10-Q 1 hsdt-10q_20170930.htm 10-Q hsdt-10q_20170930.htm

 

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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, 2017

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. 000-55364

 

HELIUS MEDICAL TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

 

Wyoming

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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

(Do not check if a smaller reporting company)

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 7, 2017

Class A Common Stock

96,489,946

 

 

 

 


 

HELIUS MEDICAL TECHNOLOGIES, INC.
INDEX

 

Part I.

Financial Information

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

3

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended
September 30, 2017 and 2016

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the nine months ended September 30, 2017

5

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

6

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

Item 4.

Controls and Procedures

23

 

 

 

Part II.

Other Information

24

 

 

 

Item 1.

Legal Proceedings

24

 

 

 

Item 1A.

Risk Factors

24

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

 

 

 

Item 3.

Defaults Upon Senior Securities

24

 

 

 

Item 4.

Mine Safety Disclosures

24

 

 

 

Item 5.

Other Information

24

 

 

 

Item 6.

Exhibits

25

 

 

 

Signatures

26

2


 

Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Balance Sheets

(Except for share data, amounts in thousands and expressed in United States Dollars)

 

 

 

September 30, 2017

 

 

December 31, 2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash

 

$

2,617

 

 

$

2,669

 

Receivables

 

 

755

 

 

 

225

 

Prepaid expenses and other current assets

 

 

190

 

 

 

556

 

Total current assets

 

 

3,562

 

 

 

3,450

 

Property, plant and equipment, net

 

 

174

 

 

 

 

Other assets

 

 

18

 

 

 

 

TOTAL ASSETS

 

$

3,754

 

 

$

3,450

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,637

 

 

$

2,161

 

Accrued liabilities

 

 

340

 

 

 

259

 

Derivative financial instruments

 

 

9,926

 

 

 

4,474

 

Total current liabilities

 

 

13,903

 

 

 

6,894

 

TOTAL LIABILITIES

 

 

13,903

 

 

 

6,894

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Common stock (Unlimited Class A common shares authorized, no par value); (96,410,413 shares issued and outstanding as of September 30, 2017 and 84,630,676 shares issued and outstanding as of December 31, 2016)

 

 

45,917

 

 

 

30,897

 

Additional paid-in capital

 

 

6,386

 

 

 

5,732

 

Accumulated deficit

 

 

(62,640

)

 

 

(38,345

)

Accumulated other comprehensive income (loss)

 

 

188

 

 

 

(1,728

)

TOTAL STOCKHOLDERS’ DEFICIT

 

 

(10,149

)

 

 

(3,444

)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$

3,754

 

 

$

3,450

 

 

(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, and expressed in United States Dollars)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

3,798

 

 

$

1,411

 

 

$

11,121

 

 

$

3,164

 

General and administrative

 

 

2,172

 

 

 

1,980

 

 

 

5,862

 

 

 

5,246

 

Total operating expenses

 

 

5,970

 

 

 

3,391

 

 

 

16,983

 

 

 

8,410

 

Operating loss

 

 

(5,970

)

 

 

(3,391

)

 

 

(16,983

)

 

 

(8,410

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense

 

 

 

 

 

 

 

 

 

 

 

(20

)

Other income

 

 

 

 

 

1

 

 

 

 

 

 

111

 

Change in fair value of derivative financial instruments

 

 

(5,960

)

 

 

288

 

 

 

(5,452

)

 

 

(1,052

)

Foreign exchange gain (loss)

 

 

(1,008

)

 

 

115

 

 

 

(1,860

)

 

 

(530

)

Total other income (expense)

 

 

(6,968

)

 

 

404

 

 

 

(7,312

)

 

 

(1,491

)

Net loss

 

 

(12,938

)

 

 

(2,987

)

 

 

(24,295

)

 

 

(9,901

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

1,266

 

 

 

(172

)

 

 

1,916

 

 

 

597

 

Comprehensive loss

 

$

(11,672

)

 

$

(3,159

)

 

