UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period to
Commission File No. 000-55364
HELIUS MEDICAL TECHNOLOGIES,
INC.
(Exact name of Registrant as specified in its
charter)
Wyoming | 36-4787690 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification Number) |
Suite 400, 41 University Drive
Newtown,
Pennsylvania, 18940
(Address of principal executive office)
(Zip Code)
(215) 809-2018
(Registrants telephone
number, including area code)
N/A
(Former name, former address and
former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes
[X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ ] | Smaller reporting company [X] |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes [
] No [X]
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class | Outstanding at November 7, 2016 |
Class A Common Stock | 84,534,684 |
HELIUS MEDICAL TECHNOLOGIES, INC.
INDEX
1
Helius Medical Technologies, Inc.
Condensed
Consolidated Balance Sheets
September 30, 2016 and March 31, 2016
(Unaudited)
(Expressed in United States Dollars)
September 30, | March 31, | |||||
2016 | 2016 | |||||
$ | $ | |||||
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | 6,172,564 | 2,643,937 | ||||
Receivables | 170,095 | 399,106 | ||||
Prepaid expenses | 459,330 | 502,264 | ||||
Other current assets | - | 495,415 | ||||
Total current assets | 6,801,989 | 4,040,722 | ||||
TOTAL ASSETS | 6,801,989 | 4,040,722 | ||||
LIABILITIES | ||||||
Current liabilities | ||||||
Accounts payable and accrued liabilities | 1,446,415 | 2,181,154 | ||||
Shares to be issued | - | 150,000 | ||||
Derivative liability | 3,014,902 | 1,725,760 | ||||
Total current liabilities | 4,461,317 | 4,056,914 | ||||
TOTAL LIABILITIES | 4,461,317 | 4,056,914 | ||||
Commitments and contingencies (Note 6) | ||||||
STOCKHOLDERS EQUITY (DEFICIT) | ||||||
Common
stock (Unlimited Class A common shares authorized);
(84,534,684 shares outstanding as of September 30, 2016 and 72,193,209 shares outstanding as of March 31, 2016) |
30,897,064 | 24,347,930 | ||||
Additional paid-in capital | 5,085,499 | 2,940,539 | ||||
Accumulated other comprehensive loss | (1,265,575 | ) | (999,398 | ) | ||
Accumulated deficit | (32,376,316 | ) | (26,305,263 | ) | ||
TOTAL STOCKHOLDERS EQUITY (DEFICIT) | 2,340,672 | (16,192 | ) | |||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) | 6,801,989 | 4,040,722 |
(The accompanying notes are an integral part of the condensed consolidated financial statements.)
2
Helius Medical Technologies, Inc.
Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss)
For the three and six months ended September 30, 2016 and 2015 (Unaudited)
(Expressed in United States Dollars, except weighted average share
information)
Three Months Ended | Six Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||
$ | $ | $ | $ | |||||||||
Operating Expenses: | ||||||||||||
General and administrative | 2,042,478 | 724,141 | 3,492,459 | 2,188,990 | ||||||||
Research and development | 1,348,172 | 1,531 | 2,002,055 | 1,522,355 | ||||||||
Total operating expenses | 3,390,650 | 725,672 | 5,494,514 | 3,711,345 | ||||||||
Loss from operations | (3,390,650 | ) | (725,672 | ) | (5,494,514 | ) | (3,711,345 | ) | ||||
Other income (expense): | ||||||||||||
Interest and other income | 1,120 | 27,801 | 110,619 | 27,748 | ||||||||
Change in fair value of derivative liability | 288,375 | 1,894,305 | (1,021,007 | ) | 2,407,089 | |||||||
Foreign exchange gain | 114,527 | 588,978 | 333,849 | 507,553 | ||||||||
Total other income (expense) | 404,022 | 2,511,084 | (576,539 | ) | 2,942,390 | |||||||
Net income (loss) | (2,986,628 | ) | 1,785,412 | (6,071,053 | ) | (768,955 | ) | |||||
Other comprehensive loss | ||||||||||||
Foreign currency translation adjustments | (172,635 | ) | (567,519 | ) | (266,177 | ) | (526,893 | ) | ||||
Comprehensive income (loss) | (3,159,263 | ) | 1,217,893 | (6,337,230 | ) | (1,295,848 | ) | |||||
Net income (loss) per share | ||||||||||||
Basic | (0.04 | ) | 0.03 | (0.07 | ) | (0.01 | ) | |||||
Diluted | (0.04 | ) | 0.03 | (0.07 | ) | (0.01 | ) | |||||
Weighted average shares outstanding | ||||||||||||
Basic | 84,366,692 | 64,408,500 | 82,694,046 | 64,055,508 | ||||||||
Diluted | 85,004,192 | 69,121,373 | 82,694,046 | 71,191,503 |
(The accompanying notes are an integral part of the condensed consolidated financial statements.)
3
Helius Medical Technologies,
Inc.
Condensed Consolidated
Statement of Stockholders Deficit
For the
six months ended September 30, 2015 (Unaudited)
(Expressed in United States
Dollars)
Accumulated | |||||||||||||||||||||
Additional | Shares | Other | |||||||||||||||||||
Paid-In | Accumulated | to be | Comprehensive | ||||||||||||||||||
Common | Amount | Capital | Deficit | Issued | Loss | Total | |||||||||||||||
Stock | $ | $ | $ | $ | $ | $ | |||||||||||||||
Balance as of April 1, 2015 | 63,104,788 | 16,358,093 | 2,434,552 | (19,423,451 | ) | 39,545 | (971,640 | ) | (1,562,901 | ) | |||||||||||
Exercise of finders warrants | 14,400 | 11,926 | - | - | - | - | 11,926 | ||||||||||||||
Issuance of common stock for private placement | 849,273 | 1,465,524 | - | - | - | - | 1,465,524 | ||||||||||||||
Issuance of common stock for private placement | 335,463 | 585,702 | - | - | (39,545 | ) | - | 546,157 | |||||||||||||
Issuance of common stock for private placement | 125,756 | 233,806 | - | - | - | - | 233,806 | ||||||||||||||
Stock option exercise | 94,640 | 42,500 | - | - | - | - | 42,500 | ||||||||||||||
Fair value of options exercised | - | 20,454 | (20,454 | ) | - | - | - | - | |||||||||||||
Share issuance cost | - | (141,100 | ) | - | - | - | - | (141,100 | ) | ||||||||||||
Stock-based compensation expense | - | - | 250,415 | - | - | - | 250,415 | ||||||||||||||
Fair value of non-employee vested options reallocated to derivative liability | - | - | (690,885 | ) | - | - | - | (690,885 | ) | ||||||||||||
Net loss | - | - | - | (768,955 | ) | - | - | (768,955 | ) | ||||||||||||
Foreign currency translation adjustments | - | - | - | - | - | (526,893 | ) | (526,893 | ) | ||||||||||||
Balance as of September 30, 2015 | 64,524,320 | 18,576,905 | 1,973,628 | (20,192,406 | ) | - | (1,498,533 | ) | (1,140,406 | ) |
(The accompanying notes are an integral part of the condensed consolidated financial statements)
4
Helius Medical Technologies,
Inc.
Condensed Consolidated
Statement of Stockholders Equity
(Deficit)
For the six months ended September 30, 2016 (Unaudited)
(Expressed in United States Dollars)
Accumulated | ||||||||||||||||||
Additional | Other | |||||||||||||||||
Paid-In | Accumulated | Comprehensive | ||||||||||||||||
Common | Amount | Capital | Deficit | Loss | Total | |||||||||||||
Stock | $ | $ | $ | $ | $ | |||||||||||||
Balance as of April 1, 2016 | 72,193,209 | 24,347,930 | 2,940,539 | (26,305,263 | ) | (999,398 | ) | (16,192 | ) | |||||||||
Exercise of finders warrants | 1,825,600 | 1,548,863 | (151,184 | ) | - | - | 1,397,679 | |||||||||||
Issuance of common stock in public offering and private placement | 10,305,125 | 6,547,997 | - | - | - | 6,547,997 | ||||||||||||
Issuance of warrants in public offering and private placement | - | - | 1,504,914 | - | - | 1,504,914 | ||||||||||||
Share issuance cost | - | (1,875,190 | ) | 366,271 | - | - | (1,508,919 | ) | ||||||||||
Stock-based compensation expense | - | - | 924,291 | - | - | 924,291 | ||||||||||||
Fair value of non-employee vested options reallocated to derivative liability | - | - | (268,135 | ) | - | - | (268,135 | ) | ||||||||||
Agent compensation option exercise | 750 | 1,129 | (548 | ) | - | - | 581 | |||||||||||
Stock option exercise | 210,000 | 326,335 | (230,649 | ) | - | - | 95,686 | |||||||||||
Net loss | - | - | - | (6,071,053 | ) | - | (6,071,053 | ) | ||||||||||
Foreign currency translation adjustments | - | - | - | - | (266,177 | ) | (266,177 | ) | ||||||||||
Balance as of September 30, 2016 | 84,534,684 | 30,897,064 | 5,085,499 | (32,376,316 | ) | (1,265,575 | ) | 2,340,672 |
(The accompanying notes are an integral part of the condensed consolidated financial statements)
5
Helius Medical Technologies, Inc.
