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 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. The Company has also initiated a program to develop and commercialize electrodes targeted for spinal
cord stimulation procedures to treat back-related pain from failed back surgeries. Additionally, we are investigating the potential
applications of our technology associated with artificial intelligence. 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.
We
are developing our cortical, sheet and depth electrode technology to provide solutions for diagnosis through cEEG recording and
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.
Failed back surgery syndrome (“FBSS”) is a condition
that produces chronic lower back/leg pain due to one or more failed back surgeries. Typically, it is related to patients that suffer
with pain after surgery of the lumbar spine for degenerative disc disease. Re-operations are usually not recommended for these
patients due to low success rates. These patients experience greater levels of pain, a lower quality of life, varying levels of
disability and higher rate of unemployment. Spinal cord stimulation works by placing an electrodes(s) in a targeted area of the
spine and then connected to an implantable pulse generator that sends electrical stimulation to the electrode to block the pain
signals from reaching the brain.
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 (meaning that additional trials will be needed prior to it being approved
for sale by the U.S. Food and Drug Administration (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.1 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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1 American
Association of Neurological Surgeons National Neurosurgical Procedural Statistics 2012.
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.
Spinal Cord Stimulation
The market for spinal cord stimulation
was reported to be $1.97 billion in the United States in 2017 as reported by Infinium Research in their Spinal Cord Stimulation
Market Research report. The market includes the following indications: Failed Back Surgery Syndrome, Ischemic Limb Pain, and Complex
Regional Pain Syndrome. Over half of this market is comprised of patients with FBSS. Certain studies have indicated a benefit for
these patients suffering from chronic back and lower limb pain when they have been treated with electrical stimulation. Prior to
the patient receiving an implant, they undergo a trial period that allows them to determine if they are receiving relief from the
therapy while preventing a surgery to implant the pulse generator that provides the stimulation. If the trial period is successful,
then the device is implanted in a follow-up procedure.
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 theorized 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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Requirement for a surgical incision: Currently, when patients have been implanted with paddle electrodes in the spinal area, a surgical incision has been required. A technology that allows for percutaneous placement is desirable.
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Limited number of contacts on an electrode: Paddle electrodes currently are available in a variety of sizes and number of contacts. Physicians want to explore adding a greater number of contacts on the same electrode in order to be able to be more precise in stimulating targeted areas.
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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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Percutaneous placement of spinal cord stimulation paddle electrodes with scalability options: Due to the thin film nature of our electrode technology, we believe that it may allow for percutaneous placement, thereby preventing the need to make surgical incisions to place the electrodes. Minimally invasive and percutaneously placed technologies have become almost a requirement for adoption with patients and physicians. In addition, our technology offers the ability to increase the number of contacts on a film that traditionally offers fewer contacts. Increasing the number of contacts may allow for more precise stimulation in the spine, potentially improving the therapeutic outcomes.
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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 December 2019, we announced that we received U.S. FDA 510(k) clearance to market our thin film cortical electrode technology for temporary (less than 30 days) recording, monitoring, and stimulation on the surface of the brain. 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.
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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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Develop percutaneous placed electrodes for spinal cord stimulation with scalable contact configurations: Given that many surgically placed technologies have become less invasive due to patient and physician demands, we believe that our flexible thin film technology will allow for percutaneous placement, thus potentially eliminating the need to make a surgical incision. By leveraging our existing FDA cleared cortical electrode technology, we may be able to offer the ability to improve precision of where the stimulation is delivered. NeuroOne’s platform thin film technology has the capability to increase the number of contacts in a similar footprint that has fewer contacts.
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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 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 placement of 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 Neurology Mapping with NeuroOne
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 and 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, The Cleveland Clinic 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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The 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).
The Company received FDA 510(k)
clearance in the fourth calendar quarter of 2019.
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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.
Commercial launch is in process.
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Depth electrodes for recording (diagnostic) purposes
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Design freeze for one design; currently there
are additional alternative designs under evaluation.
Bench top testing and pre-clinical tests (animal
testing) were conducted in the third and fourth calendar quarters of 2018.
No clinical testing has been conducted to
date.
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The Company is currently evaluating two additional
alternative designs for this product. Design freeze was completed in the fourth calendar quarter of 2018 for one of the three designs
in consideration. Additional pre-clinical tests (including safety and performance tests) expected to occur in the first calendar
quarter of 2020. 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 for one design in the second calendar quarter of 2020.
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Minimally invasive cortical electrode delivery system
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No design freeze.
An initial pre-clinical feasibility study
was conducted by the Mayo Clinic utilizing their device with our cortical film technology in December 2018. Additional testing
was completed at the University of Minnesota in the second and third calendar quarters of 2019.
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Pre-clinical testing was conducted in the
first calendar quarter of 2019, and regulatory requirements will continue to be evaluated as we develop the design of this product.
The Company conducted additional cadaver studies in the second and third calendar quarters of 2019.
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 was completed in the second calendar quarter of 2020.
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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Spinal cord stim electrodes
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No design freeze.
No pre-clinical or clinical testing to
date.
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This device is in early stages of development.
We expect to perform pre-clinical testing in mid-2020.
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. Combined,
these properties suggest that the replacement of our current competitive silicone electrodes with polyimide substrate electrodes
(NeuroOne technology) for recording brain activity for epilepsy could provide enhanced clinical value with reduced cost, reduced
infection risk, and improved patient comfort.
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 the Centers for Medicare
and Medicaid Services (“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 Technology Officer 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 as well as stimulation for spinal cord stimulation
for back related pain.
Our
research and development expenses were $1.5 million and $1.0 million for the years ended September 30, 2019 and 2018, respectively.
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’s Cortac Strips and grid electrodes and
Depthalon depth electrodes are used for recording brain activity similar to other competitive technologies. In addition, Dixie
Medical has launched a product line of depth electrodes and CorTec has launched a cortical electrode product line called AirRay.
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 thin film electrode technology for use in the brain although none are expected to be commercially available in 2019.
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. We have 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, which we submitted
on January 28, 2019. WARF may terminate this license 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, 2020 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 WARF for our technology under development,
and the termination of this license would harm our business” for additional information regarding the WARF License.
Mayo
Foundation for Medical Education and Research License and Development Agreement
We have entered into the Amended and Restated
License and Development Agreement (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.
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, see “Risk Factors—We depend on our partnership with Mayo 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 September 30, 2019, 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. patent applications filed by us and published on October
11, 2018 covering our applications and additional devices used during the diagnostic and therapeutic ablation and stimulation
procedures. In addition, we filed a provisional patent in March 2019 to include coatings for application on our thin film electrode
technology, a provisional patent application filed in June 2019 relating to minimally invasive delivery devices, electrodes, and
related methods, and we filed a patent application in August 2019 relating to our spinal cord stimulation electrode advancements
for patients suffering with nerve-related back pain. 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 “NeuroOneTM” trademark. We were issued a notice of
allowance from the U.S. Patent and Trademark Office in December 2017, and on June 11, 2019, we received an approval of our extension
request.
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 (“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 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 (“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 Investigational Device Exemption
(“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 Devices 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.
The 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 (the
“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 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 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 Anti-Kickback Statute constitutes a false or fraudulent claim
for purposes of the federal civil False Claims Act (the “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 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.
False
Claims Act
The
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 False Claims Act have made
it easier for private parties to bring “qui tam” whistleblower lawsuits against companies under the 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.
Foreign Corrupt Practices Act (“FCPA”)
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 September 30, 2019, we had four 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 11 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.
Corporate
Information
Our
principal executive offices are located at c/o David Rosa, 7599 Anagram Drive, Eden Prairie, Minnesota 55344, and our telephone
number is 952-426-1383. Our website address is www.neurooneinc.com. Information on our website is not part of this Annual Report.
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 Annual 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, 2019, we had an accumulated deficit of $17.2 million 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 costs resulting
in 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 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 have 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 fiscal year ended September 30, 2019, 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 year ended September 30, 2019, noting the existence of substantial doubt about our ability to continue as a
going concern.
At
September 30, 2019, we had $0.3 million in cash deposits. Our existing cash and cash equivalents will not be sufficient to fund
our operating expenses. 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.
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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obtaining
and 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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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, 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 to subsequently adopt our product, then we may never achieve profitability and such failure to
adopt our product could have a material adverse effect on our business, financial condition and operating results.
Additionally,
the Mayo Clinic is conducting testing of its own minimally invasive cortical electrode delivery 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 we may be unable
to enter into any arrangement with Mayo Clinic relating to its device. If we are unable to pursue the development of a minimally
invasive cortical electrode device, this may delay our ability to become profitable and we could be forced to terminate our operations.
In
addition to facing competition from major competitors and potentially our development partner, 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 (“WARF”) 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, which we filed on
January 28, 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, 2020 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 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 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.
Even
if we have our cortical strip, grid electrode and depth electrode technology approved for commercial sale, if we are unable to
expand our 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 sufficient 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
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 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 our officers and 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. patent applications filed by us and
published October 11, 2018 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 Mr. Christianson to its existing
lawsuit against Mr. Fredrickson. In the lawsuit, PMT claims that Mr. Fredrickson and Mr. Christianson breached their non-competition,
non-solicitation and non-disclosure obligations, breached their fiduciary duty obligations, were unjustly enriched, engaged in
unfair competition, engaged in a civil conspiracy, tortiously interfered with PMT’s contracts and prospective economic advantage,
and breached a covenant of good faith and fair dealing. Against Mr. Fredrickson, PMT also alleges that he intentionally or negligently
spoliated evidence, made negligent or fraudulent misrepresentations, misappropriated trade secrets in violation of Minnesota law,
and committed the tort of conversion and statutory civil theft. Against the Company and NeuroOne, 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. Furthermore, Mr. Christianson is a key officer and the loss of him would be detrimental
to our operations and prospects.
