You should read the following discussion and analysis of financial condition and results of operations of NeuroOne together with our financial statements and the related notes included elsewhere in this Report. References in this discussion to "series" or "notes" refer to all of our outstanding notes as of the relevant date of the item being discussed. References in this discussion to "convertible promissory notes" refer to all of our outstanding convertible promissory notes as of the relevant date of the item being discussed. Overview We are a medical technology company focused on the development and commercialization of thin film electrode technology for continuous electroencephalogram (cEEG) and stereoelectrocencephalography (sEEG) recording, spinal cord stimulation, brain stimulation and ablation solutions for patients suffering from epilepsy, Parkinson's disease, dystonia, essential tremors, chronic pain due to failed back surgeries and other related neurological disorders. Additionally, we are investigating the potential applications of our technology associated with artificial intelligence. Prior to FDA approval or clearance of certain of our products, our primary activities were limited to, and our limited resources were dedicated to, performing business and financial planning, raising capital, recruiting personnel, negotiating with business partners and the licensors of our intellectual property and conducting research and development activities. InNovember 2019 , our Evo cortical technology ("cEEG") received 510(k) clearance from the FDA for recording, monitoring, and stimulating brain tissue for up to 30 days, and inSeptember 2021 , we received FDA clearance for our Evo sEEG electrode technology for temporary (less than 24 hours) use with recording, monitoring, and stimulation equipment for the recording, monitoring, and stimulation of electrical signals at the subsurface level of the brain. Our submission to the FDA seeking 510(k) for use of our Evo sEEG electrode technology for up to 30 days is pending. 60 We completed feasibility bench top testing with a new design of our diagnostic and ablation depth electrode in the first calendar quarter of 2021, and signed a contract with RBC Medical Innovations to develop hardware for the system in the third calendar quarter of 2021. We are targeting the third calendar quarter of 2022 for completion of such hardware. We also completed an animal feasibility study atEmory University inSeptember 2021 . Next, we plan to submit a Pre-Submission(Q-Sub) to the FDA for the RF ablation system and to review the feasibility of "Breakthrough" designation, complete additional animal studies through the first half of calendar 2022, and submit an application for FDA 510(k) clearance in the fourth calendar quarter of 2022. Our other products
are still under development. We have incurred losses since inception. As ofSeptember 30, 2021 , we had an accumulated deficit of$40.8 million , primarily as a result of expenses incurred in connection with our research and development, selling, general and administrative expenses associated with our operations and interest expense, fair value adjustments and loss on extinguishments related to our debt, offset in part by collaborations and product revenues. Prior to FDA approval of certain of our products, our main source of cash was proceeds from the issuances of notes, common stock, warrants and unsecured loans. See "-Liquidity and Capital Resources-Historical Capital Resources" below. While we have begun to generate revenue from the sale of products based on our cEEG technology beginning in the first quarter of fiscal 2021 and through milestone payments from our current collaboration with Zimmer, we expect to continue to incur significant expenses and increasing operating and net losses for the foreseeable future until and unless we generate a higher level of revenue from commercial sales, and we will need to obtain substantial additional funding in connection with our continuing operations through public or private equity or debt financings, through collaborations or partnerships with other companies or other sources. We may be unable to raise additional funds when needed on favorable terms or at all. Our failure to raise such capital as and when needed would have a negative impact on our financial condition and our ability to develop and commercialize our cortical strip, grid electrode and depth electrode technology and future products and our ability to pursue our business strategy. See "-Liquidity and Capital Resources-Funding Requirements and Outlook" below. Recent Developments
OnOctober 13, 2021 , we entered into an Underwriting Agreement (the "Underwriting Agreement") withCraig-Hallum Capital Group LLC , as underwriter (the "Underwriter"), relating to the issuance and sale of 3,750,000 shares of our common stock, par value$0.001 per share, at a price to the public of$3.20 per share. In addition, under the terms of the Underwriting Agreement, we granted the Underwriter an option, exercisable for 30 days, to purchase up to an additional 562,500 shares of common stock on the same terms. The base offering closed onOctober 15, 2021 , and the sale of 422,057 shares of common stock subject to the Underwriter's overallotment option closed onNovember 15, 2021 . The gross proceeds from this offering were approximately$13.4 million prior to deducting underwriting discounts and other offering expenses payable by us. We intend to use the net proceeds from this offering for working capital and general corporate purposes.