Condensed
Consolidated Statements of Cash Flows
For the six months ended September
30, 2016 and 2015 (Unaudited)
(Expressed in United States Dollars)
Six Months Ended | ||||||
September 30, 2016 | September 30, 2015 | |||||
$ | $ | |||||
Cash flows from operating activities: | ||||||
Net loss | (6,071,053 | ) | (768,955 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
Change in fair value of derivative liability | 1,021,007 | (2,407,089 | ) | |||
Stock-based compensation expense | 924,291 | 250,415 | ||||
Unrealized foreign exchange loss | - | (429,494 | ) | |||
Changes in operating assets and liabilities: | ||||||
Receivables | 229,011 | (110,329 | ) | |||
Prepaid expenses and other current assets | 42,934 | 119,112 | ||||
Accounts payable and accrued liabilities | (239,324 | ) | (47,405 | ) | ||
Net cash used in operating activities | (4,093,134 | ) | (3,393,745 | ) | ||
Cash flows from investing activities: | ||||||
Proceeds from the sale of short term investment | - | 378,000 | ||||
Net cash provided by investing activities | - | 378,000 | ||||
Cash flows from financing activities: | ||||||
Proceeds from the issuance of common stock and warrants | 7,902,912 | 2,832,436 | ||||
Share issuance costs | (1,508,919 | ) | (141,100 | ) | ||
Proceeds from issuance of promissory note | - | 200,000 | ||||
Proceeds from exercise of stock options and warrants | 1,493,946 | - | ||||
Net cash provided by financing activities | 7,887,939 | 2,891,336 | ||||
Effect of foreign exchange rate changes on cash | (266,178 | ) | (102,228 | ) | ||
Net increase (decrease) in cash and cash equivalents | 3,528,627 | (226,637 | ) | |||
Cash and cash equivalents at beginning of period | 2,643,937 | 418,893 | ||||
Cash and cash equivalents at end of period | 6,172,564 | 192,256 | ||||
Supplemental disclosure of non-cash activity: | ||||||
Fair value of warrants issued to agent for services in conjunction with the Offering | 366,271 |
- |
||||
Fair value of liability classified warrants issued in conjunction with Private Placement |
- |
532,523 |
(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 AND BASIS OF PRESENTATION
Helius Medical Technologies, Inc. (the Company) is engaged primarily in the medical technology industry focused on neurological wellness. The Companys planned principal operations include the development, licensing and acquisition of unique and non-invasive platform technologies to amplify the brains ability to heal itself. To date, the Company has not generated any revenue.
The Company was incorporated in British Columbia, Canada, on March 13, 2014. On May 28, 2014, the Company completed a continuation via a plan of arrangement whereby the Company moved from being a corporation governed by the British Columbia Corporations Act to a corporation governed by the Wyoming Business Corporations Act. The Companys head office is located in Newtown, Pennsylvania.
The Company has two wholly-owned subsidiaries, Neurohabilitation Corporation (Neuro) and Helius Medical Technologies (Canada), Inc. (Helius Canada).
The Company is currently listed on the Toronto Stock Exchange (the TSX). The Company began trading on the Canadian Securities Exchange on June 23, 2014, under the ticker symbol HSM, and subsequently moved to the TSX on April 18, 2016. The Company also began trading on the OTCQB under the ticker symbol HSDT on February 10, 2015. The financial information is presented in United States Dollars.
Going Concern
As of September 30, 2016, the Companys cash and cash equivalents were $6,172,564. During the six months ended September 30, 2016, the Company incurred a net loss of $6,071,053 and as of September 30, 2016 its accumulated deficit was $32,376,316. The Company expects to continue to incur operating losses and net cash outflows until such time as it generates a level of revenue to support its cost structure. There is no assurance that profitable operations will ever be achieved, and, if achieved, will be sustained on a continuing basis. These factors raise substantial doubt about the Companys ability to continue as a going concern.
The Company intends to fund ongoing activities by utilizing current cash and cash equivalents and by raising additional capital through equity or debt financings. There can be no assurance that the Company will be successful in raising 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 expenditure or sell certain assets, including intellectual property assets.
Revision of Prior Period Financial Statements
In the fourth quarter of fiscal year 2016, the Company revised and corrected the accounting for stock compensation expense related to certain non-employee awards for prior interim periods in fiscal year 2016. The Company evaluated the materiality of this revision and concluded that it was not material to any of the previously issued financial statements. However, had this not been revised, the accounting may have resulted in a material misstatement to the financial statements for the full year fiscal 2016. Accordingly, the Company revised previously reported periods included in Form 10-Q for the three-month periods ended June 30, 2015 and December 31, 2015. The Company will revise all other previously reported periods as such financial information is included in future filings.
The effects of this revision on the Companys Condensed Consolidated Statements of Operations and Comprehensive Income (loss) were as follows:
Three Months Ended September 30, 2015 | Six Months Ended September 30, 2015 | |||||||||||||||||
As Previously | As | As Previously | As | |||||||||||||||
Reported | Adjustment | Revised | Reported | Adjustment | Revised | |||||||||||||
Research and development | $ | 1,531 | $ | - | $ | 1,531 | $ | 1,372,457 | $ | 149,898 | $ | 1,522,355 | ||||||
Loss from operations | $ | (725,672 | ) | $ | - | $ | (725,672 | ) | $ | (3,561,447 | ) | $ | (149,898 | ) | $ | (3,711,345 | ) | |
Net income (loss) | $ | 1,785,412 | $ | - | $ | 1,785,412 | $ | (619,057 | ) | $ | (149,898 | ) | $ | (768,955 | ) | |||
Net income (loss) per share | ||||||||||||||||||
Basic and diluted | $ | 0.03 | $ | - | $ | 0.03 | $ | (0.01 | ) | $ | - | $ | (0.01 | ) | ||||
Total comprehensive income (loss) | $ | 1,217,893 | $ | - | $ | 1,217,893 | $ | (1,145,950 | ) | $ | (149,898 | ) | $ | (1,295,848 | ) |
7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Helius Medical Technologies, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), applicable to interim periods and, in the opinion of management, include all normal and recurring adjustments that are necessary to state fairly the results of operations for the reported periods. The condensed consolidated financial statements have also been prepared on a basis substantially consistent with, and should be read in conjunction with, the Companys audited consolidated financial statements for the year ended March 31, 2016, included its Annual Report on Form 10-K that was filed with the Securities and Exchange Commission, or SEC, on June 28, 2016. The year end condensed consolidated balance sheet data was derived from the audited financial statements, but does not include all disclosures required by GAAP. The results of our operations for any interim period are not necessarily indicative of the results of the Companys operations for any other interim period or for a full fiscal year.
Use of Estimates
The preparation of the consolidated financial statements in accordance U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Significant estimates include the assumptions used in the fair value pricing model for share-based payment transactions and deferred income tax asset valuation allowances. Financial statements include estimates which, by their nature, are uncertain. Actual outcomes could differ from these estimates.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements reflect the operations of Helius Medical Technologies, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash at banks and on hand, and short-term highly liquid investments that have an original maturity of three months or less.
Concentrations of Credit Risk
The Company is subject to credit risk in respect of 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
Accounts receivable are stated at their net realizable value. At September 30, 2016, the accounts receivable balance consisted primarily of GST and QST refunds as well as reimbursements from the U.S. Army related to the Companys expenditures.
Stock-Based Compensation
The Company accounts for all stock-based payments and awards under the fair value based method. The Company recognizes its stock-based compensation using the straight-line method.
