10-Q 1 hsdt-10q_20190331.htm 10-Q hsdt-10q_20190331.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, 2019

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  

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

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Class A Common stock

 

HSDT

 

The Nasdaq Stock Market LLC

As of May 6, 2019, the registrant had 25,866,211 shares of Class A common stock, $0.001 par value per share, outstanding.

 

 

 


 

HELIUS MEDICAL TECHNOLOGIES, INC.
INDEX

 

Part I.

Financial Information

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

3

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended
March 31, 2019 and 2018

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three months ended March 31, 2019 and 2018

5

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

6

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

Part II.

Other Information

27

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item 1A.

Risk Factors

27

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

 

Item 3.

Defaults Upon Senior Securities

28

 

 

 

Item 4.

Mine Safety Disclosures

28

 

 

 

Item 5.

Other Information

29

 

 

 

Item 6.

Exhibits

30

 

 

 

Signatures

31

2


 

Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Balance Sheets

(Except for share data, amounts in thousands)

 

 

 

March 31, 2019

 

 

December 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash

 

$

18,656

 

 

$

25,583

 

Accounts receivable

 

 

910

 

 

 

177

 

Other receivables

 

 

182

 

 

 

98

 

Inventory

 

 

731

 

 

 

392

 

Prepaid expenses

 

 

352

 

 

 

447

 

Other current assets

 

 

 

 

 

264

 

Total current assets

 

 

20,831

 

 

 

26,961

 

Property and equipment, net

 

 

693

 

 

 

554

 

Other assets

 

 

 

 

 

 

 

 

Operating lease right-of-use asset, net

 

 

650

 

 

 

 

Non-current receivables

 

 

306

 

 

 

294

 

Other non-current assets

 

 

18

 

 

 

18

 

Total other assets

 

 

974

 

 

 

312

 

TOTAL ASSETS

 

$

22,498

 

 

$

27,827

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,474

 

 

$

2,392

 

Accrued liabilities

 

 

1,518

 

 

 

1,812

 

Operating lease liability

 

 

148

 

 

 

 

Derivative financial instruments

 

 

5,743

 

 

 

13,769

 

Total current liabilities

 

 

9,883

 

 

 

17,973

 

Non-current liabilities

 

 

 

 

 

 

 

 

Operating lease liability

 

 

597

 

 

 

 

TOTAL LIABILITIES

 

 

10,480

 

 

 

17,973

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding as of March 31, 2019 and December 31, 2018

 

 

 

 

 

 

Class A common stock, $0.001 par value; 150,000,000 shares authorized; 25,844,180 and 25,827,860 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively

 

 

26

 

 

 

26

 

Additional paid-in capital

 

 

106,363

 

 

 

105,411

 

Accumulated other comprehensive loss

 

 

(703

)

 

 

(591

)

Accumulated deficit

 

 

(93,668

)

 

 

(94,992

)

TOTAL STOCKHOLDERS’ EQUITY

 

 

12,018

 

 

 

9,854

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

22,498

 

 

$

27,827

 

 

(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 Income (Loss)

(Amounts in thousands except shares and per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

Product sales, net

 

$

677

 

 

$

 

Cost of sales:

 

 

 

 

 

 

 

 

Cost of product sales

 

 

236

 

 

 

 

Gross profit

 

 

441

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

2,681

 

 

 

2,552

 

Selling, general and administrative

 

 

4,581

 

 

 

2,165

 

Total operating expenses

 

 

7,262

 

 

 

4,717

 

Operating loss

 

 

(6,821

)

 

 

(4,717

)

Other income (expense):

 

 

 

 

 

 

 

 

Other income

 

 

11

 

 

 

59

 

Change in fair value of derivative financial instruments

 

 

8,289

 

 

 

2,525

 

Foreign exchange gain (loss)

 

 

(155

)

 

 

968

 

Total other income

 

 

8,145

 

 

 

3,552

 

Net income (loss)

 

 

1,324

 

 

 

(1,165

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(112

)

 

 

(953

)

Comprehensive income (loss)

 

$

1,212

 

 

$

(2,118

)

Net income (loss) per share

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

(0.06

)

Diluted

 

$

(0.06

)

 

$

(0.08

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

25,832,190

 

 

 

20,334,929

 

Diluted

 

 

26,785,708

 

 

 

20,460,656

 

 

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

4


 

Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Statement of Stockholders’ Equity (Deficit)