Change of Independent Registered Public Accounting Firm for Fiscal 2021
OnJune 18, 2021 , the Audit Committee of the Board (i) engagedBaker Tilly US, LLP ("Baker Tilly") to serve as the Company's independent registered public accounting firm for the Company's fiscal year endingSeptember 30, 2021 , and (ii) determined to dismissBDO USA, LLP ("BDO"), the Company's independent registered public accounting firm for the year endingSeptember 30, 2020 . 2021 Shelf Registration OnJune 4, 2021 , NeuroOne filed a Form S-3 shelf registration statement under the Securities Act, which was declared effective by theSEC onJune 14, 2021 (the "2021 Shelf"). Under the 2021 Shelf, the Company may offer and sell, from time to time in its sole discretion, securities having an aggregate offering price of up to$150 million , subject to the limitations of Form S-3. Nasdaq Capital Market The Company's common stock commenced trading on The Nasdaq Capital Market onMay 26, 2021 under the ticker symbol "NMTC." Previously, the Company's common stock was traded on the OTC Markets quotation system on the OTCQB. Reverse Stock Split Effective after the close of business onMarch 31, 2021 , the Company completed a 1-for-3 reverse stock split of its common stock. All share and per share amounts in this Report have been reflected on a post-split basis. 61 COVID-19 OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a global pandemic. As a result of the COVID-19 pandemic, the Company has experienced, and will likely continue to experience, delays and disruptions in our pre-clinical and clinical trials, as well as interruptions in our manufacturing, supply chain, shipping and research and development operations. For example:
? development of our technology was delayed in fiscal year 2021 due to
interruptions in global manufacturing and shipping as a result of the COVID-19
pandemic, including as one of our key manufacturing partners and one of the
Company's suppliers had staffing issues leading to delays in the Company's
development builds and delays in shipping product;
? the Company's own staff has been impacted by infections and mandatory
quarantines;
? the Company is currently experiencing product shortages of its primary
component, polyimide film, due to supply chain shortages attributed to COVID
related issues;
? the Company is experiencing delays in timelines for product availability and
delivery from vendors, including related to staffing shortages, both generally
and due to employee illness, and due to increases in demand from other larger
or more longstanding customers of our suppliers placing large orders due to
concerns with supply chain disruption and the impact of COVID-19. The Company's plans for further testing or clinical trials may be further impacted by the continuing effects of COVID-19. The global outbreak of COVID-19 continues to rapidly evolve. InApril 2020 , given the impact of COVID-19 on the Company, the Company applied for and received loan funding of$83,333 under the Paycheck Protection Program, which was forgiven by theU.S. Small Business Administration onJune 9, 2021 . The extent to which the COVID-19 pandemic may further impact our business and pre-clinical and clinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the effect of the pandemic on our suppliers and distributors and the global supply chain, the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social distancing in theU.S. and other countries, business closures or business disruptions and the effectiveness of actions taken in theU.S. and other countries to contain and treat the disease. The COVID-19 pandemic may also continue to impact our business as a result of employee illness, school closures, and other community response measures. The COVID-19 pandemic may also impact our ability to secure additional financing. Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on the Company's results of future operations, financial position, and liquidity in for fiscal year 2022 and beyond.
See "Risk Factors-Risks Related to Our Business-The COVID-19 pandemic has adversely impacted, and may continue to impact, our business."
Financial Overview Product Revenue Our product revenue was derived from the sale of our strip and grid cortical electrodes ("Strip/Grid Products") and electrode cable assembly products ("Electrode Cable Assembly Products") based on Evo cortical technology. We anticipate that we will generate additional revenue from the sale of products based on Evo cortical technology. We have received FDA 510(k) clearance for our cortical strip electrode for temporary (less than 30 days) recording, monitoring, and stimulation on the surface of the brain and our Evo sEEG electrode technology for temporary (less than 24 hours) use with recording, monitoring, and stimulation equipment for the recording, monitoring, and stimulation of electrical signals at the subsurface level of the brain, but we do not expect to generate any revenue from the sale of our other products until we develop and obtain all required regulatory approvals or clearances for and commercialize depth electrode technology. If we fail to complete the development of the depth electrode technology, or any other product candidate we may pursue in the future, in a timely manner, or fail to obtain regulatory approvals or clearances, we may never be able to generate revenue from product sales sufficient to sustain operations. 62 Product Gross Loss
Product gross loss represents our product revenue less our cost of product revenue. Our cost of product revenue consists of the manufacturing and materials costs incurred by our third-party contract manufacturer in connection with our Strip/Grid Products and outside supplier materials costs of producing the Electrode Cable Assembly Products. In addition, cost of product revenue includes royalty fees incurred in connection with our license agreements. Collaborations Revenue OnJuly 20, 2020 , the Company entered into the Development Agreement with Zimmer, pursuant to which the Company granted Zimmer exclusive global rights to distribute the Strip/Grid Products and electrode cable assembly products (the "Electrode Cable Assembly Products"). Additionally, the Company granted Zimmer the exclusive right and license to distribute certain depth electrodes developed by the Company ("SEEG Products", and together with the Strip/Grid Products and Electrode Cable Assembly Products, the "Products"). The parties have agreed to collaborate with respect to development activities under the Development Agreement through a joint development committee composed of an equal number of representatives of Zimmer and the Company. Under the terms of the Development Agreement, the Company is responsible for all costs and expenses related to developing the Products, and Zimmer is responsible for all costs and expenses related to the commercialization of the Products. In addition to the Development Agreement, Zimmer and the Company have entered into a Manufacturing and Supply Agreement (the "MS Agreement") and a supplier quality agreement (the "Quality Agreement") with respect to the manufacturing and supply of the Products. Except as otherwise provided in the Development Agreement, the Company is responsible for performing all development activities, including non-clinical and clinical studies directed at obtaining regulatory approval of each Product. Zimmer has agreed to use commercially reasonable efforts to promote, market and sell each Product following the "Product Availability Date" (as defined in the Development Agreement) for such Product.