Stock-based payments to non-employees are measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measurable. The fair value of stock-based payments to non-employees is periodically re-measured until the counterparty performance is complete, and any change therein is recognized over the vesting period of the award and in the same manner as if the Company had paid cash instead of paying with or using equity based instruments. The fair value of the stock-based payments to non-employees that are fully vested and non-forfeitable as at the grant date are measured and recognized at that date.
8
The Company accounts for the granting of share purchase options to employees using the fair value method whereby all awards to employees will be measured at fair value on the date of the grant. The fair value of all share purchase options is expensed over their vesting period with a corresponding increase to additional paid-in capital. Upon exercise of share purchase options, the consideration paid by the option holder, together with the amount previously recognized in additional paid-in capital is recorded as an increase to share capital. Share purchase options granted to employees are accounted for as liabilities when they contain conditions or other features that are indexed to other than a market, performance or service condition.
The Company uses the Black-Scholes option pricing model to calculate the fair value of share purchase options. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected term of the option, risk-free interest rates, the value of the common stock and expected dividend yield of the common stock. Changes in these assumptions can materially affect the fair value estimate.
Foreign Currency
The functional currency of the Company and Helius Canada is the Canadian dollar (CAD) and the functional currency of Neuro is the U.S. dollar (USD). The Companys reporting currency is the U.S. dollar. Transactions in foreign currencies are remeasured into the functional currency of the relevant subsidiary at the exchange rate in effect at the date of the transaction. Any monetary assets and liabilities arising from these transactions are translated into the functional currency at exchange rates in effect at the balance sheet date or on settlement. Resulting gains and losses are recorded in other foreign exchange gain (loss) within the condensed consolidated statements of operations. The foreign exchange adjustment in the books of Neuro relating to inter-company advances from Helius that are denominated in Canadian dollars is recorded in the condensed consolidated statements of operations and comprehensive income (loss).
Income Taxes
The Company accounts for income taxes using the asset and liability method. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The Company has adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740 Income Taxes regarding accounting for uncertainty in income taxes. The Company initially recognizes tax provisions in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of the tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Application requires numerous estimates based on available information. The Company considers many factors when evaluating and estimating its tax positions and tax benefits. These periodic adjustments may have a material impact on the 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 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 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, through its chief operating decision maker, views its operations and manages the business in one segment.
9
Derivative Liabilities
The Company evaluates its financial instruments and other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815 Derivatives and Hedging. The result of this accounting treatment is that the fair value of the derivative is marked-to-market at each balance sheet date and recorded as a liability and the change in fair value is recorded in the consolidated statements of operations and comprehensive income (loss). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Derivative instruments that become subject to reclassification are reclassified at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not the right to exercise or settle the derivative instrument lies with the holder.
Fair Value Measurements
The Companys financial instruments consist primarily of cash and cash equivalents, receivables, accounts payable and accrued liabilities. The book values of these instruments approximate their fair values due to the immediate or short-term nature of those instruments.
ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities;
Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instruments level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The Company had certain Level 3 derivative liabilities required to be recorded at fair value on a recurring basis in accordance with U.S. GAAP. Unobservable inputs used in the valuation of these liabilities includes volatility of the underlying share price and the expected term. See Note 4 for the inputs used in the Black-Scholes option pricing model at September 30, 2016 and the roll forward of the warrant liability and see Note 5 for the inputs used in the Black-Scholes option pricing model at September 30, 2016 and 2015 for the roll forward of the derivative liability for non-employee options.
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||
$ | $ | $ | $ | |||||||||
September 30, 2016 | ||||||||||||
Liabilities: | ||||||||||||
Non-employee options | 974,473 | - | - | 974,473 | ||||||||
Warrants | 2,040,429 | - | - | 2,040,429 | ||||||||
March 31, 2016 | ||||||||||||
Liabilities: | ||||||||||||
Non-employee options | 521,179 | - | - | 521,179 | ||||||||
Warrants | 1,204,581 | - | - | 1,204,581 |
10
There were no transfers between any of the levels during the three and six months ended September 30, 2016 and 2015.
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 for 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.
EPS for convertible debt is calculated under the if-converted method. Under the if-converted method, EPS is calculated as the more dilutive of EPS (i) including all interest (both cash interest and non-cash discount amortization) and excluding all shares underlying the convertible debt or; (ii) excluding all interest and costs directly related to the convertible debt (both cash interest and non-cash discount amortization) and including all shares underlying the convertible debt.
The basic and diluted net income (loss) per share for the three and six months ended September 30, 2016 and 2015 was calculated as follows:
Three Months Ended | Six Months Ended | |||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||
2016 | 2015 | 2016 | 2015 | |||||||||
Basic | ||||||||||||
Numerator | ||||||||||||
Net income (loss) | $ | (2,986,628 | ) | $ | 1,785,412 | $ | (6,071,053 | ) | $ | (768,955 | ) | |
Denominator | ||||||||||||
Weighted average common shares outstanding | 84,366,692 | 64,408,500 | 82,694,046 | 64,055,508 | ||||||||
Basic net income (loss) per share | $ | (0.04 | ) | $ | 0.03 | $ | (0.07 | ) | $ | (0.01 | ) | |
Diluted | ||||||||||||
Numerator | ||||||||||||
Net income (loss), basic | $ | (2,986,628 | ) | $ | 1,785,412 | $ | (6,071,053 | ) | $ | (768,955 | ) | |
Effect of dilutive securities: Change in fair value of derivative liability | (139,518 | ) | - | - | - | |||||||
Net income (loss), diluted | (3,126,146 | ) | 1,785,412 | (6,071,053 | ) | (768,955 | ) | |||||
Denominator | ||||||||||||
Weighted average common shares outstanding | 84,366,692 | 64,408,500 | 82,694,046 | 64,055,508 | ||||||||
Potential share issuances: | ||||||||||||
Common share options | 637,500 | 2,135,104 | - | 2,652,859 | ||||||||
Common share warrants | - | 2,577,769 | - | 4,483,136 | ||||||||
Weighted average common shares outstanding | 85,004,192 | 69,121,373 | 82,694,046 | 71,191,503 | ||||||||
Diluted net income (loss) per share | $ | (0.04 | ) | $ | 0.03 | $ | (0.07 | ) | $ | (0.01 | ) |
During the three and six months ended September 30, 2016, a total of 8,135,000 and 9,335,000 options were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive. During the three and six months ended September 30, 2016, a total of 10,182,254 and 10,182,254 warrants were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive.
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Recent Accounting Pronouncements
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payment, providing additional guidance on several cash flow classification issues, with the goal of the update to reduce the current and potential future diversity in practice. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments should be applied retrospectively to all periods presented. For issues that are impracticable to apply retrospectively, the amendments may be applied prospectively as of the earliest date practicable. The Company is currently evaluating the potential impact of the adoption of this standard.
In March 2016, the FASB issued ASU 2016-09, CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this update change existing guidance related to accounting for employee share-based payments affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the potential impact of the adoption of this standard.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the potential impact of the adoption of this standard.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update revise the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The amendments are effective for annual reporting periods after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact of the adoption of this standard.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern, which is intended to define managements responsibility to evaluate whether there is substantial doubt about an organizations ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and to provide related footnote disclosures. The ASU provides guidance to an organizations management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The ASU is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016, which for the Company is April 1, 2017. Early adoption is permitted. The adoption of this standard will not have a material impact on the Companys financial position or results of operations.
The amendments also clarify that the guidance in Topic 275, Risks and Uncertainties, is applicable to entities that have not commenced planned principal operations. The central feature of the guidance on disclosure requirements is that required disclosures are limited to matters significant to a particular entity. The disclosures focus primarily on risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near term or the near-term functioning of the reporting entity.
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3. PROMISSORY NOTE
On August 25, 2015, the Company received $200,000 in exchange for the issuance of a promissory note. The promissory note was to be repaid six months from the date of issuance with interest at the rate of 6% per annum. In addition, the lender was entitled to receive 30,000 common shares of the Company on the date of the promissory note and 30,000 common every three months thereafter so long as the principal of the loan remained outstanding.
On October 28, 2015, the Company repaid the loan in its entirety and issued 30,000 common shares that were owed the lender in accordance with the terms of the promissory note.
