10-Q 1 hsdt-10q_20180331.htm 10-Q hsdt-10q_20180331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2018

OR

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

For the transition period to

Commission File No. 001-38445

 

HELIUS MEDICAL TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

 

Wyoming

36-4787690

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

642 Newtown Yardley Road, Suite 100

Newtown, Pennsylvania, 18940

(Address of principal executive office) (Zip Code)

(215) 944-6100

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes         No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes         No

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

Large accelerated filer

 

Accelerated filer   ☒

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes         No

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

 

Class

Outstanding as of May 7, 2018

Class A Common Stock

23,260,494

 

 

 


 

HELIUS MEDICAL TECHNOLOGIES, INC.
INDEX

 

Part I.

Financial Information

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements

 

 

 

 

 

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

3

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended
March 31, 2018 and 2017

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the three months ended March 31, 2018

5

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017

6

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

 

Item 2.

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

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

Item 4.

Controls and Procedures

23

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

24

 

 

 

Item 1A.

Risk Factors

24

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

 

 

 

Item 3.

Defaults Upon Senior Securities

24

 

 

 

Item 4.

Mine Safety Disclosures

24

 

 

 

Item 5.

Other Information

24

 

 

 

Item 6.

Exhibits

25

 

 

 

Signatures

26

2

 


 

Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Balance Sheets

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

 

 

 

March 31, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash

 

$

4,395

 

 

$

5,562

 

Receivables

 

 

697

 

 

 

704

 

Prepaid expenses

 

 

258

 

 

 

352

 

Other current assets

 

 

105

 

 

 

 

Total current assets

 

 

5,455

 

 

 

6,618

 

Property, plant and equipment, net

 

 

190

 

 

 

173

 

Other assets

 

 

18

 

 

 

18

 

TOTAL ASSETS

 

$

5,663

 

 

$

6,809

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,573

 

 

$

3,479

 

Accrued liabilities

 

 

1,512

 

 

 

1,242

 

Derivative financial instruments

 

 

3,807

 

 

 

9,578

 

Total current liabilities

 

 

7,892

 

 

 

14,299

 

TOTAL LIABILITIES

 

 

7,892

 

 

 

14,299

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Common stock (Unlimited Class A common shares authorized); (20,797,309 shares

issued and outstanding as of March 31, 2018 and 20,178,226 shares issued and outstanding as of December 31, 2017)

 

 

59,229

 

 

 

52,230

 

Additional paid-in capital

 

 

6,982

 

 

 

6,602

 

Accumulated other comprehensive income (loss)

 

 

(906

)

 

 

47

 

Accumulated deficit

 

 

(67,534

)

 

 

(66,369

)

TOTAL STOCKHOLDERS’ DEFICIT

 

 

(2,229

)

 

 

(7,490

)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$

5,663

 

 

$

6,809

 

 

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

3

 


 

Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

(Amounts in thousands except shares and per share data, and expressed in United States Dollars)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

2,552

 

 

$

3,028

 

General and administrative

 

 

2,165

 

 

 

2,006

 

Total operating expenses

 

 

4,717

 

 

 

5,034

 

Operating loss

 

 

(4,717

)

 

 

(5,034

)

Other income (expense):

 

 

 

 

 

 

 

 

Other income

 

59

 

 

 

 

Change in fair value of derivative financial instruments

 

 

2,525

 

 

 

(516

)

Foreign exchange gain (loss)

 

 

968

 

 

 

(128

)

Total other income (expense)

 

 

3,552

 

 

 

(644

)

Net loss

 

 

(1,165

)

 

 

(5,678

)

Other comprehensive loss

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(953

)

 

 

(4

)

Comprehensive loss

 

$

(2,118

)

 

$

(5,682

)

Net loss per share

 

 

 

 

 

 

 

 

     Basic

 

$

(0.06

)

 

$

(0.32

)

     Diluted

 

$

(0.08

)

 

$

(0.32

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

     Basic

 

 

20,334,929

 

 

 

17,573,966

 

     Diluted

 

 

20,460,656

 

 

 

17,573,966

 

 

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

 

4

 


 

Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Statement of Stockholders’ Deficit

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (loss)

 

 

Deficit

 

 

Total

 

Balance as of December 31, 2017

 

 

20,178,226

 

 

$

52,230

 

 

$

6,602

 

 

$

47

 