Pursuant to the Development Agreement, Zimmer made an upfront initial
exclusivity fee payment of
Except where Zimmer timely delivers a Design Modification Notice under the Development Agreement, if one or more of the events set forth below occurs on or before the deadline indicated for such event and the Product Availability Date (as defined in the Development Agreement) for the SEEG Products occurs on or beforeJune 30, 2021 , then the Company shall receive the additional amount indicated for such event as part of the SEEG Exclusivity Maintenance Fee:
? Design freeze for the SEEG Products by
? Acceptance of all Deliverables for SEEG Products under the Development Plan (as
defined in the Development Agreement) byApril 30, 2021 -$500,000
If Zimmer timely delivers a Design Modification Notice to the Company under the Development Agreement, and one or more of the events set forth below occurs on or before the deadline indicated for such event and the Product Availability Date for the SEEG Products occurs on or beforeJune 30, 2021 , then the Company shall receive the additional amount indicated for such event as part of the
SEEG Exclusivity Maintenance Fee:
? Acceptance of all Deliverables for SEEG Products under the Development Plan
other than the Modified Connector by
? Acceptance of all Deliverables for SEEG Products under the Development Plan,
including the Modified Connector bySeptember 30, 2021 -$500,000 For purposes of the Development Agreement, each of the foregoing events shall have occurred only if the Company has demonstrated the achievement of the event to Zimmer's reasonable satisfaction. Notwithstanding the foregoing, the events in Sections 6.1(c)(ii), (iii) and (iv) of the Development Agreement shall not be deemed to be met if FDA Approval for the SEEG Products is not received prior to the applicable deadline. 63 Zimmer has delivered a Design Modification Notice. The design freeze for the SEEG Products occurred byDecember 15, 2020 . InSeptember 2021 , the Company received 510(k) clearance from the FDA to market its Evo sEEG Electrode technology for temporary (less than 24 hours) use with recording, monitoring, and stimulation equipment for the recording, monitoring, and stimulation of electrical signals at the subsurface level of the brain. FDA clearance is one condition of the Product Availability Date under the Development Agreement. However, the Company does not intend to deliver saleable product to Zimmer unless and until it receives regulatory clearance to expand the use of its Evo sEEG Electrode technology for up to 30 days, at which point the Company and Zimmer intend to commence negotiations regarding payments of applicable amounts above, notwithstanding the deadlines for the Product Availability Date and the Acceptance of all Deliverables for SEEG Products. In addition to the Initial Exclusivity Fee and InterimFee Bonus , in order to maintain the exclusivity of the SEEG Distribution License, Zimmer must pay the SEEG Exclusivity Maintenance Fee to the Company, on or prior to the SEEG Exclusivity Confirmation Date, in immediately available funds as follows:
? if the Product Availability Date for the SEEG Products occurs on or before June
30, 2021, then
pursuant to Section 6.1(c), including any such Interim
Modification Notice;
? if the Product Availability Date for the SEEG Products occurs after
2021, but on or before
timely issues a Design A-9 Modification Notice, any Interim
pursuant to Section 6.1(c)(iv);
? if the Product Availability Date for the SEEG Products occurs after September
30, 2021, but on or before
? if the Product Availability Date for the SEEG Products occurs after December
31, 2021, then$1,500,000 .
As noted above, upon receipt (if any) of regulatory clearance to expand the use of its Evo sEEG Electrode technology for up to 30 days, the Company and Zimmer intend to commence negotiations regarding the applicable SEEG Exclusivity Maintenance Fee amount, notwithstanding the above deadlines for the Product Availability Date. Notwithstanding any other provision of the Development Agreement, if the Product Availability Date for the SEEG Products has not occurred on or beforeJune 30, 2022 , Zimmer shall have the right to terminate the SEEG Distribution License by delivering written notice to the Company to that effect and, upon delivery of such notice, Zimmer shall be relieved of all of its obligations hereunder with respect to SEEG Products, including any obligation to pay the SEEG Exclusivity Maintenance Fee or to purchase, market, distribute or sell any SEEG Products. The Initial Exclusivity Fee and the SEEG Exclusivity Maintenance Fee (including any InterimFee Bonus (es)), once paid, are non-refundable.
The Development Agreement will expire on the tenth anniversary of the date of the first commercial sale of the last of the Products to achieve a first commercial sale, unless terminated earlier pursuant to its terms. Either party may terminate the Development Agreement (x) with written notice for the other party's material breach following a cure period or (y) if the other party becomes subject to certain insolvency proceedings. In addition, Zimmer may terminate the Development Agreement for any reason with 90 days' written notice, and the Company may terminate the Development Agreement if Zimmer acquires or directly or indirectly owns a controlling interest in certain competitors of the Company. At inception of the Zimmer Development Agreement throughSeptember 30, 2021 , the Company has identified the following three performance obligations under the Zimmer Development Agreement: (1) the Company obligation to grant Zimmer access to its intellectual property; (2) complete SEEG Product development; and (3) complete Strip/Grid Product development. Accordingly, the Company recognized revenue in the amount of$64,812 and$1,926,566 during the years endedSeptember 30, 2021 and 2020, respectively, related to the development of the Products completed during the periods in connection with the Initial Exclusivity Fee
payment. 64
In
The achievement of future milestones or level of sales required to earn royalty payments from Zimmer is uncertain.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of personnel-related costs, including stock-based compensation for personnel in functions not directly associated with research and development activities. Other significant costs include legal fees relating to corporate matters, intellectual property costs, professional fees for consultants assisting with regulatory, clinical, product development, financial matters, and beginning in the first quarter of fiscal year 2021, sales and marketing in connection with the commercial sale of ourStrip/Grid Products and Electrode Cable Assembly Products. We anticipate that our general and administrative expenses will significantly increase in the future to support our continued research and development activities, further commercialization of our cortical strip technology, commercial sales of our sEEG electrode technology, and the increased costs of operating as a public company. These expense increases will include increased costs related to the hiring of additional personnel and fees for legal and professional services, as well as other public-company related costs. Research and Development Research and development expenses consist of expenses incurred in developing our cortical strip, grid electrode and depth electrode technology, compensation and benefits for research and development employees, including stock-based compensation, overhead expenses, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, costs related to regulatory operations, fees paid to consultants and other outside expenses. Research and development costs are expensed as incurred and costs incurred by third parties are expensed as the contracted work is performed. Lastly, de minimis income from the sale of prototype products and related materials are offset against research and development expenses. We expect our research and development expenses to significantly increase over the next several years as we continue to develop our cortical strip, grid electrode and depth electrode technology and conduct preclinical testing and clinical trials and will depend on the duration, costs and timing to complete our preclinical programs and clinical trials. Interest Expense
Interest expense primarily consists of interest costs related to our 2019 Paulson Notes and 2020 Paulson Notes, as defined below.
Net valuation change of instruments measured at fair value
The net valuation change of instruments measured at fair value includes the change in fair value of the 2019 Paulson Notes and 2020 Paulson Notes.
Loss on notes extinguishment
Loss on note extinguishment includes the loss associated with debt instrument modifications and conversions accounted for as debt extinguishments.
Other Income
Other income consists of proceeds derived from activity outside of normal operating activity, including legal settlements, the forgiveness of the paycheck protection program loan and interest income.