4. COMMON STOCK AND WARRANTS
As of September 30, 2016, the Companys certificate of incorporation authorized the Company to issue unlimited Class A common shares without par value. Each Class A common share is entitled to have the right to vote at any shareholder meeting on the basis of one vote per share. Each Class A share held entitles the holder to receive dividends as declared by the directors. No dividends have been declared through September 30, 2016. In the event of the liquidation, dissolution or winding-up of the Company other distribution of assets of the Company among its shareholders for the purposes of winding-up its affairs or upon a reduction of capital the holders of the Class A common shares shall, share equally, share for share, in the remaining assets and property of the Company.
The Company is subject to a stockholders agreement, which places certain restrictions on the Companys stock and its stockholders. These restrictions include approvals prior to sale or transfer of stock, a right of first refusal to purchase stock held by the Company and a secondary right of refusal to stockholders, right of co-sale whereby certain stockholders may be enabled to participate in a sale of other stockholders to obtain the same price, term and conditions on a pro-rata basis, rights of first offer of new security issuances to current stockholders on a pro-rata basis and certain other restrictions.
On April 30, 2015, the Company closed a non-brokered private placement (the First Financing) raising gross proceeds of $1,825,937 by the issuance of 849,273 units (each a First Financing Unit) at a price of $2.15 per First Financing Unit. Each First Financing Unit consists of one (1) common share and one half of one (1/2) common share purchase warrant (each a First Financing Warrant). Each whole First Financing Warrant entitles the holder thereof to purchase one additional common share of the Company at a price of $3.00 per share for a period of thirty-six (36) months from the closing date of the Financing. The Company paid a cash finders fee of $84,074 in connection with this First Financing, as well as 27,396 finders warrants (the First Financing Finders Warrants). Each First Financing Finders Warrant entitles the holder thereof to purchase one additional common share of the Company at a price of $3.00 per share for a period of thirty-six (36) months from the closing date of the First Financing.
On June 26, 2015, the Company closed a non-brokered private placement (the Second Financing) raising gross proceeds of $721,243 by the issuance of 335,463 units (each a Second Financing Unit) at a price of $2.15 per Second Financing Unit. Each Second Financing Unit consists of one (1) common share and one half of one (1/2) common share purchase warrant (each a Second Financing Warrant). Each whole Second Financing Warrant entitles the holder thereof to purchase one additional common share of the Company at a price of $3.00 per share for a period of thirty-six (36) months from the closing date of the Second Financing. The Company paid a cash finders fee of $40,803 in connection with this Second Financing, as well as 18,978 finders warrants (the Second Financing Finders Warrants). Each Second Financing Finders Warrant entitles the holder thereof to purchase one additional common share of the Company at a price of $2.15 per share for a period of sixty (60) months from the closing date of the Second Financing.
On July 17, 2015, the Company closed a non-brokered private placement (the Third Financing) raising gross proceeds of $270,375 by the issuance of 125,756 units (each a Third Financing Unit) at a price of $2.15 per Third Financing Unit. Each Third Financing Unit consists of one (1) common share and one half of one (1/2) common share purchase warrant (each a Third Financing Warrant). Each whole Third Financing Warrant entitles the holder thereof to purchase one additional common share of the Company at a price of $3.00 per share for a period of thirty-six (36) months from the closing date of the Third Financing. The Company paid a cash finders fee of $16,223 in connection with this Third Financing, as well as 7,545 finders warrants (the Third Financing Finders Warrants). Each Third Financing Finders Warrant entitles the holder thereof to purchase one additional common share of the Company at a price of $2.15 per share for a period of sixty (60) months from the closing date of the Third Financing.
On November 10, 2015, upon conversion of the $2.0 million Note, the Company issued 2,083,333 shares of common stock at a price of $0.96 per share and 1,041,667 warrants exercisable at $1.44 for a period of three years from the date of issuance.
On December 29, 2015, the Company drew down the remaining $5.0 million commitment through the issuance of 5,555,556 shares of common stock at a price of $0.90 per share and 2,777,778 warrants exercisable at $1.35 for a period of three years from the date of issuance. The shares of common stock and the warrants were issued on January 7, 2016.
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On April 18, 2016, the Company closed its short form prospectus offering in Canada and a concurrent U.S. private placement (the "Offering") of units (the "Units") with gross proceeds to the Company of CAD $9,215,000 through the issuance of Units at a price of CAD $1.00 per Unit. Each Unit consists of one Class A common share in the capital of the Company (a Common Share) and one half of one Common Share purchase warrant (each whole warrant, a Warrant). Each Warrant entitles the holder thereof to acquire one additional Common Share at an exercise price of CAD $1.50 on or before April 18, 2019. Mackie Research Capital Corporation (the "Agent") acted as agent and sole bookrunner in connection with the Offering. The Company paid the Agent a cash commission of CAD $436,050 and has granted to the Agent compensation options exercisable to purchase 436,050 Units at an exercise price of CAD $1.00 per Unit for a period of 24 months from the closing of the Offering. The Company incurred other cash issuance costs of USD $1,238,566 related to this offering.
On May 2, 2016, the Company closed the sale of the additional units issued pursuant to the exercise of the over-allotment option (Over-Allotment Option) granted to the Agent in connection with the Offering. The 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 1,090,125 Units (the "Over-Allotment Units") at a price of CAD $1.00 per Over-Allotment Unit for additional gross proceeds to the Company of CAD $1,090,125, bringing the total aggregate gross proceeds to the Company under the Offering to CAD $10,305,125. Each Over-Allotment Unit consists of one Class A common share in the capital of the Company (an Over-Allotment Common Share) and one half of one Common Share purchase warrant (each whole warrant, an Over-Allotment Warrant). Each Over-Allotment Warrant entitles the holder thereof to acquire one additional Over-Allotment Common Share at an exercise price of CAD $1.50 on or before April 18, 2019. In connection with the closing of the Over-Allotment Option, the Company paid the Agent a cash commission of CAD $65,408 and granted to the Agent compensation options exercisable to purchase 65,407 Over-Allotment Units at an exercise price of CAD $1.00 per Over-Allotment Unit for a period of 24 months from the closing of the Offering.
The warrants issued in each of the April 18, 2016 and May 2, 2016 closings are classified within equity. The proceeds from the Offering were allocated on a relative fair value basis between the Class A common shares and the warrants issued. The compensation options are accounted for as warrants. These warrants represent additional share issuance costs and are recorded within equity at their fair value. The fair value of both the warrants and the compensation options was determined using a Black-Scholes option pricing model.
The fair value of the warrants granted during the six months ended September 30, 2016 was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
September 30, 2016 | |
Stock price | $1.09 CAD |
Exercise price | $1.50 CAD |
Expected life | 3.0 years |
Expected volatility | 83.83% |
Risk-free interest rate | 0.60% |
Dividend rate | 0.00% |
The fair value of the compensation options granted during the six months ended September 30, 2016 was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
September 30, 2016 | |
Stock price | $1.36 CAD |
Exercise price | $1.00 CAD |
Expected life | 2.0 years |
Expected volatility | 126.76% |
Risk-free interest rate | 0.61% |
Dividend rate | 0.00% |
On June 6, 2016, the Company announced that it received proceeds of CAD $1,825,600 from the exercise of 1,825,600 outstanding warrants which were issued in connection with the Companys private placement of subscription receipts that closed on May 30, 2014. The remaining 6,604,400 warrants issued in this offering expired unexercised.
On July 7, 2016, the Company received proceeds of CAD $750 from the exercise of 750 outstanding agent compensation options which were issued in connection with the Companys private placement of subscription prospectus offering that closed on April 18, 2016. Upon exercise of these compensation options, an additional 375 warrants to purchase the Companys stock were issued to the agent.
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Pursuant to the guidance of ASC 815 Derivatives and Hedging, the Company determined that all of the warrants issued during the year ended March 31, 2016 as described above are required to be accounted for as liabilities because they are considered not to be indexed to the Companys stock due to the exercise price being denominated in a currency other than the Companys functional currency. Consequently, the Company determined the fair value of each warrant issuance using the Black-Scholes option pricing model, with the remainder of the proceeds allocated to the common shares.
The warrants having an exercise price denominated in a currency other than the functional currency of the Company that are required to be accounted for as liabilities are summarized as follows for the six months ended September 30, 2016 and 2015:
Six Months Ended September 30, 2016 $ |
Six Months Ended September 30, 2015 $ | |
Fair value of warrants, beginning of the period | 1,204,581 | - |
Issuance of warrants | - | 532,523 |
Change in fair value of warrants during the period | 835,848 | (496,669) |
Fair value of warrants, end of the period | 2,040,429 | 35,854 |
The warrants are required to be re-valued with the change in fair value of the liability recorded as a gain or loss in the change of fair value of derivative liability, included in other income (expense) in the Companys 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 a liability.
