10-Q 1 hsdt-10q_20180930.htm 10-Q hsdt-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2018

OR

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

For the transition period to

Commission File No. 001-38445

 

HELIUS MEDICAL TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

36-4787690

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

642 Newtown Yardley Road Suite 100

Newtown, Pennsylvania, 18940

(Address of principal executive office) (Zip Code)

(215) 944-6100

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

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

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

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

 

Class

Outstanding as of November 6, 2018

Class A Common Stock

23,383,246

 

 

 

 


 

HELIUS MEDICAL TECHNOLOGIES, INC.
INDEX

 

Part I.

Financial Information

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements

 

 

 

 

 

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

3

 

 

 

 

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

4

 

 

 

 

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

5

 

 

 

 

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

6

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

Part II.

Other Information

29

 

 

 

Item 1.

Legal Proceedings

29

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 3.

Defaults Upon Senior Securities

29

 

 

 

Item 4.

Mine Safety Disclosures

30

 

 

 

Item 5.

Other Information

30

 

 

 

Item 6.

Exhibits

31

 

 

 

Signatures

32

2


 

Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Balance Sheets

(Except for share data, amounts in thousands)

 

 

 

September 30, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash

 

$

12,397

 

 

$

5,562

 

Receivables

 

 

41

 

 

 

704

 

Inventory

 

 

197

 

 

 

 

Prepaid expenses

 

 

100

 

 

 

352

 

Total current assets

 

 

12,735

 

 

 

6,618

 

Property and equipment, net

 

 

558

 

 

 

173

 

Other assets

 

 

18

 

 

 

18

 

TOTAL ASSETS

 

$

13,311

 

 

$

6,809

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,186

 

 

$

3,479

 

Accrued liabilities

 

 

1,304

 

 

 

1,242

 

Derivative financial instruments

 

 

14,278

 

 

 

9,578

 

Total current liabilities

 

 

17,768

 

 

 

14,299

 

TOTAL LIABILITIES

 

 

17,768

 

 

 

14,299

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

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

 

 

23

 

 

 

 

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

 

 

 

 

 

52,230

 

Additional paid-in capital

 

 

86,280

 

 

 

6,602

 

Accumulated other comprehensive (loss) income

 

 

(883

)

 

 

47

 

Accumulated deficit

 

 

(89,877

)

 

 

(66,369

)

TOTAL STOCKHOLDERS’ DEFICIT

 

 

(4,457

)

 

 

(7,490

)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$

13,311

 

 

$

6,809

 

 

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

3


 

Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

(Amounts in thousands except shares and per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

2,309

 

 

$

3,798

 

 

$

7,781

 

 

$

11,121

 

General and administrative

 

 

2,581

 

 

 

2,172

 

 

 

13,632

 

 

 

5,862

 

Total operating expenses

 

 

4,890

 

 

 

5,970

 

 

 

21,413

 

 

 

16,983

 

Operating loss

 

 

(4,890

)

 

 

(5,970

)

 

 

(21,413

)

 

 

(16,983

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

4

 

 

 

 

 

 

63

 

 

 

 

Change in fair value of derivative financial instruments

 

 

368

 

 

 

(5,960

)

 

 

(3,356

)

 

 

(5,452

)

Foreign exchange gain (loss)

 

 

1

 

 

 

(1,008

)

 

 

1,198

 

 

 

(1,860

)

Total other income (expense)

 

 

373

 

 

 

(6,968

)

 

 

(2,095

)

 

 

(7,312

)

Net loss

 

 

(4,517

)

 

 

(12,938

)

 

 

(23,508

)

 

 

(24,295

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(96

)

 

 

1,266

 

 

 

(930

)

 

 

1,916

 

Comprehensive loss

 

$

(4,613

)

 

$

(11,672

)

 

$

(24,438

)

 

$

(22,379

)

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.19

)

 

$

(0.67

)

 

$

(1.06

)

 

$

(1.32

)

Diluted

 

$

(0.19

)

 

$

(0.67

)

 

$

(1.06

)

 

$

(1.32

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

23,377,941

 

 

 

19,225,057

 

 

 

22,221,667

 