$

(22,379

)

 

$

(9,304

)

Net loss per share, basic and diluted

 

$

(0.13

)

 

$

(0.04

)

 

$

(0.26

)

 

$

(0.12

)

Weighted average common shares outstanding, basic

 

 

96,125,284

 

 

 

84,366,692

 

 

 

91,844,867

 

 

 

79,232,232

 

Weighted average common shares outstanding, diluted

 

 

96,125,284

 

 

 

85,004,192

 

 

 

91,844,867

 

 

 

79,232,232

 

 

(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 and expressed in United States Dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

Balance as of January 1, 2017

 

 

84,630,676

 

 

$

30,897

 

 

$

5,732

 

 

$

(38,345

)

 

$

(1,728

)

 

$

(3,444

)

Issuance of common stock in public offering

 

 

6,555,000

 

 

 

9,187

 

 

 

 

 

 

 

 

 

 

 

 

9,187

 

Issuance of common stock in private placement

 

 

4,000,000

 

 

 

5,360

 

 

 

 

 

 

 

 

 

 

 

 

5,360

 

Share issuance costs

 

 

 

 

 

(1,248

)

 

 

 

 

 

 

 

 

 

 

 

(1,248

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,464

 

 

 

 

 

 

 

 

 

1,464

 

Proceeds from the exercise of stock options and warrants

 

 

1,218,232

 

 

 

911

 

 

 

 

 

 

 

 

 

 

 

 

 

911

 

Vesting of restricted stock units

 

 

6,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification of exercised stock options, warrants and issued restricted stock units from additional paid-in capital

 

 

 

 

 

810

 

 

 

(810

)

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(24,295

)

 

 

 

 

 

(24,295

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,916

 

 

 

1,916

 

Balance as of September 30, 2017

 

 

96,410,413

 

 

$

45,917

 

 

$

6,386

 

 

$

(62,640

)

 

$

188

 

 

$

(10,149

)

 

(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 and expressed in United States Dollars)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(24,295

)

 

$

(9,901

)

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

 

 

 

 

 

 

 

 

Depreciation

 

7

 

 

 

 

Change in fair value of derivative financial instruments

 

 

5,452

 

 

 

1,052

 

Interest accretion

 

 

 

 

 

5

 

Stock-based compensation expense

 

 

1,464

 

 

 

1,724

 

Unrealized foreign exchange loss

 

 

1,758

 

 

 

781

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(530

)

 

 

(42

)

Prepaid expenses and other current assets

 

 

366

 

 

 

336

 

Other assets

 

 

(18

)

 

 

Accounts payable and accrued liabilities

 

 

1,557

 

 

 

120

 

Shares to be issued

 

 

 

 

 

150

 

Net cash used in operating activities

 

 

(14,239

)

 

 

(5,775

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(181

)

 

 

 

Net cash used in investing activities

 

 

(181

)

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from the issuance of common stock

 

 

14,547

 

 

 

7,903

 

Share issuance costs

 

 

(1,248

)

 

 

(1,509

)

Proceeds from the exercise of stock options and warrants

 

 

911

 

 

 

1,494

 

Net cash provided by financing activities

 

 

14,210

 

 

 

7,888

 

Effect of foreign exchange rate changes on cash

 

 

158

 

 

 

(290

)

Net change in cash

 

 

(52

)

 

 

1,823

 

Cash at beginning of period

 

 

2,669

 

 

 

4,350

 

Cash at end of period

 

$

2,617

 

 

$

6,173

 

 

(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 engaged primarily in the medical technology industry focused on neurological wellness. The Company’s planned principal operations include the development, licensing and acquisition of unique and non-invasive platform technologies to amplify the brain’s ability to heal itself.

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. The Company is headquartered 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 without par value (“common stock”) is currently listed on the Toronto Stock Exchange (the “TSX”). The Company’s common stock began trading on the Canadian Securities Exchange on June 23, 2014, under the ticker symbol “HSM”, and trading of the common stock subsequently moved to the TSX on April 18, 2016. The Company’s common stock also began trading on the OTC Markets (“OTCQB”) under the ticker symbol “HSDT” on February 10, 2015. The financial information is presented in United States Dollars.

