Attached files

file filename
EX-32.2 - EX-32.2 - HELIUS MEDICAL TECHNOLOGIES, INC.hsdt-ex322_13.htm
EX-32.1 - EX-32.1 - HELIUS MEDICAL TECHNOLOGIES, INC.hsdt-ex321_14.htm
EX-31.2 - EX-31.2 - HELIUS MEDICAL TECHNOLOGIES, INC.hsdt-ex312_6.htm
EX-31.1 - EX-31.1 - HELIUS MEDICAL TECHNOLOGIES, INC.hsdt-ex311_9.htm
EX-10.4 - EX-10.4 - HELIUS MEDICAL TECHNOLOGIES, INC.hsdt-ex104_19.htm
EX-10.3 - EX-10.3 - HELIUS MEDICAL TECHNOLOGIES, INC.hsdt-ex103_18.htm
EX-10.2 - EX-10.2 - HELIUS MEDICAL TECHNOLOGIES, INC.hsdt-ex102_17.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period to

Commission File No. 001-38445

 

HELIUS MEDICAL TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

36-4787690

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

642 Newtown Yardley Road Suite 100

Newtown, Pennsylvania, 18940

(Address of principal executive office) (Zip Code)

(215) 944-6100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

Outstanding as of November 6, 2018

Class A Common Stock

23,383,246

 

 

 

 


 

HELIUS MEDICAL TECHNOLOGIES, INC.
INDEX

 

Part I.

Financial Information

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

3

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended
September 30, 2018 and 2017

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the nine months ended September 30, 2018

5

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

6

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

Part II.

Other Information

29

 

 

 

Item 1.

Legal Proceedings

29

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 3.

Defaults Upon Senior Securities

29

 

 

 

Item 4.

Mine Safety Disclosures

30

 

 

 

Item 5.

Other Information

30

 

 

 

Item 6.

Exhibits

31

 

 

 

Signatures

32

2


 

Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Balance Sheets

(Except for share data, amounts in thousands)

 

 

 

September 30, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash

 

$

12,397

 

 

$

5,562

 

Receivables

 

 

41

 

 

 

704

 

Inventory

 

 

197

 

 

 

 

Prepaid expenses

 

 

100

 

 

 

352

 

Total current assets

 

 

12,735

 

 

 

6,618

 

Property and equipment, net

 

 

558

 

 

 

173

 

Other assets

 

 

18

 

 

 

18

 

TOTAL ASSETS

 

$

13,311

 

 

$

6,809

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,186

 

 

$

3,479

 

Accrued liabilities

 

 

1,304

 

 

 

1,242

 

Derivative financial instruments

 

 

14,278

 

 

 

9,578

 

Total current liabilities

 

 

17,768

 

 

 

14,299

 

TOTAL LIABILITIES

 

 

17,768

 

 

 

14,299

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized as of September 30, 2018; no preferred stock authorized as of December 31, 2017

 

 

 

 

 

 

Class A common stock, $0.001 par value; 150,000,000 shares authorized; 23,378,246 shares issued and outstanding as of September 30, 2018

 

 

23

 

 

 

 

Class A common stock, no par value; unlimited shares authorized; 20,178,226 shares issued and outstanding as of December 31, 2017

 

 

 

 

 

52,230

 

Additional paid-in capital

 

 

86,280

 

 

 

6,602

 

Accumulated other comprehensive (loss) income

 

 

(883

)

 

 

47

 

Accumulated deficit

 

 

(89,877

)

 

 

(66,369

)

TOTAL STOCKHOLDERS’ DEFICIT

 

 

(4,457

)

 

 

(7,490

)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$

13,311

 

 

$

6,809

 

 

(The accompanying notes are an integral part of the condensed consolidated financial statements.)

3


 

Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

(Amounts in thousands except shares and per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

2,309

 

 

$

3,798

 

 

$

7,781

 

 

$

11,121

 

General and administrative

 

 

2,581

 

 

 

2,172

 

 

 

13,632

 

 

 

5,862

 

Total operating expenses

 

 

4,890

 

 

 

5,970

 

 

 

21,413

 

 

 

16,983

 

Operating loss

 

 

(4,890

)

 

 

(5,970

)

 

 

(21,413

)

 

 

(16,983

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

4

 

 

 

 

 

 

63

 

 

 

 

Change in fair value of derivative financial instruments

 

 

368

 

 

 

(5,960

)

 

 

(3,356

)

 

 

(5,452

)

Foreign exchange gain (loss)

 

 

1

 

 

 

(1,008

)

 

 

1,198

 

 

 

(1,860

)

Total other income (expense)

 

 

373

 

 

 

(6,968

)

 

 

(2,095

)

 

 

(7,312

)

Net loss

 

 

(4,517

)

 

 

(12,938

)

 

 

(23,508

)

 

 

(24,295

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(96

)

 

 

1,266

 

 

 

(930

)

 

 

1,916

 

Comprehensive loss

 

$

(4,613

)

 

$

(11,672

)

 

$

(24,438

)

 

$

(22,379

)

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.19

)

 

$

(0.67

)

 

$

(1.06

)

 

$

(1.32

)

Diluted

 

$

(0.19

)

 

$

(0.67

)

 

$

(1.06

)

 

$

(1.32

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

23,377,941

 

 

 

19,225,057

 

 

 

22,221,667

 

 

 

18,368,973

 

Diluted

 

 

23,845,498

 

 

 

19,225,057

 

 

 

22,221,667

 

 

 

18,368,973

 

 

(The accompanying notes are an integral part of the condensed consolidated financial statements.)

4


 

Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Statement of Stockholders’ Deficit

(Except shares data, amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock, $0.001 par value

 

 

Common Stock, no par value

 

 

Additional Paid-In

 

 

Accumulated Other Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Total

 

Balance as of December 31, 2017

 

 

 

 

 

 

 

 

20,178,226

 

 

$

52,230

 

 

$

6,602

 

 

$

47

 

 

$

(66,369

)

 

$

(7,490

)

Proceeds from the issuance of common stock and accompanying warrants from April 2018 public offering

 

 

 

 

 

 

 

 

2,463,185

 

 

 

18,400

 

 

 

 

 

 

 

 

 

 

 

 

18,400

 

Fair value of liability-classified warrants issued in connection with April 2018 Offering

 

 

 

 

 

 

 

 

 

 

 

(7,372

)

 

 

 

 

 

 

 

 

 

 

 

(7,372

)

Share issuance costs

 

 

 

 

 

 

 

 

 

 

 

(1,273

)

 

 

 

 

 

 

 

 

 

 

 

(1,273

)

Proceeds from the exercise of stock options and warrants

 

 

 

 

 

 

 

 

 

 

736,130

 

 

 

4,637

 

 

 

 

 

 

 

 

 

 

 

 

4,637

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,047

 

 

 

 

 

 

 

 

 

1,047

 

Reclassification of liability-classified warrants upon exercise

 

 

 

 

 

 

 

 

 

 

 

3,748

 

 

 

 

 

 

 

 

 

 

 

 

3,748

 

Settlement of vested restricted stock units, net of taxes

 

 

 

 

 

 

 

 

705

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

(2

)

Reclassification of exercised compensation options and warrants from additional paid-in capital

 

 

 

 

 

 

 

 

 

 

 

110

 

 

 

(110

)

 

 

 

 

 

 

 

 

 

Reclassification of April 2016 compensation options and warrants from additional paid-in capital to derivative financial instruments due to change in functional currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,586

)

 

 

 

 

 

 

 

 

(1,586

)

Reclassification of USD denominated warrants from derivative financial instruments to additional paid-in capital due to change in functional currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,478

 

 

 

 

 

 

 

 

 

2,478

 

Reclassification of equity-classified stock options to stock-based compensation liability due to change in functional currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,182

)

 

 

 

 

 

 

 

 

(4,182

)

Reclassification from stock-based compensation liability to common stock as a result of exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

32

 

Reclassification of non-employee options recorded as derivative financial instruments due to modification of options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,206

 

 

 

 

 

 

 

 

 

1,206

 

Reclassification of stock-based compensation due to modification of options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,338

 

 

 

 

 

 

 

 

 

10,338

 

Reclassification upon change in corporate domicile

 

 

23,378,246

 

 

 

23

 

 

 

(23,378,246

)

 

 

(70,512

)

 

 

70,489

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,508

)

 

 

(23,508

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(930

)

 

 

 

 

 

(930

)

Balance as of September 30, 2018

 

 

23,378,246

 

 

$

23

 

 

 

 

 

$

-

 

 

$

86,280

 

 

$

(883

)

 

$

(89,877

)

 

$

(4,457

)

 

(The accompanying notes are an integral part of the condensed consolidated financial statements.)

5


 

Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(23,508

)

 

$

(24,295

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Change in fair value of derivative financial instruments

 

 

3,356

 

 

 

5,452

 

Stock-based compensation expense

 

 

7,245

 

 

 

1,464

 

Unrealized foreign exchange loss (gain)

 

 

(1,262

)

 

 

1,758

 

Depreciation expense

 

 

40

 

 

 

7

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

663

 

 

 

(530

)

Inventory

 

 

(197

)

 

 

 

Prepaid expenses

 

 

252

 

 

 

366

 

Other assets

 

 

 

 

 

(18

)

Accounts payable

 

 

(1,274

)

 

 

1,471

 

Accrued liabilities

 

 

209

 

 

 

86

 

Net cash used in operating activities

 

 

(14,476

)

 

 

(14,239

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(425

)

 

 

(181

)

Net cash used in investing activities

 

 

(425

)

 

 

(181

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from the issuance of common stock and accompanying warrants

 

 

18,400

 

 

 

14,547

 

Share issuance costs

 

 

(1,345

)

 

 

(1,248

)

Proceeds from the exercise of stock options and warrants

 

 

4,637

 

 

 

911

 

Net cash provided by financing activities

 

 

21,692

 

 

 

14,210

 

Effect of foreign exchange rate changes on cash

 

 

44

 

 

 

158

 

Net increase (decrease) in cash

 

 

6,835

 

 

 

(52

)

Cash at beginning of period

 

 

5,562

 

 

 

2,669

 

Cash at end of period

 

$

12,397

 

 

$

2,617

 

 

(The accompanying notes are an integral part of the condensed consolidated financial statements.)

6


 

Helius Medical Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1.    DESCRIPTION OF BUSINESS

Helius Medical Technologies, Inc. (the “Company”) is a neurotech company focused on neurological wellness. The Company’s purpose is to develop, license and acquire unique and non-invasive platform technologies that amplify the brain’s ability to heal itself.

The Company’s first product in development, known as the portable neuromodulation stimulator or PoNS®, is an investigational, non-invasive, medical device currently under review by the U.S. Food and Drug Administration (“FDA”) for clearance to improve balance in patients following a mild-to-moderate traumatic brain injury (mTBI) when combined with targeted physical therapy. The PoNS Treatment is the first and only tongue-delivered neuromodulation that combines stimulation of cranial nerves with physical and cognitive therapy to restore lost neurological function. 