 

 

18,368,973

 

Diluted

 

 

23,845,498

 

 

 

19,225,057

 

 

 

22,221,667

 

 

 

18,368,973

 

 

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

4


 

Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Statement of Stockholders’ Deficit

(Except shares data, amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock, $0.001 par value

 

 

Common Stock, no par value

 

 

Additional Paid-In

 

 

Accumulated Other Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Total

 

Balance as of December 31, 2017

 

 

 

 

 

 

 

 

20,178,226

 

 

$

52,230

 

 

$

6,602

 

 

$

47

 

 

$

(66,369

)

 

$

(7,490

)

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

 

 

 

 

 

 

 

 

2,463,185

 

 

 

18,400

 

 

 

 

 

 

 

 

 

 

 

 

18,400

 

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

 

 

 

 

 

 

 

 

 

 

 

(7,372

)

 

 

 

 

 

 

 

 

 

 

 

(7,372

)

Share issuance costs

 

 

 

 

 

 

 

 

 

 

 

(1,273

)

 

 

 

 

 

 

 

 

 

 

 

(1,273

)

Proceeds from the exercise of stock options and warrants

 

 

 

 

 

 

 

 

 

 

736,130

 

 

 

4,637

 

 

 

 

 

 

 

 

 

 

 

 

4,637

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,047

 

 

 

 

 

 

 

 

 

1,047

 

Reclassification of liability-classified warrants upon exercise

 

 

 

 

 

 

 

 

 

 

 

3,748

 

 

 

 

 

 

 

 

 

 

 

 

3,748

 

Settlement of vested restricted stock units, net of taxes

 

 

 

 

 

 

 

 

705

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

(2

)

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

 

 

 

 

 

 

 

 

 

 

 

110

 

 

 

(110

)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,586

)

 

 

 

 

 

 

 

 

(1,586

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,478

 

 

 

 

 

 

 

 

 

2,478

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,182

)

 

 

 

 

 

 

 

 

(4,182

)

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

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

32

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,206

 

 

 

 

 

 

 

 

 

1,206

 

Reclassification of stock-based compensation due to modification of options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,338

 

 

 

 

 

 

 

 

 

10,338

 

Reclassification upon change in corporate domicile

 

 

23,378,246

 

 

 

23

 

 

 

(23,378,246

)

 

 

(70,512

)

 

 

70,489

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,508

)

 

 

(23,508

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(930

)

 

 

 

 

 

(930

)

Balance as of September 30, 2018

 

 

23,378,246

 

 

$

23

 

 

 

 

 

$

-

 

 

$

86,280

 

 

$

(883

)

 

$

(89,877

)

 

$

(4,457

)

 

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

5


 

Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(23,508

)

 

$

(24,295

)

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

 

 

 

 

 

 

 

 

Change in fair value of derivative financial instruments

 

 

3,356

 

 

 

5,452

 

Stock-based compensation expense

 

 

7,245

 

 

 

1,464

 

Unrealized foreign exchange loss (gain)

 

 

(1,262

)

 

 

1,758

 

Depreciation expense

 

 

40

 

 

 

7

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

663

 

 

 

(530

)

Inventory

 

 

(197

)

 

 

 

Prepaid expenses

 

 

252

 

 

 

366

 

Other assets

 

 

 

 

 

(18

)

Accounts payable

 

 

(1,274

)

 

 

1,471

 

Accrued liabilities

 

 

209

 

 

 

86

 

Net cash used in operating activities

 

 

(14,476

)

 

 

(14,239

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(425

)

 

 

(181

)

Net cash used in investing activities

 

 

(425

)

 

 

(181

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from the issuance of common stock and accompanying warrants

 

 

18,400

 

 

 

14,547

 

Share issuance costs

 

 

(1,345

)

 

 

(1,248

)

Proceeds from the exercise of stock options and warrants

 

 

4,637

 

 

 

911

 

Net cash provided by financing activities

 

 

21,692

 

 

 

14,210

 

Effect of foreign exchange rate changes on cash

 

 

44

 

 

 

158

 

Net increase (decrease) in cash

 

 

6,835

 

 

 