Going Concern

As of September 30, 2017, the Company’s cash was $2.6 million. During the nine months ended September 30, 2017, the Company incurred a net loss of $24.3 million, and, as of September 30, 2017, its accumulated deficit was $62.6 million. The Company has not generated any product revenues and has not achieved profitable operations. 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 profitable operations will ever be achieved, and, if achieved, will be sustained on a continuing 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 will require substantial additional financing to fund its operations and to continue to execute its strategy. The Company intends to fund ongoing activities by utilizing its current available cash and by raising additional capital through equity or debt financings. There can be no assurance that the Company will be successful in raising sufficient additional capital at the level needed to sustain operations and develop its product candidate 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 expenditure or sell certain assets, including intellectual property assets.

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”), applicable to interim periods and, in the opinion of management, include all normal and recurring adjustments that are necessary to state fairly the results of operations for the reported periods. The condensed consolidated financial statements have also been prepared on a basis substantially consistent with, and should be read in conjunction with, the Company’s audited consolidated financial statements for the nine months ended December 31, 2016, included in its Transition Report on Form 10-K that was filed with the Securities and Exchange Commission, (“SEC”), on April 3, 2017. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the entire fiscal year or for any other interim period. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all material adjustments consisting of normal and recurring accruals necessary to present fairly the Company's condensed consolidated financial position as of September 30, 2017, and the results of operations and comprehensive loss for the three and nine months ended September 30, 2017, and 2016 and cash flows for the nine months ended September 30, 2017 and 2016. Certain prior period amounts within operating expenses have been reclassified to conform to the current period presentation.

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

7


 

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements reflect the operations of Helius Medical Technologies, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

Concentrations of Credit Risk

The Company is subject to credit risk with respect to its cash. 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

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

 

Property, Plant and Equipment

Property, plant and equipment are carried at cost, less accumulated depreciation. Depreciation is recognized using the straight-line method over the useful live of the related asset. 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, plant and equipment is comprised of leasehold improvements and software. As of September 30, 2017, the Company had recorded approximately $0.2 million in property plant and equipment, primarily related to leasehold improvements for the Company’s new office space in Newtown, Pennsylvania. For the three and nine months ended September 30, 2017, the Company recorded $7 thousand in depreciation expense.

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 using the straight-line method.

The Company accounts for the granting of stock options to employees using the fair value method whereby all awards to employees are measured at fair value on the date of the grant. The fair value of all 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 share capital. 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.

Stock-based payments to non-employees are measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measurable. The fair value of stock-based payments to non-employees are periodically re-measured until the counterparty performance is complete, and any change therein is 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 are fully vested and non-forfeitable as of the grant date are measured and recognized at that date.

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.

Foreign Currency

The functional currency of the Company and Helius Canada is the Canadian dollar (“CAD”) and the functional currency of NHC is the U.S. dollar (“USD”). The Company’s reporting currency is the U.S. dollar. 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. Resulting gains and losses are recorded in foreign exchange gain (loss) within the condensed consolidated statements of operations and comprehensive loss. The foreign exchange adjustment in the books of NHC relating to intercompany advances from Helius that are denominated in Canadian dollars is recorded in the condensed consolidated statements of operations.

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 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.

8


 

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 provisions 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 condensed 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, materials and supplies as well as regulatory costs. 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 condensed 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 marked-to-market 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. The Company’s derivative financial instruments are comprised of warrants and non-employee stock options. Upon settlement of a derivative financial instrument, the instrument is marked to fair value 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 those instruments.