 

During the third quarter of 2018, the Company submitted a request with the U.S. Food and Drug Administration (“FDA”) for de novo classification and 510(k) clearance of the PoNS device. In addition, during the third quarter of 2018, the Company also submitted an application for a Class II medical device license to Health Canada to market the PoNS device. In October 2018, the Company received a medical device license from Health Canada which authorizes the Company to market the PoNS device as a Class II medical device in Canada.

 

The Company was incorporated in British Columbia, Canada, on March 13, 2014. On May 28, 2014, the Company completed a continuation via a plan of arrangement whereby the Company moved from being a corporation governed by the British Columbia Corporations Act to a corporation governed by the Wyoming Business Corporations Act. On July 20, 2018, the Company completed its reincorporation from Wyoming to the state of Delaware. The Company is based in Newtown, Pennsylvania.

The Company has two wholly-owned subsidiaries, Neurohabilitation Corporation (“NHC”) and Helius Medical Technologies (Canada), Inc. (“Helius Canada”).

The Company’s Class A common stock (“common stock”) is listed on the Nasdaq Capital Market (“Nasdaq”) and the Toronto Stock Exchange (the “TSX”). The common stock began trading on the Canadian Securities Exchange on June 23, 2014, under the ticker symbol “HSM” and the trading was subsequently transferred to the TSX on April 18, 2016. On April 11, 2018, the common stock began trading on Nasdaq under the ticker symbol “HSDT” after having been traded on the OTCQB in the United States (“U.S.”) under the ticker symbol “HSDT” since February 10, 2015.

Reverse Stock Split

Effective after the close of business on January 22, 2018, the Company completed a 1-for-5 reverse stock split of its Class A Common Stock. All share and per share amounts in this Quarterly Report have been reflected on a post-split basis.

Going Concern

The Company has never generated any product revenues or achieved profitable operations. As of September 30, 2018, the Company’s cash was approximately $12.4 million. The Company expects to continue to incur operating losses and net cash outflows until such time as it generates a level of revenue to support its cost structure. There is no assurance that the Company will achieve profitable operations, and, if achieved, whether it will be sustained on a continued basis. These factors raise substantial doubt about the Company’s ability to continue as a going concern.  The Company’s condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business.

 

The Company intends to fund ongoing activities by utilizing its current cash on hand and by raising additional capital through equity or debt financings. There can be no assurance that the Company will be successful in raising that additional capital or that such capital, if available, will be on terms that are acceptable to the Company. If the Company is unable to raise sufficient additional capital, the Company may be compelled to reduce the scope of its operations and planned capital expenditures.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s reporting currency is the U.S. Dollar (USD$”).

Use of Estimates

The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and disclosure of contingent assets and liabilities. Significant estimates include the assumptions used in the fair value pricing model for stock-based compensation, derivative financial instruments

7


 

and deferred income tax asset valuation allowance. Financial statements include estimates which, by their nature, are uncertain. Actual outcomes could differ from these estimates.

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements reflect the operations of Helius Medical Technologies, Inc. and its wholly-owned subsidiaries. The usual condition for a controlling financial interest is ownership of a majority of the voting interests of an entity. However, a controlling financial interest may also exist through arrangements that do not involve controlling voting interests. As such, the Company applies the guidance of ASC 810, Consolidations, to determine when an entity that is insufficiently capitalized or not controlled through its voting interests, referred to as a variable interest entity should be consolidated. All intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to current period presentation.

Concentrations of Credit Risk

The Company is subject to credit risk with respect to its cash. Amounts invested in such instruments are limited by credit rating, maturity, industry group, investment type and issuer. The Company is not currently exposed to any significant concentrations of credit risk from these financial instruments. The Company seeks to maintain safety and preservation of principal and diversification of risk, liquidity of investments sufficient to meet cash flow requirements and a competitive after-tax rate of return.

Receivables

Receivables are stated at their net realizable value. As of September 30, 2018 and December 31, 2017, receivables consisted primarily of Goods and Services Tax (“GST”) and Quebec Sales Tax (‘QST”) refunds related to the Company’s expenditures.

 

Inventory

The Company’s inventory consists or raw materials, primarily related to component parts for the initial launch build of the PoNS device. Inventory is stated at the lower of cost (average cost method) or net realizable value. Adjustments to reduce the cost of inventory to its net realizable value are made if required. No inventory write-offs were recorded during the nine months ended September 30, 2018. As of September 30, 2018, the carrying value of inventory was approximately $0.2 million.

Property and Equipment

Property and equipment are carried at cost, less accumulated depreciation. Depreciation is recognized using the straight-line method over the useful lives of the related asset or the term of the related lease. Expenditures for maintenance and repairs, which do not improve or extend the expected useful life of the assets, are expensed to operations while major repairs are capitalized. The Company’s property and equipment is comprised of leasehold improvements, furniture and fixtures, and software. The estimated useful life of its leasehold improvement is over the term of its lease of 5 years, the estimated useful life for the Company’s furniture and fixtures is 7 years, equipment has an estimated useful life of 15 years, while computer software and hardware has an estimated useful life of 3 to 5 years.

The following tables summarizes the Company’s property and equipment as of September 30, 2018 and December 31, 2017 (amounts in thousands).

 

 

As of

 

 

As of

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Leasehold improvement

 

$

182

 

 

$

173

 

Furniture and fixtures

 

 

170

 

 

 

 

Equipment

 

 

219

 

 

 

 

Computer software and hardware

 

 

44

 

 

 

17

 

Property and equipment

 

 

615

 

 

 

190

 

Less accumulated depreciation

 

 

(57

)

 

 

(17

)

Property and equipment, net

 

$

558

 

 

$

173

 

 

Foreign Currency

 

Prior to April 1, 2018, the Company's functional currency was the Canadian dollar (“CAD$”). Translation gains and losses from the application of the USD$ as the reporting currency during the period that the Canadian dollar was the functional currency were included as part of cumulative currency translation adjustment, which is reported as a component of stockholders' deficit as accumulated other comprehensive income (loss).

 

The Company re-assessed its functional currency and determined that as of April 1, 2018, its functional currency had changed from the CAD$ to the USD$ based on management's analysis of changes in the primary economic environment in which the Company operates. The change in

8


 

functional currency was accounted for prospectively from April 1, 2018 and financial statements prior to and including the period ended March 31, 2018 have not been restated for the change in functional currency.

 

For periods commencing April 1, 2018, monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates in effect at the balance sheet date. Opening balances related to non-monetary assets and liabilities are based on prior period translated amounts, and non-monetary assets acquired, and non-monetary liabilities incurred after April 1, 2018 are translated at the approximate exchange rate prevailing at the date of the transaction. Revenue and expense transactions are translated at the approximate exchange rate in effect at the time of the transaction. Foreign exchange gains and losses are included in the condensed consolidated statement of operations and comprehensive loss as foreign exchange gain (loss).

 

The functional currency of Helius Canada, the Company’s Canadian subsidiary is the CAD$ and the functional currency of NHC is the U.S. dollar USD$. Transactions in foreign currencies are recorded into the functional currency of the relevant subsidiary at the exchange rate in effect at the date of the transaction. Any monetary assets and liabilities arising from these transactions are translated into the functional currency at exchange rates in effect at the balance sheet date or on settlement. Revenues, expenses and cash flows are translated at the weighted-average rates of exchanges for the reporting period. The resulting currency translation adjustments are not included in the Company’s condensed consolidated statements of operations for the reporting period, but rather are accumulated and gains and losses are recorded in foreign exchange gain (loss) within the condensed consolidated statements of operations and comprehensive loss.

Stock-Based Compensation

The Company accounts for all stock-based payments and awards under the fair value-based method. The Company recognizes its stock-based compensation expense using the straight-line method.

The Company accounts for the granting of stock options to employees and non-employees using the fair value method whereby all awards to are measured at fair value on the date of the grant. The fair value of all employee-related stock options is expensed over the requisite service period with a corresponding increase to additional paid-in capital. Upon exercise of stock options, the consideration paid by the option holder, together with the amount previously recognized in additional paid-in capital is recorded as an increase to common stock. Stock options granted to employees are accounted for as liabilities when they contain conditions or other features that are indexed to other than a market, performance or service conditions.

Prior to the adoption of ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), stock-based payment to non-employees were measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever was more reliably measurable, and the fair value of stock-based payments to non-employees was re-measured at the end of each reporting period until the counterparty performance was completed, with any change therein recognized over the vesting period of the award and in the same manner as if the Company had paid cash instead of paying with or using equity-based instruments. The fair value of the stock-based payments to non-employees that were fully vested and non-forfeitable as of the grant date were measured and recognized at that date. Following the adoption of ASU 2018-07 during the third quarter of 2018, stock-based payments to non-employees are now being measured based on the fair value of the equity instrument issued. Compensation expense for non-employee stock awards are recognized over the requisite service period following the measurement of the fair value on the grant date over the vesting period of the award.

The Company uses the Black-Scholes option pricing model to calculate the fair value of stock options. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected term of the option, risk-free interest rates, the value of the common stock and expected dividend yield of the common stock. Changes in these assumptions can materially affect the fair value estimate.

As a result of the change in the Company’s functional currency effective April 1, 2018, awards of options that provide for an exercise price that is not denominated in: (a) the currency of a market in which a substantial portion of the Company's equity securities trades, (b) the currency in which the employee's pay is denominated, or (c) the Company's functional currency, are required to be classified as liabilities.  The change in the Company’s functional currency resulted in the reclassification of these awards from equity to liability-classified options. Liability classified options are re-measured to their fair values at the end of each reporting date with changes in the fair value recognized in stock-based compensation expense or additional paid-in capital until settlement or cancellation. Under ASC 718, when an award is reclassified from equity to liability, if at the reclassification date the original vesting conditions are expected to be satisfied, then the minimum amount of compensation cost to be recognized is based on the grant date fair value of the original award. Fair value changes below this minimum amount are recorded in additional paid-in capital. In June 2018, the Company’s Board of Directors approved subject to the consent of the holders of such options the modification of outstanding stock options with exercise prices denominated in CAD$ to convert the exercise prices of such options to USD$ based on the prevailing USD$/CAD$ exchange rates on the dates of the grants for such modified stock options. During the third quarter of 2018, employee and non-employee option holders owning stock options representing an aggregate of 2,741,146 shares of common stock consented to the modification. Employee stock options with a fair value of $10.3 million on August 8, 2018, which were previously classified as stock-based compensation liability, were reclassified to equity during the third quarter of 2018.

 

Income Taxes

The Company accounts for income taxes using the asset and liability method. The asset and liability method provide that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets

9


 

and liabilities, and for operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

The Company has adopted the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 Income Taxes regarding accounting for uncertainty in income taxes. The Company initially recognizes tax positions in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of the tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Application requires numerous estimates based on available information. The Company considers many factors when evaluating and estimating its tax positions and tax benefits. These periodic adjustments may have a material impact on the consolidated statements of operations and comprehensive loss. When applicable, the Company classifies penalties and interest associated with uncertain tax positions as a component of income tax expense in its condensed consolidated statements of operations and comprehensive loss.

Research and Development Expenses

Research and development (“R&D”) expenses consist primarily of personnel costs, including salaries, benefits and stock-based compensation, clinical studies performed by contract research organizations, development and manufacturing of clinical trial devices and devices for manufacturing testing and materials and supplies. R&D costs are charged to operations when they are incurred.