65 Results of Operations
Comparison of the Fiscal Years Ended
The following table sets forth our results of operations for the fiscal years
ended
For the year ended September 30, Period to Period 2021 2020 Change Product revenue$ 178,146 $ -$ 178,146 Cost of product revenue 275,895 - 275,895 Product gross loss (97,749 ) - (97,749 ) Collaborations revenue 64,812
1,926,566 (1,861,754 )
Operating expenses: Selling, general and administrative 6,260,266 4,753,036 1,507,230 Research and development 3,925,008 2,075,791 1,849,217 Total operating expenses 10,185,274
6,828,827 3,356,447 Loss from operations (10,218,211 ) (4,902,261 ) (5,315,950 ) Interest expense (3,053 ) (7,524,581 ) 7,521,528
Net valuation change of instruments measured at fair value 1,974 804,529 (802,555 ) Loss on note extinguishment -
(2,017,847 ) 2,017,847 Other income 271,122 - 271,122 Net loss$ (9,948,168 ) $ (13,640,160 ) $ 3,691,992
Product Revenue and Product Gross Loss
Product revenue and product gross loss were$0.2 million and$(0.1) million , respectively, during the year endedSeptember 30, 2021 . The product revenue consisted of the sale ofStrip/Grid Products and Electrode Cable Assembly Products. Cost of product revenue consisted of the manufacturing and materials costs incurred by our third-party contract manufacturer in connection with our Strip/Grid Products and outside supplier materials costs in connection with the Electrode Cable Assembly Products. In addition, cost of product revenue included royalty fees incurred, including the royalty fees to WARF and Mayo of$0.1 million in connection with our license agreements. There was no product revenue or product gross loss recognized during the comparable prior year period. Collaborations Revenue
Collaborations revenue was
Selling, general and administrative expenses
Selling, general and administrative expenses were$6.3 million for the year endedSeptember 30, 2021 , compared to$4.8 million for the year endedSeptember 30, 2020 . The increase of$1.5 million was primarily due to an increase in sales and marketing costs of$0.8 million , payroll related costs of$0.3 million , board and public company costs of$0.3 million , insurance costs of$0.2 million and outside professional support and other costs of$0.2 million , offset partially by a reduction in litigation support costs of$0.2 million and stock-based compensation of$0.1 million . 66
Research and development expenses
Research and development expenses were$3.9 million for the year endedSeptember 30, 2021 , compared to$2.1 million for the year endedSeptember 30, 2020 . The increase during fiscal 2021 over the comparable prior year period was due to an increase in supporting development activities largely attributed to our Evo sEEG electrode technology, which primarily included salary-related expenses and other costs of consulting services, materials and supplies. Interest expense
Interest expense for the year endedSeptember 30, 2021 and 2020 was$3,000 and$7.5 million , respectively. The decrease year over year is attributed to the full conversion of the 2019 Paulson Notes and 2020 Paulson Notes by early fiscal year 2021. Interest expense during the year endedSeptember 30, 2021 was$3,000 and consisted of issuance costs in connection with our 2019 Paulson Notes described further below. Interest expense in fiscal year 2020 related to the 2019 Paulson Notes and 2020 Paulson Notes and was comprised of issuance costs of$1.9 million and day-one interest at issuance of$5.6 million representing the amount by which fair value exceeded note proceeds. Interest on principal in connection with the 2019 Paulson Notes and 2020 Paulson Notes is included in the net valuation change of instruments measured at fair value line item.
Net valuation change of instruments measured at fair value
The net valuation change of instruments measured at fair value for the years endedSeptember 30, 2021 and 2020 was a benefit of$(2,000) and$(0.8) million , respectively. The change was due to accrued interest on the 2019 Paulson Notes and 2020 Paulson Notes, while outstanding, and due to fluctuations in our common stock fair value, the number of potential shares of common stock issuable upon conversion of the 2019 Paulson Notes and 2020 Paulson Notes during the respective periods. Loss on note extinguishment
Non-cash loss on note extinguishment for the year endedSeptember 30, 2020 was$2.0 million . The 2019 Paulson notes as described further below were amended onApril 24, 2020 to principally add a 40% discount to the optional conversion feature and to extend the maturity date by six months. TheApril 2020 amendment was accounted for as a note extinguishment given the significant modification made to the optional conversion feature. There were no note extinguishments during the year endedSeptember 30, 2021 . Other Income
Other income during the year endedSeptember 30, 2021 consisted principally of proceeds received in connection with thePMT Corporation litigation in the amount of$0.2 million and from the forgiveness of the paycheck protection program loan in the amount of$0.1 million . We did not have other income during the comparable prior year period.
Liquidity and Capital Resources
Historical Capital Resources
As ofSeptember 30, 2021 , our principal source of liquidity consisted of cash deposits of$6.9 million . Subsequent toSeptember 30, 2021 , we received gross proceeds of$13.4 million in the aggregate from the issuance and sale of common stock in theOctober 2021 underwritten public offering described below. While we began to generate revenue from commercial sales during the first quarter of fiscal year 2021 and through milestone payments from our current collaboration with Zimmer, we expect to continue to incur significant expenses and increasing operating and net losses for the foreseeable future until and unless we generate an adequate level of revenue from commercial sales to cover expenses. We anticipate that our expenses will increase substantially as we develop and commercialize our cortical strip, grid electrode and depth electrode technology and pursue pre-clinical and clinical trials, seek regulatory approvals, manufacture products, establish our own sales, marketing and distribution infrastructure to commercialize our cortical strip, grid electrode and depth electrode technology, hire additional staff, add operational, financial and management systems and continue to operate as a public company. 67
Our source of cash, outside of collaboration and product revenues, to date has been proceeds from the issuances of notes with warrants, common stock with and without warrants and unsecured loans, the terms of which are further described below. See also "-Funding Requirements and Outlook" below.