 

$

(66,369

)

 

$

(7,490

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

380

 

 

 

 

 

 

 

 

 

380

 

Proceeds from the exercise of stock options and warrants

 

 

619,083

 

 

 

3,753

 

 

 

 

 

 

 

 

 

 

 

 

3,753

 

Reclassification of liability classified warrants upon exercise

 

 

 

 

 

3,246

 

 

 

 

 

 

 

 

 

 

 

 

3,246

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,165

)

 

 

(1,165

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

(953

)

 

 

 

 

 

(953

)

Balance as of March 31, 2018

 

 

20,797,309

 

 

$

59,229

 

 

$

6,982

 

 

$

(906

)

 

$

(67,534

)

 

$

(2,229

)

 

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

5

 


 

Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(Amounts in thousands and expressed in United States Dollars)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(1,165

)

 

$

(5,678

)

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

 

 

 

 

 

 

 

 

Change in fair value of derivative financial instruments

 

 

(2,525

)

 

 

516

 

Stock-based compensation expense

 

 

387

 

 

 

242

 

Unrealized foreign exchange (gain) loss

 

 

(993

)

 

 

110

 

Depreciation expense

 

 

10

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

7

 

 

 

(350

)

Prepaid expenses

 

 

94

 

 

 

86

 

Other assets

 

 

(105

)

 

 

(18

)

Accounts payable

 

 

(886

)

 

 

1,605

 

Accrued liabilities

 

 

316

 

 

 

623

 

Net cash used in operating activities

 

 

(4,860

)

 

 

(2,864

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of property, plant & equipment

 

 

(27

)

 

 

 

Net cash used in investing activities

 

 

(27

)

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from the issuance of common stock

 

 

 

 

9187

 

Share issuance costs

 

 

(73

)

 

 

(1,239

)

Proceeds from the exercise of stock options and warrants

 

 

3,753

 

 

 

28

 

Net cash provided by financing activities

 

 

3,680

 

 

 

7,976

 

Effect of foreign exchange rate changes on cash

 

 

40

 

 

 

(115

)

Net (decrease) increase in cash

 

 

(1,167

)

 

 

4,997

 

Cash at beginning of period

 

 

5,562

 

 

 

2,669

 

Cash at end of period

 

$

4,395

 

 

$

7,666

 

 

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

6

 


 

Helius Medical Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1.    DESCRIPTION OF BUSINESS

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

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. Our PoNS Treatment is the 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.

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

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

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

Reverse Stock Split

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

 

Liquidity and Financial Condition

The Company has not generated any product revenues and has not achieved profitable operations. The Company expects to continue to incur operating losses and net cash outflows until such time as it generates a level of revenue to support its cost structure.

 

As of March 31, 2018, the Company had cash of $4.4 million. In April 2018, the Company issued 2,463,185 shares of its common stock and warrants to purchase 2,463,185 shares of the Company’s common stock in an underwritten public offering at a price of $7.47 per share and accompanying warrants. Net proceeds from the offering after deducting underwriting discounts and commissions was approximately $17.3 million. The Company estimates that offering expenses will be approximately $1.0 million (see Note 9). While the actual amount of cash that the Company will need to operate is subject to many factors, the Company believes that its current cash position along with the net proceeds received from the offering will be sufficient to fund its operations through the second quarter of 2019.

 

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

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Use of Estimates

The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosure of contingent assets and liabilities.  

7

 


 

Significant estimates include the assumptions used in the fair value pricing model for stock-based compensation, derivative financial instruments and deferred income tax asset valuation allowance. Financial statements include estimates which, by their nature, are uncertain. Actual outcomes could differ from these estimates.

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements reflect the operations of Helius Medical Technologies, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to current period amounts.

 

Concentrations of Credit Risk

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

Receivables

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

 

Property, Plant and Equipment

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

The following tables summarizes the Company property, plant and equipment as of March 31, 2018 and December 31, 2017 (amounts in thousands).

 

 

As of

March 31, 2018

 

 

As of

December 31, 2017

 

Leasehold improvement

 

$

173

 

 

$

173

 

Software and hardware

 

 

44

 

 

 

17

 

 

 

 

217

 

 

 

190

 

Less accumulated depreciation

 

 

(27

)

 

 

(17

)

Total

 

$

190

 

 

$

173

 

 

Share-Based Payments

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

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

Share-based payment to non-employees are measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measurable. The fair value of stock-based payments to non-employees are 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 the Company had paid cash instead of paying with or using equity-based instruments. The fair value of the stock-based payments to non-employees that are fully vested and non-forfeitable as of the grant date are measured and recognized at that date.