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company operates and manages its business within one operating and reportable segment. Accordingly, the Company reports the accompanying consolidated financial statements in the aggregate in one reportable segment.

Derivative Financial Instruments

The Company evaluates its financial instruments and other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815, Derivatives and Hedging. The result of this accounting treatment is that the fair value of the derivative is re-measured at each balance sheet date and recorded as a liability or asset and the change in fair value is recorded in the condensed consolidated statements of operations and comprehensive loss. As of September 30, 2018 and December 31, 2017, the Company’s derivative financial instruments were comprised of warrants issued in connection with both public and/or private securities offerings and certain non-employee stock options. During the third quarter of 2018, these non-employee stock options were classified to equity following the modification of these stock options. Upon settlement of a derivative financial instrument, the instrument is re-measured at the settlement date and the fair value of the underlying instrument is reclassified to equity.

The classification of derivative financial instruments, including whether such instruments should be recorded as liabilities/assets or as equity, is reassessed at the end of each reporting period. Derivative financial instruments that become subject to reclassification are reclassified at the fair value of the instrument on the reclassification date. Derivative financial instruments will be classified in the condensed consolidated balance sheet as current if the right to exercise or settle the derivative financial instrument lies with the holder.

 

Fair Value Measurements

 

The Company accounts for financial instruments in accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 establishes a 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 unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The Company’s financial instruments recorded in its condensed consolidated balance sheets consist primarily of cash, receivables, accounts payable, accrued liabilities and derivative financial instruments. The book values of these instruments, with the exception of derivative financial instruments approximate their fair values due to the immediate or short-term nature of these instruments.

10


 

The Company’s derivative financial instruments are classified as Level 3 within the fair value hierarchy and are required to be recorded at fair value on a recurring basis. Unobservable inputs used in the valuation of these financial instruments include volatility of the underlying share price and the expected term. See Note 3 for the inputs used in the Black-Scholes option-pricing model as of September 30, 2018 and 2017 and the roll forward of the derivative financial instruments related to the Company’s warrants. See Note 4 for the inputs used in the Black-Scholes option-pricing model during the third quarter of 2018 for the roll forward of the derivative financial instruments related to the non-employee stock options.

 

The following table summarizes the Company’s derivative financial instruments and stock-based compensation liability within the fair value hierarchy as of September 30, 2018 and December 31, 2017 (amounts in thousands):

 

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

$

14,278

 

 

 

 

 

 

 

 

$

14,278

 

Derivative financial instruments

 

$

14,278

 

 

 

 

 

 

 

 

$

14,278

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-employee stock options

 

$

2,637

 

 

 

 

 

 

 

 

$

2,637

 

Warrants

 

 

6,941

 

 

 

 

 

 

 

 

 

6,941

 

Derivative financial instruments

 

$

9,578

 

 

 

 

 

 

 

 

$

9,578

 

There were no transfers between any levels for any of the periods presented.

Basic and Diluted Income (Loss) per Share

Earnings or loss per share (“EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) by the weighted average of all potentially dilutive shares of common stock that were outstanding during the periods presented.

The treasury stock method is used in calculating diluted EPS for potentially dilutive stock options and warrants, which assumes that any proceeds received from the exercise of in-the-money stock options and warrants, would be used to purchase common shares at the average market price for the period.

The basic and diluted loss per share for the periods noted below is as follows (amounts in thousands except shares and per share data):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(4,517

)

 

$

(12,938

)

 

$

(23,508

)

 

$

(24,295

)

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

23,377,941

 

 

 

19,225,057

 

 

 

22,221,667

 

 

 

18,368,973

 

Basic net loss per share

 

$

(0.19

)

 

$

(0.67

)

 

$

(1.06

)

 

$

(1.32

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss, basic

 

$

(4,517

)

 

$

(12,938

)

 

$

(23,508

)

 

$

(24,295

)

Effect of dilutive securities: warrants

 

 

(93

)

 

 

-

 

 

 

-

 

 

 

-

 

Net loss, diluted

 

$

(4,610

)

 

$

(12,938

)

 

$

(23,508

)

 

$

(24,295

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

23,377,941

 

 

 

19,225,057

 

 

 

22,221,667

 

 

 

18,368,973

 

Potential common share issuances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incremental dilutive shares from equity instruments (treasury stock method)

 

 

467,557

 

 

 

-

 

 

 

-

 

 

 

-

 

Weighted average common shares outstanding

 

 

23,845,498

 

 

 

19,225,057

 

 

 

22,221,667

 

 

 

18,368,973

 

Diluted net loss per share

 

$

(0.19

)

 

$

(0.67

)

 

$

(1.06

)

 

$

(1.32

)

 

11


 

For the three months ended September 30, 2018 a total of 3,133,552 stock options, 651,320 warrants and 963 restricted stock units (“RSUs”) were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive. For the nine months ended September 30, 2018, a total of 3,133,552 stock options, 4,004,304 warrants and 963 RSUs were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2017 a total of 2,642,835 stock options, 1,975,677 warrants and 1,927 RSUs were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use, or ROU, model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statement of operations. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. In July 2018, the FASB issued ASU No. 2018-11, Leases: Targeted Improvements, which provides an optional transition method that allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is currently evaluating the potential impact of the standard on its condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). This standard expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The guidance specifies that Topic 718 will be applied to all share-based payment transactions in which a grantor acquires goods and services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. ASU 2018-07 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. During the third quarter of 2018, the Company early adopted the standard and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which adds disclosure requirements to Topic 820 for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. The Company is evaluating the effect that ASU 2018-13 will have on its condensed consolidated financial statements.

12


 

3.   STOCKHOLDERS’ DEFICIT

On June 28, 2018, at the Company’s 2018 Annual Meeting of Shareholders, the Company’s shareholders approved the Company’s reincorporation from the state of Wyoming to the state of Delaware. On July 20, 2018, the Company completed its reincorporation from Wyoming to the state of Delaware.

As a result, following the Company’s reincorporation in the state of Delaware, the Company’s authorized capital stock pursuant to its Delaware charter consists of 150,000,000 authorized shares of Class A common stock, at a par value per share of $0.001 and 10,000,000 authorized shares of preferred stock at a par value per share of $0.001. Holders of common stock are entitled to vote at any meeting of the Company’s stockholders on the basis of one vote per share of common stock owned as of the record date of such meeting. Each share of common stock entitles the holder to receive dividends, if any, as declared by the directors.

No dividends have been declared since inception of the Company through September 30, 2018. In the event of a liquidation, dissolution or winding-up of the Company, other distribution of assets of the Company among its stockholders for the purposes of winding-up its affairs or upon a reduction of capital, the stockholders shall, share equally, share for share, in the remaining assets and property of the Company.

On April 18, 2016, the Company closed its short form prospectus offering in Canada and a concurrent U.S. private placement (the “April 2016 Offering”) of units (the “Units”) with gross proceeds to the Company of $7.2 million through the issuance of Units at a price of CAD$5.00 per Unit.  Each Unit consisted of one Class A common share in the capital of the Company (a “Common Share’) and one half of one Common Share purchase warrant (each whole warrant, a “Warrant”).  Each warrant entitles the holder thereof to acquire one additional Common Share at an exercise price of CAD$7.50 per share on or before April 18, 2019. Mackie Research Capital Corporation (the “Agent”) acted as agent and sole book runner in connection with the April 2016 Offering.  The Company paid the Agent a cash commission of $0.3 million and granted the Agent compensation options exercisable to purchase 87,210 Units at an exercise price of CAD$5.00 per Unit for a period of 24 months from the closing of the April 2016 Offering.  The Company incurred other cash issuance costs of $1.1 million related to this offering. As of September 30, 2018, all remaining outstanding compensation options had been cancelled due to their expiration.

On May 2, 2016, the Company closed the sale of the additional units issued pursuant to the exercise of the over-allotment option granted to the Agent in connection with the April 2016 Offering.  The April 2016 Offering was made pursuant to a short form prospectus filed with the securities regulatory authorities in each of the provinces of Canada, except Québec. Pursuant to the exercise of the over-allotment option, the Company issued an additional 218,025 units at a price of CAD$5.00 per unit for additional gross proceeds to the Company of $0.9 million, bringing the total aggregate gross proceeds to the Company under the Offering to $8.1 million. Each over-allotment unit consisted of one Class A common share in the capital of the Company and one half of one Common Share purchase warrant. Each over-allotment warrant entitles the holder thereof to acquire one additional over-allotment Common Share at an exercise price of CAD$7.50 per share on or before April 18, 2019. In connection with the closing of the over-allotment option, the Company paid the Agent a cash commission of $0.1 million and granted to the Agent compensation options exercisable to purchase 13,081 over-allotment units at an exercise price of CAD$5.00 per unit for a period of 24 months from the closing of this Offering. As of September 30, 2018, all remaining outstanding compensation options had been cancelled due to their expiration.

The proceeds from the April 2016 Offering were allocated on a relative fair value basis between the common stock and the warrants issued. The warrants issued in connection with the April 2016 Offering were classified within equity in the Company’s condensed consolidated balance sheets. These warrants were recorded in additional paid-in capital in the Company’s condensed consolidated balance sheets at their fair value. As discussed in Note 1, due to the change in the Company’s functional currency, as of April 1, 2018, these warrants have been reclassified to liabilities as derivative financial instruments on the Company’s condensed consolidated balance sheet as they are now priced in a currency other than the Company’s functional currency.

As a result of the change in the Company’s functional currency effective April 1, 2018, warrants and compensation options having a fair value on grant date of approximately $1.4 million and $0.2 million, respectively, issued in connection with the April 2016 Offering were reclassified from additional paid-in capital to derivative financial instruments. As of September 30, 2018, there were 960,699 warrants outstanding related to the April 2016 offering with a fair value of $4.2 million, and no compensation options remained outstanding.

The following table summarizes the weighted average assumptions used in estimating the fair value of the warrants granted in the April 2016 Offering using the Black-Scholes option pricing model as of the grant date and as of April 1, 2018 and September 30, 2018:

 

 

 

September 30, 2018

 

 

April 1, 2018

 

 

Grant Date

 

Stock price

 

CAD $12.65

 

 

CAD $12.87

 

 

CAD $5.45

 

Exercise price

 

CAD $7.50

 

 

CAD $7.50

 

 

CAD $7.50

 

Warrant term

 

0.55 years

 

 

1.05 years

 

 

3.0 years

 

Expected volatility

 

 

70.43

%

 

 

71.13

%

 

 

83.83

%

Risk-free interest rate

 

 

1.74

%

 

 

1.60

%

 

 

0.60

%

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

 

On February 16, 2017, the Company completed an underwritten registered public offering and issued an aggregate of 1,311,000 shares of common stock for gross proceeds of $9.2 million. The Company incurred share issuance costs of $1.2 million in connection with this offering.

On June 28, 2017, the Company completed a non-brokered private placement of 800,000 shares of common stock for gross proceeds of $5.4 million. The Company incurred approximately $9 thousand in share issuance costs related to the private placement.