9


 

The Company’s derivative financial instruments are classified as Level 3 within the fair value hierarchy and 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, 2017 and 2016 and the roll forward of the derivative financial instruments related to the warrants and see Note 4 for the inputs used in the Black-Scholes option pricing model as of September 30, 2017 and 2016 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 within the fair value hierarchy as of September 30, 2017 and December 31, 2016 (amounts in thousands):

 

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-employee stock options

 

$

3,385

 

 

 

 

 

 

 

 

$

3,385

 

Warrants

 

 

6,541

 

 

 

 

 

 

 

 

 

6,541

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-employee stock options

 

$

1,617

 

 

 

 

 

 

 

 

$

1,617

 

Warrants

 

 

2,857

 

 

 

 

 

 

 

 

 

2,857

 

 

There were no transfers between any of the levels during the nine months ended September 30, 2017 or the nine months ended December 31, 2016.

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 share purchase 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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(12,938

)

 

$

(2,987

)

 

$

(24,295

)

 

$

(9,901

)

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

 

96,125,284

 

 

 

84,366,692

 

 

 

91,844,867

 

 

 

79,232,232

 

Weighted average common shares outstanding, diluted

 

 

96,125,284

 

 

 

85,004,192

 

 

 

91,844,867

 

 

 

79,232,232

 

Basic and diluted net loss per share

 

$

(0.13

)

 

$

(0.04

)

 

$

(0.26

)

 

$

(0.12

)

 

For the three and nine months ended September 30, 2017 a total of 13,214,177 stock options, 9,878,384 warrants and 9,634 restricted stock units (“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, 2016 a total of 8,135,000 and 9,335,000 options, respectively, were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive. During the three and nine months ended September 30, 2016, a total of 10,182,629 warrants in both periods were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive.

Recent Accounting Pronouncements

In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The amendments in this update change existing guidance related to accounting for employee share-based payments affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods, with early adoption permitted. The updated accounting guidance was effective for the Company on January 1, 2017 and it did not have a material effect on the Company’s condensed consolidated financial statements and any deferred tax benefits would be offset by a valuation allowance.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) The new standard establishes a right-of-use (“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

10


 

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. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the potential impact of the standard on its condensed consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which was further amended through various updates issued by the FASB thereafter. The amendments of Topic 606 completed the joint effort between the FASB and the IASB, to develop a common revenue standard for GAAP and IFRS, and to improve financial reporting. The guidance under Topic 606 provides that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for the goods or services provided and establishes a five-step model to be applied by an entity in evaluating its contracts with customers. The Company expects to adopt the standard effective January 1, 2018 and apply the guidance retrospectively to contracts at the date of adoption. The Company also expects to elect the practical expedient available under Topic 606 for measuring progress toward complete satisfaction of a performance obligation and for disclosure requirements of remaining performance obligations. The practical expedient allows an entity to recognize revenue in the amount to which the entity has the right to invoice such that the entity has a right to the consideration in an amount that corresponds directly with the value to the customer for performance completed to date by the entity. The Company continues to assess the new standard with a focus on identifying the performance obligations included within any revenue arrangements with customers and will evaluate the methods of estimating the amount and timing of variable consideration. The Company does not currently have, and has not previously held, any significant contracts with customers. Accordingly, the Company does not believe the adoption of Topic 606 on January 1, 2018 will have a material impact on its financial statements.

3.    COMMON STOCK AND WARRANTS

As of September 30, 2017, the Company’s certificate of incorporation authorized the Company to issue unlimited shares of common stock. Each share of common stock is entitled to have the right to vote at any shareholder meeting on the basis of one vote per share. Each share of common stock held entitles the holder to receive dividends as declared by the directors. No dividends have been declared since inception of the Company through September 30, 2017. In the event of a liquidation, dissolution or winding-up of the Company, other distribution of assets of the Company among its shareholders for the purposes of winding-up its affairs or upon a reduction of capital, the shareholders shall, share equally, share for share, in the remaining assets and property of the Company.

The Company is subject to a shareholders’ agreement, which places certain restrictions on the Company’s common stock and its shareholders. These restrictions include approvals prior to sale or transfer of stock, a right of first refusal to purchase stock held by the Company and a secondary right of refusal to shareholders, right of co-sale whereby certain shareholders may be enabled to participate in a sale of the common stock of other shareholders to obtain the same price, terms and conditions on a pro-rata basis, rights of first offer of new security issuances to current shareholders on a pro-rata basis and certain other restrictions.