(Except shares data, amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock, $0.001 par value

 

 

Common Stock, no par value

 

 

Additional Paid-In

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

Balance as of December 31, 2017

 

 

 

 

$

 

 

 

20,178,226

 

 

$

52,230

 

 

$

6,602

 

 

$

(66,369

)

 

$

47

 

 

$

(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

 

 

$

(67,534

)

 

$

(906

)

 

$

(2,229

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock, $0.001 par value

 

 

Common Stock, no par value

 

 

Additional Paid-In

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Total

 

Balance as of December 31, 2018

 

 

25,827,860

 

 

$

26

 

 

 

 

 

$

 

 

$

105,411

 

 

$

(94,992

)

 

$

(591

)

 

$

9,854

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

835

 

 

 

 

 

 

 

 

 

835

 

Proceeds from the exercise of warrants

 

 

16,320

 

 

 

 

 

 

 

 

 

 

 

 

92

 

 

 

 

 

 

 

 

 

92

 

Reclassification of derivative financial instruments from the exercise of warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,324

 

 

 

 

 

 

1,324

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(112

)

 

 

(112

)

Balance as of March 31, 2019

 

 

25,844,180

 

 

$

26

 

 

 

 

 

$

 

 

$

106,363

 

 

$

(93,668

)

 

$

(703

)

 

$

12,018

 

(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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net Income (loss)

 

$

1,324

 

 

$

(1,165

)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

 

Change in fair value of derivative financial instruments

 

 

(8,289

)

 

 

(2,525

)

Stock-based compensation expense

 

 

835

 

 

 

387

 

Unrealized foreign exchange loss (gain)

 

 

176

 

 

 

(993

)

Depreciation expense

 

 

22

 

 

 

10

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(740

)

 

 

 

Other receivables

 

 

(84

)

 

 

7

 

Inventory

 

 

(339

)

 

 

 

Prepaid expenses

 

 

95

 

 

 

94

 

Other current assets

 

 

264

 

 

 

(105

)

Operating lease liability

 

 

(3

)

 

 

 

Accounts payable

 

 

83

 

 

 

(886

)

Accrued liabilities

 

 

(144

)

 

 

316

 

Net cash used in operating activities

 

 

(6,800

)

 

 

(4,860

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(161

)

 

 

(27

)

Net cash used in investing activities

 

 

(161

)

 

 

(27

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Share issuance costs

 

 

(52

)

 

 

(73

)

Proceeds from the exercise of stock options and warrants

 

 

92

 

 

 

3,753

 

Net cash provided by financing activities

 

 

40

 

 

 

3,680

 

Effect of foreign exchange rate changes on cash

 

 

(6

)

 

 

40

 

Net decrease in cash

 

 

(6,927

)

 

 

(1,167

)

Cash at beginning of period

 

 

25,583

 

 

 

5,562

 

Cash at end of period

 

$

18,656

 

 

$

4,395

 

 

(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 neurotechnology company focused on neurological wellness. The Company’s purpose is to develop, license or acquire non-invasive technologies targeted at reducing symptoms of neurological disease or trauma.

The Company’s first product, known as the Portable Neuromodulation Stimulator (“PoNS™”), is an authorized medical device in Canada for the treatment of chronic balance deficit associated with a mild to moderate traumatic brain injury (“mmTBI”), and is an  investigational, non-invasive, medical device for which the Company has submitted an application for a CE mark for marketing authorization in the European Union, to improve balance in patients following a mmTBI. The Company’s PoNS device, when combined with targeted physical and/or cognitive therapy, (“PoNS Treatment”), is the first and only treatment that combines neurostimulation of cranial nerves via the tongue to restore lost function. In April 2019, the Company announced that the U.S. Food and Drug administration (“FDA”) had completed its review and declined the Company’s request for de novo classification and marketing authorization of the PoNS device in the United States.

 

On December 21, 2018, the Company’s wholly owned subsidiary NeuroHabilitation Corporation changed its name to Helius Medical, Inc (“HMI”). On January 31, 2019, the Company formed another wholly owned subsidiary, Helius NeuroRehab, Inc., (“HNR”), a Delaware corporation, which will operate a clinical research site as well as a rehabilitation clinic that will provide the PoNS Treatment to patients with balance and gait disorder upon receipt of marketing authorization from the FDA. The Company’s wholly owned subsidiaries are comprised of HMI, Helius Medical Technologies (Canada), Inc., (“HMC”), and HNR.