The fair value of liability classified warrants outstanding during the periods ended September 30, 2016 and 2015 were estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
As of September 30, 2016 |
As of September 30, 2015 | |
Stock price | $1.09 | $0.61 |
Exercise price | $1.62 | $2.97 |
Expected life | 2.15 years | 2.72 years |
Expected volatility | 91.69% | 67.85% |
Risk-free interest rate | 0.77% | 0.94% |
Dividend rate | 0% | 0% |
The following is a summary of warrant activity for the six months ended September 30, 2016:
Weighted Average Exercise | ||||||||||||
Number of Warrants | Price | |||||||||||
CAD | US | CAD$ | US$ | |||||||||
Outstanding as of April 1, 2016 | 8,430,000 | 4,528,609 | $ | 1.00 | $ | 1.62 | ||||||
Granted | 5,152,563 | - | 1.50 | - | ||||||||
Granted (Agent Compensation) | 501,832 | - | 1.00 | - | ||||||||
Expired | (6,604,400 | ) | - | 1.00 | - | |||||||
Exercised | (1,826,350 | ) | - | 1.00 | - | |||||||
Outstanding as of September 30, 2016 | 5,653,645 | 4,528,609 | $ | 1.46 | $ | 1.62 |
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The warrants outstanding and exercisable at September 30, 2016 are as follows:
Number of Warrants Outstanding | Exercise Price | Expiry Date |
452,032 | US $3.00 | April 30, 2018 |
167,731 | US $3.00 | June 26, 2018 |
18,978 | US $2.15 | June 26, 2020 |
62,878 | US $3.00 | July 17, 2018 |
7,545 | US $2.15 | July 17, 2020 |
1,041,667 | US $1.44 | November 10, 2018 |
2,777,778 | US $1.35 | December 29, 2018 |
5,152,563 | CAD $1.50 | April 18, 2019 |
501,082 | CAD $1.00 | April 18, 2018 |
5. SHARE BASED PAYMENTS
On June 18, 2014, the Companys Board of Directors authorized and approved the adoption of the 2014 Plan (2014 Plan), under which an aggregate of 12,108,016 shares of common stock may be issued. Pursuant to the terms of the 2014 Plan, the Company is authorized to grant stock options, as well as awards of stock appreciation rights, restricted stock, unrestricted shares, restricted stock units and deferred stock units. These awards may be granted to directors, officers, employees and eligible consultants. Vesting and the term of an option is determined at the discretion of the Board of Directors of the Company.
On August 8, 2016, the Companys Board of Directors authorized and approved the adoption of the 2016 Plan (2016 Plan), under which an aggregate of 15,000,000 shares of common stock may be issued. Pursuant to the terms of the 2016 Plan, the Company is authorized to grant stock options, as well as awards of stock appreciation rights, restricted stock, unrestricted shares, restricted stock units, stock equivalent units and performance based cash awards. These awards may be granted to directors, officers, employees and eligible consultants. Vesting and the term of an option is determined at the discretion of the Board of Directors of the Company. At September 30, 2016, there were an aggregate of 17,468,376 common shares remaining available for grant under the 2014 and 2016 Plans.
The following is a summary of stock option activity for the six months ended September 30, 2016:
Weighted | |||||||||
Average | Aggregate | ||||||||
Number | Exercise Price | Intrinsic Value | |||||||
of Options | (CAD$) | (CAD$) | |||||||
Outstanding as of April 1, 2016 | 6,675,360 | $ | 1.08 | $ | 1,580,883 | ||||
Granted | 3,025,000 | 1.39 | |||||||
Forfeited | (31,250 | ) | 0.60 | ||||||
Cancelled | (124,110 | ) | 0.60 | ||||||
Exercised | (210,000 | ) | 0.60 | ||||||
Outstanding as of September 30, 2016 | 9,335,000 | $ | 1.19 | $ | 3,533,800 | ||||
Exercisable as of September 30, 2016 | 6,325,835 | $ | 1.16 | $ | 3,062,850 |
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The options outstanding and exercisable at September 30, 2016 were as follows:
Options | |||||||||||||||
Outstanding | |||||||||||||||
Remaining | Grant Date | Number of | |||||||||||||
Number of | Contractual Life | Exercise | Fair Value | Options | |||||||||||
Options | Expiry Date | (years) | Price (CAD$) | (CAD$) | Exercisable | ||||||||||
3,310,000 | June 18, 2019 | 2.72 | $ | 0.60 | $ | 0.26 | 3,310,000 | ||||||||
100,000 | July 14, 2017 | 0.79 | $ | 2.52 | $ | 1.05 | 100,000 | ||||||||
450,000 | December 8, 2019 | 3.19 | $ | 2.92 | $ | 1.65 | 450,000 | ||||||||
100,000 | December 8, 2019 | 3.19 | $ | 2.92 | $ | 1.31 | 66,667 | ||||||||
400,000 | December 8, 2019 | 3.19 | $ | 2.96 | $ | 1.29 | 400,000 | ||||||||
100,000 | March 16, 2020 | 3.46 | $ | 3.20 | $ | 1.42 | 66,667 | ||||||||
50,000 | August 15, 2020 | 3.87 | $ | 0.98 | $ | 0.39 | 33,334 | ||||||||
750,000 | October 21, 2020 | 4.06 | $ | 0.87 | $ | 0.36 | 187,500 | ||||||||
550,000 | October 28, 2020 | 4.08 | $ | 0.84 | $ | 0.44 | 550,000 | ||||||||
400,000 | October 28, 2020 | 4.08 | $ | 0.84 | $ | 0.36 | 120,000 | ||||||||
100,000 | December 31, 2020 | 4.25 | $ | 1.24 | $ | 0.50 | 33,334 | ||||||||
3,025,000 | July 13, 2020 | 3.79 | $ | 1.39 | $ | 0.65 | 1,008,333 | ||||||||
9,335,000 | 6,325,835 |
Included in the table above are non-employee awards that are subject to re-measurement each reporting period until vested. As a result, the grant date fair value is not representative of the total expense that will be recorded for these awards. As of September 30, 2016, the unrecognized compensation cost related to non-vested stock options outstanding, was $1,446,647 to be recognized over a weighted-average remaining vesting period of approximately 1.81 years. The Company recognizes compensation expense for only the portion of awards that are expected to vest. For the six months ended September 30, 2016 and 2015, the Company applied an expected forfeiture rate of 0% based on its historical experience.
Non-Employee Stock Options
In accordance with the guidance of ASC 815-40-15, stock options awarded to non-employees that are performing services for Neuro are required to be accounted for as derivative liabilities once the services have been performed and the options have vested because they are considered not to be indexed to the Companys stock due to their exercise price being denominated in a currency other than Neuros functional currency. Stock options awarded to non-employees that are not vested are re-measured at their respective fair values at each reporting period and accounted for as equity awards until the terms associated with their vesting requirements have been met. The changes in fair value of the unvested non-employee awards are reflected in their respective operating expense classification in the Companys consolidated statements of operations and comprehensive income (loss).
The non-employee stock options that are required to be accounted for as liabilities are summarized as follows for the six months ended September 30, 2016 and 2015:
Six Months Ended September 30, 2016 $ |
Six Months Ended September 30, 2015 $ | |
Fair value of non-employee options, beginning of the period | 521,179 | 1,581,444 |
Reallocation of vested non-employee options | 268,135 | 690,885 |
Change in fair value of non-employee stock options during the period | 185,159 | (1,910,420) |
Fair value of non-employee options, end of the period | 974,473 | 361,909 |
The non-employee options that have vested are required to be re-valued with the change in fair value of the liability recorded as a gain or loss on the change of fair value of derivative liability and included in other items in the Companys consolidated statements of operations and comprehensive income (loss) at the end of each reporting period. The fair value of the options will continue to be classified as a liability until such time as they are exercised, expire or there is an amendment to the respective agreements that renders these financial instruments to be no longer classified as a liability.