13


 

In December 2017, the Company completed a three-tranche non-brokered private placement (the “December 2017 financing”) of 646,016 units for gross proceeds of approximately $6.3 million. Each unit consisted of one share of common stock and one share purchase warrant, and was sold at a price of $9.80 per unit. Each warrant entitles the holder to acquire one additional share of common stock and is exercisable over a period of 36 months following the respective closing of the December 2017 financing at an exercise price of USD$12.25 per warrant share. The first tranche, which closed on December 22, 2017, was for 270,915 units for which the Company received gross proceeds of approximately $2.6 million. The second tranche which closed on December 28, 2017, was for 171,020 units for which the Company received approximately $1.7 million, while the third tranche which closed on December 29, 2017, was for 204,081 units for which the Company received $2.0 million. The Company paid $0.1 million in share issuance costs related to the December 2017 financing.

As a result of the change in the Company’s functional currency, these warrants have been reclassified from liabilities as derivative financial instruments to additional paid-in capital in the Company’s condensed consolidated balance sheet. As of April 1, 2018, $2.5 million, representing the fair value of warrants having USD$ exercise price were reclassified from derivative financial instruments to additional paid-in capital.

The following table summarizes the weighted average assumptions used in estimating the fair value of the warrants granted in the December 2017 financing using the Black-Scholes option pricing model as of the grant dates and on April 1, 2018.

 

 

 

April 1, 2018

 

 

December 22, 2017

 

 

December 28, 2017

 

 

December 29, 2017

 

Stock price

 

$

10.11

 

 

$

10.60

 

 

$

12.45

 

 

$

12.32

 

Exercise price

 

$

12.25

 

 

$

12.25

 

 

$

12.25

 

 

$

12.25

 

Warrant term

 

2.7 years

 

 

3.0 years

 

 

3.0 years

 

 

3.0 years

 

Expected volatility

 

 

65.40

%

 

 

60.24

%

 

 

60.24

%

 

 

60.24

%

Risk-free interest rate

 

 

2.39

%

 

 

2.01

%

 

 

2.00

%

 

 

1.98

%

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

 

On April 13, 2018, the Company issued 2,141,900 shares of its common stock and warrants to purchase 2,141,900 shares of the Company’s common stock in an underwritten public offering at a price of $7.47 per share and accompanying warrant. Gross proceeds from the offering were approximately $16.0 million. On April 24, 2018, the Company closed on the sale of an additional 321,285 shares of its common stock and warrants pursuant to the exercise of the over-allotment option (‘collectively the “April 2018 offering”) granted to the underwriters in connection with the offering at a price of $7.47 per share and accompanying warrants. Gross proceeds from the exercise of the over-allotment option were $2.4 million. BTIG, LLC and Echelon Wealth Partners acted as joint book-running managers for the April 2018 Offering. The Company paid approximately $1.1 million in underwriting discounts and commissions and incurred offering expenses of approximately $1.0 million in connection with the April 2018 Offering, resulting in net proceeds of $16.3 million from the April 2018 offering. The underwriting discounts and commissions and offering expenses were allocated between share issuance costs and expenses based on the relative fair values of common stock and warrants issued in connection with the April 2018 Offering.

Each warrant issued in connection with the April 2018 offering entitles the holder to acquire one additional share of common stock at an exercise price of CAD$12.25 per share on or before April 10, 2021. Pursuant to the guidance of ASC 815 Derivatives and Hedging, the Company has determined that warrants issued in connection with the April 2018 offering should be accounted for as liabilities as the ability to maintain an effective registration is outside of the Company’s control and that it may be required to settle the exercise of the warrants in cash and because, as a result of the change in the Company’s functional currency (see Note 2), the exercise prices of these warrants are in a currency other than the Company’s functional currency. Consequently, the Company determined the fair value of each warrant issuance using the Black-Scholes option pricing model, with the remainder of the proceeds allocated to the common shares. As of September 30, 2018, 70,900 warrants had been exercised for gross proceeds of CAD$0.9 million. The remaining 2,392,285 warrants had a fair value of $10.1 million as of September 30, 2018 and were recorded as derivative financial instruments.

The following table summarizes the weighted average assumptions used in estimating the fair value of the warrants granted in the April 2018 Offering using the Black-Scholes option pricing model as of the offering and over allotment dates as well as of September 30, 2018.

 

 

 

September 30, 2018

 

 

April 24, 2018

 

 

April 13, 2018

 

Stock price

 

CAD $12.65

 

 

CAD $10.76

 

 

CAD $9.85

 

Exercise price

 

CAD $12.25

 

 

CAD $12.25

 

 

CAD $12.25

 

Warrant term

 

2.5 years

 

 

3.0 years

 

 

3.0 years

 

Expected volatility

 

 

67.11

%

 

 

64.49

%

 

 

64.20

%

Risk-free interest rate

 

 

2.23

%

 

 

2.02

%

 

 

1.99

%

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

14


 

The following table summarizes warrants accounted for as liabilities and recorded as derivative financial instruments on the Company’s condensed consolidated balance sheets for the nine months ended September 30, 2018 and 2017 (amounts in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Fair value of warrants at beginning of period

 

$

6,941

 

 

$

2,857

 

Issuance of warrants

 

 

7,372

 

 

 

 

Exercise of warrants

 

 

(3,012

)

 

 

 

Fair value of previously equity-classified warrants

 

 

5,049

 

 

 

 

Fair value of previously liability-classified warrants reclassified to additional paid-in capital

 

 

(2,478

)

 

 

 

Foreign exchange (gains) losses

 

 

(142

)

 

 

 

Change in fair value of warrants during the period

 

 

548

 

 

 

3,684

 

Fair value of warrants at end of period

 

$

14,278

 

 

$

6,541

 

 

These warrants which are classified as derivative financial instruments in the Company’s condensed consolidated balance sheets are required to be re-measured at each reporting period, with the change in fair value recorded as a gain or loss in the change of fair value of derivative financial instruments, included in other income (expense) in the Company’s condensed consolidated statements of operations and comprehensive loss. The fair value of the warrants will continue to be classified as a liability until such time as they are exercised, expire or there is an amendment to the respective agreements that renders these financial instruments to be no longer classified as such.

The fair value of all warrants classified as derivative financial instruments outstanding as of September 30, 2018 and December 31, 2017 were estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Stock price

 

CAD$ 12.65

 

 

CAD$ 12.32

 

Exercise price

 

CAD$ 10.89

 

 

CAD$ 10.25

 

Warrant term

 

1.96 years

 

 

1.91 years

 

Expected volatility

 

 

68.06

%

 

 

62.20

%

Risk-free interest rate

 

 

2.09

%

 

 

1.83

%

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

The following is a summary of the Company’s warrant activity during the nine months ended September 30, 2018:

 

 

 

Number of Warrants

 

 

Weighted Average

Exercise Price

 

 

 

CAD

 

 

US

 

 

CAD$

 

 

US$

 

Outstanding as of December 31, 2017

 

 

1,011,505

 

 

 

1,343,404

 

 

$

7.38

 

 

$

10.25

 

Granted

 

 

2,476,843

 

 

 

 

 

 

12.22

 

 

 

 

Cancelled

 

 

(22,699

)

 

 

(136,528

)

 

 

5.00

 

 

 

15.00

 

Exercised

 

 

(112,665

)

 

 

(555,556

)

 

 

9.88

 

 

 

6.75

 

Outstanding as of September 30, 2018

 

 

3,352,984

 

 

 

651,320

 

 

$

10.89

 

 

$

12.24

 

 

The Company’s warrants outstanding and exercisable as of September 30, 2018 were as follows:

 

Number of Warrants Outstanding

 

 

Exercise Price

 

Expiration Date

 

3,795

 

 

US $10.75

 

June 26, 2020

 

1,509

 

 

US $10.75

 

July 17, 2020

 

960,699

 

 

CAD $7.50

 

April 18, 2019

 

270,915

 

 

US$12.25

 

December 22, 2020

 

171,020

 

 

US$12.25

 

December 28, 2020

 

204,081

 

 

US$12.25

 

December 29, 2020

 

2,392,285

 

 

CAD$12.25

 

April 10, 2021

 

4,004,304

 

 

 

 

 

 

4.    STOCK-BASED PAYMENTS

On May 15, 2018, the Company’s Board of Directors authorized and approved the adoption of the 2018 Omnibus Incentive Plan (“2018 Plan” and together with the 2014 Plan and 2016 Plan, the “Plans”), under which an aggregate of 5,356,114 shares may be issued. Pursuant to the terms of the

15


 

2018 Plan, the Company is authorized to grant stock options, as well as awards of stock appreciation rights, restricted stock, unrestricted shares, restricted stock units, stock equivalent units and performance-based cash awards.  These awards may be granted to directors, officers, employees and eligible consultants. Vesting and the term of an option is determined at the discretion of the Company’s Board of Directors. Subsequent to the adoption of the 2018 Plan, the Company ceased granting shares of common stock under either the 2014 Plan or the 2016 Plan.

As of September 30, 2018, there was an aggregate of 4,963,708 shares of common stock remaining available for grant under the Company’s 2018 Plan.

For the nine months ended September 30, 2018, the Company issued 754,906 stock options to employees and directors and issued 15,000 stock options to non-employees.

The following is a summary of the Company’s stock option activity during the nine months ended September 30, 2018:

 

 

 

 

 

 

 

Weighted

 

 

Aggregate

 

 

 

Number of

 

 

Average

 

 

Intrinsic Value

 

 

 

Stock Options

 

 

Exercise Price

 

 

(in 000's)

 

Outstanding as of December 31, 2017

 

 

2,448,646

 

 

$

5.71

 

 

$

16,960

 

Granted

 

 

769,906

 

 

 

10.37

 

 

 

 

Exercised

 

 

(85,000

)

 

 

2.91

 

 

717

 

Outstanding as of September 30, 2018

 

 

3,133,552

 

 

$

7.00

 

 

$

9,731

 

Exercisable as of September 30, 2018

 

 

1,813,360

 

 

$

3.13

 

 

$

8,192

 

 

Upon the change in the Company’s functional currency effective April 1, 2018, stock options previously classified as equity were classified as liabilities. On April 1, 2018, these options had a fair value of approximately $10.0 million which was recorded in stock-based compensation liability in the Company’s condensed consolidated balance sheet, of which approximately $4.2 million was reclassified from additional paid-in capital and the remainder was recorded as additional stock-based compensation expense in the Company’s condensed consolidated statement of operations. In June 2018, the Company’s Board of Directors’ approved the modification of all outstanding stock options with exercise prices denominated in CAD$ to convert the exercise prices of such options to USD$, subject to the consent of the holders of such options. On August 8, 2018, following the consent of option holders, the Company re-measured stock options for which its holders had consented to the modification and recorded $0.3 million reduction to stock-based compensation liability and reclassified $10.3 million from liability to equity. The incremental expense as a result of the modification was immaterial to the Company’s condensed consolidated statement of operations.