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 headquartered in Newtown, Pennsylvania.

The Company’s Class A common stock, par value $0.001 per share (“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 traded on the OTCQB in the United States under the ticker symbol “HSDT” since February 10, 2015.

Effective after the close of business on January 22, 2018, the Company completed a 1-for-5 reverse stock split of its common stock. All share and per share amounts in this quarterly report on Form 10-Q have been reflected on a post-split basis.

Going Concern Uncertainty

As of March 31, 2019, the Company had cash of $18.7 million. For the three months ended March 31, 2019, the Company had an operating loss of $6.8 million and as of March 31, 2019, its accumulated deficit was $93.7 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, cash received from the sale of its PoNS device in Canada 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 (“U.S. 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 U.S. 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 valuation of receivables, fair value-pricing model for stock-based compensation, operating lease liability and derivative financial instruments. Financial statements include estimates, which, by their nature, are uncertain. Actual results could differ from those estimates.

7


 

 

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements reflect the operations of Helius Medical Technologies, Inc. and its wholly owned subsidiaries. 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 the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 – Consolidation (“ASC 810”), 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 (see Note 7). All intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the 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.

Accounts Receivable

Accounts receivables are stated at their net realizable value. As of each of March 31, 2019 and December 31, 2018, the Company’s accounts receivable were comprised of amounts owed related to license revenue of approximately $0.5 million recognized in 2018 resulting from the Company’s strategic alliance agreement with Health Tech Connex Inc, (“HTC”), and Heuro Canada, Inc., (“Heuro”), of which $0.3 million was classified as a non-current receivable. As of March 31, 2019, accounts receivable included revenue from product sales of approximately $0.6 million.

 

Inventory

The Company’s inventory consists of raw materials, work in progress and finished goods 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 three months ended March 31, 2019.

As of March 31, 2019, and December 31, 2018, inventory consisted of the following (amounts in thousands)

 

 

As of

 

 

As of

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Raw materials

 

$

513

 

 

$

392

 

Work-in-process

 

 

73

 

 

 

 

Finished goods

 

 

145

 

 

 

 

Total

 

$

731

 

 

$

392

 

 

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 estimated useful life of the Company’s leasehold improvements is over the shorter of its lease term or useful life of 5 years, the estimated useful life of furniture and fixtures is 7 years; equipment has an estimated useful life of 15 years and 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 March 31, 2019 and December 31, 2018 (amounts in thousands).

 

 

As of

 

 

As of

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Leasehold improvement

 

$

182

 

 

$

182

 

Furniture and fixtures

 

 

248

 

 

 

185

 

Equipment

 

 

219

 

 

 

219

 

Computer software and hardware

 

 

142

 

 

 

44

 

Property and equipment

 

 

791

 

 

 

630

 

Less accumulated depreciation

 

 

(98

)

 

 

(76

)

Property and equipment, net

 

$

693

 

 

$

554

 

 

Leases

8


 

 

On January 1, 2019, the Company adopted ASU No. 2016-02, Leases, using the modified retrospective method. The Company elected the package of practical expedients permitted under the transition guidance within the new standard which allowed the Company to carry forward the historical lease classification. Adoption of this standard resulted in the recording of an operating lease right-of-use (“ROU”) asset and corresponding operating lease liabilities of $0.7 million. The Company’s condensed consolidated balance sheets for reporting periods beginning on or after January 1, 2019 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported in accordance with previous guidance.

 

The Company does not record an operating lease ROU asset and corresponding lease liability for leases with an initial term of twelve months or less and recognizes lease expense for these leases as incurred over the lease term. As of March 31, 2019, the Company had only one operating lease, which was for its headquarters office in Newtown, Pennsylvania upon the adoption date. As of March 31, 2019, the Company has not entered into any additional lease arrangements. Operating lease ROU assets and operating lease liabilities are recognized upon the adoption date based on the present value of lease payments over the lease term. The Company does not have a public credit rating and as such used a corporate yield with a “CCC” rating by S&P Capital IQ with a term commensurate with the term of its lease as its incremental borrowing rate in determining the present value of lease payments. Lease expense is recognized on a straight-line basis over the lease term. The Company’s lease arrangement does not have lease and non-lease components which are accounted for separately. As of March 31, 2019, approximately $30,000 of the Company’s operating lease ROU asset had been amortized (see Note 6).