On October 9, 2015, the Company entered into a $7.0 million funding commitment with A&B Company Limited (“A&B”), in the form of a convertible promissory note consisting of an initial $2.0 million note and a $5.0 million funding commitment. On October 9, 2015, the Company received the conversion notice on the promissory note and in November 2015, the Company issued 2,083,333 shares of common stock at a price of $0.96 per share and 1,041,667 warrants exercisable at $1.44 for a period of three years from the date of issuance. The shares of common stock and the warrants were issued on November 10, 2015. On December 29, 2015, the Company drew down the $5.0 million funding commitment through the issuance of 5,555,556 shares of common stock at a price of $0.90 per share and 2,777,778 warrants exercisable at $1.35 for a period of three years from the date of issuance. The shares of common stock and the warrants were issued on January 7, 2016.

On April 18, 2016, the Company closed a short form prospectus offering in Canada and a concurrent U.S. private placement (the “April 2016 Offering”) of units, at a price of CAD $1.00 per unit, with gross proceeds to the Company of $7.2 million. Each unit consisted of one share of common stock 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 $1.50 on or before April 18, 2019. Mackie Research Capital Corporation (“Mackie”), acted as agent and sole bookrunner in connection with the April 2016 Offering. The Company paid Mackie a cash commission of $0.3 million and granted Mackie compensation options exercisable to purchase 436,050 units at an exercise price of CAD $1.00 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 the April 2016 Offering.

On May 2, 2016, the Company closed the sale of an additional 1,090,125 units issued pursuant to the exercise of the over-allotment option granted to Mackie in connection with the April 2016 Offering for additional gross proceeds to the Company of $0.9 million, bringing the total aggregate gross proceeds to $8.1 million. In connection with this closing, the Company paid Mackie a cash commission of $0.1 million and granted Mackie compensation options exercisable to purchase an additional 65,407 units for a period of 24 months from the closing of the April 2016 Offering.

The warrants issued in connection with the April 2016 Offering were classified within equity in the Company’s condensed consolidated balance sheets. The proceeds from the April 2016 Offering were allocated on a relative fair value basis between the common stock and the warrants issued. These warrants represent additional share issuance costs and are recorded within equity in the Company’s condensed consolidated balance sheets at their fair value.

11


 

The fair value of the warrants granted in the April 2016 Offering were estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

 

 

 

 

Stock price

 

CAD $1.09

 

Exercise price

 

CAD $1.50

 

Expected life

 

3.0 years

 

Expected volatility

 

 

83.83

%

Risk-free interest rate

 

 

0.60

%

Dividend rate

 

 

0.00

%

 

The fair value of the compensation options granted during the April 2016 Offering were estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

 

 

 

 

Stock price

 

CAD $1.36

 

Exercise price

 

CAD $1.00

 

Expected life

 

2.0 years

 

Expected volatility

 

 

126.76

%

Risk-free interest rate

 

 

0.61

%

Dividend rate

 

 

0.00

%

 

On June 6, 2016, the Company received proceeds of $1.4 million from the exercise of 1,825,600 outstanding warrants issued in connection with the Company’s May 2014 private placement of subscription. The remaining 6,604,400 warrants issued in this offering expired unexercised.

On February 16, 2017, the Company completed an underwritten registered public offering and issued an aggregate of 6,555,000 shares of common stock for gross proceeds of $9.2 million. The offering was made by means of written prospectuses and prospectus supplements, dated February 9, 2017, that form part of the Company’s existing Canadian multi-jurisdictional disclosure system (“MJDS”) short-form base shelf prospectus dated January 26, 2017, in Canada, and U.S. shelf registration statement on Form S-3 that became effective on January 6, 2017, in the U.S. The Company incurred cash issuance costs of $1.2 million in connection with this offering.