8

 


 

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

Foreign Currency

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

Income Taxes

The Company accounts for income taxes using the asset and liability method. The asset and liability method provide that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

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

Research and Development Expenses

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

Segment Information

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

Derivative Financial Instruments

The Company evaluates its financial instruments and other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815, Derivatives and Hedging. The result of this accounting treatment is that the fair value of the derivative is marked-to-market at each balance sheet date and recorded as a liability or asset and the change in fair value is recorded in the consolidated statements of operations and comprehensive loss. The Company’s derivative financial instruments are comprised of warrants and non-employee stock options. Upon settlement of a derivative financial instrument, the instrument is marked to fair value at the settlement date and the fair value of the underlying instrument is reclassified to equity.

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

9

 


 

Fair Value Measurements

The Company accounts for financial instruments in accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

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

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

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

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

The Company’s derivative financial instruments are classified as Level 3 within the fair value hierarchy and required to be recorded at fair value on a recurring basis. Unobservable inputs used in the valuation of these financial instruments include volatility of the underlying share price and the expected term. See Note 3 for the inputs used in the Black-Scholes option-pricing model as of March 31, 2018 and 2017 and the roll forward of the derivative financial instruments related to the warrants. See Note 4 for the inputs used in the Black-Scholes option-pricing model as of March 31, 2018 for the roll forward of the derivative financial instruments related to the non-employee stock options.

The following table summarizes the Company’s derivative financial instruments within the fair value hierarchy as of March 31, 2018 and December 31, 2017 (amounts in thousands):

 

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-employee options

 

$

1,329

 

 

 

 

 

 

 

 

$

1,329

 

Warrants

 

 

2,478

 

 

 

 

 

 

 

 

 

2,478

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-employee options

 

$

2,637

 

 

 

 

 

 

 

 

$

2,637

 

Warrants

 

 

6,941

 

 

 

 

 

 

 

 

 

6,941

 

 

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

Basic and Diluted Income (Loss) per Share

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

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

10

 


 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Basic

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(1,165

)

 

$

(5,678

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

20,334,929

 

 

 

17,573,966

 

Basic net loss per share

 

$

(0.06

)

 

$

(0.32

)

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

Net loss, basic

 

$

(1,165

)

 

$

(5,678

)

Effect of dilutive securities: Change in fair value of derivative financial instruments

 

 

(434

)

 

 

 

Net loss, diluted

 

$

(1,599

)

 

$

(5,678

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

20,334,929

 

 

 

17,573,966

 

Potential common share issuances:

 

 

 

 

 

 

 

 

Incremental dilutive shares from stock options and warrants (treasury stock method)

 

 

125,727

 

 

 

 

Weighted average common shares outstanding - diluted

 

 

20,460,656

 

 

 

17,573,966

 

Diluted net loss per share

 

$

(0.08

)

 

$

(0.32

)

 

During the three months ended March 31, 2018, a total of 2,208,646 options and 1,818,439 warrants were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive. During the three months ended March 31, 2017, a total of 1,957,000 options and 2,017,152 warrants were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use, or ROU, model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statement of operations. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the condensed consolidated financial statements, with certain practical expedients available. We are currently evaluating the potential impact of the standard on our condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which was further amended through various updates issued by the FASB thereafter. The amendments of Topic 606 completed the joint effort between the FASB and the IASB, to develop a common revenue standard for GAAP and IFRS, and to improve financial reporting. The guidance under Topic 606 provides that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for the goods or services provided and establishes a five-step model to be applied by an entity in evaluating its contracts with customers. The Company does not have any revenues or contracts with customers and will need to evaluate the impact of Topic 606 on its results of operations, cash flows and financial position should a revenue generating transaction arise in the future. The Company adopted Topic 606 on January 1, 2018 on a modified retrospective basis, and the adoption had no impact on the Company’s condensed consolidated financial statements.