 

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' equity (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 functional currency was accounted for prospectively from April 1, 2018 and financial statements prior to and including the period ended March 31, 2018 were not 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 income (loss) as foreign exchange gain (loss).

The functional currency of HMC, the Company’s Canadian subsidiary, is the CAD$ and the functional currency of HMI and HNR is the 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 and comprehensive income (loss) for the reporting period, but rather are accumulated and gains and losses are recorded in foreign exchange gain (loss), as a component of comprehensive income (loss), within the condensed consolidated statements of operations and comprehensive income (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 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, while the par value of the shares received is reclassified from additional paid in 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.

Prior to the adoption of ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), during the third quarter of 2018, stock-based payments 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

9


 

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 was fully vested and non-forfeitable as of the grant date were measured and recognized at that date. Following the adoption of ASU 2018-07, stock-based payments to non-employees are measured based on the fair value of the equity instrument issued. Compensation expense for non-employee stock awards is 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.

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, effective April 1, 2018, resulted in the reclassification of outstanding stock options that were previously denominated in CAD$ 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 FASB’s ASC 718, Compensation – Stock Compensation, 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 liabilities, were reclassified to equity during the third quarter of 2018. Following these reclassifications, the Company no longer has any liability-classified stock options.

 

Revenue Recognition

In accordance with the FASB’s ASC 606, Revenue from Contracts with Customers, (“ASC 606”), the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, it performs the following five steps:

 

(i)

identify the contract(s) with a customer;

 

(ii)

identify the performance obligations in the contract;

 

(iii)

determine the transaction price;

 

(iv)

allocate the transaction price to the performance obligations in the contract; and

 

(v)

recognize revenue when (or as) the entity satisfies a performance obligation.

 

The Company applies the five-step model to contracts when it determines that it is probable it will collect substantially all of the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price, after consideration of variability and constraints, if any, that is allocated to the respective performance obligation when the performance obligation is satisfied.

Product Sales, net

Product sales are derived from the sale of the PoNS device and support services including services from the use of the neurocatch device, which assesses brain vital signs of each patient participating in the PoNS Treatment at two Canadian neuroplasticity clinics with which the Company has executed supply agreements. The neurocatch device is owned by HTC, and the Company remits CAD$600 for each patient treated with the PoNS device. According to the supply agreement with each of these two clinics the Company’s performance obligation is met when it delivers the PoNS device to the clinic’s facility and the clinic takes title of the PoNS device upon acceptance. In addition, the Company acts in an agency capacity for services performed using the neurocatch device. Further, according to the strategic alliance agreement, the Company shares 50/50 with Heuro in fees from support services excluding the CAD$600 payment for the neurocatch device. For the three months ended March 31, 2019, the Company recorded $0.7 million in product sales net of $25,000 for HTC’s portion related to services performed using the neurocatch device.

As of March 31, 2019, the Company had recorded $0.7 million in current receivables and had no contract assets or liabilities on its condensed consolidated balance sheet related to these supply agreements. As of March 31, 2019 and December 31, 2018, the Company had recorded $0.2 million and $0.3 million in current and non-current receivables, respectively, and had no contract assets or liabilities on its condensed consolidated balance sheets related to license revenue related to an exclusive strategic alliance agreement with HTC and Heuro.

10


 

Cost of Sales

 

Cost of product sales includes the cost to manufacture the PoNS device, royalty expenses, freight charges, customs duties, wages and salaries of employees involved in the management of the supply chain and logistics of fulfilling the Company’s sales orders and certain support services provided by Heuro on the Company’s behalf.

 

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 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 condensed consolidated statements of operations and comprehensive income (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 income (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 as well as regulatory costs. R&D costs are charged to operations when they are incurred.

Segment Information

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

Derivative Financial Instruments

The Company evaluates its financial instruments and other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815, Derivatives and Hedging. The result of this accounting treatment is that the fair value of the derivative is 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 income (loss). As of March 31, 2019, and December 31, 2018, the Company’s derivative financial instruments were comprised of warrants issued in connection with both public and/or private securities offerings. 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, accounts receivable, other current receivables, operating lease ROU asset, accounts payable, accrued liabilities, operating lease liability and derivative financial instruments.

11


 

The book values of these instruments, with the exception of derivative financial instruments, non-current lease liability, operating lease ROU asset and non-current receivables 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. 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, 2019 and 2018 and the roll forward of the Company’s derivative financial instruments. The Company’s derivative financial instruments are comprised of warrants which are classified as liabilities.

