10-K 1 hsdt-10k_20171231.htm 10-K hsdt-10k_20171231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the Fiscal Year Ended December 31, 2017

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from _____ 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
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

Suite 100, 642 Newtown Yardley Road
Newtown, Pennsylvania, 18940
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (215) 944-6100

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

None

 

None

Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes      No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes      No

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 (Section §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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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

 

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

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.

The aggregate market value of the common equity held by non-affiliates of the registrant on June 30, 2017, based on the closing price on that date of USD$7.80, was approximately $99,372,392. As of March 5, 2018, there were 20,241,135 shares of the registrant’s common stock outstanding.

Documents Incorporated by Reference

Portions of the registrant’s Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 2018 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this report.  Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2017.

 

 

 

 


TABLE OF CONTENTS

 

Item

 

Description

 

Page

 

 

 

 

 

 

 

PART I

 

4

 

 

 

 

 

ITEM 1.

 

BUSINESS

 

4

ITEM 1A.

 

RISK FACTORS

 

23

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

 

38

ITEM 2.

 

PROPERTIES

 

38

ITEM 3.

 

LEGAL PROCEEDINGS

 

38

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

39

 

 

 

 

 

 

 

PART II

 

40

 

 

 

 

 

ITEM 5.

 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

40

 

 

 

 

 

ITEM 6.

 

SELECTED FINANCIAL DATA

 

40

ITEM 7.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

41

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

47

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

47

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

47

ITEM 9A.

 

CONTROLS AND PROCEDURES

 

48

ITEM 9B.

 

OTHER INFORMATION

 

48

 

 

 

 

 

 

 

PART III

 

49

 

 

 

 

 

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

49

ITEM 11.

 

EXECUTIVE COMPENSATION

 

49

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

49

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

49

ITEM 14.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

49

 

 

 

 

 

 

 

PART IV

 

50

 

 

 

 

 

ITEM 15.

 

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

50

ITEM 16.

 

FORM 10-K SUMMARY

 

52

 

 

 

 

 

SIGNATURES

 

 

 

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In this Annual Report on Form 10-K, unless otherwise specified, references to “we,” “us,” “our,” “Helius” or “the Company” mean Helius Medical Technologies, Inc. and its wholly-owned subsidiaries, NeuroHabilitation Corporation, or NHC, and Helius Medical Technologies (Canada), Inc., unless the context otherwise requires. All financial information is stated in U.S. dollars unless otherwise specified. Our financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, or the Annual Report, includes certain statements that may constitute “forward-looking statements.” All statements contained in this Annual Report, other than statements of historical facts, that address events or developments that the Company expects to occur, are forward-looking statements. These statements are based on management’s expectations at the time the statements are made and are subject to risks, uncertainty, and changes in circumstances, which may cause actual results, performance, financial condition or achievements to differ materially from anticipated results, performance, financial condition or achievements. All statements contained herein that are not clearly historical in nature are forward-looking and the words “anticipate,” “believe,” “calls for,” “could” “depends,” “estimate,” “expect,” “extrapolate,” “foresee,” “goal,” “intend,” “likely,” “might,” “plan,” “project,” “propose,” “potential,” “target,” “think,” and similar expressions, or that events or conditions “may,” “should occur” “will,” “would,” or any similar expressions are generally intended to identify forward-looking statements.

The forward-looking statements in this Annual Report include but are not limited to statements relating to: clinical development plans, product development activities, other products not yet developed or acquired, our product candidate success, plans for U.S. Food and Drug Administration, or FDA, filings and their subsequent approvals, other foreign or domestic regulatory filings by us or our collaboration partners, including filings with Health Canada, CE Mark and the Therapeutic Goods Administration, our ability to commercialize the product(s), either independently or with collaboration partners, the safety and efficacy of our product candidate, the timeline for our improvement plans, our market awareness, our ability to compete effectively, the ability and limitation of our manufacturing source(s), our distribution network, the adequacy of our intellectual property protection, our future patent approvals, potential infringement of our intellectual property, future litigation waged against us and its outcome, any product liability we may incur, the sufficiency of our operating insurance, including sufficient product liability insurance, our limited operating history, our dependence on a small number of employees, employee conflicts of interest, our dependence on outside scientists and third party research institutions, our future expenses and cash flow, our ability to become profitable, our future financing arrangements, our ability to accurately report our financial position, our accountants’ future perspective including any going concerns, our ability to maintain effective internal controls, any future stock price, the potential dilution of the stock, future sales of the Company’s equity securities, any future Financial Industry Regulatory Authority sales practice requirements, future disclosure requirements, future regulatory risks, our relationship with the U.S. Army, our ability to build the necessary commercial infrastructure and to use existing reimbursement codes or receive reimbursement codes from the American Medical Association and the U.S. Department of Health and Human Services, and our ability to receive reimbursement coverage under Medicare, Medicaid or under other insurance plans. These and additional risks and uncertainties are more fully described in this Annual Report and our other public filings with the Securities and Exchange Commission or SEC.

Although we believe the expectations expressed in such forward-looking statements are based on reasonable assumptions at the time they were made, they are subject to risks and uncertainties, known and unknown, which could cause actual results and developments to differ materially from those expressed or implied in such statements. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from such forward-looking statements. Factors that could cause the actual results to differ materially from those in the forward-looking statements include future economic, competitive, reimbursement and regulatory conditions; new product introductions, demographic trends, the intellectual property landscape, litigation, financial market conditions, continued availability of capital, and, future business decisions made by us and our competitors. All of these factors are difficult or impossible to predict accurately and many of them are beyond our control. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and actual results or developments may differ materially from those projected in the forward-looking statements. Undue reliance should not be placed on forward looking statements which speak only as of the date they are made. Except as required by applicable securities laws, we undertake no obligation to update or alter these forward-looking statements (and expressly disclaims any such intention or obligation to do so) in the event that management's beliefs, estimates, opinions, or other factors should change.

2


INDUSTRY AND MARKET DATA

In this Annual Report, we reference information, statistics and estimates regarding the medical devices and healthcare industries. We have obtained this information from various independent third-party sources, including independent industry publications, reports by market research firms and other independent sources. This information involves a number of assumptions and limitations, and we have not independently verified the accuracy or completeness of this information. Some data and other information are also based on the good faith estimates of management, which are derived from our review of internal surveys, general information discussed in the industry, and independent sources. We believe that these external sources and estimates are reliable but have not independently verified them. The industries in which we operate are subject to a high degree of uncertainty, change, and risk due to a variety of factors, including those described in “Item 1A. Risk Factors.” These and other factors could cause results to differ materially from those expressed in this report and other publications.

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PART I

ITEM 1.

BUSINESS

 

Overview

 

We are a medical technology company focused on the development of products for the treatment of neurological symptoms caused by disease or trauma. We seek to develop, license or acquire unique and noninvasive platform technologies that amplify the brain’s ability to heal itself.

 

Many patients with brain injury or brain-related disease have disrupted neural networks that result in their brains being unable to correctly or efficiently carry neural impulses, which are responsible for directing bodily functions like movement control or sensory perception. Our first product in development, known as the portable neuromodulation stimulator or PoNS®, device, is designed to enhance the brain’s ability to compensate for this damage. The PoNS Treatment is a combination of our PoNS device and functional, targeted physical or cognitive therapy, and is currently being developed for the treatment of movement, gait and balance disorders in patients with traumatic brain injury, or TBI, and other chronic neurological diseases.

 

We recently completed our registrational clinical trial of the PoNS Treatment for mild- to moderate TBI, in which we observed statistically and clinically significant increases in composite sensory observation test scores. Based on the safety and efficacy results from this clinical trial, we intend to submit a request for FDA marketing authorization for the treatment of chronic balance deficit due to mild- to moderate-TBI via the FDA’s de novo classification process in the first half of 2018.  In addition, we intend to submit applications for marketing authorizations in Canada, the European Union and Australia during the first half of 2018.

 

The PoNS Treatment

The PoNS Treatment consists of an investigational medical device that is comprised of two major components, an electric pulse generator and a replaceable mouthpiece combined with physical or cognitive therapy. The PoNS device delivers specially-patterned electrical stimulation developed to mirror nerve impulses to the brain through 143 gold-plated electrodes on the mouthpiece which is placed on the tongue. For 20 minutes the electrical stimulation, called translingual neurostimulation, is coupled with physical or cognitive therapy, which consists of condition specific physical, relaxation and cognitive exercises, based on the patient's functional deficits. Clinical research has shown that electrical stimulation of the tongue activates two major cranial nerves – the lingual nerve, a part of the trigeminal nerve, and the chorda tympani, a part of the facial nerve. Electrical stimulation of the cranial nerves creates a flow of neural impulses that are then delivered directly into the brain stem and cerebellum – the main control centers for multiple life functions including sensory perception and movement. From the brain stem, these impulses travel throughout the brain and activate or reactivate neurons and structures involved in human function such as the cortex, spinal cord and potentially the entire central nervous system. Researchers believe that sustained stimulation initiates a sequential cascade of changes in the actual interconnected nuclei, or neuronal network, the fundamental connections between the anatomical components of the brain.  The PoNS device is also a smart device with built in technology to allow tracking of the patient use, including time and intensity of treatments.

Design

The PoNS device is ergonomically designed for patient comfort, is relatively light, contains a replaceable hygienic mouthpiece, and a rechargeable battery with built-in technology that allows for technical data logging and communications. See Figure 1.

 

Figure 1

The portable neuromodulation stimulator, PoNS device

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The mouthpiece of the PoNS device is held lightly in place by the lips and teeth around the neck of the tab that goes into the mouth and rests on the anterior and superior part of the tongue. See Figure 2.

 

Figure 2

A rechargeable lithium polymer battery with built-in charge safety circuitry provides power. While the voltage and pulse timing to each electrode are programmed into the device and cannot be altered, the stimulus intensity can be adjusted by the user. The sensation produced by the array is similar to the feeling of drinking a carbonated beverage. The patented waveform is specifically designed to minimize the potential for tissue irritation.

Concurrent Use with Physical or Cognitive Rehabilitation

We have designed the PoNS Treatment whereby the PoNS device is used in conjunction with physical or cognitive rehabilitation, typically delivered for two weeks in the clinic followed by use by the patient at home.  The PoNS device has a design feature that stops delivering treatment every 14 weeks, thus requiring the patient to return to their physician or physical therapy center, or PTC, for assessment of their progress, reestablishment of challenging physical therapy to achieve higher goals and download of utilization data, which we believe will be helpful for reimbursement and future research. We currently expect the PoNS device to be inspected visually by the physical therapist, reset for another 14 weeks of treatment if necessary, and the mouthpiece replaced with a new one to reduce the likelihood of degradation of the electrodes. We expect this business model feature to ensure proper support for patients in the early phase of their treatment.

We expect physicians will be informed to prescribe the PoNS Treatment, which includes both the PoNS device and a prescription to work with PTCs who are trained and PoNS-certified. We anticipate supporting the launch of the PoNS Treatment with the development and implementation of a hub services center with online and offline elements to help facilitate the healthcare transaction.

Upon completion of the in-clinic portion of the PoNS Treatment, which is normally two weeks, patients are expected to be monitored in their home treatment through the PTCs. At the end of their prescribed treatment, we expect patients to be directed back to their physician for assessment and then return to the PTC for additional treatment as necessary including replacement of the mouthpiece if continued treatment is deemed necessary.

PoNS Trials in TBI

During the third quarter of 2017, we completed our registrational clinical trial in mild- to moderate- TBI, which was a double-blind randomized, controlled study of the safety and effectiveness of the PoNS Treatment for translingual noninvasive neuromodulation stimulation training in subjects with chronic balance deficit due to mild- to moderate- TBI.

The study, which was launched in the third quarter of 2015 in conjunction with the U.S. Army Medical Research and Materiel Command, was conducted at seven sites in the United States and Canada. The trial evaluated a total of 122 randomized subjects, with ages between 18 and 65 years. Each subject received five weeks of treatment, two weeks in-clinic and three weeks at home with the treatment consisting of physical therapy with either a high-frequency pulse (25.7 million pulses per 20-minute treatment), or HFP, PoNS device or a low-frequency pulse (13,728 pulses per 20-minute treatment), or LFP, PoNS device.  While the intensity of the pulses between the HFP and the LFP were identical, the frequency of the pulses was different between the two devices.

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All subjects for the trial were at least one-year post injury to ensure spontaneous recovery was unlikely. To be considered for the study, all subjects had to have participated in a focused physical rehabilitation program for the TBI-related balance disorder and been deemed by the treating clinician to have reached a plateau and yet continued to have significant balance issues as they entered the trial.

An objective balance assessment is performed using the Composite Score from the NeuroCom Sensory Organization Test, or SOT, which measures balance using computerized sensors that measures participants’ ability to maintain balance under six different conditions. This was used as the efficacy endpoint for the trial. The SOT is a widely used measurement tool for balance disorder associated with TBI.  A responder was defined as a subject with an improvement of at least 15 points on the composite SOT score at five weeks of PoNS Treatment when compared to their baseline score.  According to published, independent third-party data, patients receiving physical therapy alone to treat balance disorders related to TBI improve by 8-10 points on the composite SOT, and patients tend to drift back to their baseline disability when physical therapy is discontinued.  It would be expected that if the PoNS Treatment was not effective that the improvement in SOT score in our patient population would be greater than 8-10 points compared with the patient score at the start of the trial.

The statistical analysis plan contemplated how to analyze the efficacy data based on the results of the comparison between the HFP and LFP PoNS device groups.  There were three possible scenarios:

 

The two devices would produce a response that was not statistically different from each other and neither device was effective at producing a 15-point SOT response (failed study).

 

One device would be statistically superior to the other and produce a 15-point response in the SOT (positive study).

 

The two devices would produce a response that was not statistically different from each other and both produced a significant response greater than 15 points (positive study).  This third scenario is what happened in out trial.

Since scenario three was the outcome of the primary endpoint of the study, the statistical analysis plan prospectively dictated that the secondary endpoint would be calculated by combining the two groups and comparing the response to baseline at week two and week five.  

Secondary effectiveness endpoints demonstrated statistically and clinically significant increases (at least 8 points) in composite SOT scores:

 

o

The mean improvement at two weeks for combined-arms was 18.3 points, p<0.0005.

 

o

The mean improvement at five weeks for combined-arms was 24.6 points, p<0.0005.

The primary safety endpoint was an improvement in the frequency of falls, as determined by daily event recording on the subject data case report form during the in-clinic phase of the study. The secondary safety endpoint was the frequency and severity of headaches, as measure by the Headache Disability Index at baseline and at the end of treatment, which was at week five.

 

We successfully met the primary and secondary safety endpoints as measured by a decrease in falls and headaches, in both treatment groups.

 

There were no serious device related adverse events.

PoNS Long-Term Treatment Study

This study was performed to understand the durability of treatment response. This double-blind randomized controlled study in patients with mild- to moderate- TBI was completed in May 2017 at the Tactile Communication Neurorehabilitation Laboratory at University of Wisconsin-Madison and was sponsored by the U.S. Army. The study was conducted with 22 patients using the HFP PoNS device and 21 patients using the LFP PoNS device with 14 weeks of active treatment followed by a 12-week washout period after which final SOT scores were captured.

Highlights of the study results were as follows:

 

There was no statistical difference between the HFP and LFP PoNS device groups in the trial supporting the results of the registrational clinical trial.

 

On average, participants entered the study with an SOT score of approximately 40, which is a score that indicates profound disability due to impaired balance.

 

At the end of 14 weeks of active treatment with the HFP PoNS device group, patients showed improvements on average of 29.7 points on the SOT score, which put the participants within the normal range of SOT score after 14 weeks of treatment.

 

Participants then discontinued treatment and were told to resume normal lifestyle for another12 weeks and were monitored on a weekly basis. The participants, on average, maintained the benefit of the treatment throughout the 12-week withdrawal period.  

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Conclusion:

 

The study demonstrated that the PoNS Treatment with the HFP PoNS device could, on average, make patients who were profoundly disabled at entry into the study, achieve a SOT score in the normal range from a balance perspective in 14 weeks and maintain that benefit after a 12-week washout period, supporting the durability of the response to the treatment and the potential restoration of the balance system.

With the completion of our registrational clinical trial, we expect to complete the verification and validation for device design and manufacturing to meet the requirements of the applications for commercial distribution, and submit applications for marketing authorizations for the treatment of balance disorder in mild- to moderate-TBI, with the FDA, Health Canada, CE Mark in Europe and the Therapeutic Goods Administration in Australia during 2018.

Planned Studies

Multiple Sclerosis

According to the National Multiple Sclerosis Society, there are approximately one million individuals in the United States living with MS, for an annual economic cost of MS in the United States of approximately $28 billion, many of whom experience balance problems. Studies from several countries estimate that 50% to 70% of MS patients had reported falls within the past two to six months.

The FDA has determined that we must obtain an investigational device exemption, or IDE, prior to commencing any clinical trial of the PoNS Treatment in MS patients in the United States.  We intend to commence a registrational clinical trial of the PoNS Treatment in MS patients with balance and gait deficit in the second half of 2018, contingent on the availability of funding and the timing of our submission and approval of our IDE by the FDA.