The following table summarizes the change in stock-based compensation liability on the Company’s condensed consolidated balance sheets for the six months ended September 30, 2018 (amounts in thousands):

 

 

Six Months Ended September 30, 2018

 

Fair value of stock-based compensation liability at April 1, 2018

 

$

10,061

 

Exercise of stock options classified as stock-based compensation liability

 

 

(32

)

Foreign exchange gain

 

 

(108

)

Stock-based compensation expense

 

 

417

 

Reclassification to additional paid-in capital upon modification of stock options

 

 

(10,338

)

Fair value of stock-based compensation liability at September 30, 2018

 

$

-

 

 

 

16


 

The following table summarizes stock options outstanding and exercisable by employees and directors as of September 30, 2018: 

 

 

 

 

 

 

Stock Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Number of Stock

 

 

 

 

Contractual Life

 

 

Exercise

 

 

Fair Value

 

 

Grant Date

 

 

Stock Options

 

Options Outstanding

 

 

Expiration Date

 

(In Years)

 

 

Price

 

 

Post Modification 1

 

 

Fair Value

 

 

Exercisable

 

 

360,000

 

 

June 18, 2019

 

 

0.71

 

 

$

2.77

 

 

$

6.62

 

 

$

 

 

 

360,000

 

 

80,000

 

 

June 18, 2019

 

 

0.71

 

 

$

2.77

 

 

$

6.62

 

 

$

 

 

 

80,000

 

 

20,000

 

 

December 8, 2019

 

 

1.19

 

 

$

12.72

 

 

$

2.18

 

 

$

 

 

 

20,000

 

 

80,000

 

 

December 8, 2019

 

 

1.19

 

 

$

12.72

 

 

$

2.14

 

 

$

 

 

 

80,000

 

 

20,000

 

 

March 16, 2020

 

 

1.46

 

 

$

12.52

 

 

$

2.43

 

 

$

 

 

 

20,000

 

 

8,500

 

 

August 14, 2020

 

 

1.87

 

 

$

3.79

 

 

$

6.15

 

 

$

 

 

 

8,500

 

 

150,000

 

 

October 21, 2020

 

 

2.06

 

 

$

3.20

 

 

$

6.57

 

 

$

 

 

 

112,500

 

 

20,000

 

 

December 31, 2020

 

 

2.25

 

 

$

4.48

 

 

$

5.86

 

 

$

 

 

 

20,000

 

 

595,000

 

 

July 13, 2020

 

 

1.78

 

 

$

5.35

 

 

$

5.18

 

 

$

 

 

 

595,000

 

 

20,000

 

 

August 8, 2020

 

 

1.85

 

 

$

4.98

 

 

$

5.42

 

 

$

 

 

 

20,000

 

 

617,000

 

 

April 17, 2027

 

 

8.54

 

 

$

8.13

 

 

$

7.54

 

 

$

 

 

 

154,250

 

 

6,146

 

 

May 18, 2027

 

 

8.62

 

 

$

7.35

 

 

$

4.75

 

 

$

 

 

 

4,610

 

 

10,000

 

 

May 18, 2027

 

 

8.62

 

 

$

7.35

 

 

$

7.65

 

 

$

 

 

 

2,500

 

 

30,000

 

 

August 8, 2027

 

 

8.85

 

 

$

10.38

 

 

$

7.38

 

 

$

 

 

 

7,500

 

 

40,000

 

 

April 9, 2028

 

 

9.52

 

 

$

9.03

 

 

$

8.01

 

 

$

 

 

 

 

 

337,500

 

 

May 15, 2028

 

 

9.62

 

 

$

10.99

 

 

$

7.89

 

 

$

 

 

 

48,750

 

 

150,000

 

 

July 9, 2028

 

 

9.77

 

 

$

9.69

 

 

$

 

 

$

6.83

 

 

 

 

 

114,229

 

 

August 22, 2028

 

 

9.89

 

 

$

10.23

 

 

$

 

 

$

7.21

 

 

 

 

 

13,177

 

 

September 4, 2028

 

 

9.92

 

 

$

10.19

 

 

$

 

 

$

7.19

 

 

 

 

 

50,000

 

 

September 10, 2028

 

 

9.94

 

 

$

10.34

 

 

$

 

 

$

7.30

 

 

 

 

 

50,000

 

 

September 24, 2028

 

 

9.98

 

 

$

9.71

 

 

$

 

 

$

6.79

 

 

 

 

 

2,771,552

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,533,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. Reflects fair value of modified stock options on August 8, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018 and 2017, the unrecognized compensation cost related to non-vested stock options outstanding for employees and directors, was $8.0 million and $4.1 million, respectively, to be recognized over a weighted-average remaining vesting period of approximately 3.0 years and 2.7 years, respectively. The Company recognizes compensation expense for only the portion of awards that are expected to vest.  

During the fourth quarter of 2017, upon a review of the Company’s equity compensation awards granted under the 2016 Plan it determined that the Company had inadvertently exceeded the annual per-person sub-limits involving an option award previously granted to a current executive officer. The aggregate amount of common stock represented by this excess award was 60,000 shares. This excess award was deemed to have been granted outside of the 2016 Plan and, as such, the Company applied liability accounting to the award. As a result, this excess award was to be re-measured at the end of each reporting period until such time that the Company’s shareholders approved the excess award, at which time the liability would be reclassified to equity. On June 28, 2018, the Company’s shareholders approved the excess award. On August 8, 2018, upon the modification of the exercise price of this stock option to convert such exercise price from CAD$ to USD$ as described above this excess award was re-measured again and reclassified from liability to equity for the portion of the option that had vested.

The fair value of liability-classified stock options recorded as stock-based compensation liability for employees and directors as of August 8, 2018 and April 1, 2018 was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

 

August 8, 2018

 

 

April 1, 2018

 

Stock price

 

CAD $12.14

 

 

CAD $12.87

 

Exercise price

 

CAD $8.81

 

 

CAD $7.72

 

Expected term

 

4.96 years

 

 

4.23 years

 

Expected volatility

 

 

76.34

%

 

 

72.56

%

Risk-free interest rate

 

 

2.20

%

 

 

1.84

%

Dividend rate

 

 

0.00

%

 

 

0.00

%

Non-Employee Stock Options

The following table summarizes stock options outstanding and exercisable by non-employees as of September 30, 2018:

17


 

 

 

 

 

 

 

Stock Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Number of Stock

 

 

 

 

Contractual Life

 

 

Exercise

 

 

Fair Value

 

 

Grant Date

 

 

Stock Options

 

Options Outstanding

 

 

Expiration Date

 

(In Years)

 

 

Price

 

 

Post Modification 1

 

 

Fair Value

 

 

Exercisable

 

 

80,000

 

 

June 18, 2019

 

 

0.71

 

 

$

2.77

 

 

$

6.62

 

 

 

 

 

 

 

80,000

 

 

30,000

 

 

December 8, 2019

 

 

1.19

 

 

$

12.72

 

 

$

2.18

 

 

 

 

 

 

 

30,000

 

 

77,000

 

 

October 3, 2020

 

 

2.01

 

 

$

5.15

 

 

$

5.35

 

 

 

 

 

 

 

36,000

 

 

110,000

 

 

October 28, 2020

 

 

2.08

 

 

$

3.18

 

 

$

6.59

 

 

 

 

 

 

 

110,000

 

 

20,000

 

 

May 18, 2027

 

 

8.62

 

 

$

7.35

 

 

$

7.65

 

 

 

 

 

 

 

5,000

 

 

15,000

 

 

August 8, 2027

 

 

8.85

 

 

$

10.38

 

 

$

7.38

 

 

 

 

 

 

 

3,750

 

 

15,000

 

 

November 6, 2027

 

 

9.09

 

 

$

16.20

 

 

$

6.98

 

 

 

 

 

 

 

 

 

15,000

 

 

August 22, 2028

 

 

9.89

 

 

$

10.23

 

 

 

 

 

 

$

8.87

 

 

 

15,000

 

 

362,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

279,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   1. Reflects fair value of modified stock options on August 8, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The fair value of liability-classified stock options recorded as stock-based compensation liability for non-employees as of August 8, 2018 and April 1, 2018 was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

 

August 8, 2018

 

 

April 1, 2018

 

Stock price

 

CAD $12.14

 

 

CAD $12.87

 

Exercise price

 

CAD $7.13

 

 

CAD $7.12

 

Expected term

 

3.62 years

 

 

3.95 years

 

Expected volatility

 

 

69.26

%

 

 

70.59

%

Risk-free interest rate

 

 

2.18

%

 

 

1.92

%

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

As of September 30, 2018 and 2017, the unrecognized compensation cost related to non-vested stock options outstanding for non-employees, was $0.1 million and $1.9 million, respectively, to be recognized over a weighted-average remaining vesting period of approximately 2.4 years and 3.7 years, respectively. The Company recognizes compensation expense for only the portion of awards that are expected to vest.

During the third quarter of 2018 following the modification of stock options from CAD$ to USD$, stock options awarded to non-employees that are performing services for NHC were no longer being accounted for as derivative financial instruments. As a result, following the remeasurement of non-employee stock options on August 8, 2018, vested non-employee stock options were reclassified from liability to equity.

The following table summarizes non-employee stock options that had been accounted for as derivative financial instruments for the nine months ended September 30, 2018 (amounts in thousands):

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Fair value of non-employee options at beginning of period

 

$

2,637

 

 

$

1,617

 

Exercise of non-employee options

 

 

(737

)

 

 

 

Foreign exchange gains

 

 

(38

)

 

 

 

Change in fair value of non-employee stock options during the

   period

 

 

(656

)

 

 

1,768

 

Reclassification to additional paid-in capital

 

 

(1,206

)

 

 

 

Fair value of non-employee options at end of period

 

$

-

 

 

$

3,385

 

18


 

The fair value of non-employee stock options previously classified as derivative financial instruments as of August 8, 2018 and September 30, 2017 was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

 

August 8, 2018

 

 

September 30, 2017

 

Stock price

 

CAD $12.14

 

 

CAD $17.70

 

Exercise price

 

CAD $4.83

 

 

CAD $6.15

 

Expected term

 

0.93 years

 

 

1.84 years

 

Expected volatility

 

 

73.18

%

 

 

60.77

%

Risk-free interest rate

 

 

1.95

%

 

 

1.52

%

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

Restricted Stock Units

During the second quarter of 2017, the Company granted restricted stock units (“RSUs”) to certain employees under the 2016 Plan that vest over a three-year period, with 25% vested immediately. The fair value of the restricted stock units was based on the closing price of the Company’s common stock on the date of grant. As of September 30, 2018, the Company had 964 RSUs outstanding with a weighted average grant date fair value of CAD$10.00 per share. For the nine months ended September 30, 2018, the Company issued 705 net shares of common stock (net of tax withholding of 258 shares) in settlement of vested RSUs.

Stock-Based Compensation Expense

Stock-based compensation expense is classified in the Company’s condensed consolidated statements of operations and comprehensive loss as follows (amounts in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development

 

$

208

 

 

$

121

 

 

$

745

 

 

$

252

 

General and administrative

 

 

317

 

 

 

553

 

 

 

6,500

 

 

 

1,212

 

Total

 

$

525

 

 

$

674

 

 

$

7,245

 

 

$

1,464

 

 

5.