 

The following table summarizes the Company’s financial instruments within the fair value hierarchy as of March 31, 2019 and December 31, 2018 (amounts in thousands):

 

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

5,743

 

 

 

 

 

 

 

 

$

5,743

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

13,769

 

 

 

 

 

 

 

 

$

13,769

 

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 share purchase warrants, would be used to purchase common shares at the average market price for the period, unless including the effects of these potentially dilutive securities would be anti-dilutive.

The basic and diluted income (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,

 

 

 

2019

 

 

2018

 

Basic

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,324

 

 

$

(1,165

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

25,832,190

 

 

 

20,334,929

 

Basic net income (loss) per share

 

$

0.05

 

 

$

(0.06

)

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

Net income (loss), basic

 

$

1,324

 

 

$

(1,165

)

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

 

 

(2,809

)

 

 

(434

)

Net loss, diluted

 

$

(1,485

)

 

$

(1,599

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

25,832,190

 

 

 

20,334,929

 

Potential common share issuances:

 

 

 

 

 

 

 

 

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

 

 

953,518

 

 

 

125,727

 

Weighted average common shares outstanding - diluted

 

 

26,785,708

 

 

 

20,460,656

 

Diluted net loss per share

 

$

(0.06

)

 

$

(0.08

)

 

12


 

The following outstanding securities have been excluded from the computation of diluted weighted shares outstanding for the periods noted below, as they would have been anti-dilutive due to the Company’s losses for the three months ended March 31, 2018 and because the exercise price of certain of these outstanding securities was greater than the average closing price of the Company’s common stock.

 

 

For the Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Stock options outstanding

 

 

1,799,795

 

 

 

2,208,646

 

Warrants outstanding

 

 

3,043,605

 

 

 

1,818,439

 

Restricted stock units

 

 

 

 

 

1,928

 

Total

 

 

4,843,400

 

 

 

4,029,013

 

Recent Accounting Pronouncements

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.

 

3.   COMMON STOCK AND WARRANTS

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 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 Company’s Board of Directors.

No dividends have been declared since inception of the Company through March 31, 2019. 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 consists of one share of common stock of the Company (a “Common Share’) and one-half of one Common Share purchase warrant (each whole warrant, a “Warrant”). Each Warrant entitled 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 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.  As of March 31, 2019, the Company had 944,379 warrants outstanding.

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 2, 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.

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 December 31, 2018 and March 31, 2019:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

Grant Date

 

Stock price

 

CAD$8.95

 

 

CAD$12.80

 

 

CAD$5.45

 

Exercise price

 

CAD$7.50

 

 

CAD$7.50

 

 

CAD$7.50

 

Warrant term

 

0.05 years

 

 

0.30 years

 

 

3.0 years

 

Expected volatility

 

 

58.52

%

 

 

83.56

%

 

 

83.83

%

Risk-free interest rate

 

 

1.68

%

 

 

1.64

%

 

 

0.60

%

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

 

13


 

In December 2017, the Company completed a three-tranche non-brokered private placement (the “December 2017 Financing”) for an aggregate 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 $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 sheets.

On April 13, 2018, the Company issued 2,141,900 shares of its common stock and warrants to purchase 2,141,900 shares of the Company’s common stock in an underwritten public offering at a price of $7.47 per share and accompanying warrant. Gross proceeds from the offering were approximately $16.0 million. On April 24, 2018, the Company closed on the sale of an additional 321,285 shares of its common stock and warrants pursuant to the exercise of the over-allotment option (collectively the “April 2018 Offering”) granted to the underwriters in connection with the offering at a price of $7.47 per share and accompanying warrants. Gross proceeds from the exercise of the over-allotment option was $2.4 million. BTIG, LLC and Echelon Wealth Partners acted as joint book-running managers for the April 2018 Offering. The Company paid approximately $1.1 million in underwriting discounts and commissions and incurred offering expenses of approximately $1.0 million in connection with the April 2018 Offering, resulting in net proceeds of $16.3 million from the April 2018 Offering. The underwriting discounts and commissions and offering expenses were allocated between share issuance costs and expenses based on the relative fair values of common stock and warrants issued in connection with the April 2018 Offering, resulting in the recording of approximately $0.8 million of expenses in the Company’s condensed consolidated statement of operations and comprehensive income (loss). The fair value of these warrants at issuance was approximately $7.4 million.