OnOctober 13, 2021 , we entered into Underwriting Agreement relating to the issuance and sale of 3,750,000 shares of our common stock at a price to the public of$3.20 per share. In addition, under the terms of the Underwriting Agreement, we granted the Underwriter an option, exercisable for 30 days, to purchase up to an additional 562,500 shares of common stock on the same terms. The base offering closed onOctober 15, 2021 , and the sale of 422,057 shares of common stock subject to the Underwriter's overallotment option closed onNovember 15, 2021 . The gross proceeds from this offering were approximately$13.4 million prior to deducting underwriting discounts and other offering
expenses payable by us. 2021 Private Placement OnJanuary 12, 2021 , we entered into a purchase agreement with certain accredited investors, pursuant to which the Company, in a private placement (the "2021 Private Placement"), agreed to issue and sell an aggregate of 4,166,682 shares (the "Shares") of the common stock of the Company, and warrants to purchase an aggregate of 4,166,682 shares of common stock (the "2021 Warrants") at an aggregate purchase price of$3.00 per share of common stock and corresponding warrant, resulting in total gross proceeds of$12.5 million before deducting placement agent fees and estimated offering expenses. The 2021 Warrants have an initial exercise price of$5.25 per share. The 2021 Warrants became immediately exercisable beginning on the date of issuance and will expire on the fifth anniversary of such date. Prior to expiration, subject to the terms and conditions set forth in the 2021 Warrants, the holders of such 2021 Warrants may exercise the 2021 Warrants for shares of common stock by providing notice to the Company and paying the exercise price per share for each share so exercised or by utilizing the "cashless exercise" feature contained in each 2021 Warrant. The 2021 Private Placement closed onJanuary 14, 2021 . In connection with the 2021 Private Placement, the Company agreed to file a registration statement with theSEC covering the resale of the Shares, the 2021 Warrants and the shares of common stock issuable upon exercise of the 2021 Warrants. The Company agreed to file such registration statement within 30 days of the execution of the 2021 Purchase Agreement onJanuary 12, 2021 and filed such registration statement onFebruary 10, 2021 .
Other Common Stock Offerings
OnJuly 24, 2020 , we entered into a Securities Purchase Agreement ("2020 Purchase Agreement") with an accredited investor pursuant to which we, in a private placement, issued and sold 25,000 shares of the Company's common stock for gross proceeds in the amount of$135,000 . Under the 2020 Purchase Agreement, we agreed to use the net proceeds from the private placement for funding operations or working capital and general corporate purposes. We granted the investor indemnification rights with respect to representations, warranties and agreements under the 2020 Purchase Agreement. OnOctober 23, 2019 , we entered into securities purchase agreements with certain accredited investors, pursuant to which the Company, in a private placement, issued and sold 47,223 shares of the Company's common stock to the accredited investors at a price of$5.40 per share, for gross proceeds amounting to$0.3 million before deducting offering expenses. We filed a registration statement with theSEC covering the resale of the shares of common stock sold in the private placement onAugust 11, 2020 .
2020 Paulson Convertible Notes
OnApril 30, 2020 , the Company entered into a subscription agreement with certain accredited investors, pursuant to which the Company, in a private placement (the "2020 Paulson Private Placement"), agreed to issue and sell to the investors 13% convertible promissory notes (each, a "2020 Paulson Note" and collectively, the "2020 Paulson Notes") and warrants (each, a "2020 Paulson Warrant" and collectively, the "2020 Paulson Warrants") to purchase shares
of the Company's common stock. 68 BetweenApril 30, 2020 andJune 30, 2020 , the Company issued 2020 Paulson Notes in an aggregate principal amount of$5.1 million to the accredited investors. The final closing under the 2020 Paulson Private Placement occurred onJune 30, 2020 . InJuly 2020 , all remaining 2020 Paulson Notes outstanding were automatically converted into Common Stock following the announcement of a Strategic Transaction (as defined in the 2020 Paulson Notes) withZimmer, Inc. The terms of the 2020 Paulson Notes are summarized below: The 2020 Paulson Notes had interest at a fixed rate of 13% per annum and required the Company to repay the principal and accrued and unpaid interest thereon on the earlier of (i)December 31, 2020 or (ii) a change of control transaction. If the Company had raised more than$5,000,000 in an equity financing before the maturity date (the "2020 Qualified Financing"), without any action on the part of the subscribers, all of the outstanding principal and accrued and unpaid interest of the 2020 Paulson Notes (the "Outstanding Balance") would have been converted into that number of shares of the securities issued by the Company in the closing on the date a 2020 Qualified Financing occurred equal to: (i) the Outstanding Balance divided by (ii) the lower of 0.6 multiplied by (A) the actual per share price of the securities issued by the Company in the closing on the date a 2020 Qualified Financing occurred and (B) the volume weighted average price ("VWAP") of the common stock for ten (10) trading days immediately preceding the 2020 Qualified Financing. In addition, as was the case inJuly 2020 , if the Company announced a transaction between the Company and any other company (or an affiliate of any such company) that was included in the S&P 500 Health Care Index as published from time to time byS&P Dow Jones Indices LLC that included an investment or upfront payments resulting in gross proceeds to the Company of at least$2,000,000 upon the execution of such transaction or definitive agreement, and provided for terms of collaboration, manufacturing, distribution, licensing or supply of the Company's products (a "Strategic Transaction") before the maturity date, without any action on the part of the subscribers, the Outstanding Balance would convert into that number of shares of common stock equal to: (i) the Outstanding Balance divided by (ii) the lower of 0.6 multiplied by (A) the VWAP of the common stock for the ten (10) trading days immediately preceding the first announcement of the Strategic Transaction or (B) closing price of the common stock on the day preceding the first announcement by the Company of