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The fair value of non-employee liability classified awards at September 30, 2016 and 2015 was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
September 30, 2016 | September 30, 2015 | |
Stock price | $1.38 CAD | $0.84 CAD |
Exercise price | $1.23 CAD | $1.52 CAD |
Expected life | 2.84 years | 3.73 years |
Expected volatility | 70.52% | 67.85% |
Risk-free interest rate | 0.51% | 0.68% |
Dividend rate | 0.00% | 0.00% |
Share-based payments are classified in the Companys statements of operations and comprehensive income (loss) as follows for the six months ended September 30, 2016 and 2015:
Six Months Ended September 30, 2016 $ |
Six Months Ended September 30, 2015 $ | |
General and administrative | 817,359 | 357,999 |
Research and development | 106,932 | (107,584) |
Total | 924,291 | 250,415 |
6. COMMITMENTS AND CONTINGENCIES
(a) |
On January 22, 2013, The Company entered into a license agreement with Advanced NeuroRehabilitation, LLC (ANR) for an exclusive right on ANRs patent pending technology, claims and knowhow. In addition to the issuance of 16,035,026 shares, the Company agreed to pay a 4% royalty on net revenue on the sales of devices covered by the patent-pending technology and services related to the therapy or use of devices covered by the patent-pending technology. The Company has not made any royalty payments to date under this agreement. |
(b) |
On March 7, 2014, the Company entered into a commercial development-to-supply program with Ximedica, LLC (Ximedica) where Ximedica will design, develop and produce the PoNS product solution suitable for clinical trial and commercial sale. The multi-phased development program contains total contracted amounts of $5,900,000, of which $5,714,062 was expensed as research and development since inception through September 30, 2016. Invoices are to be issued monthly for work in progress. The Company can cancel the project at any time with a written notice at least 30 days prior to the intended date of cancellation. During the six months ended September 30, 2016 and 2015, the Company incurred R&D charges of $676,246 and $1,047,425 pursuant to this agreement. As the development agreement progresses, the company expects to contract for additional phases. |
(c) |
Under the Companys Asset Purchase Agreement with A&B, if the Company fails to obtain FDA clearance for commercialization of or otherwise fails to ensure that the PoNS device is available for purchase by the U.S. Government by December 31, 2017, the Company is subject to a US$2,000,000 contract penalty payable to A&B, unless the Company receives an exemption for the requirement of FDA clearance from the US Army Medical Material Agency. The Company has determined that the possibility of an economic outlay under this contractual penalty is remote. |
(d) |
In November 2014, the Company signed a development and distribution agreement with the Altair company in Russia to apply for registration and distribute the PoNS device in the territories of the former Soviet Union. However, there is no assurance that such commercialization will occur. |
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7. RELATED PARTY TRANSACTIONS
During the three months ended September 30, 2016 and 2015, the Company paid $34,441 and $9,400 in consulting fees to certain directors of the Company. During the six months ended September 30, 2016 and 2015, the Company paid $63,548 and $49,560 in consulting fees to certain directors of the Company. At September 30, 2016 and March 31, 2016, the Company owed $11,957 and $3,450 to a director for consulting services.
During the three months ended September 30, 2016 and 2015, an expense of $0 and a benefit of $241,731 was included in research & development expense as the fair value of stock-based compensation attributed to the options granted to two directors and a consultant for consulting services rendered with respect to the design and development of the PoNS device. During the six months ended September 30, 2016 and 2015, an expense of $106,932 and a benefit $257,481 was included in research & development expense as the fair value of stock-based compensation attributed to the options granted to two directors and a consultant for consulting services rendered with respect to the design and development of the PoNS device.
8. SOLE-SOURCE COST-SHARING AGREEMENT
During the year ended March 31, 2016, the Company entered into a sole source cost sharing contract executed with the U.S. Army Medical Research and Materiel Command (USAMRMC). Under the terms of the contract, the USAMRMC will reimburse the Company up to a maximum of $2,996,244 representing approximately 62% of the Companys estimated costs for the registrational trial (the trial) investigating the safety and effectiveness of the portable neuromodulation stimulator for mild to moderate traumatic brain injury. The original contract expires on December 31, 2016; however, the Company has extended the contract with the USAMRMC through December 31, 2017 based on the current trial forecast timelines. As of September 30, 2016, the Company has received a total of $1,789,727 in respect of expenses reimbursed. All reimbursement amounts received are credited directly to the accounts in which the original expense is recorded, including research and development, wages and salaries, and legal expenses.
9. SUBSEQUENT EVENTS
During September 2016, the Company was assessed by Lloyds Register Quality Assurance Limited (LQRA), an independent certifying agency, and recommended for ISO 13485 certification for its PoNSTM device. LQRA concluded that the Company complies with the requirements of ISO 13485 for an integrated quality management system for medical devices across all functions of the business, from design and development to manufacturing and distribution. Achievement of ISO 13485 certification constitutes an important regulatory milestone in the commercialization process for the Companys products.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this Quarterly Report on Form 10-Q, unless otherwise specified, references to we, us or our mean Helius Medical Technologies, Inc. and its wholly owned subsidiaries, NeuroHabilitation Corporation, or NHC, and Helius Medical Technologies (Canada), Inc., unless the context otherwise requires. All financial information is stated in U.S. dollars unless otherwise specified. Our financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, including statements regarding our market, strategy, competition, capital needs, business plans and expectations. Such forward-looking statements involve risks and uncertainties regarding the success of our business plan, availability of funds, our ability to maintain and enforce our intellectual property rights, government regulations, operating costs, our ability to achieve significant revenues and other factors. Forward-looking statements are made, without limitation, in relation to operating plans, availability of funds and operating costs. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as may, will, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors, including the risks outlined in our Annual Report on Form 10-K. These factors may cause our actual results to differ materially from any forward-looking statements. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith, based on information available to us as of the date hereof, and reflect our current judgment regarding our business plans, our actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. We do not intend to update any of the forward-looking statements to conform these statements to actual results, except as required by applicable law, including the securities laws of the United States. The forward-looking statements are subject to a number of risks and uncertainties which are discussed in the section entitled Item 1A. Risk Factors in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on June 28, 2016, and those described from time to time in our future reports filed with the SEC. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
INDUSTRY AND MARKET DATA
Within this Quarterly Report on Form 10-Q, we reference information, statistics and estimates regarding the medical devices and healthcare industries. We have obtained this information from various independent third party sources, including independent industry publications, reports by market research firms and other independent sources. This information involves a number of assumptions and limitations, and we have not independently verified the accuracy or completeness of this information. Some data and other information is also based on the good faith estimates of management, which are derived from our review of internal surveys and independent sources. We believe that these external sources and estimates are reliable but have not independently verified them. The industries in which we operate are subject to a high degree of uncertainty and risk due to a variety of factors, including those described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016, as filed with the Securities and Exchange Commission (the SEC) on June 28, 2016, and in Item 1A. Risk Factors in Part II of this Quarterly Report on Form 10-Q. These and other factors could cause results to differ materially from those expressed in these publications and reports.
Overview
We are a medical technology company focused on neurological wellness. We seek to develop, license or acquire unique and non-invasive platform technologies that amplify the brains ability to heal itself.
Our mission is to develop, license and acquire non-invasive treatments designed to help patients affected by neurological symptoms caused by disease or trauma. Applying the principles of neuroplasticity, our patented PoNS device induces Cranial Nerve Non Invasive Neuromodulation that utilizes the brains innate ability to achieve neuroplastic change to aid persons with neurological, cognitive, sensory, and motor disorders when combined with the rehabilitation process.
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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The discussion below contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward looking statements as a result of many factors, including, but not limited to, those set forth under Item 1. Business Business Uncertainties and Going Concern Risk in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016, as filed with the SEC on June 28, 2016 and elsewhere in this Quarterly Report on Form 10-Q.
Results of Operations
Comparison of Three Months Ended September 30, 2016 and 2015
The following table summarizes our results of operations for the three months ended September 30, 2016 and 2015:
Three Months Ended | |||||||||
September 30, | |||||||||
2016 | 2015 | Change | |||||||
Revenue | $ | - | $ | - | $ | - | |||
Operating expenses: | |||||||||
General and administrative | 2,042,478 | 724,141 | 1,318,337 | ||||||
Research and development | 1,348,172 | 1,531 | 1,346,641 | ||||||
Total operating expenses | 3,390,650 | 725,672 | 2,664,978 | ||||||
Loss from operations | (3,390,650 | ) | (725,672 | ) | (2,664,978 | ) | |||
Other income: | |||||||||
Interest and other income | 1,120 | 27,801 | (26,681 | ) | |||||
Change in fair value of derivative liability | 288,375 | 1,894,305 | (1,605,930 | ) | |||||
Foreign exchange gain | 114,527 | 588,978 | (474,451 | ) | |||||
Total other income | 404,022 | 2,511,084 | (2,107,062 | ) | |||||
Net income (loss) | $ | (2,986,628 | ) | $ | 1,785,412 | $ | (4,772,040 | ) |
Revenue
During the three months ended September 30, 2016 and 2015, we did not generate any revenue.