ACCRUED EXPENSES

Accrued expenses consisted of the following (amounts in thousands):

 

 

September 30, 2018

 

 

December 31, 2017

 

Employees benefits

 

$

433

 

 

$

442

 

Professional services

 

 

260

 

 

 

88

 

Legal expense

 

 

277

 

 

 

343

 

Advance from U.S Army

 

 

233

 

 

 

233

 

Rent

 

 

100

 

 

 

97

 

Severance

 

 

 

 

 

38

 

Other

 

 

1

 

 

 

1

 

 

 

$

1,304

 

 

$

1,242

 

 

6.    COMMITMENTS AND CONTINGENCIES

(a)

On January 22, 2013, The Company entered into a license agreement with Advanced NeuroRehabilitation, LLC (“ANR”) for an exclusive right to ANR’s patent pending technology, claims and knowhow. In addition to the issuance 3,207,005 shares of common stock to ANR, the Company agreed to pay a 4% royalty on net revenue on the sales of devices covered by the patent-pending technology and services related to the treatment or use of devices covered by the patent-pending technology. The Company has not made any royalty payments to date under this agreement.

(b)

On October 30, 2017, NHC amended the Asset Purchase Agreement with A&B which specified that if the Company fails to obtain FDA marketing authorization for commercialization of or otherwise fails to ensure that the PoNS device is available for purchase by the U.S. Government by December 31, 2021, the Company would be subject to a $2.0 million contract penalty payable to A&B, unless the Company receives an exemption for the requirement of FDA marketing authorization from the US Army Medical Material Agency. Based on this amendment the Company has determined that the possibility of a payment under this contractual penalty is remote. 

(c)

In November 2014, the Company signed a development and distribution agreement with Altair LLC to apply for registration and distribution of the PoNS device in the territories of the former Soviet Union. The Company will receive a 7% royalty on sales of the devices within the territories. However, there is no assurance that such commercialization will occur.

19


 

(d)

In March 2017, the Company entered into a lease for office space in Newtown, Pennsylvania. The initial term of the lease is from July 1, 2017 through December 31, 2022, with an option to extend until 2027. In July 2017, the Company amended the contract to commence the lease on July 17, 2017 through January 16, 2023, with an option to extend until January 2028. Monthly rent plus utilities will be approximately $20,000 per month beginning in January 2018 with a 3% annual increase.

The future minimum lease payments related to the Company’s non-cancellable operating lease commitments were as follows (amounts in thousands):

 

For the Period Ending December 31,

 

 

 

 

2018 (remaining three months)

 

$

60

 

2019

 

 

246

 

2020

 

 

253

 

2021

 

 

260

 

2022

 

 

267

 

Thereafter

 

 

12

 

 

 

$

1,098

 

(e)

On December 29, 2017, NHC, a wholly owned subsidiary of the Company entered into a Manufacturing and Supply Agreement (“MSA”) with Key Tronic Corporation (“Key Tronic”), for the manufacture and supply of the Company’s PoNS device based upon the Company’s product specifications as set forth in the MSA. Per the agreement, the Company shall provide to Key Tronic a rolling forecast for the procurement of parts and material and within normal lead times based on estimated delivery dates for the manufacture of the PoNS device. The term of the agreement will be for three-years and will automatically renew for additional consecutive terms of one year, unless cancelled by either party upon 180-day written notice to the other party prior to the end of the then current term. During the third quarter of 2018, the Company provided an initial forecast to Key Tronic to deliver initial launch quantities of approximately $1.0 million. 

(f)

In September 2018, the Company’s wholly owned subsidiaries NHC and Helius Canada entered into an exclusive strategic and distribution alliance with HealthTech Connex, Inc. (“HTC”), a health technology company located in Surrey, BC, Canada and Heuro Canada Inc. (“Heuro”) a wholly owned subsidiary of HTC, to generate a model for the PoNS Treatment that would be transferable to other neuroplasticity clinics in Canada. Under the terms of the agreement, Heuro will be responsible for commercializing the PoNS Treatment in Canada during the initial term with a goal of engaging three founding clinics. The agreement also includes a supply arrangement whereby Heuro shall order and the Company shall invoice Heuro for the PoNS device. The agreement also provide for HTC to pay the Company CAD$0.8 million in partial consideration for the exclusivity right granted by the Company to Heuro, over a three year period. The Company has also agreed to fund up to CAD$1.0 million of Heuro’s operating budget as agreed upon by a joint steering committee but not to exceed 50% of the operating budget associated with this arrangement and also share in the net profit/loss of Heuro as will be defined on a 50/50 basis with HTC. The term of this agreement is the earlier of five years or the formal adoption of a clinical expansion plan which is expected to be within the first year. As of September 30, 2018, the Company had recorded CAD$0.2 million in accounts payable for its share of estimated costs incurred by Heuro and recorded an additional $0.2 million expenses incurred by the Company in performing services on behalf of Heuro.

 

7.    VARIABLE INTEREST ENTITIES

 

A variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support, or (ii) has equity investors who lack the characteristics of a controlling financial interest. Under ASC 810 – Consolidation (“ASC 810”), an entity that holds a variable interest in a VIE and meets certain requirements would be considered to be the primary beneficiary of the VIE and is required to consolidate the VIE in its condensed consolidated financial statements. In order to be considered the primary beneficiary of a VIE, an entity must hold a variable interest in the VIE and have both:

 

 

the power to direct the activities that most significantly impact the economic performance of the VIE; and

 

the right to receive benefits from, or the obligation to absorb losses of, the VIE that could be potentially significant to the VIE.

 

The Company regularly assesses its relationships with contractual third party and other entities for potential VIE’s. In making this assessment, the Company considers the potential that its contracts or other arrangements provide subordinated financial support, absorb losses or rights to residual returns of the entity and the ability to directly or indirectly make decisions about the entity’s activities. If the Company determines that it is the primary beneficiary of a VIE, the Company consolidates the statements of operations and financial condition of the VIE into its condensed consolidated financial statements.

 

Unconsolidated Variable Interest Entity

 

The Company utilized the consolidation guidance under ASC 810 to determine whether Heuro was a VIE, and if so, whether the Company was the primary beneficiary of Heuro (see Note 6(f)). As of September 30, 2018, the Company concluded that Heuro is a VIE based on the fact that the equity investment at risk in Heuro is not sufficient. The Company’s variable interests in Heuro arise from a profit sharing arrangement with Heuro. In determining whether the Company is the primary beneficiary and whether the Company has the right to receive benefits and the obligation to absorb losses that could potentially be significant to the VIE, the Company evaluated its economic interest in Heuro.

20


 

 

This evaluation considered all relevant factors of Heuro’s structure, including its capital structure, contractual rights to earnings (losses) as well as other contractual arrangements that have the potential to be economically significant. Following the guidance in ASC 810, although the Company has the obligation to absorb losses as of September 30, 2018, the Company concluded that it is not the primary beneficiary as it does not have the power to direct the activities that most significantly affect the economic performance of Heuro. The significant economic activities identified were financing activities, research and development activities, commercialization activities, supply and distribution activities, business strategy activities and clinic expansion activities. The evaluation of each of these factors in reaching a conclusion about the potential significance of the Company’s economic interests and control was a matter that required the exercise of professional judgement. Accordingly, as of September 30, 2018, the Company did not consolidate Heuro in its condensed consolidated financial statements.

8.    RELATED PARTY TRANSACTIONS

During the three months ended September 30, 2018 and 2017, the Company paid $25 thousand and $0 respectively, in consulting fees to a director of the Company. During the nine months ended September 30, 2018 and 2017, the Company paid $34 thousand and $21 thousand, respectively, in consulting fees to two directors of the Company. As of September 30, 2018, the Company owed $4 thousand to a director for consulting services.

In April 2016, the Company entered into a consulting agreement with Montel Media, Inc. (“Montel Media”), pursuant to which Montel Media provides consulting services for the promotion of the Company’s clinical trials and ongoing media and marketing strategies. Under the agreement, Montel Media received $15,000 per month. During the first quarter of 2018, the Company terminated its agreement with Montel Media. Montel Media is owned by Montel Williams, who beneficially owns greater than 5% of the Company’s common stock. The Company paid Montel Media $45 thousand and $0.1 million during the nine months ended September 30, 2018 and 2017, respectively, and $0 and $45 thousand during the three months ended September 30, 2018 and 2017, respectively pursuant to the consulting agreement.

For the three months ended September 30, 2018, a benefit of $17 thousand, which included a foreign exchange gain of $5 thousand compared to an expense of $1.4 million for the three months ended September 30, 2017, was included in the change in fair value of derivative financial instruments as the fair value of stock-based compensation attributed to the options granted to a director for consulting services rendered with respect to the design and development of the PoNS device.

For the nine months ended September 30, 2018, a benefit of $0.3 million, which included a foreign exchange gain of $18 thousand compared to an expense of $1.5 million for the nine months ended September 30, 2017, was included in the change in fair value of derivative financial instruments as the fair value of stock-based compensation attributed to the options granted to a director for consulting services rendered with respect to the design and development of the PoNS device.      

The Company’s Chief Medical Officer is a founding member of Clinvue LLC, (“Clinvue”), a company that provides regulatory advisory services to the Company. For the three months ended September 30, 2018 and 2017, the Company made no payment to Clinvue for consulting services. For the nine months ended September 30, 2018 and 2017, the Company paid Clinvue approximately $0.1 million and $17 thousand, respectively, for consulting services.

In connection with the December 2017 financing, the Company’s Chief Executive Officer, its Chief Financial Officer/Chief Operating Officer, two directors and A&B (HK) Company Ltd. a greater than 5% owner of the Company’s outstanding common stock subscribed for units in the December 2017 financing.

The following table summarizes the participation of these individuals and entities in the December 2017 financing (subscription amounts in thousands):

 

 

Units Purchased

 

 

Subscription Amount

 

A&B (HK) Company Ltd.

 

 

204,081

 

 

$

2,000

 

Director 1

 

 

76,530

 

 

 

750

 

Director 2

 

 

51,019

 

 

 

500

 

CEO

 

 

25,510

 

 

 

250

 

CFO/COO

 

 

15,816

 

 

 

155

 

 

 

 

372,956

 

 

$

3,655

 

 

9.    SOLE-SOURCE COST-SHARING AGREEMENT

In July 2015, the Company entered into a sole source cost sharing agreement with the U.S. Army Medical Research and Materiel Command (“USAMRMC”). Under the terms of the contract, the USAMRMC will reimburse the Company up to a maximum of $3.0 million to conduct a registrational trial investigating the safety and effectiveness of the PoNS device for the treatment of chronic balance deficits due to mild to moderate traumatic brain injury. Reimbursement of expenses under the agreement is based on a schedule of milestones related to the completion of subjects in the trial. The original contract expired on December 31, 2016; however, the Company extended the contract agreement through

21


 

December 31, 2017. On November 7, 2017, the Company received another extension of the contract agreement to December 31, 2018. As of September 30, 2018, the Company has received a total of $3.0 million with respect to expenses reimbursed for amounts owed to the Company for completion of development milestones, of which $0.2 million of the total received has been recorded as an advance against the fifth and final milestone. All reimbursement amounts received are credited directly to the accounts in which the original expense is recorded, including research and development, wages and salaries, and legal expenses. In addition, during the third quarter of 2017, the Company announced the execution of an extension to its Cooperative Research and Development Agreement (“CRADA”) with the USAMRMC through 2018 and extended the deadline for commercialization of the PoNS device to December 31, 2021.