Each warrant issued in connection with the April 2018 Offering entitles the holder to acquire one additional share of common stock at an exercise price of CAD$12.25 per share on or before April 10, 2021. Pursuant to the guidance of ASC 815 Derivatives and Hedging, the Company has determined that warrants issued in connection with the April 2018 Offering should be accounted for as liabilities as the ability to maintain an effective registration is outside of the Company’s control and that it may be required to settle the exercise of the warrants in cash and because, as a result of the change in the Company’s functional currency (see Note 2), the exercise prices of these warrants are in a currency other than the Company’s functional currency. Consequently, the Company determined the fair value of each warrant issuance using the Black-Scholes option pricing model, with the remainder of the proceeds allocated to the common shares. As of March 31, 2019, 70,900 warrants had been exercised, all during 2018, for gross proceeds of CAD$0.9 million.

The following table summarizes the weighted average assumptions used in estimating the fair value of the warrants granted in the April 2018 Offering using the Black-Scholes option pricing model as of the date of the initial closing of the offering and the date of the closing of the over-allotment option as well as at March 31, 2019.

 

 

 

March 31, 2019

 

 

April 24, 2018

 

 

April 13, 2018

 

Stock price

 

CAD $8.95

 

 

CAD $10.76

 

 

CAD $9.85

 

Exercise price

 

CAD $12.25

 

 

CAD $12.25

 

 

CAD $12.25

 

Warrant term

 

2.0 years

 

 

3.0 years

 

 

3.0 years

 

Expected volatility

 

 

69.14

%

 

 

64.49

%

 

 

64.20

%

Risk-free interest rate

 

 

1.55

%

 

 

2.02

%

 

 

1.99

%

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

14


 

On November 19, 2018, the Company issued 2,121,212 shares of its common stock in an underwritten public offering at a price of $8.25 per share. Gross proceeds from the offering were $17.5 million. On November 30, 2018, the Company closed on the sale of an additional 318,182 shares of its common stock pursuant to the exercise of the over-allotment option (collectively the “November 2018 Offering”) granted to the underwriters in connection with the offering at a price of $8.25 per share. Gross proceeds from the exercise of the over-allotment option was $2.6 million. BTIG LLC and Oppenheimer & Co acted as joint book-running managers for the November 2018 Offering. The Company paid approximately $1.2 million in underwriting discounts and commissions and incurred offering expenses of approximately $0.7 million, of which $0.1 million was paid during the three months ended March 31, 2019, resulting in net proceeds of $18.3 million.

The following table summarizes the activities of warrants that the Company accounted for as liabilities and recorded as derivative financial instruments on the Company’s condensed consolidated balance sheets for the three months ended March 31, 2019 and 2018 (amounts in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Fair value of warrants at beginning of period

 

$

13,769

 

 

$

6,941

 

Exercise of warrants

 

 

(25

)

 

 

(2,509

)

Foreign exchange loss

 

 

288

 

 

 

 

Change in fair value of warrants during the period

 

 

(8,289

)

 

 

(1,954

)

Fair value of warrants at end of period

 

$

5,743

 

 

$

2,478

 

 

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

The fair value of all warrants classified as derivative financial instruments outstanding as of March 31, 2019 and December 31, 2018 were estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Stock price

 

CAD$ 8.95

 

 

CAD$ 12.80

 

Exercise price

 

CAD$ 10.91

 

 

CAD$ 10.89

 

Warrant term

 

1.47 years

 

 

1.71 years

 

Expected volatility

 

 

66.13

%

 

 

75.31

%

Risk-free interest rate

 

 

1.59

%

 

 

1.80

%

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

The following table summarizes the Company’s warrant activity during the three months ended March 31, 2019:

 

 

 

Number of Warrants (by currency denomination of exercise price)

 

 

Weighted Average

Exercise Price

 

 

 

CAD$

 

 

USD$

 

 

CAD$

 

 

USD$

 

Outstanding as of December 31, 2018

 

 

3,352,984

 

 

 

651,320

 

 

$

10.89

 

 

$

12.24

 

Exercised

 

 

(16,320

)

 

 

 

 

 

7.50

 

 

 

 

Outstanding as of March 31, 2019

 

 

3,336,664

 

 

 

651,320

 

 

$

10.91

 

 

$

12.24

 

 

The following table summarizes the Company’s warrants outstanding and exercisable as of March 31, 2019:

 

Number of Warrants Outstanding

 

 

Exercise Price

 

Expiration Date

 

3,795