spinal cord stem electrode even more exciting than, you know, what I had originally expected. So, I think what we're going to wind up with, and I don't want to get too far of myself, but the path that I saw and the opportunity that I saw with the electrode, I think she's got some other ideas to make it even more interesting with physicians. So we've recently gone out and brought on some both neurosurgeons as well as anesthesiologists who you know, also place a number of these devices and do a number of these procedures and initiated discussions with them about, you know, some of these new ideas. And, you know, there's an excitement level. We've still got a lot of work to do, but I think she's really going to accelerate the process for us. And I think some of her ideas already are so much further beyond what I had even anticipated.

So stay tuned on that front. You might have some intriguing ideas.

Yeah, I think that some of the advantages that I saw with the technology, I think she's expanding beyond that with what she feels we may be able to do with the design of this electrode. So, you know, once we get a little further along, we'll disclose more about what we're doing, but I don't want to go into too much detail at this stage.

Fair enough. Well, that's all I had, gentlemen. Thanks for taking the questions, and we'll be in touch.

Thank you.

We've reached the end of the question and answer session, and this concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.