a Strategic Transaction. At any time, at the sole election of the holder of such 2020 Paulson Note prior to a 2020 Qualified Financing, Strategic Transaction or change of control transaction, all or a portion of the Outstanding Balance could be converted into that number of shares of common stock equal to: (i) the Outstanding Balance elected by the holder to be converted divided by (ii) an amount equal to 0.6 multiplied by the volume weighted average price of the common stock for the ten (10) trading days immediately preceding the date of conversion. If a change of control transaction had occurred prior to the conversion of the 2020 Paulson Notes or the maturity date, the 2020 Paulson Notes would have become payable on demand as of the closing date of such transaction. Change of control meant a merger or consolidation with another entity in which the Company's stockholders did not own more than 50% of the outstanding voting power of the surviving entity or the disposition of all or substantially all of the Company's assets. Each 2020 Paulson Warrant grants the holder the option to purchase the number of shares of common stock equal to (i) 0.5 multiplied by (ii) the principal amount of such subscriber's 2020 Paulson Notes divided by 5.61, with an exercise price per share equal to$5.61 . As of the final closing onJune 30, 2020 , the Company issued 2020 Paulson Warrants exercisable for 456,564 shares of Common Stock in connection with all closings of the private placement. The 2020 Paulson Warrants are immediately exercisable and expire onApril 30, 2023 . The exercise price is subject to adjustment in the event of any stock dividends or splits, reverse stock split, recapitalization, reorganization,
or similar transaction. In connection with the 2020 Paulson Private Placement,Paulson Investment Company ("Paulson"), received a cash commission equal to 12% of the gross proceeds from the sale of the 2020 Paulson Notes, and at the final closing of the 2020 Paulson Private Placement, Paulson received 7-year warrants to purchase an amount of Common Stock equal to 136,971 ("Broker Warrants"). The Broker Warrants have an exercise price equal to$5.61 . 2020 Paulson Note Conversions BetweenMay 4, 2020 andJuly 22, 2020 , certain subscribers elected to convert$3,590,353 of the outstanding principal and interest of such subscribers' 2020 Paulson Notes into 1,337,459 shares of common stock. OnJuly 23, 2020 , the remaining outstanding principal and interest balance of the 2020 Paulson Notes in the amount of$1,613,961 was converted into 535,178 shares of common stock upon the announcement of the Zimmer Development Agreement that qualified as a Strategic Transaction as discussed above. 69
2019 Paulson Convertible Notes
OnNovember 1, 2019 , the Company entered into a subscription agreement with certain accredited investors, pursuant to which the Company, in a private placement (the "2019 Paulson Private Placement"), agreed to issue and sell to the investors 13% convertible promissory notes (each, a "2019 Paulson Note" and collectively, the "2019 Paulson Notes") and warrants (each, a "2019 Paulson Warrant" and collectively, the "2019 Paulson Warrants") to purchase shares
of the Company's common stock.
The initial closing of the private placement was consummated onNovember 1, 2019 , and, on that date and throughDecember 3, 2019 , the Company issued 2019 Paulson Notes in an aggregate principal amount of$3,234,800 to the Subscribers for gross proceeds equaling the principal amount. The private placement terminated onDecember 3, 2019 . The Paulson Notes had a fixed interest rate of 13% per annum and required the Company to repay the principal and accrued and unpaid interest thereon onMay 1, 2020 (the "Maturity Date"). If the Company had raised more than$3,000,000 in an equity financing before the Maturity Date (the "Qualified Financing"), each subscriber would have had the option to convert the outstanding principal and accrued and unpaid interest of such subscriber's 2019 Paulson Note (the "Outstanding Balance") into the securities issued by the Company in such Qualified Financing in an amount equal to (i) the Outstanding Balance divided by (ii) the lower of 0.6 multiplied by (A) the actual per share price of securities issued by the Company in the Qualified Financing and (B) the ten day volume weighted average closing price of the common stock prior to the first closing of a Qualified Financing. If a change of control transaction had occurred prior to the earlier of a Qualified Financing or the Maturity Date, the 2019 Paulson Notes would have become payable on demand as of the closing date of such transaction. Change of control meant a merger or consolidation with another entity in which the Company's stockholders did not own more than 50% of the outstanding voting power of the surviving entity or the disposition of all or substantially all of the Company's assets. Each 2019 Paulson Warrant grants the holder the option to purchase the number of shares of common stock equal to (i) 0.5 multiplied by (ii) the principal amount of such subscriber's 2019 Paulson Notes divided by 5.61, with an exercise price per share equal to$5.61 . As of the final closing onDecember 3, 2019 , the Company issued 2019 Paulson Warrants exercisable for 288,305 shares of Common Stock in connection with all closings of the private placement. The 2019 Paulson Warrants are immediately exercisable and expire onNovember 1, 2022 . The exercise price is subject to adjustment in the event of any stock dividends or splits, reverse stock split, recapitalization, reorganization or similar transaction, as described therein. In connection with the private placement, Paulson received a cash commission equal to 12% of the gross proceeds from the sale of the 2019 Paulson Notes, and 10-year warrants to purchase an amount of Common Stock equal to 86,498 shares of common stock at an exercise price equal to$5.61 per share.
Second Amendment of 2019 Paulson Notes
OnApril 24, 2020 , the Company and holders of a majority in aggregate principal amount of the 2019 Paulson Notes entered into an amendment to the 2019 Paulson Notes (the "Second Paulson Amendment") to, among other things:
i. Extended the Maturity Date - The Second Paulson Amendment extended the
maturity date of the 2019 Paulson Notes from
(in either case, unless a change of control transaction happens prior to such
date);
ii. Revised Optional Conversion Terms - The Second Paulson Amendment provided
that the amount of shares to be received upon the a subscriber's optional
conversion of the 2019 Paulson Notes prior to a Qualified Financing (as defined in the 2019 Paulson Notes) would have been equal to: (1) the outstanding balance of such subscriber's 2019 Paulson Note elected by the
subscriber to be converted divided by (2) an amount equal to 0.6 multiplied
by the volume weighted average price of the common stock for the ten (10)
trading days immediately preceding the date of conversion; and 70
iii. Revised the Registration Date - The Second Paulson Amendment provided that
promptly following the earlier of (1)May 1, 2020 , if the applicable subscriber had converted all or a majority of the outstanding balance of such subscriber's 2019 Paulson Note prior to such date; (2) the final
closing a Qualified Financing; and (3) the maturity date, the Company would
enter into a registration rights agreement with the applicable subscriber
containing customary and usual terms pursuant to which the Company shall
agree to prepare and file with the
to the 90th calendar day following the registration date, covering the
resale of any common stock received on conversion of such 2019 Paulson
Notes, and shares of common stock underlying the Warrants.