 

22


 

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise specified or the context otherwise requires, references to “we”, “us” or “our” mean Helius Medical Technologies, Inc. and its wholly owned subsidiaries, Neurohabilitation Corporation, or NHC, and Helius Medical Technologies (Canada), Inc. The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2017, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission, or the SEC, on March 12, 2018, or our 2017 Annual Report. All financial information is stated in U.S. dollars unless otherwise specified. Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, including statements regarding our market, strategy, competition, capital needs, business plans and expectations. Such forward-looking statements involve risks and uncertainties regarding the success of our business plan, availability of funds, its ability to maintain and enforce its intellectual property rights, government regulations, operating costs, and its ability to achieve significant revenues and other factors. Forward-looking statements are made, without limitation, in relation to operating plans, availability of funds and operating costs. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors, including the risks outlined in the “Risk Factors” sections of our 2017 Annual Report and this report. These factors may cause our actual results to differ materially from any forward-looking statements. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith, based on information available to us as of the date hereof, and reflect our current judgment regarding our business plans, our actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. We do not intend to update any of the forward-looking statements to conform these statements to actual results, except as required by applicable law, including the securities laws of the United States. The forward-looking statements are subject to a number of risks and uncertainties which are discussed in the section entitled “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q and in our 2017 Annual Report and those described from time to time in our future reports filed with the SEC. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with its unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

Overview

Helius Medical Technologies, Inc. (the “Company”) is a neurotech company focused on neurological wellness. Our purpose is to develop, license and acquire unique and non-invasive platform technologies that amplify the brain’s ability to heal itself.

Our first product in development, known as the portable neuromodulation stimulator or PoNS®, is an investigational, non-invasive, medical device currently under review by the FDA for clearance to improve balance in patients following a mild-to-moderate traumatic brain injury (mTBI) when combined with targeted physical therapy. The PoNS Treatment is the first and only tongue-delivered neuromodulation that combines stimulation of cranial nerves with physical and cognitive therapy to restore lost neurological function. 

 

Business Update

During the third quarter of 2018, we submitted a request with the FDA for de novo classification and 510(k) clearance of the PoNS device. Our request for de novo classification and 510(k) clearance is supported by clinical data on 163 patients from two double-blind, randomized, controlled trials demonstrating the PoNS device’s safety and efficacy. In addition, during the third quarter of 2018, we also submitted an application for a Class II medical device license to Health Canada to market the PoNS device. In October 2018, we received a medical device license from Health Canada which authorizes us to market our PoNS device as a Class II medical device in Canada.

 

During the third quarter, we also announced our partnership with the Ohio State University Wexner Medical Center, a leading neurohabilitation center located in Columbus, OH, to establish our first clinical experience program, or CEP, and in October 2018, we announced another partnership with Northwell Health’s Feinstein Institute for Medical Research in Manhasset, NY, to establish our second CEP for our PoNS device. Our CEPs are being sponsored by us to be implemented in partnership with leading neurohabilitation centers in the U.S., including academic and research institutions as well as hospital systems. We expect the clinical experience programs to allow us to offer an open label clinical study of our PoNS therapy in patients suffering from chronic balance deficit due to mild- to moderate-traumatic brain injury, or TBI in a real-world clinical setting in advance of a 510(k) clearance of our PoNS device by the FDA. We expect our CEPs to be an important component

23


 

of our pre-regulatory clearance activities, as we expect them to enable us to build relationship with leading, neurohabilitation centers and key opinion leaders in the area of TBI, generate clinical evidence and gain real-world experience in the use of the PoNS device. Patient recruitment at both sites is expected to begin during the fourth quarter of 2018.

 

In September 2018, we entered into an exclusive strategic and distribution alliance with HealthTech Connex, Inc. (“HTC”), a health technology company located in Surrey, BC, Canada and Heuro Canada Inc. (“Heuro”) a wholly owned subsidiary of HTC, to generate a model for the PoNS Treatment that would be transferable to other neuroplasticity clinics in Canada. Under the terms of the agreement, Heuro will be responsible for commercializing the PoNS Treatment in Canada during the initial term with a goal of engaging three founding clinics. The agreement also includes a supply arrangement whereby Heuro shall order and we shall invoice Heuro for the PoNS device. In November 2018, Heuro engaged with two of the founding clinics and we expect these clinics to be operational in the fourth quarter of 2018 and expect to begin treating patients in Canada in the first quarter of 2019.

 

We also expect to submit applications for marketing authorizations in Europe and Australia during the fourth quarter of 2018.

Results of Operations

Three Months Ended September 30, 2018 compared to the Three Months Ended September 30, 2017

The following table summarizes our results of operations for the three months ended September 30, 2018 and 2017 (amounts in thousands):

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

Revenue

 

$

 

 

$

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,309

 

 

 

3,798

 

 

 

(1,489

)

General and administrative

 

 

2,581

 

 

 

2,172

 

 

 

409

 

Total operating expenses

 

 

4,890

 

 

 

5,970

 

 

 

(1,080

)

Loss from operations

 

 

(4,890

)

 

 

(5,970

)

 

 

1,080

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

4

 

 

 

 

 

 

4

 

Change in fair value of derivative financial instruments

 

 

368

 

 

 

(5,960

)

 

 

6,328

 

Foreign exchange gain (loss)

 

 

1

 

 

 

(1,008

)

 

 

1,009

 

Total other income (expense)

 

 

373

 

 

 

(6,968

)

 

 

7,341

 

Net loss

 

$

(4,517

)

 

$

(12,938

)

 

$

8,421

 

 

Revenue

During the three months ended September 30, 2018 and 2017, we did not generate any revenue.

Research and Development Expense

Research and development or R&D expenses were $2.3 million during the three months ended September 30, 2018 compared to $3.8 million during the three months ended September 30, 2017, a decrease of $1.5 million. The decrease was primarily driven by a $1.2 million reduction in clinical trial expenses as we completed our registrational clinical trial during the third quarter of 2017 and a $1.1 million reduction in product development costs due to the completion of the design and development work on the PoNS device. These decreases were partially offset by higher consulting expenses of $0.4 million, higher regulatory fees of $0.1 million as we prepared our FDA submission. In addition, wages and salaries increased by approximately $0.2 million.

 

General and Administrative Expense

 

General and administrative or G&A expenses were $2.6 million during the three months ended September 30, 2018 compared to $2.2 million during the three months ended September 30, 2017, an increase of $0.4 million. The increase was primarily due to $0.2 million in higher wages and salaries and $0.4 million increase in consulting expenses relating to our commercial infrastructure build out, partially offset by $0.2 million reduction in stock-based compensation expense.

Change in Fair Value of Derivative Financial Instruments

The change in fair value of derivative financial instruments was a gain of $0.4 million during the three months ended September 30, 2018 compared to a loss of $6.0 million during the three months ended September 30, 2017.

24


 

The change in fair value of our derivative financial instruments was primarily attributable to the change in our stock price, volatility and the number of derivative financial instruments being measured during the period, as we reclassified non-employee options previously recorded as derivative financial instruments to equity (see Note 3 to our condensed consolidated financial statements included elsewhere in this report). The change in the fair value of derivative financial instruments is a non-cash item.

Foreign Exchange Gain (Loss)

Foreign exchange gain was $1 thousand during the three months ended September 30, 2018 compared to a loss of $1.0 million during the three months ended September 30, 2017. This was primarily due to the amount of Canadian dollars held at the end of each reporting period, coupled with the change in our functional currency from CAD$ to USD$.

 

Nine Months Ended September 30, 2018 compared to the Nine Months Ended September 30, 2017

The following table summarizes our results of operations for the nine months ended September 30, 2018 and 2017 (amounts in thousands):

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

Revenue

 

$

 

 

$

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,781

 

 

 

11,121

 

 

 

(3,340

)

General and administrative

 

 

13,632

 

 

 

5,862

 

 

 

7,770

 

Total operating expenses

 

 

21,413

 

 

 

16,983

 

 

 

4,430

 

Loss from operations

 

 

(21,413

)

 

 

(16,983

)

 

 

(4,430

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

63

 

 

 

 

 

 

63

 

Change in fair value of derivative financial instruments

 

 

(3,356

)

 

 

(5,452

)

 

 

2,096

 

Foreign exchange gain (loss)

 

 

1,198

 

 

 

(1,860

)

 

 

3,058

 

Total other expense

 

 

(2,095

)

 

 

(7,312

)

 

 

5,217

 

Net loss

 

$

(23,508

)

 

$

(24,295

)

 

$

787

 

Revenue

During the nine months ended September 30, 2018 and 2017, we did not generate any revenue.

Research and Development Expense

R&D expenses were $7.8 million during the nine months ended September 30, 2018 compared to $11.1 million during the nine months ended September 30, 2017. The decrease of $3.3 million was primarily attributable to a reduction in clinical trial expenses as we completed our registrational clinical trial during the third quarter of 2017.

General and Administrative Expense

G&A expenses were $13.6 million during the nine months ended September 30, 2018 compared to $5.9 million during the nine months ended September 30, 2017 an increase of $7.7 million. The increase was primarily due to higher stock-based compensation expense of $5.3 million in 2018, which was mainly the result of the change in our functional currency (as described in Note 4 to our condensed consolidated financial statements included elsewhere in this report). Legal and other professional services expenses increased by $1.3 million compared to the nine months ended September 30, 2017, primarily driven by a $0.9 million increase from expenses incurred in connection with the April 2018 offering that were allocated to the liability-classified warrants issued in the offering. Rent and other office expense also increased by $0.3 million in 2018 as we moved into our new corporate office space during the third quarter of 2017. Commercial operations expenses, including wages and salaries increased by $0.8 million in 2018 as we continue to build our commercial operation infrastructure in anticipation of device clearance from the FDA.

25


 

Change in Fair Value of Derivative Financial Instruments

The change in fair value of derivative financial instruments was a loss of $3.4 million during the nine months ended September 30, 2018 compared to a loss of $5.5 million during the nine months ended September 30, 2017. During the nine months ended September 30, 2018, we recorded a $3.3 million loss from the change in fair value of warrants that were previously classified in equity which have now been reclassified as derivative financial instruments as a result of a change in our functional currency. In addition, we recorded a $3.3 million loss from the change in fair value of warrants issued in our April 2018 offering as these warrants are also recorded as derivative financial instruments.

These losses were partially offset by a $2.0 million gain from the change in fair value of warrants that were previously classified as derivative financial instruments that are now classified in equity due to the change in our functional currency, a $0.7 million gain from the change in fair value of certain of our non-employee stock options that were previously classified as derivative financial instruments and a $0.5 million gain from the change in the fair value of our warrants issued in our April 2016 offering.

The change in fair value of derivative financial instruments was primarily attributable to the change in our stock price, volatility and the number of derivative financial instruments being measured during the period. The change in the fair value of derivative financial instruments is a non-cash item.

Foreign Exchange Loss

Foreign exchange gain was $1.2 million during the nine months ended September 30, 2018 compared to a loss of $1.9 million during the nine months ended September 30, 2017. This was primarily due to fluctuations in the foreign exchange rate as related to the amount of Canadian dollars held at the end of each reporting period.