On
April 18, 2018, Mr. Christianson, the Company and NeuroOne, Inc. filed a motion for dismissal, which was heard by the Court on
October 11, 2018. The motion for dismissal states that: the contract claims against Mr. Christianson fail because his agreement
was not supported by consideration; the Minnesota Uniform Trade Secrets Act preempts plaintiff’s claims for unfair competition,
civil conspiracy and unjust enrichment; plaintiff fails to state a claim regarding alleged breach of the duties of loyalty and
good faith/fair dealing; plaintiff cannot legally obtain a constructive trust; plaintiff has insufficiently pled its tortious
interference claims; and Plaintiff has not stated a claim for unfair competition. On January 7, 2019, the judge granted the motion
for dismissal with respect to PMT’s claim for breach of the duty of good faith and fair dealing, and denied the motion for
dismissal with respect to the other claims presented. Discovery is now virtually complete. On June 28, 2019, the Company presented
to the special master evidence of what it believed to reflect significant litigation misconduct by PMT relating to a manufactured
non-compete agreement for Wade Fredrickson that it had attempted to pass off as a business record of PMT. Based on the evidence
presented, the special master ruled that PMT had waived the attorney client privilege with respect to certain communications with
respect to the Fredrickson non-compete with both its former and current litigation counsel and authorized a deposition of the
former litigation counsel concerning these communications. On August 30, 2019 the Hennepin County District Court heard dispositive
motions in this case. The district court judge indicated some claims would likely be tried to a jury and encouraged the parties
to settle.
On
September 12, 2019 the district court heard NeuroOne’s motion for sanctions. The district court has set the sanctions hearing
for December 17, 2019 and December 18, 2019, and indicated any remaining claims would be tried in May 2020. NeuroOne and Mark
Christianson (who has not worked for PMT since February 2012) intend to continue to defend themselves vigorously.
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 FDCA
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 FDCA, 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 FDCA; 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 FCPA,
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 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 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 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; and
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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).
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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, guidance on tax reform continues to be released and such guidance may adversely affect our business and financial condition.
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 resulted in changes in the valuation of our deferred tax assets and
liabilities.
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.
Inadequate
funding for the FDA, the SEC and other government agencies could hinder their ability to hire and retain key leadership and other
personnel, prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those
agencies from performing normal business functions on which the operation of our business may rely, which could negatively impact
our business.
The
ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and
funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy
changes. Average review times at the agency have fluctuated in recent years as a result. Disruptions at the FDA and other agencies
may also slow the time necessary for new drugs, devices and treatments to be reviewed and/or approved by necessary government
agencies, which would adversely affect our business.
In
addition, government funding of the SEC and other government agencies on which our operations may rely, is subject to the political
process, which is inherently fluid and unpredictable. For example, over the last several years, including beginning on December
22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA and the SEC, have had
to furlough critical FDA, SEC and other government employees and stop critical activities. If a prolonged government shutdown
occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could
have a material adverse effect on our business. Further, upon completion of this offering and in our operations as a public company,
future government shutdowns could impact our ability to access the public markets and obtain necessary capital in order to properly
capitalize and continue our 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 September 30, 2019, 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 44.3% 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.
As of September 30, 2018, our management
identified certain internal control deficiencies, which management believed constituted material weaknesses. These material weaknesses
were remediated as of September 30, 2019; however, any failure to 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.
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 have a public float of $75 million or greater.
During the audits for the period ended
September 30, 2018, we determined that our internal control over financial reporting was not effective due to material weaknesses
relating to: (i) accounting for non-routine and complex debt and equity transactions, (ii) the financial statement close and reporting
process, (iii) accounting for routine transactions, and (iv) segregation of duties. Management determined that we have remediated
these material weaknesses as of September 30, 2019.
However, if we fail to maintain effective
internal controls and procedures for financial reporting, it could result in material misstatements in the annual or interim financial
statements that would not be prevented or detected in a timely manner. We cannot assure you that material weaknesses or significant
deficiencies will not occur in the future and that we will be able to remediate such weaknesses or deficiencies in a timely manner,
which could impair our ability to accurately and timely report our financial position, results of operations or cash flows.
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, 2019, we had outstanding warrants to purchase an aggregate of 7,265,598 shares of Common Stock at a weighted
average exercise price of $2.55 per share, and options to purchase an aggregate of 845,840 shares of Common Stock at a weighted
average exercise price of $1.82 per share. For a description of our outstanding warrants and information about the number of shares
of Common Stock for which they are 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, 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 such as, 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.
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 liabilities 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.