General and administrative expenses
General and administrative expenses were $2,042,478 for the three months ended September 30, 2016 compared to $724,141 for the three months ended September 30, 2015. The increase of $1,318,337 was primarily attributable to an increase in headcount due to increased business activities as well as an increase in stock-based compensation expense.
Research and development expenses
Research and development expenses were $1,348,172 for the three months ended September 30, 2016 compared to $1,531 for the three months ended September 30, 2015. The increase of $1,346,641 was primarily attributable to an increase in the Companys activities as it was recruiting and performing its clinical trial.
Other income
Other income was $1,120 for the three months ended September 30, 2016 compared to $27,801 for the three months ended September 30, 2015. The decrease of $26,681 was primarily attributable to the fact that the Company experienced sales of prototype PoNSTM devices to various trial sites in the previous year and none in the current interim period.
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Change in fair value of derivative liability
The gain in fair value of derivative liability was $288,375 for the three months ended September 30, 2016 compared to $1,894,305 for the three months ended September 30, 2015. The change in fair value of derivative liability is attributable to the change in our stock price during the period, as this is an input to the Black-Scholes option pricing model that is used to re-measure the derivative liability at each reporting period. The derivative liabilities do not represent cash liabilities.
Foreign exchange gain
Foreign exchange gain was $114,527 for the three months ended September 30, 2016 as compared to $588,978 for the three months ended September 30, 2015. This is primarily due to fluctuations in the foreign exchange rate as related to the amount of Canadian dollars held at the end of each reporting period.
Comparison of Six Months Ended September 30, 2016 and 2015
The following table summarizes our results of operations for the six months ended September 30, 2016 and 2015:
Six Months Ended | |||||||||
September 30, | |||||||||
2016 | 2015 | Change | |||||||
Revenue | $ | - | $ | - | $ | - | |||
Operating expenses: | |||||||||
General and administrative | 3,492,459 | 2,188,990 | 1,303,469 | ||||||
Research and development | 2,002,055 | 1,522,355 | 479,700 | ||||||
Total operating expenses | 5,494,514 | 3,711,345 | 1,783,169 | ||||||
Loss from operations | (5,494,514 | ) | (3,711,345 | ) | (1,783,169 | ) | |||
Other income (expense): | |||||||||
Interest and other income | 110,619 | 27,748 | 82,871 | ||||||
Change in fair value of derivative liability | (1,021,007 | ) | 2,407,089 | (3,428,096 | ) | ||||
Foreign exchange gain | 333,849 | 507,553 | (173,704 | ) | |||||
Total other income (expense) | (576,539 | ) | 2,942,390 | (3,518,929 | ) | ||||
Net loss | $ | (6,071,053 | ) | $ | (768,955 | ) | $ | (5,302,098 | ) |
Revenue
During the six months ended September 30, 2016 and 2015, we did not generate any revenue.
General and administrative expenses
General and administrative expenses were $3,492,459 for the six months ended September 30, 2016, compared to $2,188,990 for the six months ended September 30, 2015. The increase of $1,303,469 was primarily attributable to an increase in headcount due to increased business activities as well as an increase in stock-based compensation expense.
Research and development expenses
Research and development expenses were $2,002,055 for the six months ended September 30, 2016, compared to $1,522,355 for the six months ended September 30, 2015. The increase of $479,700 was primarily attributable to an increase in the Companys activities as it was recruiting and performing its clinical trial.
Other income
Other income was $110,619 for the six months ended September 30, 2016, compared to $27,748 for the six months ended September 30, 2015. The increase of $82,871 was primarily attributable to an increase in the sale of prototype PoNSTM devices through the Companys Russian distribution agreement.
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Change in fair value of derivative liability
The change in fair value of derivative liability was a loss of $1,021,007 for the six months ended September 30, 2016, compared to a gain of $2,407,089 for the six months ended September 30, 2015. The change in fair value of derivative liability is attributable to the change in our stock price during the period, as this is an input to the Black-Scholes option pricing model that is used to re-measure the derivative liability at each reporting period. The derivative liabilities do not represent cash liabilities.
Foreign exchange gain
Foreign exchange gain was $333,849 for the six months ended September 30, 2016 as compared to $507,553 for the six months ended September 30, 2015. This is primarily due to fluctuations in the foreign exchange rate as related to the amount of Canadian dollars held at the end of each reporting period.
Statement of Cash Flows
Comparison of the Six Months ended September 30, 2016 and 2015
The following table summarizes our cash flows for each of the periods presented:
Six Months Ended September 30, | ||||||
2016 | 2015 | |||||
Net cash used in operating activities | $ | (4,093,134 | ) | $ | (3,393,745 | ) |
Net cash provided by investing activities | - | 378,000 | ||||
Net cash provided by financing activities | 7,887,939 | 2,891,336 | ||||
Effect of foreign exchange rate changes on cash | (266,178 | ) | (102,228 | ) | ||
Net increase (decrease) in cash and cash equivalents | 3,528,627 | (226,637 | ) |
Net Cash Used in Operating Activities
Net cash used in operating activities during the six months ended September 30, 2016 was $4,093,134. This was comprised of a net loss of $6,071,053 less adjustments for non-cash items such as change in fair value of derivative liability of $1,021,007, stock-based compensation of $924,291, receivables of $229,011, prepaid expenses and other current assets of $42,934 and accounts payable and accrued expenses of ($239,324).
Net cash used in operating activities during the six months ended September 30, 2015 was $3,393,745. This was comprised of a net loss of $768,955 less adjustments for non-cash items such as change in fair value of derivative liability of ($2,407,089), stock-based compensation of $250,415, receivables of ($110,329), prepaid expenses and other current assets of $119,112, unrealized foreign exchange loss of $(429,494) and accounts payable and accrued liabilities of $(47,405). Receivables increased due to the higher amount of refundable Canadian commodity tax.
Net Cash Provided by Investing Activities
Net cash provided by investing activities during the six months ended September 30, 2015 totaled $378,000. This consisted of the receipt of funds from a short-term investment.
Net Cash Provided by Financing Activities
Net cash provided by financing activities during the six months ended September 30, 2016 was $7,887,939 which was comprised of $7,902,912 received from our Offering as well as $1,493,946 received from the exercise of stock options and warrants. These amounts were partially offset by $1,508,919 in share issuance costs incurred in connection with our Offering.
Net cash provided by financing activities during the six months ended September 30, 2015 was $2,891,336 which was comprised of $2,832,436 received from the issuance of common stock and warrants as well as $200,000 from the issuance of a promissory note. These amounts were partially offset by $141,100 in share issuance costs incurred in connection with our private placement.
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Liquidity and Capital Resources
Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, does not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation.
The following table sets out our cash and working capital as of September 30, 2016 and March 31, 2016:
September 30, 2016 | March 31, 2016 | |||||
Cash and cash equivalents | $ | 6,172,564 | $ | 2,643,937 | ||
Working capital (deficit) | $ | 2,340,672 | $ | (16,192 | ) |
Our cash and cash equivalents as of September 30, 2016 were $6,172,564. To date we have not generated any revenue from the commercial sales of products or services. There are a number of conditions that we must satisfy before we will be able to generate revenue, including but not limited to successful completion of the clinical trial, FDA clearance of the PoNS device for treating balance disorder associated with mild to moderate TBI, manufacturing of a commercially-viable version of the PoNS device and demonstration of effectiveness sufficient to generate commercial orders by customers for our product. While we are currently seeking additional funding, we do not currently have sufficient resources to accomplish any of these conditions necessary for us to generate revenue. We will therefore require substantial additional funds in order to continue to conduct the research and development and regulatory clearance and approval activities necessary to bring our product to market, to establish effective marketing and sales capabilities and to develop other product candidates.
The Company intends to fund ongoing activities by utilizing current cash and cash equivalents and by raising additional capital through equity or debt financings. There can be no assurance that the Company will be successful in raising 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 expenditure or sell certain assets, including intellectual property assets.