There were no other significant changes to terms under the Second Paulson Amendment.
2019 Paulson Note Conversions During the years endedSeptember 30, 2021 and 2020, the 2019 Paulson Notes were converted into 292,754 and 725,394 shares of common stock, respectively. All of the 2019 Paulson notes were converted shares of common stock byDecember 31, 2020 .
Paycheck Protection Program Loan
In connection with the 2020 Coronavirus Aid, Relief, and Economic Security ("CARES Act"), the Company received loan funding of approximately$83,000 under the Paycheck Protection Program ("PPP"), which was forgiven by theU.S. Small Business Administration onJune 9, 2021 .
Funding Requirements and Outlook
AtSeptember 30, 2021 , we had approximately$6.9 million in cash deposits. Subsequent toSeptember 30, 2021 , we received gross proceeds of approximately$13.4 million in the aggregate from the issuance and sale of common stock in theOctober 2021 underwritten public offering described below. To date, we have generated limited revenues from commercialization and through milestone payments from our current collaboration with Zimmer, and we expect to continue to incur significant expenses and increasing operating and net losses for the foreseeable future until and unless we generate a higher level of revenue from commercial sales. Management has noted the existence of substantial doubt about our ability to continue as a going concern. Additionally, our independent registered public accounting firm and our former independent registered public accounting firm included explanatory paragraphs in the reports on our financial statements as of and for the years endedSeptember 30, 2021 and 2020, respectively, noting the existence of substantial doubt about our ability to continue as a going concern. Our existing cash may not be sufficient to fund our operating expenses through at least twelve months from the date of this filing. To continue to fund operations, we will need to secure additional funding through public or private equity or debt financings, through collaborations or partnerships with other companies or other sources. We may not be able to raise additional capital on terms acceptable to us, or at all. Any failure to raise capital when needed could compromise our ability to execute on our business plan. If we are unable to raise additional funds, or if our anticipated operating results are not achieved, we believe planned expenditures may need to be reduced in order to extend the time period that existing resources can fund our operations. If we are unable to obtain the necessary capital, it may have a material adverse effect on our operations and the development of our technology, or we may have to cease operations altogether. For a discussion of potential fee payments under theZimmer Development Agreement, see "Management's Discussion and Analysis of Financial Condition and Results of Operations- Financial Overview-Collaborations Revenue," "Note 7 - Zimmer Development Agreement" included in "Item 8 - Financial Statements and Supplementary Data" in this Report and "Risk Factors-Risks Related to Our Business-Zimmer has exclusive global rights to distribute our strip and grid cortical electrodes and electrode cable assembly products. Zimmer's failure to timely develop or commercialize these products would have a material adverse effect on our business and operating results. Further, our inability to agree with Zimmer on dates of completion for product development, regulatory clearance and commercialization milestones on which various fee payments to the Company are based under the Zimmer Development Agreement could have a material adverse impact on our financial and operating results." 71
Our material cash requirements relate to the funding of our ongoing product development and commercialization operations and our royalty obligations under our intellectual property licenses with theWisconsin Alumni Research Foundation ("WARF") and theMayo Foundation for Medical Education and Research ("Mayo"). See "Item 1-Business-Clinical Development and Regulatory Pathway-Clinical Experience,Future Development and Clinical Trial Plans" in this Report for a discussion of design, development, pre-clinical and clinical activities that we may conduct in the future, including expected cash expenditures required for some of those activities, to the extent we are able to estimate such costs. In addition, we have agreements with the WARF Mayo that require us to make certain milestone and royalty payments. OnJanuary 22, 2020 , we entered into an Amended and Restated License Agreement (the "WARF License") with WARF, which amended and restated in full our prior license agreement with WARF, datedOctober 1, 2014 (the "Original WARF License"). Under the WARF License, 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 2020,$100,000 for 2021 and$150,000 for 2022 and each calendar year thereafter that the WARF License is in effect. The minimum annual royalty payment for calendar year 2020 in the amount of$50,000 was paid inJanuary 2021 . If we or any of our sublicensees contest the validity of any licensed patent, the royalty rate will be doubled during the pendency of such contest and, if the contested patent is found to be valid and would be infringed by us if not for the WARF License, the royalty rate will be tripled for the remaining term of the WARF License. Under the Amended and Restated License and Development Agreement with Mayo (the "Mayo Development Agreement"), we have agreed to pay Mayo a royalty equal to a single-digit percentage of our product sales pursuant to theMayo Development Agreement. Nothing further was due until we started selling our products. As ofSeptember 30, 2021 ,$4,000 in royalty payments were earned by Mayo based on the commencement of commercial sales in fiscal year 2021. Refer to "Item 1-Business-WARF License", "Item 1-Business-Mayo Foundation for Medical Education and Research License and Development Agreement", "Item 1A-Risk Factors-Risks Related to Our Business-We depend on intellectual property licensed from WARF for our technology under development, and the termination of this license would harm our business" and "Item 1A-Risk Factors-Risks Related to Our Business-We depend on our partnership with Mayo to license certain know how for the development and commercialization of our technology" of this Report. The development and commercialization of our cortical strip, grid electrode and depth electrode technology is subject to numerous uncertainties, and we could use our cash resources sooner than we expect. Additionally, the process of developing medical devices is costly, and the timing of progress in pre-clinical tests and clinical trials is uncertain. Our ability to successfully transition to profitability will be dependent upon achieving further regulatory approvals and achieving a level of product sales adequate to support our cost structure. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities. Cash Flows The following is a summary of cash flows for each of the periods set forth below. For the Year EndedSeptember 30, 2021 2020
Net cash used in operating activities
(67,079 ) (122,427 ) Net cash provided by financing activities 11,534,854 7,323,377 Net increase in cash$ 2,864,949 $ 3,775,648 72
Net cash used in operating activities
Net cash used in operating activities was$8.6 million for the year endedSeptember 30, 2021 , which consisted of a net loss of$9.9 million partially offset primarily by stock-based compensation, depreciation, amortization related to intangible assets, revaluation of convertible notes, non-cash lease expense and Paycheck Protection Program loan forgiveness, totaling approximately$1.9 million in the aggregate. The net change in our net operating assets and liabilities associated with fluctuations in our operating activities resulted in a cash use of approximately$0.5 million . The year on year change in operating assets and liabilities was primarily attributable to a net decrease in accounts payable and accrued expenses, and by an increase in our prepaid expenses. Net cash used in operating activities was$3.4 million for the year endedSeptember 30, 2020 , which consisted of a net loss of$13.6 million partially offset primarily by non-cash interest, stock-based compensation, depreciation, amortization related to intangible assets, revaluation of convertible notes and loss on notes extinguishment, totaling approximately$10.6 million in the aggregate. The net change in our net operating assets and liabilities associated with fluctuations in our operating activities resulted in a cash use of approximately$0.4 million . The year on year change in operating assets and liabilities was primarily attributable to a decrease in accounts payable and accrued expenses, largely in connection with the payment of legal expenses, and by an increase in our prepaid expenses.