On June 28, 2017, the Company completed a non-brokered private placement of 4,000,000 shares of common stock for gross proceeds of $5.4 million. The Company incurred approximately $9 thousand in share issuance cost related to the private placement.

Pursuant to the guidance of ASC 815 Derivatives and Hedging, the Company determined that the warrants issued in the May 2014 private placement as well as the warrants issued in January 2016 in connection with the funding commitment with A&B were required to be accounted for as liabilities because they were considered not to be indexed to the Company’s stock due to the exercise price being denominated 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.

The warrants having an exercise price denominated in a currency other than the functional currency of the Company that are required to be accounted for as liabilities are summarized as follows for the nine months ended September 30, 2017 and 2016 (amounts in thousands):

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Fair value of warrants at beginning of period

 

$

2,857

 

 

$

351

 

Issuance of warrants

 

 

 

 

 

797

 

Change in fair value of warrants during the period

 

 

3,684

 

 

 

892

 

Fair value of warrants at end of period

 

$

6,541

 

 

$

2,040

 

 

These warrants which are classified as derivative financial instruments in the Company’s condensed consolidated balance sheets are required to be revalued 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.

12


 

The fair value of the warrants classified as derivative financial instruments outstanding as of September 30, 2017 and December 31, 2016 were estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Stock price

 

$

2.88

 

 

$

1.38

 

Exercise price

 

$

1.62

 

 

$

1.62

 

Expected life

 

1.15 years

 

 

1.89 years

 

Expected volatility

 

 

69.61

%

 

 

94.97

%

Risk-free interest rate

 

 

1.30

%

 

 

0.79

%

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

The following is a summary of the Company’s warrant activity during the nine months ended September 30, 2017:

 

 

 

Number of Warrants

 

 

Weighted Average

Exercise Price

 

 

 

CAD

 

 

US

 

 

CAD$

 

 

US$

 

Outstanding as of January 1, 2017

 

 

5,557,653

 

 

 

4,528,609

 

 

$

1.46

 

 

$

1.62

 

Granted

 

 

100,179

 

 

 

 

 

 

1.50

 

 

 

 

Exercised

 

 

(458,232

)

 

 

 

 

 

1.28

 

 

 

 

Outstanding as of September 30, 2017

 

 

5,199,600

 

 

 

4,528,609

 

 

$

1.47

 

 

$

1.62

 

 

The Company’s warrants outstanding and exercisable as of September 30, 2017 were as follows:

 

Number of Warrants Outstanding

 

Exercise Price

 

Expiration Date

452,032

 

US $3.00

 

April 30, 2018

167,731

 

US $3.00

 

June 26, 2018

18,978

 

US $2.15

 

June 26, 2020

62,878

 

US $3.00

 

July 17, 2018

7,545

 

US $2.15

 

July 17, 2020

1,041,667

 

US $1.44

 

November 10, 2018

2,777,778

 

US $1.35

 

December 29, 2018

4,899,250

 

CAD $1.50

 

April 18, 2019

300,350

 

CAD $1.00

 

April 18, 2018

 

4.    SHARE BASED PAYMENTS

On June 18, 2014, the Company’s Board of Directors authorized and approved the adoption of the June 2014 Equity Incentive Plan (“2014 Plan”), under which an aggregate of 12,108,016 shares of common stock was authorized to be issued. Pursuant to the terms of the 2014 Plan, the Company is authorized to grant stock options, as well as awards of stock appreciation rights, restricted stock, unrestricted shares, restricted stock units and deferred stock units. These awards could 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. The Company has now granted awards for the full amount of the shares authorized under the 2014 Plan, and no future awards may be made under the 2014 Plan. On August 22, 2017, the Company’s Board of Directors approved the amended and restated 2014 Plan to correct for a formulaic error included in the deemed net stock and cashless exercise equation within the 2014 Plan. This amendment had no impact on the Company’s condensed consolidated financial statements.