Stroke

Stroke is the third leading cause of death in the United States, with approximately 795,000 annual episodes, resulting in approximately 140,000 deaths. The term “stroke” or “brain attack” implies brain tissue has been destroyed – because one of the vessels that provide oxygen and nutrients to the brain has ruptured or become blocked by atheromatous plaque or a blood clot traveling from elsewhere in the body, often due to an irregularly beating heart. Whichever mechanism leads to a stroke, the end result is the same; death of brain tissue and variable disability depending on what parts of the brain have been affected.  This might be the inability to feel or move a part of the body, to speak, think, or many other symptoms. Acute treatment consists of maneuvers including drugs, interventional radiology or surgery to stop bleeding or remove blockages. Thereafter, therapy is focused on trying to help the patient recover use of disabled anatomy with physical therapy or learn to overcome disability with occupational therapy. We are determining next steps for our studies of the PoNS Treatment for stroke patients, which are subject to the availability of funding.

Cognition

In December 2016, we announced, based on preliminary, encouraging results, the expansion of our comprehensive study in healthy adults to measure the benefit of investigational PoNS Treatment on physiological improvements associated with cognition. The study was conducted at HealthTech Connex Inc, or HTC, in Surrey, BC. HTC also collaborated with us to explore whether a single, twenty-minute session of two PoNS stimulation waveforms - high frequency, or HF, and low frequency, or LF - impacted objective measures of brain activity recorded by high density 64-channel electroencephalography, or EEG, and whether there were differences between the two PoNS stimulation waveforms. The study in neurologically intact volunteers showed that:

 

EEG results showed that translingual neurostimulation delivered through the PoNS device generated significant differences in brain activity.

Statistically significant increases in alpha and theta frequency power were observed in the post-stimulation rest period for HF group, suggesting a lasting exposure effect.

Statistically significant increases in alpha waveform power pre- to post-stimulation were present when both HF and LF groups were evaluated together.

Significant increases in attentional microstate activity were seen in the HF group. The effects began during PoNS stimulation and continued to increase to the level of significantly greater than baseline following stimulation.

These findings confirmed several important assumptions about the PoNS technology, most importantly, being that a single PoNS stimulation session has an impact on brain activity, and the results also provide insights on the differences between PoNS waveforms and potential opportunities for research that will continue to drive improved and more effective patient experiences and results.

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Further Studies

Given the likely mechanism of action of PoNS Treatment, we are exploring a range of other clinical applications including Parkinson’s Disease, cognitive disorders, the treatment of addiction, xerostomia and other neurological conditions. We will require additional funding, in the form of grants and partnerships with collaborators, to expand our clinical development.

Our Partnership with the U.S. Army

In July 2015, we entered into a sole source cost sharing agreement, or the U.S. Army Agreement, with the U.S. Army for the commercial development of the PoNS Treatment for chronic balance deficits related to mild- to moderate-TBI. Pursuant to the U.S. Army Agreement, the laboratories of the U.S. Army Medical Material Agency, or USAMMA, and the U.S. Army Medical Research and Material Command, or USAMRMC, the “Army Laboratories,” agreed to cooperate with NHC, our wholly-owned subsidiary, on clinical studies and regulatory responsibilities necessary to obtain FDA marketing authorization for this indication.  Under the U.S. Army Agreement, NHC is the sole regulatory sponsor and will oversee and execute all required clinical studies. Further, the U.S. Army will reimburse NHC for the initially budgeted costs related to the registrational clinical trial of the safety and effectiveness of the PoNS Treatment for chronic balance deficits related to mild to moderate TBI, up to a maximum amount of $3.0 million. The U.S. Army Agreement terminates on December 31, 2018 unless the parties agree to extend the term.

We previously entered into a collaborative relationship with the U.S. Army, pursuant to a February 2013 cooperative research and development agreement as amended, or the CRADA, to determine if the PoNS Treatment could be developed for commercial use in the treatment of soldiers and others with a variety of military-relevant neurological manifestations of TBI, including tinnitus, post-traumatic stress disorder, pain and any subsequent indications identified by the parties. Under the CRADA, NHC is the sole regulatory sponsor of the PoNS Treatment, and the Army Laboratories provide support for the execution of clinical studies for FDA marketing authorization. 

Based on our research and development work performed under the CRADA, we intend to initially seek FDA marketing authorization only for treatment of patients with chronic balance deficits due to mild- to moderate-TBI. Should we obtain FDA marketing authorization for this indication, we plan to develop the PoNS Treatment to treat other indications caused by neurological disorders. We would sponsor the regulatory process for these additional indications, but the Army Laboratories has agreed to support the execution of required studies. The amount of such support, if any, and the terms of such responsibility to support such studies are not yet negotiated, and we have no assurance that we can ultimately reach agreement with the Army Laboratories on such amount or terms of support. There can be no assurance that the Army Laboratories will not otherwise attempt to renegotiate its responsibilities under the U.S. Army Agreement or the CRADA.

The CRADA may be terminated by NHC or the Army Laboratories unilaterally at any time by providing the other party written notice at least 30 days prior to the desired termination date. The CRADA is subject to a four-year automatic extension as required for both FDA marketing authorization in the event that a pre-market approval application with the FDA is required, as well as for commercialization of the PoNS Treatment. The CRADA terminates on December 31, 2018 unless the parties agree to extend the term. We are required to commercialize the PoNS Treatment by December 31, 2021.

As of December 31, 2017, we have received a total of approximately $3.0 million with respect to reimbursements for expenses owed to the us 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 research and development expenses.

Manufacturing

We presently have relationships with three vendor partners on the design, development and manufacturing of the PoNS device: Cambridge Consulting, LLC, or Cambridge, Ximedica, LLC, or Ximedica and Key Tronic Corporation, or Key Tronic.  Ximedica was our original design and development and clinic unit manufacturing partner. In January 2017, we entered into an agreement with Cambridge, pursuant to which Cambridge assumed responsibilities for the design and development, performance of the engineering and design verification testing of the PoNS device and documentation support for the FDA submission, and to assist in the identification of, and transition to, our commercial-scale manufacturer.  

On December 29, 2017, we selected Key Tronic as our contract manufacturing partner for the PoNS device after a competitive selection process. The commercial design of the PoNS device will be manufactured and assembled at Key Tronic’s facilities located in Oakdale, Minnesota. Key Tronic will manufacture devices for engineering and design verification testing as well as build launch inventory.  Key Tronic has multiple locations across the United States, Mexico and China with back-up manufacturing capabilities to help mitigate the risk of a single source provider. We remain ultimately responsible for the compliance of our submissions and products, and activities performed on our behalf.

We place an emphasis on protecting our patented technology, trade secrets and know-how and only share confidential information on an as needed basis. Ximedica and Key Tronic are registered as medical device manufacturers in good standing with the FDA and along with Cambridge are certified in accordance with International Organization for Standardization, or ISO, 13485, a comprehensive quality

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management system for the design and manufacture of medical devices.  In addition, on November 30, 2016, NHC received our ISO 13485 certification.

Commercialization

We believe that, due to the lack of non-invasive devices currently on the market, if commercialized, the PoNS Treatment will be the first and only treatment that addresses the high unmet needs of brain injury patients with balance disorders.

PoNS in Civilian Population

In the United States, there are approximately five million patients suffering from chronic symptoms due to TBI, of which approximately 40% have balance and gait disorder as their primary complaint. By definition all TBIs are the result of an accident, with the patient’s workers’ compensation responsible for the medical and income replacement costs for those injured at work.

Our commercialization strategy is premised on leveraging workers’ compensation, or WC, payers to drive early reimbursements and entice disability, Medicaid/Medicare and other commercial payers to study the experience in the WC market to help accelerate support for coverage under Medicaid/Medicare. As the PoNS Treatment has been deemed a non-significant risk device study for TBI, under Institutional Review Board, or IRB, supervision we intend to launch clinical experience programs for TBI patients to develop and test our commercialization strategy prior to FDA clearance and launch.  Specifically, we intend to undertake the following:

 

Engage with target WC payers to demonstrate the health economic benefit of a 14-week PoNS Treatment.

 

Engage high visibility neurorehabilitation clinics to participate in clinical experience programs to accelerate commercial infrastructure at launch.

 

Leverage new patients in hospital/clinic systems to build clinic revenues by providing other non-PoNS related services such as   MRIs, sleep therapy or other complimentary services.

In addition, we intend to leverage high demand and hospital/clinic system savings to drive premium pricing for the PoNS Treatment, as well as target our marketing activity at physical therapy clinic systems to drive demand into their system, by negotiating exclusivity for a given territory and time-period. Further, we intend to leverage the clinic system equity to target physical therapy clinic referral base for an efficient deployment of our sales representatives.

Our clinical experience program contemplates identifying “clinical centers of excellence” around the country and conducting training with these centers in the use of the PoNS device along with the specific therapeutic protocol, with participants selected based on an established criterion. This would also be reinforced with patient, clinician and claim staff outreach and education.

PoNS in the U.S. Army

The U.S. Army’s interest in the PoNS Treatment stems from the high incidence of TBI in soldiers and the fact that there are few proven, effective treatments available for those soldiers who suffer from chronic TBI symptoms. While the number of cases of TBI among active duty personnel may vary based on troop levels maintained by the federal government, our primary target market will be the large number of retired soldiers within the Veteran’s Administration, or VA, system who suffer from chronic TBI symptoms as this population is less subject to material, year-to-year fluctuation. Based on the U.S. Army’s indication of interest, we estimate that there is a sufficient potential market of active duty and retired soldiers who could potentially benefit from the PoNS treatment due to their chronic TBI symptoms. However, the U.S. Army is not under any obligation to purchase our product under the U.S. Army Agreement, the CRADA or any other agreement with us, and there is no assurance that the U.S. Army will ultimately purchase our product, even if we do demonstrate effectiveness and obtain FDA marketing authorization.

If it ultimately decides to purchase the PoNS Treatment from us, we expect that the U.S. Army would deploy the treatment to active duty personnel through their rehabilitation centers under orders from the central medical command. All personnel are expected to be certified PoNS therapists supported by live, paper and video-based training materials developed through this project by the U.S. Army. We also intend to pursue other military organizations in relevant countries based on need and size of potential deployment.

As part of our clinical experience program we intend to also focus on the nation’s defense and veterans brain injury centers which is comprised of a network of eighteen centers, operating out of thirteen military treatment facilities and five Department of Veterans Affairs medical centers. We intend to establish pre-launch clinical experience programs in certain select centers.

PoNS Outside the United States

We intend to commercialize the PoNS device outside the United States, subject to approval by foreign regulatory authorities.  We will evaluate the benefits of commercialization in certain territories either independently or with collaboration partners.  For example, we intend to enter into a definitive exclusive license agreement with A&B (HK) Company Limited to commercialize the PoNS device in certain Asian countries.

 

9


Competition

The neurostimulation market is predominately comprised of invasive technologies that are growing but are not directly competitive with our technology. Our competitors in the industry are predominantly large, publicly-traded companies that have a history in the market, have significantly easier access to capital and other resources and have an established product pipeline. The combined clinical research and product development done by the industry, including by us and all of our competitors, is uncovering the secrets of neuro-modulation which now establishes neurostimulation as a legitimate and scientifically validated approach to the treatment of neurological conditions, and accordingly, we expect for competition in the non-invasive space to grow in the future. However, we believe that we will have the first-mover advantage in the non-invasive neurostimulation space.

We believe that the PoNS Treatment introduces an innovative target and method of stimulation because targeting the tongue for neurostimulation provides several clear advantages that competitively distinguish the PoNS Treatment, which are discussed below.

Advantages of the PoNS Treatment

We believe that the PoNS Treatment offers the following benefits over existing neuro-stimulation technologies:

 

The PoNS Treatment stimulates the trigeminal nerve which developing science has implicated to be beneficial in some neurological disorder models. The PoNS Treatment stimulates the lingual part of the nerve through the tongue, while other technologies stimulate other branches of the trigeminal nerve. It is the largest branch, having the highest amount of nerve fibers of the three branches. We believe this will be an advantage in therapy.

 

Stimulating the tongue also allows for the simultaneous stimulation of a second cranial nerve found in the tongue, the facial nerve. The ability to stimulate more than one nerve alone differentiates us from our competition. However, it has not been scientifically proven that stimulating additional nerves adds to the efficacy or safety of the treatment.

 

The tongue has an anatomically unique surface with a high density of receptors, a consistently moist and conductive environment, constant pH, constant temperature and a direct connection to the brain through at least two cranial nerves.

 

We believe that the trigeminal and facial cranial nerves offer a high-bandwidth pathway for impulses to directly affect the central nervous system. The trigeminal and facial nerves project directly onto several areas of the brain, primarily the brainstem (trigeminal and solitary nuclei), cerebellum, cochlear nuclei and spinal cord. Secondary targets include the limbic system, basal ganglia and thalamus. We believe that this range of projections allows impulses be sent through sites regulating dozens of functions.

 

Unlike deep brain stimulation devices, implantable vagal nerve devices and other invasive forms of electrical stimulation, the tongue allows for neurostimulation to be delivered non-invasively and portably. This opens the door for integration of neurostimulation with a wide range of therapies previously unexplored for neurological rehabilitation.

Reimbursement

With the completion of our registrational clinical trials and should we obtain FDA marketing authorization for the treatment of balance disorder in mild- to moderate-TBI, and ultimately receive customer orders for the PoNS Treatment, we plan to submit applications for appropriate reimbursement codes so that insurers, including WC payers, disability payers, commercial payers, Medicare and Medicaid, are able to pay for the treatment. We plan to seek coverage and reimbursement of the PoNS Treatment as a whole, applying for reimbursement codes for the combination of stimulations and the associated physical or cognitive therapy. There are complex laws, regulations and guidance that set forth Medicare coverage and reimbursement policies. To help us navigate the regulatory complexities, we have engaged consultants to assist us with our reimbursement strategy.

From time to time, Congress enacts laws that impact Medicare coverage and reimbursement policy. In addition, the Centers for Medicare & Medicaid Services, or CMS, regularly engage in rulemaking activities and issues instructions and guidance that may affect Medicare coverage and reimbursement policy. Similarly, the federal and state governments may enact future laws or issue regulations or guidance that may impact Medicaid coverage and reimbursement policies, or the coverage and reimbursement policies of private insurers. We must ensure that we are in full compliance with all applicable requirements, and that we remain abreast of potential legislative or regulatory developments that could impact our business. For all payers, the PoNS Treatment must fit within an identifiable coverage category and fully meet the requirements of such category.

We initially intend to leverage what we learn from our clinical experience programs and seek coverage for the PoNS Treatment through workers’ compensation and disability insurance, for those injured through work or leisure. We intend to contract with WC payers and third-party administrators for a 14-week PoNS Treatment unit and at the same time contract with some of the large rehabilitation centers in the United States who will provide the physical therapy.  We believe that the WC case managers have the ability to identify potential patients for the treatment and refer those patients to physicians for a prescription to be generated and a PoNS certified physical therapy center identified.  At the end of the 14-week treatment, patients will return to their physician for evaluation of their progress and future

10


needs. It is also possible that in some states the physical therapist would undertake the evaluation. We believe that this process should enable us to get reimbursement faster than the time experienced by other medical devices.

We understand that the process for obtaining coverage from commercial and public payers could be up to a 24-month process from the time a medical device receives marketing authorization.  We intend to begin pursuing such coverage upon clearance and will be guided by our experiences in working through the WC process as there are many pathways to consider. As part of the coverage process, we may have to submit an application request to CMS, to revise the Healthcare Common Procedure Coding System, or HCPCS, level II national code set so that the PoNS Treatment becomes eligible to be covered and reimbursed, not only by Medicare, but by other public and private payers.  The HCPCS Level II Code Set is a standardized coding set used for claims submitted to public and private payers that identifies products, supplies and services. At present, we do not believe that the PoNS Treatment would fit easily within an existing HCPCS code as the PoNS Treatment requires the combination of stimulation and targeted physical therapy. Thus, we are considering submitting a request to CMS for a new HCPCS code and are evaluating our options with our consultants. An applicant can request that (i) a new permanent code be added to the HCPCS level II national code set; (ii) the language used to describe an existing code be modified; or (iii) an existing code be deleted.  However, prior to submitting the coding request application, we must satisfy several criteria, including but not limited to receiving documentation of the FDA’s marketing authorization of the device and have sufficient claims activity or volume in the United States (evidenced by 3 months of marketing activity).  The national codes are updated annually.  Coding requests must be received by January 3 of the current year to be considered for the January update of the following year.

At launch, we will support our customers with hub services to aid in submitting the expense to private insurers as well as the communication between the patient, physician and physical therapist.  The PoNS device is a smart-device with built in technology to allow tracking of patient use including time and intensity of treatments.  We have also created a device management application which allows the physical therapist to gather the information from the device on the patient’s usage to guide further treatment option discussions with the patient’s physician.  This data can also be used to support reimbursement and coverage decisions by insurance carriers.

In addition, Medicare and other insurers must find that the PoNS Treatment is medically reasonable and necessary for the treatment of patients’ illness or injuries.  If Medicare and other insurers find that the PoNS Treatment does not meet their medical necessity criteria, it will not be reimbursed.  Medicare and commercial insurers must also develop a payment amount for the PoNS Treatment.  If that amount is inadequate to cover the costs of the PoNS Treatment, healthcare providers will be unlikely to use this therapy.

11


Intellectual Property

Licensed Intellectual Property

Pursuant to the Second Amended and Restated Patent Sub-License agreement dated June 6, 2014 entered into between Advanced NeuroRehabilitation LLC, or ANR, and NHC, ANR has granted NHC a worldwide, exclusive license to make, have made, use, lease and sell devices utilizing certain patent applications, which are collectively referred to as the “Patent Pending Rights.” The Patent Pending Rights relate to the PoNS device and include the following patents and patent applications, which cover a device that noninvasively delivers neurostimulation through the skin or intra- orally to the brain stem via various nerves including the trigeminal and facial nerves:

 

U.S. Patent

Application No.

 

Application

Filing Date

 

Status

 

U.S.

Patent No.

 

 

Issue Date

 

Subject Matter

12/348,301

 

1/4/2009

 

Issued

 

 

8,849,407

 

 

9/30/2014

 

non-invasive neurostimulation of the skin combined with simultaneous physical therapy to provide neurorehabilitation of a patient to treat various maladies including, e.g., TBI, stroke and Alzheimer’s disease

14/340,144

 

7/24/2014

 

Issued

 

 

8,909,345

 

 

12/9/2014

 

non-invasive neurostimulation within a patient’s mouth combined with physical therapy to provide neurorehabilitation of a patient to treat various maladies including, e.g., TBI, stroke, and Alzheimer’s disease

14/341,141

 

7/25/2014

 

Issued

 

 

9,020,612

 

 

4/28/2015

 

non-invasive neurostimulation within a patient’s mouth combined with cognitive therapy to provide neurorehabilitation of a patient resulting in improved reading comprehension and increased attention span as well as the treatment various maladies including, but not limited to, TBI, stroke, and Alzheimer’s disease

14/615,766

 

2/6/2015

 

Issued

 

 

9,656,078

 

 

5/23/2017

 

non-invasive neurostimulation within a patient’s mouth combined with stimulation of the patient’s vision, hearing, vestibular systems, or somatosensory systems for the treatment of tinnitus

14/689,462

 

4/17/2015

 

Issued

 

9.597,501

 

 

3/21/2017

 

non-invasive neurostimulation of a patient’s skin combined with cognitive therapy to provide neurorehabilitation of a patient resulting in improved reading comprehension and increased attention span as well as the treatment various maladies including, e.g., TBI, stroke, and Alzheimer’s disease

14/815,171

 

7/31/2015

 

Issued

 

 

9,597,504

 

 

3/21/2017

 

non-invasive neurostimulation of a patient’s mouth combined with therapy to provide neurorehabilitation of a patient, with a focus on features of a neurostimulation device

15/207,029

  

7/11/2016

 

Issued

 

 

9,656,069

 

 

5/23/2017

 

Utility patent covering non-invasive neurostimulation of a subject’s oral cavity while the subject engages in an exercise in order to enhance a subject’s proficiency in the exercise

61/019,061

(Provisional)

 

1/4/2008

 

Expired

 

N/A

 

 

N/A

 

N/A

61/020,265

(Provisional)

 

1/10/2008

 

Expired

 

N/A

 

 

N/A

 

N/A

 

U.S. Patent Nos. 8,909,345; 9,020,612; 9,656,078; 9,597,501; 9,597,504; and 9,656,069 claim priority to U.S. Patent No. 8,849,407.

A U.S. provisional patent application provides the means to establish an early effective filing date for a later filed nonprovisional patent application. Therefore, though the two provisional applications have expired, they establish a priority date for U.S. Patent Nos. 8,849,407; 8,909,345; 9,020,612; 9,656,078; 9,597,501; 9,597,504; and 9,656,069, and any future filings that claim priority. We intend to file additional continuation applications in the United States Patent and Trademark Office, or USPTO, claiming priority to U.S. Patent No. 8,849,407 to protect other aspects of the PoNS device and related non-invasive neurostimulation techniques.

ANR holds an interest in the Patent Pending Rights pursuant to an exclusive license from the inventors. U.S. Patent Nos. 8,909,345; 9,020,612; 9,656,078; 9,597,501; 9,597,504; and 9,656,069 are included in the exclusive license as the exclusive license agreement

12


covers (i) U.S. Patent Application No. 12/348,301 (now U.S. Patent No. 8,849,407) and Provisional Application No. 61/019,061, (ii) any patents issuing therefrom and (iii) any patents claiming priority to U.S. Patent Application No. 12/348,301 or Provisional Application No. 61/019,061, which U.S. Patent Nos. 8,909,345; 9,020,612; 9,656,078; 9,597,501; 9,597,504; and 9,656,069 claim priority through such provisional application as well as through Provisional Application 61/020,265.

In addition, ANR has agreed that ownership of any improvements, enhancements or derivative works of the Patent Pending Rights that are developed by NHC or ANR shall be owned by NHC, provided that if NHC decides not to patent such improvements, ANR may choose to pursue patent rights independently. Pursuant to the Sublicense Agreement, NHC has agreed to pay ANR royalties equal to 4% of NHC’s revenues collected from the sale of devices covered by the Patent Pending Rights and services related to the therapy or use of devices covered by the Patent Pending Rights in therapy services. The Sublicense Agreement provides that the sublicense granted by ANR to NHC, if in good standing, shall not be cancelled, limited or impaired in any way should there be a termination of the master license granted by the inventors to ANR, which was acknowledged by the inventors in the Sublicense Agreement. On June 6, 2014, NHC and ANR entered into a second amended and restated sublicense agreement, or the Second Sublicense Agreement, which acknowledges the Reverse Merger (see “Our Corporate History - Acquisition of NeuroHabilitation Corporation and Concurrent Financing” below) and adds us as a party to the agreement.

The license of the Patent Pending Rights is subject to the right of the government of the United States, which funded certain research relating to the development of the PoNS device, to a nonexclusive, non-transferable, irrevocable, paid- up license to use the Patent Pending Rights for governmental purposes. In addition, NHC has granted a perpetual, royalty-free license to the Patent Pending Rights back to ANR for non-profit research and development activities which do not compete with NHC’s business and to produce and derive revenues from devices and services in connection with investigational uses of the PoNS device and related technology.

The license of the Patent Pending Rights is also subject to the terms of the CRADA. In the event that we are not willing or unable to commercialize the PoNS technology within four years from the expiration of the CRADA, the Company is required to transfer possession, ownership and sponsorship/holdership of the regulation application, regulatory correspondence and supporting regulatory information related technology to USAMRMC and grant the U.S. Government a non-exclusive, irrevocable license to any patent, copyright, data rights, proprietary information or regulatory information for the U.S. Government to commercialize the technology.

On April 17, 2017, we announced that the USPTO had issued two medical method patents (U.S. Patent Nos. 9,597,501 and 9,597,504) that together further protect the intellectual property rights for our core asset, the PoNS device therapeutic techniques. These patents bolster the current family of PoNS patents protecting various forms of physical and cognitive therapy combinations with both skin and oral cavity stimulation using the PoNS  device or any equivalent neurostimulation device.

Company Owned Intellectual Property

On May 23, 2017, we announced that the USPTO had issued its first method patent (US Patent No. 9,656,069) that features claims directed to the use of the PoNS device for human performance improvement rather than rehabilitation therapy. This patent is the first member of the existing family of patents we have received for our PoNS device. We have filed 29 U. S. patent applications related to various technical and ornamental aspects of the PoNS device. We have also filed 13 non-provisional patent applications that describe various technical features in the current version device and 16 design patent applications describing various ornamental designs. We are the sole assignee for these 29 U.S. patent filings. Prior to issuance, once the USPTO determines that a patent application meets all of the statutory requirements for patentability it provides a notice of allowance. In addition to the first issued patent (U.S. Patent No.

13


9,072,889), the USPTO has issued nine utility patents, 16 design patents and provided notices of allowance for utility applications as summarized in the table below:

 

U.S. Patent

Application No.

 

Application

Filing Date

 

Status

 

U.S. Patent

No.

 

 

Issue Date

 

Subject Matter

14/558,768

 

12/3/2014

 

Issued

 

 

9,072,889

 

 

7/7/2015

 

Utility patent covering overall system design, including controller and mouthpiece

14/559,123

 

12/3/2014

 

Issued

 

 

9,272,133

 

 

3/1/2016

 

Utility patent covering strain relief mechanisms for the connection between the mouthpiece and the controller

14/558,787

 

12/3/2014

 

Issued

 

 

9,227,051

 

 

1/5/2016

 

Utility patent covering shape of the mouthpiece

14/558,789

 

12/3/2014

 

Issued

 

 

9,283,377

 

 

3/15/2016

 

Utility patent covering center of gravity of the mouthpiece

14/559,080

 

12/3/2014

 

Issued

 

 

9,415,209

 

 

8/16/2016

 

Utility patent covering structural support of the mouthpiece

14/559,105

 

12/3/2014

 

Issued

 

 

9,415,210

 

 

8/16/2016

 

Utility patent covering glue wells of the mouthpiece

14/727,100

 

6/1/2015

 

Issued

 

 

9,616,222

 

 

4/11/2017

 

Utility patent covering overall system design, including controller and mechanical details of the mouthpiece

14/558,775

 

12/3/2014

 

Allowed

 

N/A

 

 

N/A

 

Utility patent covering aspects of the controller

14/558,784

 

12/3/2014

 

Issued

 

 

9,789,306

 

 

10/17/2017

 

Utility patent covering authentication techniques

14/559,045

 

12/3/2014

 

Pending

 

N/A

 

 

N/A

 

Utility patent covering the locators of the mouthpiece

14/559,118

 

12/3/2014

 

Issued

 

 

9,656,060

 

 

5/23/2017

 

Utility patent covering methods of manufacturing the mouthpiece

15/484,077

 

4/21/2017

 

Pending

 

N/A

 

 

N/A

 

Utility application covering overall system design, including controller and mechanical details of the mouthpiece

15/602,055

 

9/5/2017

 

Pending

 

N/A

 

 

N/A

 

Utility application covering methods of manufacturing the mouthpiece

29/510,741

 

12/3/2014

 

Issued

 

D750264

 

 

2/23/2016

 

Design patent covering an alternative version of the current PoNS device (over-ear double boom design)

29/510,742

 

12/3/2014

 

Issued

 

D749746

 

 

2/16/2016

 

Design patent covering an alternative version of the current PoNS device (overhead minimal interference design)

29/510,743

 

12/3/2014

 

Issued

 

D752236

 

 

3/22/2016

 

Design patent covering system design used in the current PoNS device

29/510,745

 

12/3/2014

 

Issued

 

D750265

 

 

2/23/2016

 

Design patent covering an alternative mouthpiece not used in the current PoNS device

14


 

U.S. Patent

Application No.

 

Application

Filing Date

 

Status

 

U.S. Patent

No.

 

Issue Date

 

Subject Matter

29/510,754

 

12/3/2014

 

Issued

 

D750794

 

3/1/2016

 

Design patent covering the controller used in the PoNS device

29/510,755

 

12/3/2014

 

Issued

 

D751215

 

3/8/2016

 

Design patent covering an alternative controller not used in the current PoNS device

29/510,746

 

12/3/2014

 

Issued

 

D750266

 

2/23/2016

 

Design patent covering an alternative mouthpiece not used in the current PoNS device

29/510,749

 

12/3/2014

 

Issued

 

D750268

 

2/23/2016

 

Design patent covering an alternative mouthpiece not used in the current PoNS device

29/510,747

 

12/3/2014

 

Issued

 

D751213

 

3/8/2016

 

Design patent covering an alternative mouthpiece not used in the current PoNS device

29/510,748

 

12/3/2014

 

Issued

 

D750267

 

2/23/2016

 

Design patent covering an alternative mouthpiece not used in the current PoNS device

29/510,750

 

12/3/2014

 

Issued

 

D753315

 

4/5/2016

 

Design patent covering mouthpiece used in the current PoNS device

29/510,751

 

12/3/2014

 

Issued

 

D751722

 

3/15/2016

 

Design patent covering an alternative controller not used in the current PoNS device

29/510,752

 

12/3/2014

 

Issued

 

D752766

 

3/29/2016

 

Design patent covering an alternative controller not used in the current PoNS device

29/510,753

 

12/3/2014

 

Issued

 

D753316

 

4/5/2016

 

Design patent covering an alternative controller not used in the current PoNS device

29/510,744

 

12/3/2014

 

Issued

 

D760397

 

6/28/2016

 

Design patent covering alternative system design used in the current PoNS device

29/510,756

 

12/3/2014

 

Issued

 

D759830

 

6/21/2016

 

Design patent covering alternative system design used in the current PoNS device

 

In addition to its U.S. patents, We have been granted four foreign utility patents (three in Australia and one in Eurasia), and 11 foreign design patents (seven in Canada, three in Russia, and one community design in Europe), as detailed in the tables below.

 

Foreign Utility Patents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Australian Application No.

 

Application

Filing Date

 

Status

 

Australian Patent No.

 

Issue Date

 

Subject Matter

2015355211

 

6/4/2017

 

Issued

 

2015355211

 

11/16/2017

 

Utility patent covering overall system design, including controller and mechanical details of the mouthpiece

2015355212

 

6/4/2017

 

Issued

 

2015355212

 

12/21/2017

 

Utility patent covering center of gravity of the mouthpiece

2017218934

 

8/19/2017

 

Issued

 

2017218934

 

1/3/2018

 

Utility patent covering overall system design, including controller and mechanical details of the mouthpiece

 

 

 

 

 

 

 

 

 

 

 

Eurasian Application No.

 

Application

Filing Date

 

Status

 

Eurasian Patent No.

 

Issue Date

 

Subject Matter

201790009

 

1/10/2017

 

Issued

 

28551

 

11/30/2017

 

Utility patent covering methods for non-invasively aiding neurorehabilitation using intraoral stimulation in combination with an exercise regimen

 

 

Russian Design

Application No.

 

Application

Filing Date

 

Status

 

Russian

Patent No.

 

Issue Date

 

Subject Matter

2015501883

 

6/3/2015

 

Issued

 

98981

 

7/16/2016

 

Design patent covering the system design currently used in the PoNS device

2015501882

 

6/3/2015

 

Issued

 

99240

 

8/16/2016

 

Design patent covering the mouthpiece design currently used in the PoNS device

2015501881

 

6/3/2015

 

Issued

 

98947

 

7/16/2016

 

Design patent covering the controller design currently used in the PoNS device

15


 

Canadian Design

Application No.

 

Application

Filing Date

 

Status

 

Canadian

Patent No.

 

Issue Date

 

Subject Matter

162676

 

6/2/2015

 

Issued

 

162676

 

2/29/2016

 

Design patent covering system design used in the current PoNS device

162672

 

6/2/2015

 

Issued

 

162672

 

2/29/2016

 

Design patent covering an alternative mouthpiece not used in the current PoNS device

162671

 

6/2/2015

 

Issued

 

162671

 

2/29/2016

 

Design patent covering an alternative mouthpiece not used in the current PoNS device

162674

 

6/2/2015

 

Issued

 

162674

 

2/29/2016

 

Design patent covering mouthpiece used in the current PoNS device

162675

 

6/2/2015

 

Issued

 

162675

 

2/29/2016

 

Design patent covering an alternative controller not used in the current PoNS device

162670

 

6/2/2015

 

Issued

 

162670

 

2/29/2016

 

Design patent covering the controller used in the PoNS device

162673

 

6/2/2015

 

Issued

 

162673

 

2/29/2016

 

Design patent covering system design used in the current PoNS device

 

EU Community Design

Application No.

 

Application

Filing Date

 

Status

 

EU Community

Design Reg. No.

 

Issue Date

 

Subject Matter

002712026

 

6/3/2015

 

Issued

 

002712026

 

9/4/2015

 

Design patent covering several aspects of the system design currently used in the PoNS device

 

16


Further, we have filed nine foreign utility patent applications that are currently pending: one application in Australia, and two applications in each of Canada, Europe, Israel, and Russia:

 

Australian Application No.

 

 

Application

Filing Date

 

Status

 

Australian Patent No.

 

Issue Date

 

Subject Matter

2017228517

 

 

9/11/2017

 

Pending

 

N/A

 

N/A

 

Utility application covering the shape of the mouthpiece

 

 

 

 

 

 

 

 

 

 

 

 

 

Canadian

Application No.

 

 

Application

Filing Date

 

Status

 

Canadian

Patent No.

 

Issue Date

 

Subject Matter

 

2,969,729

 

 

6/2/2017

 

Pending

 

N/A

 

N/A

 

Utility application covering overall system design, including controller and mouthpiece, and authentication techniques

 

2,969,731

 

 

6/2/2017

 

Pending

 

N/A

 

N/A

 

Utility application covering various aspects of the mouthpiece such as shape, center of gravity, and the locators

 

 

 

 

 

 

 

 

 

 

 

 

 

European Application No.

 

 

Application

Filing Date

 

Status

 

European Patent No.

 

Issue Date

 

Subject Matter

15813638.2

 

 

7/3/2017

 

Pending

 

N/A

 

N/A

 

Utility application covering overall system design, including controller and mouthpiece, and authentication technique

15812899.1

 

 

7/3/2017

 

Pending

 

N/A

 

N/A

 

Utility application covering various aspects of the mouthpiece such as shape, center of gravity, and the locators

 

 

 

 

 

 

 

 

 

 

 

 

 

Israeli     Application No.

 

 

Application

Filing Date

 

Status

 

Israeli Patent No.

 

Issue Date

 

Subject Matter

252648

 

 

6/4/2017

 

Pending

 

N/A

 

N/A

 

Utility application covering overall system design, including controller and mouthpiece

252649

 

 

6/4/2017

 

Pending

 

N/A

 

N/A

 

Utility application covering center of gravity of the mouthpiece

 

 

 

 

 

 

 

 

 

 

 

 

 

Russian     Application No.

 

 

Application

Filing Date

 

Status

 

Russian Patent No.

 

Issue Date

 

Subject Matter

2017123125

 

 

6/29/2017

 

Pending

 

N/A

 

N/A

 

Utility application covering overall system design, including controller and mouthpiece

2017123041

 

 

6/29/2017

 

Pending

 

N/A

 

N/A

 

Utility application covering center of gravity of the mouthpiece

 

Currently, we use four trademarks in connection with the operation of our business: PoNS, NeuroHabilitation, NHC and Helius Medical Technologies. We own the rights to the PoNS mark by virtue of an assignment agreement having an effective date of October 27, 2014 and entered into with ANR and the inventors of the PoNS technology. We are the sole owner of the rights in the NeuroHabilitation and NHC trademarks, and we are the owner of the rights in the Helius Medical Technologies mark. On October 31, 2014, we filed trademark applications in the USPTO for these four trademarks.

On January 7, 2015, we filed trademark applications with the Canada Intellectual Property Office, claiming priority to the corresponding U.S. applications filed on October 31, 2014. We are the owner of the rights in the NeuroHabilitation, NHC, and PoNS marks in Canada, and we are the owner of the rights in the Helius Medical Technologies mark in Canada. We have also applied for the PoNS trademark in Canada, Europe, Russia and China.

Government Regulation  

Our products under development and our operations are subject to significant government regulation. In the United States, our products are regulated as medical devices by the FDA and other federal, state, and local regulatory authorities. The following is a general description of the review and marketing authorization process of the FDA for medical devices.

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FDA Regulation of Medical Devices

The FDA and other U.S. and foreign governmental agencies regulate, among other things, the following activities with respect to medical devices:

 

design, development and manufacturing;

 

testing, labeling, content and language of instructions for use and storage;

 

clinical trials;

 

product storage and safety;

 

marketing, sales and distribution;

 

pre-market clearance and approval;

 

record keeping procedures;

 

advertising and promotion;

 

recalls and field safety corrective actions;

 

post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury;

 

post-market approval studies; and

 

product import and export.

In the United States, numerous laws and regulations govern all the processes by which medical devices are brought to market and marketed. These include the Food, Drug and Cosmetic, or FD&C, Act and the FDA’s implementing regulations, among others.

The FDA Review, Clearance and Approval Processes

Each medical device we seek to commercially distribute in the United States must first receive either clearance under Section 510(k) of the FD&C Act, receive de novo down-classification and 510(k) clearance, or pre-market approval application, or PMA, from the FDA, unless specifically exempted by the FDA. FDA review and approval is required for each intended use of a device, regardless of whether the device has been approved for other indications for use. The FDA classifies all medical devices into one of three classes. Devices deemed to pose the lower risk are categorized as either Class I or II, which requires the manufacturer to submit to the FDA a 510(k) pre-market notification application requesting clearance of the device for commercial distribution in the United States, unless the device is exempted from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously 510(k) cleared device are categorized as Class III and require submission and approval of a PMA.

In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. Clinical data may be required to support a determination of substantial equivalence. The PMA pathway requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. However, some devices are automatically assigned to Class III regardless of the level of risk they pose, because they have not previously been classified into a lower risk class by the FDA. Manufacturers of these devices may request that the FDA review such devices in accordance with the de novo classification procedure, which allows a manufacturer whose novel device would otherwise require the submission and approval of a PMA prior to marketing to request down-classification of the device on the basis that the device presents low or moderate risk. If the FDA agrees with the down-classification, the applicant will then receive clearance of a 510(k) to market the device. This cleared device can then be used as a predicate device for future 510(k) submissions by the manufacturer or a competitor.

We intend to utilize the de novo classification procedures to seek marketing authorization for the PoNS device, because there is currently no predicate cleared or approved by the FDA for commercial distribution and no existing classification decision by the FDA for such a device. The process of obtaining regulatory clearances or approvals, or completing the de novo classification process, to market a medical device can be costly and time consuming, and we may not be able to successfully obtain pre-market reviews on a timely basis, if at all.

If the FDA requires us to go through a lengthier, more rigorous examination for the PoNS device, introducing the product could be delayed or canceled, which could cause our launch to be delayed. In addition, the FDA may determine that the PoNS device requires the more costly, lengthy and uncertain PMA process. For example, if the FDA disagrees with our determination that the de novo classification procedures are the appropriate path to obtain marketing authorizations for the PoNS device, the FDA may require us to

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submit a PMA application, which is generally more costly and uncertain and can take from one to three years, or longer, from the time the application is submitted to the FDA until an approval is obtained. Further, even with respect to those future products where a PMA may not be required, we cannot be certain that we will be able to obtain 510(k) clearances with respect to those products.

510(k) Clearance Process

To obtain 510(k) clearance, we must submit a pre-market notification to the FDA demonstrating that the proposed device is substantially equivalent to a previously-cleared 510(k) device or is a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of a PMA application. The FDA’s 510(k) clearance process usually takes from three to 12 months from the date the application is submitted and filed with the FDA but may take significantly longer and clearance is never assured. Although many 510(k) pre-market notifications are cleared without clinical data, in some cases, the FDA requires clinical data to support substantial equivalence. In reviewing a pre-market notification submission, the FDA may request additional information, which may significantly prolong the review process.

After a device receives 510(k) clearance, any subsequent modification of the device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new 510(k) clearance or could require a PMA. The FDA requires each manufacturer to make this determination initially, but the FDA may review any such decision and may disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA may require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA approval is obtained. Under these circumstances, the FDA may also subject a manufacturer to significant regulatory fines or other penalties. In addition, the FDA is currently evaluating the 510(k) process and may make substantial changes to industry requirements, including which devices are eligible for 510(k) clearance, the ability to rescind previously granted 510(k)s and additional requirements that may significantly impact the process.

De novo Classification Process

If a previously unclassified new medical device does not qualify for the 510(k) pre-market notification process because no predicate device to which it is substantially equivalent can be identified, the device is automatically classified into Class III. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act, or FDASIA, in July 2012, a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) pre-market notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) pre-market notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, the FDA is required to classify the device within 120 days following receipt of the de novo application. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. The FDA may reject the reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed.

As previously discussed, we plan on utilizing the de novo classification process to obtain marketing authorization for the PoNS device for balance disorder in mild- to moderate- TBI, and we plan to seek Class II classification. In order to be placed in Class II, the FDA would need reasonable assurance of safety and effectiveness of the PoNS device. Under Class II, general controls (e.g., premarket notification) and special controls (e.g., specific performance testing) would be applicable. We are currently working to complete our device verification testing with our goal for submission of the de novo application and a 510(k) in the middle of 2018. To the extent the FDA completes its review in accordance with the goal of the medical device users fee amendments of 90 days, we anticipate marketing authorization in the second half of 2018.

Obtaining FDA marketing authorization, de novo down-classification, or approval for medical devices can be expensive and uncertain, generally takes several years, and generally requires detailed and comprehensive scientific and clinical data. Notwithstanding the expense, these efforts may never result in FDA authorization for commercial distribution. Even if we were to obtain regulatory authorization, it may not be for the uses we believe are important or commercially attractive, in which case we would not be permitted to market our product for those uses.

Pre-market Approval Process

A PMA must be submitted if the medical device is in Class III (although the FDA has the discretion to continue to allow certain pre-amendment Class III devices to use the 510(k) process) or cannot be cleared through the 510(k) process. A PMA must be supported by,

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among other things, extensive technical, preclinical, clinical trial, manufacturing and labeling data to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use.

After a PMA is submitted and filed, the FDA begins an in-depth review of the submitted information, which typically takes between one and three years, but may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a pre-approval inspection of the manufacturing facility to ensure compliance with Quality System Regulations, or QSR, which may impose elaborate design development, testing, control, documentation and other quality assurance procedures in the design and manufacturing process. The FDA may approve a PMA with post-approval conditions intended to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale and distribution and collection of long-term follow-up data from patients in the clinical study that supported approval. Failure to comply with the conditions of approval can result in materially adverse enforcement action, including the loss or withdrawal of the approval. New PMAs or supplements are required for significant modifications to the manufacturing process, labeling of the product and design of a device that is approved through the PMA process. PMA supplements often require submission of the same type of information as an original pre-market approval application, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require extensive clinical data or the convening of an advisory panel.

Clinical Trials

A clinical trial is typically required to support a PMA and is sometimes required for a 510(k) pre-market notification. FDA’s regulations require submission and approval of an Investigational Device Exemption, or IDE, for all clinical investigations of significant risk medical devices to determine safety and effectiveness.  Abbreviated requirements apply for non-significant risk device studies.  After a clinical trial begins, the FDA may place it on hold or terminate it if, among other reasons, it concludes that the clinical subjects are exposed to an unacceptable health risk. Any clinical trials we conduct must be conducted in accordance with FDA regulations as well as other federal regulations and state laws concerning human subject protection and privacy. Moreover, the results of a clinical trial may not be sufficient to obtain clearance or approval of the product, and separate clinical trials may be necessary to obtain clearance for multiple uses of one device.

Pervasive and Continuing U.S. Food and Drug Administration Regulation

After a medical device is placed on the market, numerous FDA regulatory requirements apply, including, but not limited to the following:

 

the QSR, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures during the manufacturing process;

 

establishment registration, which requires establishments involved in the production and distribution of medical devices, intended for commercial distribution in the United States, to register with the FDA;

 

medical device listing, which requires manufacturers to list the devices they have in commercial distribution with the FDA;

 

correction and removal reporting regulations which require that manufacturers report to the FDA field corrections and product recalls or removals undertaken to reduce a risk to health posed by the device or remedy a violation of the FD&C Act that may present a risk to health;

 

labeling regulations, which prohibit “misbranded” devices from entering the market, as well as prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling;

 

clearance or approval of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use;

 

post-market surveillance including Medical Device Reporting, which requires manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury, or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; and

 

other post-approval restrictions or conditions.

Our Corporate History Highlights

Formation and Arrangement with Boomerang Oil, Inc.

We were originally incorporated on March 13, 2014 under the British Columbia Business Corporations Act, or the BCBCA, as “0996445 B.C. Ltd.” On March 25, 2014, and amended on April 8, 2014, we entered into an arrangement agreement with Boomerang Oil, Inc. (formerly known as 0922327 B.C. Ltd.) and 0995162 B.C. Ltd. to reorganize the business structure of such three entities in such a manner which would allow Boomerang Oil, Inc. to spin us out to become an independent entity that is a reporting issuer in Canada and for us to complete a reverse take-over of 0995162 B.C. Ltd. As a result of the arrangement agreement, we became a reporting issuer in

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the provinces of British Columbia and Alberta. In addition, the arrangement resulted in 0995162 B.C. Ltd. becoming our wholly-owned subsidiary. The assets of 0995162 B.C. Ltd. consisted of cash and 0995162 B.C. Ltd.’s interest in a letter agreement pursuant to which it had agreed to acquire all of the outstanding shares of NHC, a Delaware corporation, and to seek a listing on a recognized stock exchange.

Reincorporation in Wyoming

On May 23, 2014, we changed our name to “Helius Medical Technologies, Inc.” and filed articles of continuation with the Wyoming Secretary of State office to reincorporate from being a corporation governed by the BCBCA to a corporation governed by the Wyoming Business Corporation Act, or WBCA.

Acquisition of NeuroHabilitation Corporation and Concurrent Financing

On June 13, 2014, we completed the acquisition of NHC by way of an agreement and plan of merger. We refer to this transaction as the Reverse Merger. Pursuant to the agreement and plan of merger, HMT Mergersub, Inc., our wholly-owned subsidiary, merged with and into NHC with NHC as the surviving corporation. In connection with the Reverse Merger, we issued an aggregate of 7,060,016 shares of our Class A common stock, or our common stock, to the former shareholders of NHC. The Reverse Merger was deemed to be a capital transaction in substance and recorded as a reverse recapitalization of NHC whereby NHC is deemed to be the continuing, surviving entity for accounting purposes, but through reorganization, has deemed to have adopted the capital structure of Helius.

In connection with the Reverse Merger, we completed a non-brokered private placement financing of $7.02 million (CAD$7.62 million) by issuing 3,048,000 subscription receipts. Pursuant to its terms, each subscription receipt automatically converted into one unit upon satisfaction of certain escrow release conditions, which had been satisfied. Each unit consisted of one share of our common stock and one-half of one share purchase warrant with each whole warrant being exercisable at CAD$5.00 per share for a period of two years.

Listing of our Common Stock on the CSE, TSX and OTCQB

Following our Reverse Merger, we obtained approval of the listing of our common stock on the Canadian Securities Exchange, or CSE. On April 18, 2016, our common stock was listed on the Toronto Stock Exchange, or TSX, under the symbol “HSM.” At the same time, we delisted our common stock from the CSE. Our Warrants were also approved for listing on the TSX on April 18, 2016. The Company’s common stock also began trading on the OTC Markets, or OTCQB, under the ticker symbol “HSDT” on February 10, 2015.

Reverse Stock Split

Effective after the close of business on January 22, 2018, we completed a 1-for-5 reverse stock split of our Class A Common Stock. Since January 23, 2018, our Class A common stock has traded on a post-split basis on the OTCQB and Toronto Stock Exchange.  All share and per share amounts in this Annual Report have been reflected on a post-split basis.

 

Corporate Information

 

Our principal executive offices are located at 642 Newtown Yardley Road, Suite 100 Newtown, PA 18940 and our telephone number is 215-944-6100. We maintain a corporate website at www.heliusmedical.com. We make available free of charge through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to these reports, as soon as its reasonably practicable after we electronically file such material with, or furnish such material to the SEC. We are not including the information on our website as a part of, nor incorporating it by reference into this report. You may read and/or copy any materials we file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the Public Reference Room. Additionally, the SEC maintains a website that contains annual, quarterly, and current reports, proxy statements, and other information that issuers (including us) file electronically with the SEC. The SEC’s website address is http://www.sec.gov.

Employees

As of December 31, 2017, we had ten full time employees and 40 full-time equivalent independent contractors.  With the completion of our registrational clinical trial, we continue to work on completing certain activities required as part of our marketing application that we submit to FDA for clearance of the PoNS device.  We intend to invest in our scale manufacturing capabilities, internal infrastructure for core functionality, as well as full commercialization resources.

Business Uncertainties and Going Concern Risk

To date we have not generated any revenue from the sales 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 obtaining FDA, Health Canada, CE Mark in Europe and the TGA, in Australia, clearance of the PoNS Treatment for balance disorder associated with TBI, manufacturing of a commercially viable

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version of the PoNS device, demonstration of safety and effectiveness sufficient to generate commercial orders by customers for our product and the creation of a national framework of PoNS-certified therapists. To date, we have not achieved many of these conditions, and the successful achievement of such conditions will require significant expenditures. Because we have not generated any revenues, we are dependent entirely on funding from outside investors. There is no guarantee that such funding will be available at all or in sufficient amounts to satisfy our required expenditures. Furthermore, even if we were able to raise sufficient capital to successfully design and manufacture a commercially viable version of the PoNS device and to receive FDA, CE Mark, Health Canada or TGA clearance, we do not currently have any contract or other arrangement to sell the PoNS Treatment. Accordingly, we cannot know for certain that we will ever be able to generate any revenue from the sales of products or services.

Additionally, based on management’s assessment there is substantial doubt about the Company’s ability to continue as a going concern. This means that there is substantial doubt that we can continue as an on-going business for the next twelve months. While we had $5.6 million of cash as of December 31, 2017, we do not currently have sufficient resources to accomplish all of the above conditions necessary for us to generate revenue. In reviewing this filing, you should carefully consider the risks described in the section entitled “Risk Factors” and other risks described throughout this Annual Report. 

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ITEM 1A.

RISK FACTORS

RISK FACTORS

An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in this Annual Report in evaluating our company and its business before purchasing shares of our common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The risks described below may not be all of the risks facing our company. Additional risks not presently known to us or that we currently consider immaterial may also impair our business operations. You could lose all or part of your investment due to any of these risks.

Risks Related to Our Financial Position and Need for Capital

We have a very limited operating history and have incurred substantial net losses since our inception and anticipate that we will continue to incur substantial net losses for the foreseeable future. We may never achieve or sustain profitability.

We are a holding company and have no material assets other than cash and our ownership of all of the outstanding shares of NHC, which is our wholly owned subsidiary. NHC was incorporated in Delaware on January 22, 2013 and has had limited operations to date.

We have incurred substantial net losses since our inception. For the year ended December 31, 2017 and nine months ended December 31, 2016, we incurred a net loss of $28.0 million and $12.0 million, respectively, and used cash in operations of $19.3 million and $7.9 million respectively. We have an accumulated deficit of $66.4 million as of December 31, 2017. Our losses have resulted primarily from costs incurred in connection with our design, manufacturing and development, research and development activities, stock-based compensation, legal, advertising, marketing and investor relations, and general and administrative expenses associated with our operations. Even if we are successful in obtaining marketing authorization from the FDA in order to launch our PoNS Treatment in the United States or foreign regulatory authorities to launch outside of the United States, we expect to continue to incur substantial losses for the foreseeable future as we continue to research and develop and seek regulatory marketing authorization for our product candidate.

We are subject to all of the business risks and uncertainties associated with any new business enterprise, including under-capitalization, cash shortages, limitations with respect to personnel, financial and other resources, lack of revenue and the risk that we will not achieve our growth objective. If sales revenue from any product candidates that receive marketing authorization from the FDA or other regulatory body is insufficient, if we are unable to develop and commercialize any of our potential product candidates, or if our product development is delayed, we may never achieve or sustain profitability.

We will require additional financing to carry out our plan of operations and if we are unable to obtain such financing, our business may fail.

We currently have limited working capital and liquid assets. We held cash totaling $5.6 million at December 31, 2017. To date we have not generated any revenue from the sales of products or of services. There are a number of conditions that we must satisfy before we will be able to generate revenue, including but not limited to FDA marketing authorization of the PoNS device for mild- to moderate- TBI, manufacturing of a commercially-viable version of the PoNS device, obtaining favorable reimbursement from third party payers, and demonstration of effectiveness sufficient to generate commercial orders by customers for our product. While we are seeking additional funding, we do not currently have sufficient resources to accomplish all of these conditions necessary for us to generate revenue, and we do not expect to generate revenue in an amount sufficient to fund our operations for the foreseeable future. We will therefore require substantial additional funds in order to continue to conduct the research and development and regulatory authorization activities necessary to bring our product to market, to establish effective marketing and sales capabilities and to develop other product candidates. Our existing capital resources will not be sufficient to enable us to fund the completion of the development and commercialization of our current product and our product candidates. We cannot determine with certainty the duration and completion costs of the current or future development and commercialization of our product candidate or if, when, or to what extent we will generate revenues from the commercialization and sale of our current product candidate or potential future product candidates for which we obtain regulatory marketing authorization. We may never succeed in achieving regulatory authorization for our current product candidate and any potential future product candidates. We may be unable to raise the additional funding to finance our business on commercially reasonable terms, or at all. If we are unable to obtain additional financing as needed, we may be forced to reduce the scope of our operations and planned capital expenditures 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, which would have a material adverse effect on the value of our common stock..

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Raising additional capital by issuing securities or through debt financings or licensing arrangements may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidate on terms unfavorable to us.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of such securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic partnerships with third parties, we may have to relinquish valuable rights to our technologies or product candidate, future revenue streams, research programs or product candidate, or otherwise grant licenses on terms that are not favorable to us. If we are unable to raise additional capital when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts for our product candidate or our preclinical product candidates, or grant rights to develop and market potential future product candidates that we would otherwise prefer to develop and market ourselves. Any of these events could adversely affect our ability to achieve our product development and commercialization goals and have a material adverse effect on our business, financial condition and results of operations.

Our independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited financial statements. We may be unable to continue to operate without the threat of liquidation for the foreseeable future.

In connection with our management’s assessment, our report from our independent registered public accounting firm for the fiscal year ended December 31, 2017 includes an explanatory paragraph stating that our recurring losses from operations and net capital deficiency raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. For example, our existing capital resources will be insufficient to fund our operations beyond the first half of 2018. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements, and investors will likely lose all or a part of their investment. Future reports from our independent registered public accounting firm may also contain statements expressing substantial doubt about our ability to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all.

Risks Related to the Development and Commercialization of our Product Candidate

We currently only have one product candidate, which is still in development, and we have not obtained authorization from the FDA to commercially distribute the device in the United States, a CE Mark for commercial distribution in Europe, from Health Canada for commercial distribution in Canada or from the TGA for commercial distribution in Australia, and we may never obtain such authorizations.

We currently have no products authorized for commercial distribution. We are developing the PoNS Treatment for use in the neuromodulation market, but we cannot begin marketing and selling the device in the United States, Europe, Canada or Australia until we obtain authorizations from the FDA, EU, Health Canada or TGA, respectively. We have not yet submitted applications for regulatory authorization in any of these jurisdictions. The process of obtaining regulatory authorization is expensive and time-consuming and can vary substantially based upon, among other things, the type, complexity and novelty of a product. Changes in regulatory policy, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application may cause delays in the authorization of a product candidate or rejection of a regulatory application altogether. The FDA has substantial discretion in the de novo review and authorization processes and may refuse to accept any application or may decide that our data are insufficient for authorization and require additional pre-clinical, clinical, or other studies. In addition, varying interpretations of the data obtained from pre-clinical and clinical testing could delay, limit, or prevent marketing authorization from the FDA or other regulatory authorities. Any marketing authorization from the FDA we ultimately obtain may be limited or subject to restrictions or post-market commitments that render the product candidate not commercially viable. If our attempts to obtain marketing authorization are unsuccessful, we may be unable to generate sufficient revenue to sustain and grow our business, and our business, financial condition, and results of operations will be materially adversely affected.

If we are able to complete development of the PoNS device and obtain authorization of the PoNS device for the treatment of chronic balance deficit in patients with mild- to moderate- TBI in the United States, Europe, Canada or Australia, we plan to develop the PoNS device for other indications, or symptoms caused by neurological disorders. We would be required to commit our own resources to fund development of any other indications and each would require separate FDA authorization. The costs of such development efforts and FDA authorizations could be substantial and would likely require additional funding, and each such indication would be subject to the same foregoing risks and uncertainties for FDA authorization.

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We may encounter substantial delays in our clinical trials, or our clinical trials may fail to demonstrate the safety and efficacy of the PoNS device to the satisfaction of applicable regulatory authorities.

Before obtaining marketing authorization from regulatory authorities for the sale of the PoNS Treatment, we must conduct extensive clinical trials to demonstrate the safety and efficacy of the product candidate. Clinical trial are expensive, time consuming and uncertain as to outcome. We cannot guarantee that clinical trials will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical trials can occur at any stage of testing. Delays can be costly and could negatively affect our ability to complete a clinical trial and may allow our competitors to bring products to market before we do, which could impair our ability to successfully commercialize the PoNS Treatment. If we are unable to complete clinical trials, or are unsuccessful in doing so, we will be unable to advance the PoNS device to regulatory authorization and commercialization, which would harm our business, financial condition, results of operations.

Our PoNS technology is a new, “untested” form of neurostimulation therapy, and the medical community tends not to adopt new therapies very rapidly. If physicians elect not to prescribe the PoNS Treatment, or if we cannot train physical therapists in the supervision of the use of the PoNS Treatment, we will be unable to generate significant revenue, if any.

Our deployment strategy in the civilian population depends on physicians prescribing the PoNS Treatment to patients with relevant neurological disorders and physical therapists being trained in the supervision of patients’ use of our treatment. While the effectiveness of our PoNS technology to treat balance disorders related to TBI or any other neurological disorder has not been established in studies conducted in a controlled environment designed to produce scientifically significant results, it remains a new, “untested,” and therefore unproven, treatment. Such technologies are usually more slowly adopted by the medical community as the medical community tends to be very conservative. Physicians may elect not to use our products for a variety of reasons, including:

 

lack or perceived lack of evidence supporting the beneficial characteristics of our technology;

 

limited long-term data on the use of PoNS technology for therapy;

 

physicians’ perception that there are insufficient advantages of our product relative to currently available products;

 

our inability to effectively train physical therapists in the supervision of patients’ use of the therapy;

 

hospitals may choose not to purchase our product;

 

group purchasing organizations may choose not to contract for our product, thus limiting availability of our products to hospital purchasers;

 

lack of coverage or adequate payment from managed care plans and other third-party payers for our product;

 

Medicare, Medicaid or other third-party payers may limit or not permit reimbursement for our product; and

 

the development or improvement of competitive products.

If the medical community is slow to adopt, or declines to adopt our PoNS Treatment for neurostimulation therapy, we will not be able to generate significant revenues, if any, which would have a material adverse effect on our business.

There is limited market awareness of our product and the neuromodulation market is new and uncertain.

There is currently limited market awareness of our product. In order to succeed, we must, among other things, increase market awareness of our PoNS Treatment and implement a sales and marketing strategy. If we fail in any of these endeavors or experience delays in pursuing them, we will not generate revenues as planned and will need to curtail operations or seek additional financing earlier than otherwise anticipated. In addition, if the neuromodulation market fails to become more integrated in neurological therapy, it could have a materially adverse effect on our business and financial position.

We face significant competition in an environment of rapid technological change, and our competitors may develop devices or products that are more advanced or more effective than ours, which may adversely affect our financial condition and our ability to successfully market the PoNS device.

The neurostimulation market involves rapidly developing technology. Our competitors in the industry are predominantly large companies with longer operating histories, with significantly easier access to capital and other resources and an established product pipeline than us. The combined clinical research and product development done by the industry, including by us and all of our competitors, is foundational, and neurostimulation has slowly become integrated into neurological therapy. This foundation has allowed for new and innovative neurostimulation companies to enter the market.  New developments occur rapidly, and we anticipate that we will face increasing competition as new companies enter our market.

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There can be no assurance that we will be able to establish ourselves in the neurostimulation market, or, if established, that we will be able to maintain our market position, if any. Our commercial opportunity may be reduced if our competitors develop new or improved products that are more convenient, more effective or less expensive than our product candidate. Competitors also may obtain FDA or other regulatory marketing authorization for their products more rapidly or earlier than we may obtain marketing authorization for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. Additionally, technologies developed by our competitors may render the PoNS Treatment uneconomical or obsolete.

Risks Related to our Reliance on Third Parties

We are, and will continue to be, dependent in significant part on outside scientists and third-party research institutions for our research and development in order to be able to commercialize our product candidate.

We currently have a limited number of employees and resources available to perform the research and development necessary to commercialize our PoNS Treatment and potential future product candidates. We therefore rely, and will continue to rely, on third-party research institutions, collaborators and consultants for this capability.

Our subsidiary NHC is party to a sole source contract with the U.S. Army. Pursuant to the sole source contract, the U.S. Army has agreed to cooperate with NHC on research to determine if the PoNS Treatment can be developed for commercial use in assisting physical therapy in the treatment of soldiers and others with balance disorders resulting from mild- to moderate- TBI; however, NHC is solely responsible for sponsoring the registrational trial and the sole regulatory sponsor for the PoNS treatment for this indication. The Army Laboratories, the inventors and background patent owners of the PoNS device have agreed through a collaborative research and development agreement, or the CRADA to support the execution of clinical studies for the PoNS device as a treatment for other mutually agreed upon military-relevant neurological disorders, which could include tinnitus, PTSD and pain and any subsequent indications identified by the parties. The amount of such support, if any, and the terms of such responsibility to support such clinical studies are not yet negotiated and we have no assurance that we can ultimately reach agreement with the Army Laboratories on such amount or terms of support, and there can be no assurance that the U.S. Army or USAMRMC will not otherwise attempt to renegotiate its responsibilities under the CRADA or the sole-source contractual agreement, respectively. The Army Laboratories may terminate their obligations under the CRADA at any time upon 30 days prior written notice to us. If there are insufficient funds available to cover the necessary research and development costs for our product, the Army Laboratories could terminate the CRADA and cease research and development efforts, which could jeopardize our ability to commercialize our PoNS Treatment.

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, 2018, 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, 2018 or otherwise 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, in either such case, we will 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.

We depend on third parties for the manufacture of our product and the loss of these third-party manufacturers could harm our business.

We will be dependent on our third-party scale manufacturing partner to manufacture and supply our PoNS device for clinical and commercial purposes.  Our new contract manufacturer will manufacture the units for our engineering and device verification testing and will build the launch quantities for our early commercialization. This contract manufacturer also has the capability to warehouse and ship our products to customers and multiple locations to expand capacity and back-up capabilities. Our reliance on third-party manufacturers to supply us with our PoNS device to provide such other distribution and warranty services exposes us to risks that could delay our sales or result in higher costs or lost product revenues. In addition, our manufacturers could encounter difficulties in achieving volume production, quality control and quality assurance or suffer shortages of qualified personnel, which could result in their inability to manufacture sufficient quantities of our commercially available product to meet market demand. Our third-party manufacturer and distributor may also fail to follow and remain in compliance with the FDA-mandated Quality System Regulations, or QSR, compliance which is required for all

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medical devices, or fail to document their compliance to QSRs, either of which could lead to significant delays in the availability of materials for our product and/or FDA enforcement actions against them and/or us.

If we are unable to obtain adequate supplies of our product that meet our specifications and quality standards, it will be difficult for us to compete effectively. While we have supply agreements in place with our manufacturer, and they may change the terms of our future orders or choose not to supply us with products in the future. Furthermore, if such manufacturer fails to perform their obligations, we may be forced to purchase our product from other third-party manufacturers, which we may not be able to do on reasonable terms or in sufficient time, if at all. In addition, if we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. We will also need to obtain FDA approval for any new manufacturers. The delays associated with the verification of a new manufacturer or the reverification of an existing manufacturer could negatively affect our ability to produce and distribute our product in a timely manner.

If the U.S. Army terminates the sole-source cost sharing contract or decides in the future not to purchase our product candidate, we would be forced to find new partners or customers in order to continue advancing the PoNS device.

The U.S. Army is under no obligation to purchase the PoNS device from us. If the U.S. Army were to eventually decide not to purchase our product, we would need to find other buyers for our product. If the U.S. Army were to decline to purchase our product, we may have more difficulty persuading other third parties to purchase our product, which would materially harm our business.

In order to be successful, we must expand our products beyond our single product by commercializing new potential product candidates, but we may not be able to do so in a timely fashion and at expected costs, or at all.

In order to be successful, we will need to expand our product lines beyond our PoNS Treatment for mild- to moderate-TBI, which is currently our only indication for our only product candidate. To succeed in our commercialization efforts, we must effectively continue product development and testing, obtain regulatory authorizations, and enhance our sales and marketing capabilities. There is no assurance that we will succeed in developing a future product candidate or in bringing any of our current or potential future product candidates to market. If we fail in bringing our product candidates to market, or experience delays in doing so, we will not generate revenues as planned and will need to curtail operations or seek additional financing earlier than otherwise anticipated.

The development of additional products is subject to the risks of failure inherent in the development of new, state of the art products, and products based on new technologies. These risks include: (a) delays in product development or manufacturing; (b) unplanned expenditures for product development or manufacturing; (c) failure of new products to have the desired effect or an acceptable accuracy and/or safety profile; (d) emergence of superior or equivalent products; (e) failure by any potential collaborative partners to successfully develop products; and (f) the dependence on third parties for the manufacture, development and sale of our products. Because of these risks, our research and development efforts or those of potential collaborative partners may not result in any commercially viable products. If a significant portion of these development efforts is not successfully completed, or any products are not commercially successful, we are less likely to generate significant revenues, or become profitable. The failure to perform such activities could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Intellectual Property

If our intellectual property protection is inadequate, competitors may gain access to our technology and undermine our competitive position.

We regard our intended and future intellectual property as important to our success, and we intend to rely on patent law to protect our proprietary rights. Despite our precautions, unauthorized third parties may copy certain portions of our devices or products or reverse engineer or obtain and use information that we regard as proprietary. We may seek additional patents in the future. We do not know if any future patent application will be issued with the scope of the claims we seek, if at all, or whether any patents we receive will be challenged or invalidated. Thus, we cannot assure you that any intellectual property rights that we may receive can be successfully asserted in the future or that they will not be invalidated, circumvented or challenged. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. Our means of protecting any proprietary rights we may receive in the United States or abroad may not be adequate and competitors may independently develop a similar technology. Any failure to protect our proprietary information and any successful intellectual property challenges or infringement proceedings against us could have a material adverse effect on our business, financial condition and results of operations.

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We may be subject to various litigation claims and legal proceedings, including intellectual property litigation, such as patent infringement claims, which could adversely affect our business.

We, as well as certain of our directors and officers, may be subject to claims or lawsuits. These lawsuits may result in significant legal fees and expenses and could divert management’s time and other resources. If the claims contained in these lawsuits are successfully asserted against us, we could be liable for damages and be required to alter or cease certain of our business practices or product lines. Any of these outcomes could cause our business, financial performance and cash position to be negatively impacted.

Additionally, our commercial success will also depend, in part, on not infringing on the patents or proprietary rights of others. There can be no assurance that the technologies and products used or developed by us will not infringe such rights. If such infringement occurs and we are not able to obtain a license from the relevant third party, we will not be able to continue the development, manufacture, use, or sale of any such infringing technology or product. There can be no assurance that necessary licenses to third-party technology will be available at all or on commercially reasonable terms. In some cases, litigation or other proceedings may be necessary to defend against or assert claims of infringement or to determine the scope and validity of the proprietary rights of third parties. Any potential litigation could result in substantial costs to, and diversion of, our resources and could have a material and adverse impact on us.

An adverse outcome in any such litigation or proceeding could subject us to significant liabilities, require us to cease using the subject technology or require us to license the subject technology from the third party, all of which could have a material adverse effect on our business.

Risks Related to Government Regulation

Before we can market and sell our products, we will be required to obtain marketing authorization from the FDA and foreign regulatory authorities. These authorizations will take significant time and require significant research, development, and clinical study expenditures, and ultimately may not succeed.

Before we begin to label and market the PoNS Treatment for use in the United States, we are required to obtain authorization from the FDA under Section 510(k) of the FD&C Act, approval of a de novo reclassification petition for our product, or approval of pre-market application from the FDA, unless an exemption from pre-market review applies. We intend to utilize the de novo classification procedures to seek marketing authorization for the PoNS device for the treatment of mild- to moderate- TBI, because there is currently no predicate cleared or approved by the FDA for commercial distribution and no existing classification decision by the FDA for such a device. We will also be required to comply with costly and more often time-consuming compliance by foreign regulatory authorities if we want to sell our products outside of the United States. The process of obtaining regulatory clearances or approvals, or completing the de novo classification process, to market a medical device can be costly and time consuming, and we may not be able to successfully obtain pre-market reviews on a timely basis, if at all.

If the FDA requires us to go through a lengthier, more rigorous examination for the PoNS Treatment for mild- to moderate-TBI, introducing the product could be delayed or canceled, which could cause our launch to be delayed. In addition, the FDA may determine that the PoNS device requires the more costly, lengthy and uncertain pre-market approval process. For example, if the FDA disagrees with our determination that the de novo classification procedures are the appropriate path to obtain marketing authorization for the PoNS device, the FDA may require us to submit a PMA application, which is generally more costly and more burdensome and can take several years from the time the application is submitted to the FDA until an approval is obtained.

Moreover, we are currently developing the PoNS device for other potential indications.  At this time, we do not know what pathways FDA or other regulatory authorities will require us to utilize for these additional indications.  We may be required to pursue marketing authorization via more rigorous pathways, such as a PMA application in the United States, which may require more development work than we are currently planning.  This would delay the potential marketing authorization for such indications, potentially make marketing authorization more difficult to obtain, and increase our costs.

Obtaining FDA marketing authorization will be costly, may result in time-consuming delays and will subject us to ongoing compliance costs and regulatory risk for non-compliance.

Obtaining FDA marketing authorization, de novo down-classification, or PMA approval for medical devices can be expensive and uncertain, and generally takes from several months to several years, and generally requires detailed and comprehensive scientific and clinical data. Notwithstanding the expense, these efforts may never result in FDA authorization. Even if we were to obtain regulatory authorization, it may not be for the uses we believe are important or commercially attractive, in which case we would not be permitted to market our product for those uses.

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The FDA can delay, limit or deny authorization of a device for many reasons, including:

 

we may not be able to demonstrate to the FDA’s satisfaction that our product candidate is safe and effective for its intended users;

 

the data from our pre-clinical studies and clinical trials may be insufficient to support authorization, where required; and

 

the manufacturing process or facilities we use may not meet applicable requirements.

In addition, the FDA may change its authorization policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or delay marketing authorization of our products under development. For example, in response to industry and healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) regulatory pathway, the FDA initiated an evaluation of the program, and in January 2011, announced several proposed actions intended to reform the review process governing the clearance of medical devices. The FDA intends these reform actions to improve the efficiency and transparency of the clearance process, as well as bolster patient safety. In addition, as part of the FDASIA the U.S. Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms which are further intended to clarify and improve medical device regulation both pre- and post-approval. Any delay in, or failure to receive or maintain clearance or approval for our product candidate could prevent us from generating revenue from our product candidate and adversely affect our business operations and financial results.

Even if granted, a 510(k) clearance, de novo down-classification, or pre-market approval for any future product would likely place substantial restrictions on how our device is marketed or sold, and FDA will continue to place considerable restrictions on our products and operations. For example, the manufacture of medical devices must comply with FDA’s QSR. In addition, manufacturers must register their manufacturing facilities, list the products with FDA, and comply with requirements relating to labeling, marketing, complaint handling, adverse event and medical device reporting, reporting of corrections and removals, and import and export. FDA monitors compliance with the QSR and these other requirements through periodic inspections. If our facilities or those of our manufacturers or suppliers are found to be in violation of applicable laws and regulations, or if we or our manufacturers or suppliers fail to take satisfactory corrective action in response to an adverse inspection, the regulatory authority could take enforcement action, including any of the following sanctions:

 

untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;

 

customer notifications of repair, replacement, refunds, detention or seizure of our products;

 

product recalls;

 

operating restrictions or partial suspension or total shutdown of production;

 

refusing or delaying requests for marketing authorization of new products or modified products;

 

withdrawing marketing authorizations that have already been granted;

 

refusing to provide Certificates for Foreign Government;

 

refusing to grant export approval for our products; or

 

pursuing criminal prosecution.

Additionally, the FDA and other regulatory authorities have broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could affect the perceived safety and efficacy of our product candidate and dissuade our customers from using our product candidate, if and when it is authorized for marketing.

We expect to be required to conduct clinical trials to support regulatory marketing authorization of some of our potential future product candidates. We have limited experience in the clinical trials process, they may proceed more slowly than anticipated, and we cannot be certain that our product candidate will be shown to be safe and effective for human use.

In order to commercialize our product candidate in the United States, we may be required by the FDA to submit an application for PMA for review and approval by the FDA. A PMA application must be submitted to the FDA if our device cannot be cleared through the 510(k) clearance process, down-classified via the de novo process, or is not exempt from premarket review by the FDA. We could also be required to submit a PMA application for other potential future product candidates. If we are required by the FDA to submit a PMA application, the FDA will also require us to conduct clinical trials. The FDA could also require us to provide the FDA with clinical trial data to support any 510(k) premarket notifications and we are required to submit clinical trial data to support the de novo down classification of our PoNS device. We will receive marketing authorization from the FDA to commercialize products requiring a clinical trial only if we can demonstrate to the satisfaction of the FDA, through well-designed and properly conducted clinical trials, that our

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product candidate is safe and effective and otherwise meet the appropriate standards required for marketing authorization for specified indications.

Clinical trials are complex, expensive, time consuming, uncertain and are subject to substantial and unanticipated delays. Before we may begin clinical trials, we may be required to submit and obtain approval for an investigational device exemption, or IDE, that describes, among other things, the manufacture of, and controls for, the device and a complete investigational plan. Clinical trials generally involve a substantial number of patients in a multi-year study. Because we do not have the experience or the infrastructure necessary to conduct clinical trials, we will have to hire one or more contract research organizations, or CROs, to conduct trials on our behalf. CRO contract negotiations may be costly and time consuming and we will rely heavily on the CRO to ensure that our trials are conducted in accordance with regulatory and industry standards. We may encounter problems with our clinical trials and any of those problems could cause us or the FDA to suspend those trials or delay the analysis of the data derived from them. Moreover, any failure to abide by the applicable regulatory requirements by us, our CROs, and/or clinical trial sites may result in regulatory enforcement action against us or such third parties.

 

We will be substantially dependent on third parties to conduct our clinical trials.

As we are required to conduct clinical trials to obtain FDA marketing authorization, we need to rely heavily on third parties over the course of our clinical trials, and as a result will have limited control over the clinical investigators and limited visibility into their day-to-day activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol and legal, regulatory, and scientific standards, and our reliance on third parties does not relieve us of our regulatory responsibilities. We and these third parties are required to comply with current good clinical practices, or cGCPs, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for product candidates in clinical development. Regulatory authorities enforce these cGCPs through periodic inspections of trial sponsors, principal investigators, and trial sites. If we or any of these third parties fail to comply with applicable cGCP regulations, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional nonclinical or clinical trials before approving our marketing applications or may subject us or them to regulatory enforcement actions. We cannot be certain that, upon inspection, such regulatory authorities will determine that any of our clinical trials comply with the cGCP regulations. In addition, our clinical trials may be required to be conducted with a large number of test patients. Our failure or any failure by these third parties to comply with these regulations or to recruit a sufficient number of patients may require us to repeat clinical trials, which would delay the regulatory marketing authorization process. Moreover, our business may be implicated if any of these third parties violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws.

Any third parties conducting our clinical trials are not and will not be our employees and, except for remedies available to us under our agreements with such third parties, we cannot control whether or not they devote sufficient time and resources to our ongoing preclinical, clinical, and nonclinical programs. These third parties may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies or other drug development activities, which could affect their performance on our behalf. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed, or terminated and we may not be able to complete development of, obtain regulatory marketing authorization of or successfully commercialize our product candidate. As a result, our financial results and the commercial prospects for our product candidate would be harmed, our costs could increase, and our ability to generate revenue could be delayed.

If any of our relationships terminate with these third-party CROs, we may not be able to enter into arrangements with alternative CROs or do so on commercially reasonable terms. Switching or adding additional CROs involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new CRO begins work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition, and prospects.

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If we are unable to secure contracts with workers’ compensation and third-party administrators or rehabilitation clinics who treat patients with balance and gait issues associated with TBI or to launch our clinical experience programs, this could have a negative impact on our intended sales and would have a material adverse effect on our business, financial condition and operating results.

We intend to launch clinical experience programs but there are no guarantees we will be able to get the contracts in place for the timely execution of the programs. Our clinical experience program also contemplates conducting training at certain clinical centers around the United States in the use of the PoNS Treatment along with the specific therapeutic protocol, with participants selected based on an established criterion and we may not be successful in reaching agreement at these centers in establishing our programs at their facilities. This could have the effect of delaying our sales and marketing strategy for the PoNS Treatment. In addition, our commercialization strategy is premised on leveraging workers’ compensation payers to drive early reimbursements and entice Medicaid and commercial payers through third party administrators and rehabilitation clinics. Should we fail in securing such contracts it could have a material adverse effect on our intended sales projections, which would impact our financial conditions and operating results.

 

If we are unable to obtain a reimbursement code from the U.S. Department of Health and Human Services so that the PoNS device is covered under Medicare and Medicaid, this would have a negative impact on our intended sales and would have a material adverse effect on our business, financial condition and operating results.

We plan to submit an application to the U.S. Department of Health and Human Services for reimbursement code so that the PoNS Treatment is covered under Medicare and Medicaid. There can be no assurance that our application will be successful, or that we will be able to obtain a reimbursement code in a timely manner. In the event that we do not obtain a reimbursement code for the PoNS Treatment, our customers may be unable to obtain reimbursement for their purchases under private or government-sponsored insurance plans which would have a negative impact on sales and have a material adverse effect on our business, financial condition and operating results. In addition, Medicare and its administrative contractors as well as other insurers must find that the PoNS device meets their medical necessity requirements for the treatment of patients with mild- to moderate- TBI or they will not pay for the treatment. In addition, there is a risk that the payment amount for the PoNS Treatment is either too low or too high to incentivize customer adoption.

If hospitals and other healthcare providers are unable to obtain coverage or adequate reimbursement for procedures performed with our products, our product will not likely be widely used.

In the United States, the commercial success of our existing product and any future products will depend, in part, on the extent to which governmental payers at the federal and state levels, including Medicare and Medicaid, private health insurers and other third-party payers provide coverage for and establish adequate reimbursement levels for procedures utilizing our products. Hospitals and other healthcare providers that purchase our product for treatment of their patients generally rely on third-party payers to pay for all or part of the costs and fees associated with our products as part of a “bundled” rate for the associated procedures. The existence of coverage and adequate reimbursement for our products and the procedures performed with them by government and private payers critical to market acceptance of our existing and future products. Neither hospitals nor physicians are likely to use our product and any future products if they do not receive adequate reimbursement for the procedures utilizing our products.

Many private payers currently base their reimbursement policies on the coverage decisions and payment amounts determined by the CMS, which administers the Medicare program. Others may adopt different coverage or reimbursement policies for procedures performed with our products, while some governmental programs, such as Medicaid, have reimbursement policies that vary from state to state, some of which may not pay for the procedures performed with our products in an adequate amount, if at all. A Medicare national or local coverage decision denying coverage for one or more of our products could result in private and other third-party payers also denying coverage for our products. Third-party payers also may deny reimbursement for our products if they determine that a product used in a procedure was not medically necessary, was not used in accordance with cost-effective treatment methods, as determined by the third-party payer, or was used for an unapproved use. Unfavorable coverage or reimbursement decisions by government programs or private payers underscore the uncertainty that our products face in the market and could have a material adverse effect on our business.

Many hospitals and clinics in the United States belong to group purchasing organizations, which typically incentivize their hospital members to make a relatively large proportion of purchases from a limited number of vendors of similar products that have contracted to offer discounted prices. Accordingly, the commercial success of our products may also depend to some extent on our ability to either negotiate favorable purchase contracts with key group purchasing organizations and/or persuade hospitals and clinics to purchase our product “off contract.”

The healthcare industry in the United States has experienced a trend toward cost containment as government and private payers seek to control healthcare costs by paying service providers lower rates. While we believe that hospitals will be able to obtain coverage for procedures using our products, the level of payment available to them for such procedures may change over time. State and federal healthcare programs, such as Medicare and Medicaid, closely regulate provider payment levels and have sought to contain, and sometimes reduce, payment levels. Private payers frequently follow government payment policies and are likewise interested in controlling increases in the cost of medical care. In addition, some payers are adopting pay-for-performance programs that differentiate

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payments to healthcare providers based on the achievement of documented quality-of-care metrics, cost efficiencies, or patient outcomes. These programs are intended to provide incentives to providers to deliver the same or better results while consuming fewer resources. As a result of these programs, and related payer efforts to reduce payment levels, hospitals and other providers are seeking ways to reduce their costs, including the amounts they pay to medical device manufacturers. We may not be able to sell our treatment profitably if third-party payers deny or discontinue coverage or reduce their levels of payment below that which we project, or if our production costs increase at a greater rate than payment levels. Adverse changes in payment rates by payers to hospitals could adversely impact our ability to market and sell our products and negatively affect our financial performance.

In international markets, medical device regulatory requirements and healthcare payment systems vary significantly from country to country, and many countries have instituted price ceilings on specific product lines. We cannot assure you that our products will be considered cost-effective by international third-party payers, that reimbursement will be available or, if available, that the third-party payers’ reimbursement policies will not adversely affect our ability to sell our product profitably. Any failure to receive regulatory or reimbursement approvals would negatively impact market acceptance of our products in any international markets in which those approvals are being sought.

If we fail to comply with healthcare laws, we could face substantial penalties and financial exposure, and our business, operations and financial condition could be adversely affected.

We do not have a product candidate available for sale. If, however, we achieve this goal, the availability of payments from Medicare, Medicaid or other third-party payers would mean that many healthcare laws would place limitations and requirements on the manner in which we conduct our business, including our sales and promotional activities and interactions with healthcare professionals and facilities. In some instances, our interactions with healthcare professionals and facilities that occurred prior to commercialization (e.g., the granting of stock options) could have implications at a later date. The laws that may affect our ability to operate include, among others: (i) the federal healthcare programs Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as Medicare or Medicaid, (ii) federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent, and which may apply to entities like us if we provide coding and billing advice to customers, or under theories of “implied certification” where the government and qui tam relators may allege that device companies are liable where a product that was paid for by the government in whole or in part was promoted “off-label,” lacked necessary marketing authorization, or failed to comply with good manufacturing practices or other laws; (iii) transparency laws and related reporting and/or disclosures such as the Sunshine Act; and/or (iv) state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers, many of which differ from their federal counterparts in significant ways, thus complicating compliance efforts.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, exclusion from participation in government healthcare programs, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that their provisions are open to a variety of evolving interpretations and enforcement discretion. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

Our communications regarding products candidates, even while in development, are subject to extensive government scrutiny. We may be subject to governmental, regulatory and other legal proceedings relative to advertising, promotion, and marketing, and communications with study subjects and healthcare professionals, which could have a significant negative effect on our business.

We are subject to governmental oversight and associated civil and criminal enforcement relating to medical device advertising, promotion, and marketing, and such enforcement is evolving and intensifying. Communications regarding our products in development and regarding our clinical trials may subject us to enforcement if they do not comply with applicable laws. In the U.S., we are potentially subject to enforcement from the FDA, other divisions of the Department of Health and Human Services, the U.S. Federal Trade Commission, the Department of Justice, and state and local governments. Other parties, including private plaintiffs, also are commonly bringing suit against pharmaceutical and medical device companies. We may be subject to liability based on the actions of individual employees and third-party contractors carrying out activities on our behalf.

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Non-compliance with laws and requirements unique to our government contracts could subject us to substantial penalties and financial exposure, and our business, operations, and financial condition could be adversely affected by any non-compliance or the government’s discretionary exercise of its rights under our government contracts.

We perform contracts awarded by federal governmental entities. Doing business in the public sector is very different than doing business in the commercial marketplace. For example, unlike commercial contracts, federal government contracts are governed by an array of statutes and regulations that define the way in which government contracts are conceived, structured, competed, awarded, performed, and ultimately completed. Due to the highly regulated nature of our business with the government, we have heightened responsibilities and compliance risks under those contracts. Non-compliance could result in significant civil liability and, in egregious cases, criminal prosecution.

In addition to presenting heightened compliance risks, our government contracts include terms that afford the government special rights that, if exercised at the government’s discretion, could adversely affect our business, operations, and financial condition. For example, our sole source contract with the U.S. Army incorporates a clause allowing the government to terminate the contract for convenience of the government, in whole or in part, without any advance notice to us. A termination of this contract, or any other exercise of special governmental rights, could cause our business to suffer.

Risks Related to our Business Operations

If our expenses are greater than anticipated, then we will have fewer funds with which to pursue our plan of operations and our financing requirements will be greater than anticipated.

We may find that the costs of carrying out our plan of operations are greater than we anticipate. Increased operating costs may cause the amount of financing that we require to increase. Investors may be more reluctant to provide additional financing if we cannot demonstrate that we can control our operating costs. There is no assurance that additional financing required as a result of our operating costs being greater than anticipated will be available to us. If we do not control our operating expenses, then we will have fewer funds with which to carry out our plan of operations with the result that our business may fail.

We are heavily dependent upon the ability and expertise of our Chief Executive Officer and a very limited number of employees and the loss of such individuals could have a material adverse effect on our business, operating results or financial condition.

We currently have a very small management team and very limited other employees. Our success is dependent upon the ability, expertise, judgment, discretion and good faith of our senior management, and in particular Philippe Deschamps, our President and Chief Executive Officer. Currently, Mr. Deschamps is joined by Joyce LaViscount, our Chief Financial Officer and Chief Operating Officer, Jonathan Sackier, our Chief Medical Officer, and seven others as our only full-time employees. We also have engaged approximately 40 full-time equivalent persons as independent contractors. While employment agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on our business, operating results or financial condition.

Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.

Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in a corporation’s ownership may limit the amount of net operating losses, or NOLs, that can be utilized annually in the future to offset the corporation’s (and the corporation’s affiliates’) U.S. federal and state taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of more than 50% within any three-year period. The amount of the annual limitation is determined based on the value of the corporation that underwent the ownership change, immediately before the ownership change. Subsequent ownership changes may further affect any limitation in future years (including by the way of exercising of warrants). We plan to undertake a study to analyze and determine if any historical ownership changes of us or our subsidiary NHC have occurred to determine if there are any permanent limitations on our ability to utilize NOLs in the future. If we determine that an ownership change has occurred, the limitations on the use of our NOLs could increase our U.S. federal and state tax liability and reduce the amount of cash available for distribution to shareholders or otherwise adversely affect the value of an investment in our common stock or warrants.

We may not be able to build an effective distribution network for our products.

We currently have very few employees and will likely need to rely on third party distributors to sell our product. We cannot assure you that we will succeed in entering into and maintaining productive arrangements with an adequate number of distributors that are sufficiently committed to selling our products. The establishment of a distribution network is expensive and time consuming. As we launch new products and increase our marketing effort with respect to existing products, we will need to continue to hire, train, retain and motivate skilled independent distributors with significant technical knowledge. In addition, the commissions we pay our distributors could increase over time which would result in higher sales and marketing expenses. Furthermore, current and potential distributors may market and sell the products of our competitors. Even if the distributors market and sell our products, our competitors may be able, by

33


offering higher commission payments or other incentives, to persuade these distributors to reduce or terminate their sales and marketing efforts related to our products. The distributors may also help competitors solicit business from our existing customers. Some of our independent distributors will likely account for a significant portion of our sales volume, and, if we were to lose them, our sales could be adversely affected. Even if we engage and maintain suitable relationships with an adequate number of distributors, they may not generate revenue as quickly as we expect them to, commit the necessary resources to effectively market and sell our products, or ultimately succeed in selling our products.

Outside of the United States, subject to approval by foreign regulatory authorities, we intend to evaluate the benefits of commercialization of the PoNS Therapy in certain territories either independently or with collaboration partners.  For example, we intend to enter into a definitive exclusive license agreement with A&B to commercialize the PoNS device in certain Asian countries.  However, to date, we have not entered into such a definitive agreement, and there can be no guarantee that we will be able to do so on commercially acceptable terms or at all.

As a result of the use of our product candidates in clinical trials, and if and when we sell our products, we may be liable for product liability claims and we may not carry sufficient product liability insurance.

The devices and products that we are developing may expose us to potential liability from personal injury claims by clinical trial subjects and, if commercially sold, end-users of the product. We maintain clinical trial liability insurance and intend to carry product liability insurance to protect us against the risk that in the future a product liability claim, or product recall could materially and adversely affect our business. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of our intended products. We cannot assure you that if and when we commence distribution of our product that we will be able to obtain or maintain adequate coverage on acceptable terms, or that such insurance will provide adequate coverage against all potential claims. Moreover, even if we maintain adequate insurance, any successful claim could materially and adversely affect our reputation and prospects and divert management’s time and attention. If we are sued for any injury allegedly caused by our future products our liability could exceed our total assets and our ability to pay the liability.

We are an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act. As an “emerging growth company”, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation, shareholder approval of any golden parachute payments not previously approved and presenting the relationship between executive compensation actually paid and our financial performance. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. Additionally, we have irrevocably elected to comply with new or revised accounting standards even though we are an emerging growth company.

We will remain an “emerging growth company” for up to five years after our first sale of common stock pursuant to a Securities Act of 1933, as amended, or the Securities Act, registration statement, although we will lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the end of our second quarter in any calendar year.

Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital as and when we need it. Because of the exemptions from various reporting requirements provided to us as an “emerging growth company”, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

We have incurred increased costs and have become subject to additional regulations and requirements as a result of becoming a public company, which could lower our profits, if any, or make it more difficult to run our business.

As a public company, we have incurred significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We will continue to incur costs associated with the rules implemented by the SEC, the TSX, the OTCQB, and any other exchange on which our common stock may become listed. The expenses incurred by public companies for reporting and corporate governance purposes have generally been increasing. These rules and regulations have increased our legal and financial compliance costs and have made some activities more time-consuming and costly. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and

34


officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

Several people who work for us on a part-time consulting basis may be subject to conflicts of interest.

Several people who provide services to us are part-time consultants. Each may devote part of his working time to other business endeavors, including consulting relationships with other corporate entities, and may have responsibilities to these other entities. Because of these relationships, some of the persons who provide services to us may be subject to conflicts of interest. Such conflicts may include deciding how much time to devote to our affairs, as well as what business opportunities should be presented to us.

 

We have been the victim of a cyber-related crime and our controls may not be successful in avoiding further cyber-related crimes in the future.

During the third quarter of, 2017, we were the victim of a business email compromise, fraud which resulted in our incurring a loss of approximately $0.2 million. We are working with law enforcement authorities and the banks involved in the wire transfer to pursue recovery of the $0.2 million, but at this time we do not know whether we will be able to recover any of the funds, and we have been advised that it may take several months before we are better able to evaluate our recovery prospects. Enhancements have been made to our controls relating to electronic payments by or for us that we believe will reduce our risk of becoming a victim of future frauds related to our payments, including by wire transfers. However, cyber-related criminal activities continue to evolve and increase in sophistication, frequency and severity. As a result, the control enhancements that have been made, and any additional enhancements that may be made in the future, to our controls may not be successful in avoiding our becoming a victim to further cyber-related crimes.

Risks Related to Our Common Stock

A decline in the price of our common stock could affect our ability to raise any required working capital and adversely impact our operations.

A decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise any required capital for our operations. Because our operations to date have been principally financed through the sale of equity securities, a decline in the price of our common stock could have an adverse effect upon our liquidity and our continued operations. A reduction in our ability to raise equity capital in the future may have a material adverse effect upon our business plan and operations. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.

Our common stock does not have a well-established trading market in the United States. Trading of our common stock is sporadic, and the price of our common stock may be volatile; we caution you as to the highly illiquid nature of an investment in our shares.

Our common stock is currently periodically quoted on the OTCQB electronic quotation service operated by OTC Markets Group Inc. A well-established market for our common stock may never develop in the United States. Trading in stock quoted on the OTCQB is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance or the future prospect of our business. Moreover, the OTCQB is not a stock exchange, and trading of securities on the OTCQB is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like Amex. Accordingly, shareholders may have difficulty reselling any of the shares.

Our common stock has been listed on the TSX since April 18, 2016. Certain shares of our common stock are also restricted for immediate resale to U.S. persons or to anyone for the account or on behalf of any U.S. person, pursuant to the requirements of Regulation S. These shares are traded separately on the TSX under a separate ticker symbol. To date, trading on the TSX in our common stock has been extremely limited and sporadic.

Our warrants were also approved for listing on the TSX on April 18, 2016. However, because only the warrants issued in the offshore offering in transactions exempt from the registration requirements of the Securities Act were approved for listing on the TSX, the warrants listed on the TSX may not be purchased by or on behalf of a U.S. person, or by a person in the United States, unless in a registered transaction or pursuant to an applicable safe harbor or exemption from registration.

Securities of microcap and small-cap companies have experienced substantial volatility in the past, often based on factors unrelated to the companies’ financial performance or prospects. We believe that trading in our stock, if it occurs at all, will likely be subject to

35


significant volatility since, among other reasons, we do not have nor, will we have in the foreseeable future an active trading market in our stock. These factors include macroeconomic developments in North America and globally and market perceptions of the attractiveness of particular industries. Factors unrelated to our performance that may affect the price of our common stock include the following: the extent of analytical coverage available to investors concerning our business may be limited if investment banks with research capabilities do not follow us, a reduction in trading volume and general market interest in our common stock may affect an investor’s ability to trade significant numbers of shares of our common stock; the size of our public float may limit the ability of some institutions to invest in our common stock; and a substantial decline in the price of shares of our common stock that persists for a significant period of time could cause our common stock, if listed on an exchange, to be delisted from such exchange, further reducing market liquidity. As a result of any of these factors, the market price of our common stock at any given point in time may not accurately reflect our long-term value. The price of our common shares may increase or decrease in response to a number of events and factors, including: changes in financial estimates; our acquisitions and financings; quarterly variations in our operating results; the operating and share price performance of other companies that investors may deem comparable; and purchase or sale of blocks of our common stock. These factors, or any of them, may materially adversely affect the prices of our common shares regardless of our operating performance. We caution you as to the highly illiquid nature of an investment in our shares.

The market price of our common stock is affected by many other variables which are not directly related to our success and are, therefore, not within our control. These include other developments that affect the breadth of the public market for shares of our common stock and the attractiveness of alternative investments. The effect of these and other factors on the market price of our common stock is expected to make our common stock price volatile in the future, which may result in losses to investors.

Our shares are subject to potential delisting if we do not meet or continue to maintain the listing requirements of the TSX.

The TSX rules for continued listing include minimum market capitalization and other requirements. Failure to maintain our listing on the TSX or being de-listed from the TSX would make it more difficult for shareholders to dispose of our common stock and more difficult to obtain accurate quotations on our common stock. This could have an adverse effect on the price of our common stock. Our ability to issue additional securities for financing or other purposes, or to otherwise arrange for any financing we may need in the future, may also be materially and adversely affected if our common stock is not traded on a national securities exchange.

The market price of our common stock is likely to be highly volatile and subject to wide fluctuations, and you may be unable to resell your shares at or above the price at which you acquired them, or at all.

The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including, but not limited to:

 

quarterly variations in our revenues and operating expenses;

 

developments in the financial markets and worldwide or regional economies;

 

announcements of innovations or new products or services by us or our competitors;

 

announcements by the government relating to regulations that govern our industry;

 

significant sales of our common stock or other securities in the open market;

 

variations in interest rates;

 

changes in the market valuations of other comparable companies; and

 

changes in accounting principles.

In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company’s securities. If a stockholder were to file any such class action suit against us, we would incur substantial legal fees and our management’s attention and resources would be diverted from operating our business to respond to the litigation, which could harm our business.

We are authorized to issue an unlimited number of Class A common stock, and we intend to issue significantly more shares to raise capital, which would result in substantial dilution to your investment in our shares.

Our Articles of Incorporation authorize the issuance of an unlimited number of Class A common shares that can be issued for such consideration and on such terms and conditions as are established by our board of directors without the approval of any of our shareholders. Any additional financings effected by us may result in the issuance of additional securities without stockholder approval and the substantial dilution in the percentage of common stock held by our then existing stockholders. Moreover, the common stock issued in any such transaction may be valued on an arbitrary or non-arm’s-length basis by our management, resulting in an additional

36


reduction in the percentage of common stock held by our current stockholders. Moreover, in connection with any such financing, we may be required to issue warrants to the investors, which could result in additional dilution. Our board of directors has the power to issue any or all of such authorized but unissued shares without stockholder approval. To the extent that additional shares of common stock are issued in connection with a financing, dilution to the interests of our stockholders will occur and the rights of the holders of common stock might be materially and adversely affected. We may issue additional common shares in connection with a future financing or acquisition. The issuance of additional common shares may dilute an investor’s investment in us and reduce cash available for distribution per common share, if any dividends are declared by the board of directors in the future.

We have not paid any dividends and do not foresee paying dividends in the future.

We intend to retain earnings, if any, to finance the growth and development of our business and do not intend to pay cash dividends on shares of our common stock in the foreseeable future. The payment of future cash dividends, if any, will be reviewed periodically by the board of directors and will depend upon, among other things, conditions then existing including earnings, financial condition and capital requirements, restrictions in financing agreements, business opportunities and other factors.

A significant portion of our outstanding common stock may be sold into the public market in the future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur in the future. These sales, or the market perception that the holders of a large number of shares of our common stock intend to sell shares, could reduce the market price of our common stock.

FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our stock.

In addition to the “penny stock” rules promulgated by the SEC, the Financial Industry Regulatory Authority or FINRA, has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock.

Any future sales of our equity securities will dilute the ownership percentage of our existing stockholders and may decrease the market price for our common stock.

Future sales or issuances of equity securities could decrease the value of our common stock, dilute stockholders’ voting power and reduce future potential earnings per share. We intend to sell additional equity securities in future offerings (including through the sale of securities convertible into shares of our common stock) and may issue additional equity securities to finance our operations, development, acquisitions or other projects. We cannot predict the size of future sales and issuances of equity securities or the effect, if any, that future sales and issuances of equity securities will have on the market price of our common stock. Sales or issuances of a substantial number of equity securities, or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock. With any additional sale or issuance of equity securities, investors will suffer dilution of their voting power and may experience dilution in our earnings per share.

Anti-takeover provisions may limit the ability of another party to acquire us, which could cause our stock price to decline.

Though not now, we may be or in the future we may become subject to Wyoming’s control share law. The law focuses on the acquisition of a “controlling interest” which means the ownership of outstanding voting shares sufficient, but for the control share law, to enable the acquiring person to exercise the following proportions of the voting power of the corporation in the election of directors: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more. The ability to exercise such voting power may be direct or indirect, as well as individual or in association with others. The effect of the control share law is that the acquiring person, and those acting in association with it, obtains only such voting rights in the control shares as are conferred by a resolution of the stockholders of the corporation, approved at a special or annual meeting of stockholders. The control share law contemplates that voting rights will be considered only once by the other stockholders. Thus, there is no authority to strip voting rights from the control shares of an acquiring person once those rights have been approved. If the stockholders do not grant voting rights to the control shares acquired by an acquiring person, those shares do not become permanent non-voting shares. The acquiring person is free to sell its shares to others. If the buyers of those shares themselves do not acquire a controlling interest, their shares do not become governed by the control share law. If control shares are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of the voting power, any stockholder of record, other than an acquiring person, who has not voted in favor of approval of voting rights is entitled to demand fair value for such stockholder’s shares.

37


Wyoming’s control share law may have the effect of discouraging takeovers of the corporation. In addition to the control share law, Wyoming has a business combination law which prohibits certain business combinations between Wyoming corporations and “interested stockholders” for three years after the “interested stockholder” first becomes an “interested stockholder,” unless the corporation’s board of directors approves the combination in advance. For purposes of Wyoming law, an “interested stockholder” is any person who is (i) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation, or (ii) an affiliate or associate of the corporation and at any time within the three previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation. The definition of the term “business combination” is sufficiently broad to cover virtually any kind of transaction that would allow a potential acquirer to use the corporation’s assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders. The effect of Wyoming’s business combination law is to potentially discourage parties interested in taking control of the Company from doing so if it cannot obtain the approval of our board of directors.

In addition, our Articles of Incorporation provide for unlimited authorized shares of our Class A common stock. Our authorized but unissued shares of common stock will be available for future issuance without stockholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of unlimited authorized but unissued shares of common stock could render more difficult or discourage an attempt to obtain control of a majority of our Class A common stock by means of a proxy contest, tender offer, merger or otherwise.

Holders of our Warrants will have no rights as shareholders until such holders exercise their Warrants and acquire our common shares.

Until holders of Warrants acquire common shares upon exercise of the Warrants, holders of Warrants will have no rights with respect to the common shares underlying such Warrants. Upon exercise of the Warrants, the holders thereof will be entitled to exercise the rights of common shareholders only as to matters for which the record date occurs after the exercise date.

 

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

 

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

The United States Tax Cuts and Jobs Act of 2017 could adversely affect our business and financial condition.

The U.S. Tax Cuts and Jobs Act, or the TCJA, significantly reforms the U.S. Internal Revenue Code. The TCJA, among other things, contains significant changes to U.S. federal corporate income taxation, including reduction of the U.S. federal corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks for net operating losses arising after December 31, 2017, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and creating, modifying or repealing many business deductions and credits. Federal net operating losses arising in taxable year ending after December 31, 2017 will be carried forward indefinitely pursuant to the TCJA. We continue to examine the impact this tax reform legislation may have on our business. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the TCJA is uncertain and our business and financial condition could be adversely affected. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Our head office is located at 642 Newtown-Yardley Road, Suite 100, Newtown, PA 18940, with 10,444 square feet of lease office space. The lease terminates in January 2023, with an option to extend until January 2028. Monthly rent plus utilities is approximately $20 thousand per month, with a 3% annual increase. Our registered office and registered agent is located at CT Corporation System, 1712 Pioneer Ave., Ste. 120, Cheyenne, Wyoming 82001.

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ITEM 3.

LEGAL PROCEEDINGS

From time to time, we are subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, as of the date of this filing, we do not believe we are party to any claim or litigation, the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business, other than as set forth below in respect of the matters described below. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

We are not aware of any legal proceedings contemplated by any governmental authority involving us or our properties. As of December 31, 2017, no director, officer or affiliate is: (i) a party adverse to us in any legal proceeding, or (ii) has an adverse interest to us in any legal proceedings.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

39


PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our shares of common stock commenced trading on the TSX under the symbol “HSM” on April 18, 2016. Our Warrants were also approved for listing on the TSX on April 18, 2016. See Part I Item 1, “Listing of our Common Stock on the CSE, TSX and OTCQB.”

Our common stock is currently quoted on the OTCQB under the symbol “HSDT.”

The following table sets forth, for the periods indicated, the high and low prices (on a post-split basis) relating to our common stock for the periods indicated, as provided by the CSE, the TSX and the OTCQB.  The Company’s common stock was delisted from the CSE concurrently with the TSX listing. These quotations reflect inter-dealer prices without retail mark-up, mark-down, or commissions, and may not reflect actual transactions.

 

 

 

OTC (US$)

 

 

CSE / TSX (CAD$)

Period

 

High

 

 

Low

 

 

High

 

Low

Year Ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

4.30

 

 

$

3.40

 

 

CAD$ 6.20

 

CAD$ 4.75

Second Quarter

 

$

7.50

 

 

$

3.50

 

 

CAD$ 9.75

 

CAD$ 5.05

Third Quarter

 

$

5.67

 

 

$

4.28

 

 

CAD$ 7.50

 

CAD$ 5.55

Fourth Quarter

 

$

9.05

 

 

$

5.18

 

 

CAD$ 11.75

 

CAD$ 6.75

Year Ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

9.55

 

 

$

7.10

 

 

CAD$ 12.95

 

CAD$ 8.80

Second Quarter

 

$

8.00

 

 

$

6.45

 

 

CAD$ 11.00

 

CAD$ 8.60

Third Quarter

 

$

15.60

 

 

$

7.65

 

 

CAD$ 19.05

 

CAD$ 9.75

Fourth Quarter

 

$

20.70

 

 

$

7.35

 

 

CAD$ 25.45

 

CAD$ 9.00

 

As of March 5, 2018, the last reported sales price of our common stock on the TSX was CAD$15.70 per share. As of March 5, 2018, the last reported sales price of our common stock on the OTCQB was US$12.09 per share.

The exchange rate in effect on March 5, 2018 as reported by Bank of Canada was US$1.00 = CAD$1.2977.

Holders

As of March 5, 2018, there were approximately 214 holders of record of our common stock. The number of holders of record is based on the actual number of holders registered on the books of our transfer agent and does not reflect holders of shares in “street name” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.

Dividend Policy

We have not paid any cash dividends on our common stock since our inception and do not anticipate paying any cash dividends in the foreseeable future. We plan to retain our earnings, if any, to provide funds for the expansion of our business.

Recent Sales of Unregistered Securities.

In December 2017, we issued 646,016 units in a multi-tranche private placement with certain of our officers and directors and other accredited investors.  Each unit consisted of one share of our Class A of common stock and one share purchase warrant and had a purchase price of $9.80 per share of our Class A common stock. Each warrant entitled the holder to acquire one additional share of our Class A common stock for a period of 36 months following the closing of the private placement at an exercise price of $12.25 per share. The issuance of these securities was exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. We intend to use the net proceeds from the private placement to finance our near-term operations, satisfy accrued payables, fund our continued work towards our planned FDA de novo 510(k) submission and marketing applications in other jurisdictions and any remainder for working capital and other corporate purposes.

 

ITEM 6.SELECTED FINANCIAL DATA

As an accelerated filer in a transition period from a smaller reporting company, we have elected not to provide selected financial data in reliance on Item 301(c) of Regulation S-K.

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this filing, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Overview

 

We are a medical technology company focused on the development of products for the treatment of neurological symptoms caused by disease or trauma. We seek to develop, license or acquire unique and noninvasive platform technologies that amplify the brain’s ability to heal itself.

 

Many patients with brain injury or brain-related disease have disrupted neural networks that result in their brains being unable to correctly or efficiently carry neural impulses, which are responsible for directing bodily functions like movement control or sensory perception. Our first product in development, known as the portable neuromodulation stimulator or PoNS®, device, is designed to enhance the brain’s ability to compensate for this damage. The PoNS Treatment is a combination of our PoNS device and functional, targeted physical therapy, and is currently being developed for the treatment of movement, gait and balance disorders in patients with traumatic brain injury, or TBI, and other chronic neurological diseases.

 

We recently completed our registrational clinical trial of the PoNS Treatment for mild- to moderate TBI, in which we observed statistically and clinically significant increases in composite sensory observation test scores. Based on the safety and efficacy results from this clinical trial, we intend to submit a request for FDA marketing authorization for the treatment of chronic balance deficit due to mild- to moderate-TBI via the FDA’s de novo classification process in the first half of 2018.  In addition, we intend to submit applications for marketing authorizations in Canada, the European Union and Australia during the first half of 2018.

Since our inception, we have incurred significant operating losses. Our net loss was $28.0 million for the year ended December 31, 2017 and $12.0 million for the nine months ended December 31, 2016. As of December 31, 2017, we had an accumulated deficit of $66.4 million. We expect to incur significant expenses and operating losses for the foreseeable future as we continue to advance the PoNS Treatment and seek regulatory clearance and pursue its commercialization. In addition, if we obtain marketing clearance, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. Further, we may incur expenses in connection with the in-license or acquisition of other potential products.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings, or other capital sources, including potential collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements, as, and when, needed, we may have to reduce the scope of our operations and planned capital expenditures or sell certain assets, including intellectual property assets.

As of December 31, 2017, we had cash of $5.6 million. We intend to seek additional funding through the sale of equity or debt financing to continue to fund our operations. However, we do not currently have sufficient resources to accomplish all of the conditions necessary for us to generate revenue. For this reason, there is substantial doubt that we can continue as a going concern for the next 12 months unless we obtain additional capital to pay or reduce our expenditures.

Reverse Stock Split

Effective after the close of business on January 22, 2018, we completed a 1-for-5 reverse stock split of our Class A Common Stock. Since January 23, 2018, our Class A common stock has traded on a post-split basis on the OTCQB and Toronto Stock Exchange.  All share and per share amounts in this Annual Report have been reflected on a post-split basis.

Components of Our Results of Operations

Revenue

We have not generated any revenue since our inception however, and will not generate revenue unless the PoNS device receives marketing authorization approval from the FDA or other foreign regulatory authorities.

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Research and Development Expenses

Research and development, or R&D, expenses consists of expenses incurred in connection with the discovery and development of our product candidates. We expense R&D costs as incurred. These expenses include:

 

expenses incurred under agreements with consultants that conduct our clinical trials;

 

outsourced professional scientific development services;

 

employee-related expenses, which include salaries, benefits and stock-based compensation;

 

 

expenses relating to product development and manufacturing of clinical trial devices;

 

expenses relating to regulatory activities, including filing fees paid to regulatory agencies; and

 

laboratory materials and supplies used to support our research activities.

R&D activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage registrational clinical trials. We expect our R&D expenses to increase over the next several years as we increase personnel costs, conduct feasibility and pilot studies and registrational clinical trials for additional indications, invest in our product development and manufacturing capabilities and prepare regulatory filings for our product candidates.

The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when, if ever, material net cash inflows may commence from any of our product candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:

 

the number of clinical sites included in the trials;

 

the length of time required to enroll suitable patients;

 

the number of patients that ultimately participate in the trials;

 

the manufacturing costs of devices used in our clinical trials;

 

the duration of patient follow-up; and

 

the results of our clinical trials.

Our expenditures are subject to additional uncertainties, including those described in Item 1A. “Risk Factors” in this Annual Report.

General and Administrative Expenses

G&A expenses consist principally of salaries and related costs for personnel in executive, finance and legal functions, including stock-based compensation, and travel expenses. Other G&A expenses include facility related costs, professional fees for legal, auditing and tax services, consulting, and insurance costs.

We anticipate that our G&A expenses will increase as a result of increased personnel costs, including stock-based compensation, expanded infrastructure and higher consulting, legal and tax-related services associated with maintaining compliance with the TSX stock exchange listing and Securities and Exchange Commission, or SEC, requirements, accounting and investor relations costs, and director and officer insurance premiums associated with being a public company. Additionally, if and when we believe a regulatory approval of a drug candidate appears likely, we anticipate an increase in payroll and other expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing and commercial infrastructure.

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. U.S. GAAP provides the framework from which to make these estimates, assumption and disclosures. We choose accounting policies within U.S. GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. Actual results could differ from those estimates made by management. While there are a number of significant accounting policies affecting our financial statements,

42


we believe the critical accounting policies involving the most complex, difficult and subjective estimates and judgments are: fair value of non-monetary transactions, fair value of stock options, warrants and derivative liabilities and valuation of income tax allowances and uncertain tax position.

Share-Based Payments

We account for all share-based payments and awards under the fair value-based method. We recognize our stock-based compensation expense using the straight-line method.

Share-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 share-based payments to non-employees is re-measured at each reporting period 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 we had paid cash instead of paying with or using an equity-based instrument. The fair value of share-based payments to non-employees that is fully vested and non-forfeitable as at the grant date is measured and recognized at that date.

We account for the granting of stock options and restricted stock units to employees using the fair value method whereby all awards to employees are recorded 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 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 condition.

 

We use 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. The expected term of our employee-related stock options is determined utilizing the “simplified” method for awards that qualify as “plain vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. We lack historical and implied volatility information. Therefore, we estimate our expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our own traded stock price. The risk-free interest rate is determined by reference to the Bank of Canada Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.

Derivative Financial Instruments

We evaluate our 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 embedded derivative is marked-to-market at each balance sheet date and recorded as a liability and the change in fair value is recorded in the consolidated statements of operations and comprehensive loss. Upon conversion or exercise of a derivative financial instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

The classification of derivative financial instruments, including whether such instruments should be recorded as a liability or as equity, is re-assessed 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 instrument liabilities are classified in the consolidated balance sheet as current or non-current based on whether or not the right to exercise or settle the derivative financial instrument lies with the holder.

We use the Black-Scholes option pricing model to value derivative financial instrument liabilities. This model uses Level 3 inputs in the fair value hierarchy established by ASC 820 - Fair Value Measurement.

On January 4, 2017, our Board of Directors approved a change in our fiscal year end from March 31 to December 31.  We believe that a reader’s understanding of our results of operations will be enhanced by review of a comparison between our audited results for the fiscal year ended December 31, 2017 and our unaudited results for the calendar year ended December 31, 2016. Accordingly we present our discussion and analysis under “Results of Operations” and “Statements of Cash Flows” below based on comparisons of the results for such periods.

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Results of Operations

The following table summarizes our results of operations for the year ended December 31, 2017, the twelve months ended December 31, 2016 and the nine months ended December 31, 2016:

 

 

Year Ended

 

 

Twelve Months Ended

 

 

 

 

 

 

Nine Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

Change

 

 

2016

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

 

$

 

 

$

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

14,387

 

 

 

5,704

 

 

 

8,683

 

 

 

4,723

 

General and administrative

 

 

8,466

 

 

 

7,585

 

 

 

881

 

 

 

5,651

 

Total operating expenses

 

 

22,853

 

 

 

13,289

 

 

 

9,564

 

 

 

10,374

 

Operating loss

 

 

(22,853

)

 

 

(13,289

)

 

 

(9,564

)

 

 

(10,374

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

-

 

 

 

90

 

 

 

(90

)

 

 

111

 

Change in fair value of derivative financial instruments

 

 

(3,443

)

 

 

(2,511

)

 

 

(932

)

 

 

(2,480

)

Foreign exchange loss

 

 

(1,728

)

 

 

(161

)

 

 

(1,567

)

 

 

703

 

Total other expense

 

 

(5,171

)

 

 

(2,582

)

 

 

(2,589

)

 

 

(1,666

)

Net loss

 

$

(28,024

)

 

$

(15,871

)

 

$

(12,153

)

 

$

(12,040

)

  

Year Ended December 31, 2017 Compared to Unaudited Twelve Months Ended December 31, 2016

Revenue

During the year ended December 31, 2017 and the twelve months ended December 31, 2016 we did not generate any revenue.

 

Research and Development Expenses

Research and development, or R&D expenses were $14.4 million for the year ended December 31, 2017, compared to $5.7 million for the twelve months ended December 31, 2016. The increase of $8.7 million was primarily attributable to an increase in our activities with respect to the clinical development of our PoNS device, including our registrational clinical trial and device design and development and manufacturing activities.

Design and engineering verification and manufacturing of our PoNS device was $5.3 million higher for the year ended December 31, 2017 over the comparable period in 2016 as we prepared the required documentation for our FDA submission. In addition, expenses related to our registrational clinical trial for mild- to moderate- TBI increased by approximately $2.1 million for the year ended December 31, 2017 over the comparable period in 2016. This expense included start-up and operating costs which supported an increase in the number of our clinical sites as well expenses related to traditional and digital clinical trial recruitment activities. The increased spending during 2017 accelerated the completion of our registrational clinical trial, which we completed during the third quarter of 2017.

We also incurred $1.0 million for the year ended December 31, 2017, in expenses related to regulatory initiatives towards our FDA submission for marketing clearance of our PoNS device.

 

General and Administrative Expenses

General and administrative, or G&A, expenses were $8.5 million for the year ended December 31, 2017, compared to $7.6 million for the twelve months ended December 31, 2016.

The increase of $0.9 million was primarily attributable to higher legal expenses of $1.3 million and professional services fees of $0.2 million which were partially offset by lower stock-based compensation expense of $0.6 million, as a result of lower number of stock options granted in 2017.

 

Change in Fair Value of Derivative Financial Instruments

The change in fair value of derivative financial instruments was an expense of $3.4 million for the year ended December 31, 2017, compared to an expense of $2.5 million for the twelve months ended December 31, 2016.

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The change in fair value of derivative financial instruments was primarily attributable a change in our stock price and volatility. The change in the fair value of derivative financial instruments is a non-cash item.

During the year ended December 31, 2017, derivative financial instruments increased by $3.0 million from the issuance of 646,016 warrants issued in our December 2017 financing, as these warrants were denominated in a currency other than our functional currency. This was partially offset by a $1.2 million decrease in derivative financial instruments as a result of the exercise of 208,333 warrants which were classified as derivative financial instruments (see Note 3).

 

Foreign Exchange Loss

Foreign exchange loss was $1.7 million during the year ended December 31, 2017, compared to a loss of $0.2 million during the twelve months ended December 31, 2016. This was primarily due to fluctuations in the foreign exchange rate as it relates to the amount of Canadian dollars held at the end of each reporting period.

Statements of Cash Flows

The following table summarizes our cash flows during the year ended December 31, 2017, the twelve months ended December 31, 2016 and the nine months ended December 31, 2016:

 

 

 

Year Ended

 

 

Twelve Months Ended

 

 

 

 

 

 

Nine Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

Change

 

 

2016

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

$

(19,325

)

 

$

(9,568

)

 

$

(9,757

)

 

$

(7,885

)

Net cash used in investing activities

 

 

(190

)