 

Statement of Cash Flows

The following table summarizes our cash flows for the nine months ended September 30, 2018 and 2017 (amounts in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

Net cash used in operating activities

 

$

(14,476

)

 

$

(14,239

)

 

$

(237

)

Net cash used in investing activities

 

 

(425

)

 

 

(181

)

 

 

(244

)

Net cash provided by financing activities

 

 

21,692

 

 

 

14,210

 

 

 

7,482

 

Effect of exchange rate changes on cash

 

 

44

 

 

 

158

 

 

 

(114

)

Net increase (decrease) in cash

 

$

6,835

 

 

$

(52

)

 

$

6,887

 

 

Net Cash Used in Operating Activities

Net cash used in operating activities during the nine months ended September 30, 2018 was $14.5 million. This was comprised of a net loss of $23.5 million and net cash used in changes in operating assets and liabilities of $0.4 million, adjusted for non-cash items including the change in fair value of derivative financial instruments of $3.4 million, and stock-based compensation expense of $7.2 million, which amounts were partially offset by unrealized foreign exchange gains of $1.3 million.

Net cash used in operating activities during the nine months ended September 30, 2017 was $14.2 million. This was comprised of a net loss of $24.3 million adjusted for non-cash items including stock-based compensation expense of $1.5 million, unrealized foreign exchange loss of $1.8 million, change in fair value of derivative financial instruments of $5.5 million and net cash provided by changes in operating assets and liabilities of $1.4 million.

Net Cash Used in Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2018 was $0.4 million, which was primarily related to the purchase of furniture and fixtures for our office as well as laser marking equipment.

Net cash used in investing activities during the nine months ended September 30, 2017 was $0.2 million, which was primarily related to leasehold improvements expenditure for our office.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2018 was $21.7 million, which was comprised of $18.4 million received from the sale of 2,463,185 shares of our common stock and accompanying warrants in our April 2018 public offering. In addition, we received $4.6 million in proceeds from the exercise of stock options and warrants. These amounts were partially offset by $1.3 million in share issuance costs incurred primarily in connection with the April 2018 public offering.

Net cash provided by financing activities during the nine months ended September 30, 2017 was $14.2 million, which was comprised of $14.5 million received from the sale of 6,555,000 shares of our common stock in our February 2017 public offering and 4,000,000 shares of our

26


 

common stock in our June 2017 private placement, as well as $0.9 million received from the exercise of stock options and warrants. These amounts were partially offset by $1.2 million in share issuance costs incurred in connection with our February 2017 public offering.

Liquidity and Capital Resources

Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation. Our major sources of cash have been proceeds from various public and private offerings of our common stock and exercises of options and warrant. From June 2014 through September 30, 2018, we raised approximately $73.9 million in gross proceeds from various public and private offerings of our common stock as well as the exercise of options and warrants, including $18.4 million in gross proceeds from our April 2018 public offering.

In April 2018, we issued 2,463,185 shares of our common stock and warrants to purchase 2,463,185 shares of our common stock in an underwritten public offering at a price of $7.47 per share and accompanying warrants. Net proceeds from the offering after deducting underwriting discounts and commissions and offering expenses was $16.3 million. We intend to use the net proceeds from this offering primarily to fund manufacturing activities for the PoNS device, activities related to our submissions for marketing authorization of the PoNS device to the FDA and other regulatory authorities, commercial launch preparations, and for working capital and general corporate purposes.

The following table summarizes our cash and working capital (which we define as current assets less current liabilities excluding derivative financial instruments) as of September 30, 2018 and December 31, 2017 (amounts in thousands):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Cash

 

$

12,397

 

 

$

5,562

 

Working capital

 

$

9,245

 

 

$

1,897

 

 

We currently have limited working capital and liquid assets. Our cash as of September 30, 2018 was approximately $12.4 million. To date, we have not generated any revenue from the commercial sale of products or services. There are a number of conditions that we must satisfy before we will be able to generate revenue, including but not limited to the recruitment of patients for treatment in Canada, manufacturing of a commercially-viable version of the PoNS device and demonstration of effectiveness sufficient to generate commercial orders by customers for our product.  Moreover, because we expect that the revenue opportunity in the United States is significantly greater than in Canada, our ability to generate significant revenue in the future is also dependent upon the receipt of FDA marketing authorization of the PoNS device for treating balance disorder associated with mild- to moderate-TBI.  

We will require additional funding to fund our ongoing activities. There can be no assurance that we will be successful in raising additional capital or that such capital, if available, will be on terms that are acceptable to us. If we are unable to raise sufficient additional capital, we may be compelled to reduce the scope of our operations and planned capital expenditure or sell certain assets, including intellectual property, and we may be forced to cease or wind down operations, seek protection under the provisions of the U.S. Bankruptcy Code, or liquidate and dissolve our company.

 

Contractual Commitments and Obligations

 

The disclosure of our contractual obligations and commitments was reported in our 2017 Annual Report. There have been no material changes from the contractual commitments and obligations previously disclosed in our 2017 Annual Report, other than the changes described in Note 6, “Commitments and Contingencies” to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

Off Balance Sheet Arrangements

To the best of management’s knowledge, there are no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our results of operations or financial condition other than that described in Note 7 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements that have been prepared in accordance with U.S. GAAP. This preparation requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.

Our critical accounting policies and estimates are described in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” of our 2017 Annual Report. There have been no changes in critical accounting policies in the current year from those described in our 2017 Annual Report.

27


 

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use, or ROU, model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statement of operations. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. In July 2018, the FASB issued ASU No. 2018-11, Leases: Targeted Improvements, which provides an optional transition method that allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We are currently evaluating the potential impact of the standard on our condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. This standard expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance specifies that Topic 718 will be applied to all share-based payment transactions in which a grantor acquires goods and services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. ASU 2018-07 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. During the third quarter of 2018, we early adopted the standard and the adoption did not have any material impact on our condensed consolidated financial statements.

In August 2018, the Securities and Exchange Commission (“SEC”) adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendment expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendment, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. We anticipate that our first presentation of changes in stockholders’ equity will be included in our Form 10-Q for the quarter ended March 31, 2019.

JOBS Act

In April 2012, the JOBS Act was enacted in the United States. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth public companies.

ITEM 3.    Quantitative and Qualitative Disclosures about Market Risk

We are exposed to foreign currency exchange risk from the transfer of funds between the United States and Canada to satisfy obligations as we do not hedge our foreign exchange exposure.

ITEM 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Exchange Act, under the direction of the Chief Executive Officer and the Chief Financial Officer, we have evaluated our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, we have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There has not been any change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

 

28


 

PART II – OTHER INFORMATION

Item 1.    Legal Proceedings

From time to time, we are subject to litigation and claims arising in the ordinary course of business. We are not currently a party to any material legal proceedings and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results or financial condition.

Item 1A.  Risk Factors

Except as set forth below, there have been no material changes to the risk factors previously disclosed in our 2017 Annual Report. You should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our 2017 Annual Report, as updated below, which could materially affect our business, financial condition and/or operating results. The risks described in our 2017 Annual Report, as updated below, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deems to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

If we fail to obtain FDA authorization for commercialization of or otherwise fail to ensure that the PoNS device is available for purchase by the U.S. Government by December 31, 2021, we are subject to significant risk of loss of data and proprietary rights and to certain contractual penalties.

Under the CRADA, if we fail to obtain FDA marketing authorization of the PoNS device by December 31, 2021 we would be in breach of the CRADA should we and the army decide not to extend the CRADA termination date. In addition, if we fail to ensure commercialization of the PoNS Treatment is available for purchase by the U.S. Government by December 31, 2021, we may forfeit the right to pursue commercialization on our own. Specifically, if we do not commercialize the PoNS by December 31, 2021, we may be required to (i) transfer possession, ownership and sponsorship of any regulatory application, and correspondence supporting the PoNS technology to the USAMRMC and (ii) provide the U.S. Government with a non-exclusive, irrevocable license to any patent, copyright, data rights, proprietary information and regulatory information, in order to permit the U.S. Government to pursue commercialization on its own. Any such loss of our ability to exclusively market and sell the PoNS Treatment would have a material adverse effect on our business.

Additionally, under our Strategic Agreement with A&B (HK) Company Ltd., or A&B, if we fail to obtain FDA marketing authorization for commercialization, or otherwise fail to ensure that the PoNS device is available for purchase by the U.S. Government, by December 31, 2021, we may be required to pay a $2.0 million contract penalty to A&B.

 

An active trading market for our common stock on Nasdaq may not continue to develop or be sustained.

 

Although our common stock is listed on The Nasdaq Capital Market as of April 2018, we cannot assure you that an active trading market for our common stock will continue to develop or be sustained. If an active market for our common stock does not continue to develop or is not sustained, it may be difficult for investors in our common stock to sell their shares of our common stock without depressing the market price for the shares or to sell the shares at all.

 

If we are not able to comply with the applicable continued listing requirements or standards of The Nasdaq Capital Market, Nasdaq could delist our common stock.

 

Our common stock is currently listed on The Nasdaq Capital Market. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance requirements. There can be no assurances that we will be able to comply with the applicable listing standards.

 

In the event that our common stock is delisted from Nasdaq and is not eligible for quotation or listing on another market or exchange, trading of our common stock could be conducted only in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

During the third quarter of 2018, we issued 50 shares of common stock upon the exercise of warrants at an exercise price of CAD$7.50 per share. The issuance of these securities was exempt from registration pursuant to Regulation S of the Securities Act as an offering outside the United States.

Item 3.    Defaults upon Senior Securities

Not applicable.

29


 

Item 4.    Mine Safety Disclosures

Not applicable.

Item 5.    Other Information

Not applicable.

30


 

Item 6.    Exhibits

 

Exhibit No.

Description of Exhibit

3.1

Certificate of Conversion filed with the Delaware Secretary of State on July 18, 2018 (incorporated by reference to Exhibit 3.1 to the Form 10-Q filed August 9, 2018)

3.2

Certificate of Incorporation, as corrected (incorporated by reference to Exhibit 3.1 to the Form 8-K filed October 30, 2018)

3.3

Bylaws as amended and restated (incorporated by reference to Exhibit 3.3 to the Form 10-Q filed August 9, 2018)

10.1

Employment agreement between Helius Medical Technologies, Inc. and Jennifer Laux, dated July 9, 2018, (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed August 9, 2018)

10.2

2018 Omnibus Incentive Plan, as amended *

10.3

2018 Omnibus Incentive Plan Form of Option Grant Agreement *

10.4

2018 Omnibus Incentive Plan Form of Restricted Stock Unit Grant Agreement *

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), as adopted pursuant to Section302 of the Sarbanes-Oxley Act of 2002 *

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

101.INS

XBRL Instance Document *

101.SCH

XBRL Taxonomy Extension Schema Document *

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document *

101.LAB

XBRL Taxonomy Extension Label Linkbase Document *

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document *

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document *

 

* filed herewith

31


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

HELIUS MEDICAL TECHNOLOGIES, INC.

 

 

 

Dated: November 8, 2018

By:

/s/ Philippe Deschamps

 

 

Philippe Deschamps

 

 

President, Chief Executive Officer and a Director

 

 

 

Dated: November 8, 2018

By:

/s/ Joyce LaViscount

 

 

Joyce LaViscount

 

 

Chief Financial Officer (Principal Accounting

 

 

Officer)

 

 

32