11

 


 

3.    COMMON STOCK AND WARRANTS

As of March 31, 2018, the Company’s certificate of incorporation authorized the Company to issue unlimited Class A common shares without par value. Each Class A common share is entitled to have the right to vote at any shareholder meeting on the basis of one vote per share. Each Class A share held entitles the holder to receive dividends as declared by the directors. No dividends have been declared through March 31, 2018. In the event of a liquidation, dissolution or winding-up of the Company other distribution of assets of the Company among its shareholders for the purposes of winding-up its affairs or upon a reduction of capital the holders of the Class A common shares shall, share equally, share for share, in the remaining assets and property of the Company.

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

On October 9, 2015, the Company entered into a $7.0 million funding commitment with A&B (HK) Company Limited (“A&B”), in the form of a convertible promissory note consisting of an initial $2.0 million note and a $5.0 million funding commitment. On October 9, 2015, the Company received the conversion notice on the promissory note and in November 2015, the Company issued 416,666 shares of common stock at a price of $4.80 per share and 208,333 warrants exercisable at $7.20 for a period of three years from the date of issuance. The shares of common stock and the warrants were issued on November 10, 2015. On December 29, 2015, the Company drew down the $5.0 million funding commitment through the issuance of 1,111,111 shares of common stock at a price of $4.50 per share and 555,556 warrants exercisable at $6.75 for a period of three years from the date of issuance. The shares of common stock and the warrants were issued on January 7, 2016. In November 2017, A&B exercised 208,333 warrants at a price of $7.20 and the Company received gross cash proceeds of $1.5 million upon the exercise. During the first quarter of 2018, A&B exercised its remaining 555,556 warrants at a price of $6.75 and the Company received gross cash proceeds of $3.8 million.

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

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

The warrants issued in each of the April 18, 2016 and May 2, 2016 closings are classified within equity. The proceeds from the Offering were allocated on a relative fair value basis between the Class A common shares and the warrants issued. The compensation options are accounted for as warrants. These warrants represent additional share issuance costs and are recorded within shareholders’ deficit in the Company’s condensed consolidated balance sheets at their fair value.  

The fair value of the warrants granted in such offering was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

 

 

 

 

Stock price

 

CAD $5.45

 

Exercise price

 

CAD $7.50

 

Warrant term

 

3.0 years

 

Expected volatility

 

 

83.83

%

Risk-free interest rate

 

 

0.60

%

Dividend rate

 

 

0.00

%

 

12

 


 

The fair value of the compensation options granted during such offering was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

 

 

 

 

Stock price

 

CAD $6.80

 

Exercise price

 

CAD $5.00

 

Option term

 

2.0 years

 

Expected volatility

 

 

126.76

%

Risk-free interest rate

 

 

0.61

%

Dividend rate

 

 

0.00

%

 

 

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

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

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

 

The fair value of the warrants granted in the December 2017 financing were estimated using the Black-Scholes option pricing model with the following weighted average assumptions

 

 

 

December 22, 2017

 

 

December 28, 2017

 

 

December 29, 2017

 

Stock price

 

$

10.60

 

 

$

12.45

 

 

$

12.32

 

Exercise price

 

$

12.25

 

 

$

12.25

 

 

$

12.25

 

Warrant term

 

3.0 years

 

 

3.0 years

 

 

3.0 years

 

Expected volatility

 

 

60.24

%

 

 

60.24

%

 

 

60.24

%

Risk-free interest rate

 

 

2.01

%

 

 

2.00

%

 

 

1.98

%

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

 

Pursuant to the guidance of ASC 815 Derivatives and Hedging, the Company determined that certain of its warrants issued and outstanding should be accounted for as liabilities because they are not considered to be indexed to the Company’s stock due to the exercise price being denominated in a currency other than the Company’s functional currency. Consequently, the Company determined the fair value of each warrant issuance using the Black-Scholes option pricing model, with the remainder of the proceeds allocated to the common shares.

