| Summary of Significant Accounting Policies | NOTE 3 – Summary of Significant Accounting Policies Management’s Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash. The Company’s cash is held by one financial institution in the United States. Amounts on deposit may at times exceed federally insured limits. Management believes that the financial institution is financially sound, and accordingly, minimal credit risk exists with respect to the financial institution. As of September 30, 2017, the Company did not have deposits in excess of federally insured amounts. Prior to October 27, 2016, the LLC did not maintain a bank account. Any expenses incurred while the LLC was organized as a limited liability company were paid by the sole member of the LLC. Fair Value of Financial Instruments The Company’s accounting for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the condensed consolidated financial statements on a recurring or nonrecurring basis adheres to the Financial Accounting Standards Board (FASB) 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 of September 30, 2017 and December 31, 2016, the fair values of cash, other assets, accrued expenses and the unsecured loan approximated their carrying values because of the short-term nature of these assets or liabilities. The estimated fair value of the short-term promissory notes and the convertible promissory notes of the Company was based on amortized cost which was deemed to approximate fair value. The fair value of the warrant liability and premium conversion derivative associated with the convertible promissory notes was based on cash flow models discounted at current implied market rates evidenced in recent arms-length transactions representing expected returns by market participants for similar instruments which were based on Level 3 inputs. There were no transfers between fair value hierarchy levels during the three and nine month periods ended September 30, 2017. The fair value of financial instruments measured on a recurring basis is as follows: As of September 30, 2017 Description Total Level 1 Level 2 Level 3 Liabilities: Warrant liability $ 774,172 $ — $ — $ 774,172 Premium conversion derivative 441,823 — — 441,823 Total liabilities at fair value $ 1,215,995 $ — $ — $ 1,215,995 As of December 31, 2016 Description Total Level 1 Level 2 Level 3 Liabilities: Warrant liability $ 345,960 $ — $ — $ 345,960 Premium conversion derivative 137,650 — — 137,650 Total liabilities at fair value $ 483,610 $ — $ — $ 483,610 The following table provides a roll-forward of the warrant liability and premium conversion derivative measured at fair value on a recurring basis using unobservable level 3 inputs for the nine months ended
September 30, 2017: Warrant liability Nine months ended Balance as of beginning of period $ 345,960 Issuance of warrants in connection with convertible promissory notes 440,919 Change in fair value of warrant liability (12,707 ) Balance as of end of period $ 774,172 Premium conversion derivative Nine months ended Balance as of beginning of period $ 137,650 Value assigned to the underlying derivative in connection with convertible notes 213,961 Change in fair value of premium conversion derivative 90,212 Balance as of end of period $ 441,823 There
were no financial instruments measured on a fair value recurring basis during the nine month period ended September 30, 2016. Intellectual Property NeuroOne and the LLC have entered into two licensing agreements with major research institutions, which allows for access to certain patented technology and know-how. Milestone payments under those agreements are capitalized and amortized to general and administrative expense over the expected useful life of the acquired technology. Impairment of Long-Lived Assets The Company evaluates their long-lived assets, which consists entirely of licensed intellectual property for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. The Company assesses the recoverability of long-lived assets by determining whether or not the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Through September 30, 2017, the Company has not impaired any long-lived assets. Debt Issuance Costs Debt issuance costs are recorded as a reduction of the short-term promissory notes and convertible promissory notes. Amortization of debt issuance costs is calculated using the straight-line method over the term of respective short-term and convertible promissory notes, which approximates the effective interest method, and is recorded in interest expense in the accompanying condensed consolidated statements of operations. Research and Development Costs Research and development costs are charged to expense as incurred. Research and development expenses may comprise costs incurred in performing research and development activities, including clinical trial costs, manufacturing costs for both clinical and pre-clinical materials as well as other contracted services, license fees, and other external costs. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity is performed or when the goods have been received, rather than when payment is made, in accordance with ASC 730, Research and Development Warrant Liability The Company issued warrants to purchase equity securities in connection with the issuance of the convertible promissory notes (see Note 8 – Convertible Promissory Notes and Warrant Agreements). The Company accounts for these warrants as a liability at fair value as the number of shares were not fixed and determinable at the issuance date. Additionally, issuance costs associated with the warrants are expensed as incurred and reflected as interest expense in the accompanying condensed consolidated statements of operations. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrant, or until such time, if any, as the number of shares to be exercised becomes fixed, at which point the warrants will be classified in stockholders’ (deficit) equity provided that there are sufficient authorized and unissued shares of common stock to settle the warrants and redeem any other contracts that may require settlement in shares of common stock. Any future change in fair value of the warrant liability will be recognized as a component of interest expense in the condensed consolidated statements of operations. Premium Debt Conversion Derivative The Company evaluates all conversion and redemption features contained in a debt instrument to determine if there are any embedded derivatives that require separation from the host debt instrument. An embedded derivative that requires separation is bifurcated from its host debt instrument and a corresponding discount to the host debt instrument is recorded. The discount is amortized and recorded to interest expense over the term of the host debt instrument using the straight-line method which approximates the effective interest method. The separated embedded derivative is accounted for separately on a fair market value basis. The Company records the fair value changes of a separated embedded derivative to interest expense at each reporting period. The Company issued convertible promissory notes that contained a 125% conversion premium in the event that a qualified financing occurs at a price under $2.25 per common share (see Note 8 – Convertible Promissory Notes and Warrant Agreements). We also issued 2017 Convertible Notes that contained a 125% conversion premium in the event that a qualified financing occurs at a price under $2.8125 per common share (see Note 13 – Subsequent Events). The Company determined that the redemption feature under the convertible promissory notes qualified as an embedded derivative and was separated from its debt host. Income Taxes For NeuroOne, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion of all of the deferred tax asset will not be realized. The LLC operated as a single-member LLC from formation on December 12, 2013 until it was merged into NeuroOne on October 27, 2016. As such, it was a disregarded legal entity for income tax purposes. Accordingly, no provision for income taxes was included in the financial statements for the period from January 1, 2016 through October 26, 2016. Net Loss Per Share The LLC was a single-member LLC for which no units were outstanding. Accordingly, earnings per share is not presented for the LLC. For NeuroOne, basic loss per share of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings or loss per share of common stock is computed similarly to basic earnings or loss per share except the weighted average shares outstanding are increased to include additional shares from the assumed exercise of any common stock equivalents, if dilutive. The Company’s stock options, convertible promissory notes and warrants are considered common stock equivalents for this purpose. Diluted earnings is computed utilizing the treasury method for the stock options and warrants. Diluted earnings with respect to the convertible promissory notes utilizing the if-converted method was not applicable during the three and nine months ended September 30, 2017 as no conditions required for conversion had occurred during these periods. No incremental common stock equivalents were included in calculating diluted loss per share because such inclusion would be anti-dilutive given the net loss reported for the three and nine months ended September 30, 2017. The following potential common shares were not considered in the computation of diluted net loss per share as their effect would have been anti-dilutive for the three and nine month periods ended September 30, 2017: Warrants 1,074,181 Stock options 365,716 Recent Accounting Pronouncements In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2016-09) In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity and Derivatives and Hedging |