Net cash used in investing activities
Net cash used by investing activities for the year ended
Net cash used by investing activities for the year ended
Net cash provided by financing activities
Net cash provided by financing activities was$11.5 million for the year endedSeptember 30, 2021 , which consisted primarily of net proceeds received upon the issuance of the 2021 Private Placement in the amount of$11.3 million in the aggregate. There were also exercises of stock options and warrants during the year endedSeptember 30, 2021 resulting in additional cash proceeds of$0.3 million , offset in part by deferred offering costs of$49,000 . Net cash provided by financing activities was$7.3 million for the year endedSeptember 30, 2020 , which consisted primarily of net proceeds received upon the issuance of the 2020 and 2019 Paulson Notes and the common stock offerings totaling$7.2 million in the aggregate, and$0.1 million in proceeds received from the Paycheck Protection Program.
Critical Accounting Policies and Significant Judgments and Estimates
Critical Accounting Policies Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America , or GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of revenue and expenses during the reporting periods. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances at the time such estimates are made. Actual results may differ materially from our estimates and judgments under different assumptions or conditions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in our financial statements prospectively from the date of the change in estimate. While our significant accounting policies are more fully described in the notes to our financial statements appearing elsewhere in this Report, we believe the following are the critical accounting policies used in the preparation of our financial statements that require significant estimates and judgments. 73 Product Revenue
Revenues from product sales are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. At the inception of each contract, performance obligations are identified and the total transaction price is allocated to the performance obligations.
Cost of Product Revenue Cost of product revenue consists of the manufacturing and materials costs incurred by our third-party contract manufacturer in connection with our strip and grid cortical electrodes (the "Strip/Grid Products") and outside supplier materials costs in connection with the Electrode Cable Assembly Products. In addition, cost of product revenue includes royalty fees incurred in connection with our license agreements. Collaborations Revenue In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under our agreements, we perform the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) we satisfy each performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Account Standards Codification ("ASC") Topic 606. Performance obligations may include license rights, development services, and services associated with regulatory submission and approval processes. Significant management judgment is required to determine the level of effort required under an arrangement and the period over which we expect to complete our performance obligations under the arrangement. If we cannot reasonably estimate when our performance obligations are either completed or become inconsequential, then revenue recognition is deferred until we can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method. As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. We use key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. We allocate the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised goods or service underlying each performance obligation. Licenses of intellectual property: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer, and the customer can use and benefit from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. Milestone payments: At the inception of each arrangement that includes milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone (such as a regulatory submission) is included in the transaction price. Milestone payments that are not within our control, such as approvals from regulators, are not considered probable of being achieved until those approvals are received. When our assessment of probability of achievement changes and variable consideration becomes probable, any additional estimated consideration is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised goods or service underlying each performance obligation and recorded in license, collaboration, and other revenues based upon when the customer obtains control of each element. 74 Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Fair Value of Financial Instruments
We account for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring or nonrecurring basis adhering to theFinancial Accounting Standards Board ("FASB") fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
? Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets
or liabilities accessible to the Company at the measurement date.
? Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are
observable for the asset or liability, either directly or indirectly, for
substantially the full term of the asset or liability.
? Level 3 Inputs: Unobservable inputs for the asset or liability used to measure
fair value to the extent that observable inputs are not available, thereby
allowing for situations in which there is little, if any, market activity for
the asset or liability at measurement date. As ofSeptember 30, 2021 and 2020, the fair values of cash, accounts receivable, inventory, prepaid, other assets, accounts payable and accrued expenses approximated their carrying values because of the short-term nature of these assets or liabilities. We elected to account for the convertible notes while they were outstanding on a fair value basis under ASC 825 to comprehensively value and streamline the accounting for the embedded conversion options. The fair value of these convertible notes were based on both the fair value of our common stock, discount associated with the embedded redemption features, and cash flow models discounted at current implied market rates evidenced in recent arms-length transactions representing expected returns by market participants for similar instruments and are based on Level 3 inputs.
Recent Accounting Pronouncements
See "Note 3 - Summary of Significant Accounting Policies" included in "Item 8 - Financial Statements and Supplementary Data" in this Report regarding the impact of certain recent accounting pronouncements on our financial statements.
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