The following table summarizes warrants that the Company accounts for as liabilities for the three months ended March 31, 2018 and 2017:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Fair value of warrants at beginning of period

 

$

6,941

 

 

$

2,857

 

Exercise of warrants

 

 

(2,509

)

 

 

 

Change in fair value of warrants during the period

 

 

(1,954

)

 

 

354

 

Fair value of warrants at end of period

 

$

2,478

 

 

$

3,211

 

 

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

13

 


 

The fair value of warrants outstanding as of March 31, 2018 and 2017 were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

 

 

March 31, 2018

 

 

March 31, 2017

 

Stock price

 

$

10.11

 

 

$

7.80

 

Exercise price

 

$

12.72

 

 

$

8.10

 

Warrant term

 

2.29 years

 

 

1.65 years

 

Expected volatility

 

 

63.77

%

 

 

94.21

%

Risk-free interest rate

 

 

2.26

%

 

 

0.75

%

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

The following is a summary of warrant activity during the three months ended March 31, 2018:

 

 

 

Number of Warrants

 

 

Weighted Average

Exercise Price

 

 

 

CAD

 

 

US

 

 

CAD$

 

 

US$

 

Outstanding as of December 31, 2017

 

 

1,011,505

 

 

 

1,343,404

 

 

$

7.38

 

 

$

10.25

 

Granted

 

 

206

 

 

 

 

 

 

7.50

 

 

 

 

Exercised

 

 

(618

)

 

 

(555,556

)

 

 

5.83

 

 

 

6.75

 

Outstanding as of March 31, 2018

 

 

1,011,093

 

 

 

787,848

 

 

$

7.38

 

 

$

12.72

 

 

The warrants outstanding and exercisable as of March 31, 2018 were as follows:

 

Number of Warrants Outstanding

 

 

Exercise Price

 

Expiration Date

 

90,406

 

 

US$15.00

 

April 30, 2018

 

33,546

 

 

US$15.00

 

June 26, 2018

 

3,795

 

 

US$10.75

 

June 26, 2020

 

12,576

 

 

US$15.00

 

July 17, 2018

 

1,509

 

 

US$10.75

 

July 17, 2020

 

961,489

 

 

CAD$7.50

 

April 18, 2019

 

49,604

 

 

CAD$5.00

 

April 18, 2018

 

270,915

 

 

US$12.25

 

December 22, 2020

 

171,020

 

 

US$12.25

 

December 28, 2020

 

204,081

 

 

US$12.25

 

December 29, 2020

 

1,798,941

 

 

 

 

 

 

4.    SHARE BASED PAYMENTS

On June 18, 2014, the Company’s Board of Directors authorized and approved the adoption of the 2014 Stock Incentive Plan (“2014 Plan”), under which an aggregate of 2,421,603 shares of common stock may be issued. Pursuant to the terms of the 2014 Plan, the Company is authorized to grant stock options, as well as awards of stock appreciation rights, restricted stock, unrestricted shares, restricted stock units and deferred stock units. These awards may be granted to directors, officers, employees and eligible consultants. Vesting and the term of an option is determined at the discretion of the Company’s Board of Directors. On August 22, 2017, the Company’s Board of Directors approved the amended and restated 2014 Plan to correct for a formulaic error included in the deemed net stock and cashless exercise equation within the 2014 Plan. This amendment had no impact on the Company’s consolidated financial statements.

On August 8, 2016, the Company’s Board of Directors authorized and approved the adoption of the 2016 Omnibus Incentive Plan (“2016 Plan” and, together with the 2014 Plan, the “Plans”), under which an aggregate of 3,000,000 shares of common stock may be issued.  Pursuant to the terms of the 2016 Plan, the Company is authorized to grant stock options, as well as awards of stock appreciation rights, restricted stock, unrestricted shares, restricted stock units, stock equivalent units and performance-based cash awards.  These awards may be granted to directors, officers, employees and eligible consultants. Vesting and the term of an option is determined at the discretion of the Company’s Board of Directors.  

14

 


 

 

As of March 31, 2018, there were an aggregate of 2,733,614 shares of common stock remaining available for grant under its Plans.

For the three months ended March 31, 2018 and 2017, the Company did not issue any stock options t employees, directors or non-employees.

The following is a summary of stock option activity during the three months ended March 31, 2018:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Aggregate

 

 

 

Number

 

 

Exercise Price

 

 

Intrinsic Value

 

 

 

of Options

 

 

(CAD$)

 

 

(CAD$ in '000s)

 

Outstanding as of December 31, 2017

 

 

2,448,646

 

 

$

7.35

 

 

$

21,089

 

Exercised (1)

 

 

(80,000

)

 

 

3.00

 

 

560

 

Outstanding as of March 31, 2018

 

 

2,368,646

 

 

$

7.50

 

 

$

13,119

 

Exercisable as of March 31, 2018

 

 

1,371,739

 

 

$

5.85

 

 

$

9,934

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) For the three months ended March 31, 2018, 80,000 stock options were exercised on a cashless basis resulting in 17,091 common shares being withheld.