Off Balance Sheet Arrangements
To the best of managements knowledge, there are no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our results of operations or financial condition.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements that have been prepared in accordance with U.S. GAAP. This preparation requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. U.S. GAAP provides the framework from which to make these estimates, assumption and disclosures. We choose accounting policies within U.S. GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. Actual results could differ from those estimates made by management. While there are a number of significant accounting policies affecting our financial statements, we believe the critical accounting policies involving the most complex, difficult and subjective estimates and judgments are: valuation of non-monetary transactions, stock compensation for services, valuation of options and valuation of income taxes.
Stock-Based Compensation
We account for all stock-based payments and awards under the fair value based method. We recognize our stock-based compensation using the straight-line method.
Stock-based payments to non-employees are measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measurable. The fair value of stock-based payments to non-employees is periodically re-measured until the counterparty performance is complete, and any change therein is recognized over the vesting period of the award and in the same manner as if we had paid cash instead of paying with or using equity based instruments. The fair value of the stock-based payments to non-employees that is fully vested and non-forfeitable as at the grant date is measured and recognized at that date.
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We account for the granting of share purchase options to employees using the fair value method whereby all awards to employees will be recorded at fair value on the date of the grant. The fair value of all share purchase options are expensed over their vesting period with a corresponding increase to additional capital surplus. Upon exercise of share purchase options, the consideration paid by the option holder, together with the amount previously recognized in additional paid-in capital is recorded as an increase to share capital. Share purchase options granted to employees are accounted for as liabilities when they contain conditions or other features that are indexed to other than a market, performance or service condition.
We use the Black-Scholes option pricing model to calculate the fair value of our share purchase options. We lack historical and implied volatility information. Therefore, we estimate our expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our own traded stock price. The expected term of our stock options has been determined utilizing the simplified method for awards that qualify as plain vanilla options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.
Derivative Liabilities
We evaluate our financial instruments and other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market at each balance sheet date and recorded as a liability and the change in fair value is recorded in the consolidated statements of operations and comprehensive income (loss). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Derivative instruments that become subject to reclassification are reclassified at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not the right to exercise or settle the derivative instrument lies with the holder.
We use the Black-Scholes option valuation model to value derivative liabilities. This model uses Level 3 inputs in the fair value hierarchy established by ASC 820 - Fair Value Measurement.
Recently Issued Accounting Pronouncements
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payment, providing additional guidance on several cash flow classification issues, with the goal of the update to reduce the current and potential future diversity in practice. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We are currently evaluating the potential impact of the adoption of this standard.
In March 2016, the FASB issued ASU 2016-09, CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this update change existing guidance related to accounting for employee share-based payments affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods, with early adoption permitted. We are currently evaluating the potential impact of the adoption of this standard.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the potential impact of the adoption of this standard.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update revise the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The amendments are effective for annual reporting periods after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the potential impact of the adoption of this standard.
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In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern, which is intended to define managements responsibility to evaluate whether there is substantial doubt about an organizations ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and to provide related footnote disclosures. The ASU provides guidance to an organizations management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The ASU is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016, which for the Company is April 1, 2017. Early adoption is permitted. The adoption of this standard will not have a material impact on our financial position or results of operations.
The amendments also clarify that the guidance in Topic 275, Risks and Uncertainties, is applicable to entities that have not commenced planned principal operations. The central feature of the guidance on disclosure requirements is that required disclosures are limited to matters significant to a particular entity. The disclosures focus primarily on risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near term or the near-term functioning of the reporting entity.
JOBS Act
In April 2012, the JOBS Act was enacted in the United States. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth public companies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4. CONTROLS AND PROCEDURES
In connection with this Quarterly Report on Form 10-Q, under the direction of our Chief Executive Officer and our Chief Financial Officer, our management evaluated our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objective.
As of September 30, 2016, our management concluded that our disclosure controls and procedures were not effective. In connection with the preparation of the condensed consolidated financial statements for the six months ended September 30, 2016, our management determined that our accounting staff did not have sufficient technical accounting knowledge related to accounting for complex U.S. GAAP matters, which our management determined has caused our disclosure controls and procedures to be ineffective.
We are currently taking appropriate steps towards improving our internal controls over financial reporting. During the six months ended September 30, 2016, we engaged the services of an external consulting group experienced in U.S. GAAP and SEC regulations to assist us in accounting for complex transactions. Additionally, subsequent to September 30, 2016, we added personnel experienced in U.S. GAAP as well as SEC rules and regulations to our internal accounting staff. We will continue to add internal experienced accounting resources as necessary throughout the upcoming quarters.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, as of the date of this filing, we do not believe we are party to any claim or litigation, the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business, other than as set forth below in respect of the matters described below. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
We are not aware of any legal proceedings contemplated by any governmental authority or any other party involving us or our properties. As of September 30, 2016, no director, officer or affiliate is: (i) a party adverse to us in any legal proceeding, or (ii) has an adverse interest to us in any legal proceedings. We are not aware of any other legal proceedings pending or that have been threatened against us or our properties.
Item 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended March 31, 2016. You should carefully consider the risk factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended March 31, 2016, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K for the year ended March 31, 2016, are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
See Note 4 above in the Unaudited Condensed Consolidated Financial Statements
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
We are working with Ximedica to develop and manufacture PoNS devices for use in the clinical trials, commercial units and manufacturing scale-up. As we are advancing clinical trials and moving toward a commercial iteration of the PoNS device, we are reviewing the concomitant documentation required to support our regulatory submissions. We recently engaged a third party to assist in the oversight of the manufacturing and related documentation for our PoNS device to better prepare us for such regulatory submissions and the challenges of manufacturing scale up for commercial supply. As a result of our ongoing auditing, testing and monitoring processes, we observed that 2% of the batteries in our inventory were out of visual specification. As these batteries were from the same lot as or clinical units, and we briefly voluntarily suspended clinical trials to replace the batteries at the clinical sites. We anticipate that there may be additional adjustments to the clinical and FDA submission timelines in the ordinary course as we work to ensure that we have reliable component suppliers and manufacturers and the necessary processes and procedures to support our clinical program, our regulatory submissions and a commercial platform for the PoNS device.
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Item 6. Exhibits
Exhibit |
|
* filed herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HELIUS MEDICAL TECHNOLOGIES, INC.
Dated: November 14, 2016 | By: | /s/ Philippe Deschamps |
Philippe Deschamps | ||
President, Chief Executive Officer and a Director | ||
Dated: November 14, 2016 | By: | /s/ Joyce LaViscount |
Joyce LaViscount | ||
Chief Financial Officer (Principal Accounting | ||
Officer), and Corporate Secretary |
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EXHIBIT 31.1
CERTIFICATIONS
I, Phillippe Deschamps, certify that:
1) I have reviewed this report on Form 10-Q of Helius Medical Technologies, Inc.
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4) I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant is made known to me by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5) I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions);
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 14, 2016 | /s/ Phillippe Deschamps |
Phillippe Deschamps | |
Chief Executive Officer and Director |
EXHIBIT 31.2
CERTIFICATIONS
I, Joyce LaViscount, certify that:
1) I have reviewed this report on Form 10-Q of Helius Medical Technologies, Inc.
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4) I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant is made known to me by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5) I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions);
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 14, 2016 | /s/ Joyce LaViscount |
Joyce LaViscount | |
Chief Financial Officer | |
(Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
HELIUS
MEDICAL TECHNOLOGIES, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER
30, 2016
PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I am the Chief Executive Officer of Helius Medical Technologies, Inc., a Wyoming corporation (the Company). I am delivering this certificate in connection with the Form 10-Q of the Company for the quarter ended September 30, 2016 and filed with the Securities and Exchange Commission (Form 10-Q).
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I hereby certify that, to the best of my knowledge, the Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 14, 2016 | /s/ Phillippe Deschamps |
Phillippe Deschamps | |
Chief Executive Officer and Director | |
(Principal Executive Officer) |
EXHIBIT 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
HELIUS
MEDICAL TECHNOLOGIES, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER
30, 2016
PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I am the Chief Financial Officer of Helius Medical Technologies, Inc., a Wyoming corporation (the Company). I am delivering this certificate in connection with the Form 10-Q of the Company for the quarter ended September 30, 2016 and filed with the Securities and Exchange Commission (Form 10-Q).
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I hereby certify that, to the best of my knowledge, the Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 14, 2016 | /s/ Joyce LaViscount |
Joyce LaViscount | |
Chief Financial Officer | |
(Principal Financial Officer) | |