On August 8, 2016, the Company’s Board of Directors authorized and approved the adoption of the 2016 Omnibus Incentive Plan (“2016 Plan”), under which an aggregate of 15,000,000 shares of common stock may be issued. Pursuant to the terms of the 2016 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.

As of September 30, 2017, there were an aggregate of 12,804,626 shares of common stock remaining available for grant under the 2016 Plans.

13


 

The following is a summary of the Company’s stock option activity during the nine months ended September 30, 2017:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Aggregate

 

 

 

Number of

 

 

Exercise Price

 

 

Intrinsic Value

 

 

 

Stock Options

 

 

(CAD)

 

 

(CAD$ 000's)

 

Outstanding as of January 1, 2017

 

 

9,845,000

 

 

$

1.20

 

 

$

8,218

 

Granted

 

 

4,269,513

 

 

 

2.20

 

 

 

 

 

Forfeited

 

 

(40,336

)

 

 

2.00

 

 

 

 

 

Cancelled

 

 

(100,000

)

 

 

2.52

 

 

 

 

 

Exercised

 

 

(760,000

)

 

 

0.78

 

 

 

 

 

Outstanding as of September 30, 2017

 

 

13,214,177

 

 

$

1.54

 

 

$

26,468

 

Exercisable as of September 30, 2017

 

 

7,256,311

 

 

$

1.22

 

 

$

16,850

 

 

The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2017 was $2.1 million.

 

The Company’s stock options outstanding and exercisable as of September 30, 2017 were as follows:

 

 

 

 

 

 

 

Stock Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

 

Grant Date

 

 

Number of

 

Number of Stock

 

 

 

 

Contractual Life

 

 

Exercise

 

 

Fair Value

 

 

Stock Options

 

Options Outstanding

 

 

Expiration Date

 

(In Years)

 

 

Price (CAD)

 

 

(CAD)

 

 

Exercisable

 

 

3,000,000

 

 

June 18, 2019

 

 

1.72

 

 

$

0.60

 

 

$

0.26

 

 

 

3,000,000

 

 

450,000

 

 

December 8, 2019

 

 

2.19

 

 

$

2.92

 

 

$

1.65

 

 

 

450,000

 

 

100,000

 

 

December 8, 2019

 

 

2.19

 

 

$

2.92

 

 

$

1.31

 

 

 

100,000

 

 

400,000

 

 

December 8, 2019

 

 

2.19

 

 

$

2.96

 

 

$

1.29

 

 

 

400,000

 

 

100,000

 

 

March 16, 2020

 

 

2.46

 

 

$

3.20

 

 

$

1.42

 

 

 

100,000

 

 

50,000

 

 

August 15, 2020

 

 

2.87

 

 

$

0.98

 

 

$

0.39

 

 

 

50,000

 

 

750,000

 

 

October 21, 2020

 

 

3.06

 

 

$

0.87

 

 

$

0.36

 

 

 

375,000

 

 

550,000

 

 

October 28, 2020

 

 

3.08

 

 

$

0.84

 

 

$

0.44

 

 

 

550,000

 

 

100,000

 

 

December 31, 2020

 

 

3.25

 

 

$

1.24

 

 

$

0.50

 

 

 

66,668

 

 

2,975,000

 

 

July 13, 2020

 

 

2.79

 

 

$

1.39

 

 

$

0.65

 

 

 

1,983,332

 

 

100,000

 

 

August 8, 2020

 

 

2.86

 

 

$

1.31

 

 

$

0.65

 

 

 

50,000

 

 

410,000

 

 

October 3, 2020

 

 

3.01

 

 

$

1.35

 

 

$

0.80

 

 

 

102,500

 

 

3,585,000

 

 

April 17, 2027

 

 

9.55

 

 

$

2.16

 

 

$

1.55

 

 

 

 

 

44,177

 

 

May 18, 2021

 

 

3.63

 

 

$

2.00

 

 

$

1.05

 

 

 

28,811

 

 

100,000

 

 

May 18, 2027

 

 

9.64