(52

)

Cash at beginning of period

 

 

5,562

 

 

 

2,669

 

Cash at end of period

 

$

12,397

 

 

$

2,617

 

 

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

6


 

Helius Medical Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1.    DESCRIPTION OF BUSINESS

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

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

 

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

 

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

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

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

Reverse Stock Split

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

Going Concern

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

 

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

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Use of Estimates

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

7


 

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

 

Principles of Consolidation

 

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

Concentrations of Credit Risk

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

Receivables

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

 

Inventory

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

Property and Equipment

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

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

 

 

As of

 

 

As of

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Leasehold improvement

 

$

182

 

 

$

173

 

Furniture and fixtures

 

 

170

 

 

 

 

Equipment

 

 

219

 

 

 

 

Computer software and hardware

 

 

44

 

 

 

17

 

Property and equipment

 

 

615

 

 

 

190

 

Less accumulated depreciation

 

 

(57

)

 

 

(17

)

Property and equipment, net

 

$

558

 

 

$

173

 

 

Foreign Currency

 

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

 

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

8


 

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

 

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

 

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

Stock-Based Compensation

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

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

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

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

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

 

Income Taxes

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

9


 

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

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

Research and Development Expenses

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

Segment Information

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

Derivative Financial Instruments

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

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

 

Fair Value Measurements

 

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

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

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

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

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

10


 

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

 

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

 

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

$

14,278

 

 

 

 

 

 

 

 

$

14,278

 

Derivative financial instruments

 

$

14,278

 

 

 

 

 

 

 

 

$

14,278

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-employee stock options

 

$

2,637

 

 

 

 

 

 

 

 

$

2,637

 

Warrants

 

 

6,941

 

 

 

 

 

 

 

 

 

6,941

 

Derivative financial instruments

 

$

9,578

 

 

 

 

 

 

 

 

$

9,578

 

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

Basic and Diluted Income (Loss) per Share

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

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

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(4,517

)

 

$

(12,938

)

 

$

(23,508

)

 

$

(24,295

)

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

23,377,941

 

 

 

19,225,057

 

 

 

22,221,667

 

 

 

18,368,973

 

Basic net loss per share

 

$

(0.19

)

 

$

(0.67

)

 

$

(1.06

)

 

$

(1.32

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss, basic

 

$

(4,517

)

 

$

(12,938

)

 

$

(23,508

)

 

$

(24,295

)

Effect of dilutive securities: warrants

 

 

(93

)

 

 

-

 

 

 

-

 

 

 

-

 

Net loss, diluted

 

$

(4,610

)

 

$

(12,938

)

 

$

(23,508

)

 

$

(24,295

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

23,377,941

 

 

 

19,225,057

 

 

 

22,221,667

 

 

 

18,368,973

 

Potential common share issuances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incremental dilutive shares from equity instruments (treasury stock method)

 

 

467,557

 

 

 

-

 

 

 

-

 

 

 

-

 

Weighted average common shares outstanding

 

 

23,845,498

 

 

 

19,225,057

 

 

 

22,221,667

 

 

 

18,368,973

 

Diluted net loss per share

 

$

(0.19

)

 

$

(0.67

)

 

$

(1.06

)

 

$

(1.32

)

 

11


 

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

Recent Accounting Pronouncements

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

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

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

12


 

3.   STOCKHOLDERS’ DEFICIT

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

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

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

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

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

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

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

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

 

 

 

September 30, 2018

 

 

April 1, 2018

 

 

Grant Date

 

Stock price

 

CAD $12.65

 

 

CAD $12.87

 

 

CAD $5.45

 

Exercise price

 

CAD $7.50

 

 

CAD $7.50

 

 

CAD $7.50

 

Warrant term

 

0.55 years

 

 

1.05 years

 

 

3.0 years

 

Expected volatility

 

 

70.43

%

 

 

71.13

%

 

 

83.83

%

Risk-free interest rate

 

 

1.74

%

 

 

1.60

%

 

 

0.60

%

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

 

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

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

13


 

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

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

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

 

 

 

April 1, 2018

 

 

December 22, 2017

 

 

December 28, 2017