 

 

 

The Company has adopted the simplified method prescribed by the SEC in SAB Topic 14 with respect to estimating the expected term of a stock option as its limited share purchase option history does not provide a reasonable basis to estimate the expected term. Expected volatility is determined by reference to the average volatility rates of other companies in the same industry due to the Company’s limited trading history.  The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2018 and 2017, was $0.6 million and $0.1 million, respectively.

The following table summarizes stock options outstanding and exercisable by employees and directors as of March 31, 2018: 

 

 

 

 

 

 

Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

Remaining

 

 

 

 

 

 

 

 

 

 

Number of

 

Options

 

 

 

 

Contractual Life

 

 

Exercise

 

 

Grant Date Fair

 

 

Options

 

Outstanding

 

 

Expiration Date

 

(In Years)

 

 

Price (CAD)

 

 

Value (CAD)

 

 

Exercisable

 

 

360,000

 

 

June 18, 2019

 

 

1.22

 

 

$

3.00

 

 

$

1.00

 

 

 

360,000

 

 

80,000

 

 

June 18, 2019

 

 

1.22

 

 

$

3.00

 

 

$

1.32

 

 

 

80,000

 

 

20,000

 

 

December 8, 2019

 

 

1.69

 

 

$

14.60

 

 

$

6.55

 

 

 

20,000

 

 

80,000

 

 

December 8, 2019

 

 

1.69

 

 

$

14.80

 

 

$

6.46

 

 

 

80,000

 

 

20,000

 

 

March 16, 2020

 

 

1.96

 

 

$

16.00

 

 

$

7.09

 

 

 

20,000

 

 

8,500

 

 

August 14, 2020

 

 

2.38

 

 

$

4.90

 

 

$

1.94

 

 

 

8,500

 

 

150,000

 

 

October 21, 2020

 

 

2.56

 

 

$

4.20

 

 

$

1.80

 

 

 

112,500

 

 

20,000

 

 

December 31, 2020

 

 

2.76

 

 

$

6.20

 

 

$

2.49

 

 

 

20,000

 

 

595,000

 

 

July 13, 2020

 

 

2.29

 

 

$

6.95

 

 

$

3.23

 

 

 

396,666

 

 

20,000

 

 

August 8, 2020

 

 

2.36

 

 

$

6.55

 

 

$

3.23

 

 

 

10,000

 

 

617,000

 

 

April 17, 2027

 

 

9.05

 

 

$

10.80

 

 

$

7.76

 

 

 

-

 

 

6,146

 

 

May 18, 2027

 

 

9.14

 

 

$

10.00

 

 

$

5.23

 

 

 

3,073

 

 

10,000

 

 

May 18, 2027

 

 

9.14

 

 

$

10.00

 

 

$

7.63

 

 

 

-

 

 

30,000

 

 

August 8, 2027

 

 

9.36

 

 

$

13.15

 

 

$

8.86

 

 

 

-

 

 

2,016,646

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,110,739

 

 

As of March 31, 2018 and 2017, the unrecognized compensation cost related to non-vested stock options outstanding for employees and directors, was $3.3 million and $1.0 million, respectively, to be recognized over a weighted-average remaining vesting period of approximately 2.3 years and 1.2 years, respectively.  The Company recognizes compensation expense for only the portion of awards that are expected to vest.  

 

During the fourth quarter of 2017, upon a review of the Company’s equity compensation awards granted under the 2016 Plan it determined that it had inadvertently exceeded the annual per-person sub-limits involving certain awards previously made to a current executive officer. The aggregate amount of common stock represented by this excess award, which consisted of stock options, was 60,000 shares. This excess award was deemed to have been granted outside of the 2016 Plan and as such the Company applied liability accounting to the awards. As a result, this excess award is being remeasured at each reporting period until such time that the Company’s shareholders approve the excess award at which

15

 


 

time the liability will be reclassified to additional paid-in capital. The unrecognized fair value calculated for the excess award as of the date of shareholders’ approval will be recognized as compensation expense ratably over the remaining requisite service period for the excess award.

Non-Employee Stock Options

The following table summarizes stock options outstanding and exercisable by non-employees as of March 31, 2018:

 

 

 

 

 

 

Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding