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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended September 30, 2017

OR

For the transition period to

Commission File No. 000-55364

 

HELIUS MEDICAL TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

 

642 Newtown Yardley Road Suite 100

Newtown, Pennsylvania, 18940

(Address of principal executive office) (Zip Code)

(215) 944-6100

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

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

 

 

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

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

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

 

 

 

 

 

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HELIUS MEDICAL TECHNOLOGIES, INC.
INDEX

 

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Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Balance Sheets

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

 

 

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

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Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

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

 

 

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

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Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Statement of Stockholders’ Deficit

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

 

 

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

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Helius Medical Technologies, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(Amounts in thousands and expressed in United States Dollars)

 

 

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

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Helius Medical Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1.    DESCRIPTION OF BUSINESS

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

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

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

The Company’s Class A common stock without par value (“common stock”) is currently listed on the Toronto Stock Exchange (the “TSX”). The Company’s common stock began trading on the Canadian Securities Exchange on June 23, 2014, under the ticker symbol “HSM”, and trading of the common stock subsequently moved to the TSX on April 18, 2016. The Company’s common stock also began trading on the OTC Markets (“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, 2017, the Company’s cash was $2.6 million. During the nine months ended September 30, 2017, the Company incurred a net loss of $24.3 million, and, as of September 30, 2017, its accumulated deficit was $62.6 million. The Company has not generated any product revenues and has not achieved profitable operations. The Company expects to continue to incur operating losses and net cash outflows until such time as it generates a level of revenue to support its cost structure. 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 Company’s ability to continue as a going concern. The Company’s condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business.

The Company will require substantial additional financing to fund its operations and to continue to execute its strategy. The Company intends to fund ongoing activities by utilizing its current available cash and by raising additional capital through equity or debt financings. There can be no assurance that the Company will be successful in raising sufficient additional capital at the level needed to sustain operations and develop its product candidate 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.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), 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 Company’s audited consolidated financial statements for the nine months ended December 31, 2016, included in its Transition Report on Form 10-K that was filed with the Securities and Exchange Commission, (“SEC”), on April 3, 2017. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the entire fiscal year or for any other interim period. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all material adjustments consisting of normal and recurring accruals necessary to present fairly the Company's condensed consolidated financial position as of September 30, 2017, and the results of operations and comprehensive loss for the three and nine months ended September 30, 2017, and 2016 and cash flows for the nine months ended September 30, 2017 and 2016. Certain prior period amounts within operating expenses have been reclassified to conform to the current period presentation.

Use of Estimates

The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and disclosure of contingent assets and liabilities. Significant estimates include the assumptions used in the fair value pricing model for stock-based compensation and deferred income tax asset valuation allowance. Financial statements include estimates which, by their nature, are uncertain. Actual outcomes could differ from these estimates.

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Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements reflect the operations of Helius Medical Technologies, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

Concentrations of Credit Risk

The Company is subject to credit risk with respect to its cash. 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

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

 

Property, Plant and Equipment

Property, plant and equipment are carried at cost, less accumulated depreciation. Depreciation is recognized using the straight-line method over the useful live of the related asset. Expenditures for maintenance and repairs, which do not improve or extend the expected useful life of the assets, are expensed to operations while major repairs are capitalized. The Company’s property, plant and equipment is comprised of leasehold improvements and software. As of September 30, 2017, the Company had recorded approximately $0.2 million in property plant and equipment, primarily related to leasehold improvements for the Company’s new office space in Newtown, Pennsylvania. For the three and nine months ended September 30, 2017, the Company recorded $7 thousand in depreciation expense.

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.

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

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 are 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 of the grant date are measured and recognized at that date.

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

Foreign Currency

The functional currency of the Company and Helius Canada is the Canadian dollar (“CAD”) and the functional currency of NHC is the U.S. dollar (“USD”). The Company’s reporting currency is the U.S. dollar. Transactions in foreign currencies are recorded into the functional currency of the relevant subsidiary at the exchange rate in effect at the date of the transaction. Any monetary assets and liabilities arising from these transactions are translated into the functional currency at exchange rates in effect at the balance sheet date or on settlement. Resulting gains and losses are recorded in foreign exchange gain (loss) within the condensed consolidated statements of operations and comprehensive loss. The foreign exchange adjustment in the books of NHC relating to intercompany advances from Helius that are denominated in Canadian dollars is recorded in the condensed consolidated statements of operations.

Income Taxes

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

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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 condensed consolidated statements of operations and comprehensive loss. When applicable, the Company classifies penalties and interest associated with uncertain tax positions as a component of income tax expense in its condensed consolidated statements of operations and comprehensive loss.

Research and Development Expenses

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

Segment Information

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

Derivative Financial Instruments

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

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

Fair Value Measurements

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

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

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

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

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

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The Company’s derivative financial instruments are classified as Level 3 within the fair value hierarchy and required to be recorded at fair value on a recurring basis. Unobservable inputs used in the valuation of these financial instruments include volatility of the underlying share price and the expected term. See Note 3 for the inputs used in the Black-Scholes option pricing model as of September 30, 2017 and 2016 and the roll forward of the derivative financial instruments related to the warrants and see Note 4 for the inputs used in the Black-Scholes option pricing model as of September 30, 2017 and 2016 for the roll forward of the derivative financial instruments related to the non-employee stock options.

The following table summarizes the Company’s derivative financial instruments within the fair value hierarchy as of September 30, 2017 and December 31, 2016 (amounts in thousands):

 

 

There were no transfers between any of the levels during the nine months ended September 30, 2017 or the nine months ended December 31, 2016.

Basic and Diluted Income (Loss) per Share

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

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

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

 

 

For the three and nine months ended September 30, 2017 a total of 13,214,177 stock options, 9,878,384 warrants and 9,634 restricted stock units (“RSUs”) were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2016 a total of 8,135,000 and 9,335,000 options, respectively, were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive. During the three and nine months ended September 30, 2016, a total of 10,182,629 warrants in both periods were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive.

Recent Accounting Pronouncements

In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). 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 updated accounting guidance was effective for the Company on January 1, 2017 and it did not have a material effect on the Company’s condensed consolidated financial statements and any deferred tax benefits would be offset by a valuation allowance.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) 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

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months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statement of operations. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the potential impact of the standard on its condensed consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which was further amended through various updates issued by the FASB thereafter. The amendments of Topic 606 completed the joint effort between the FASB and the IASB, to develop a common revenue standard for GAAP and IFRS, and to improve financial reporting. The guidance under Topic 606 provides that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for the goods or services provided and establishes a five-step model to be applied by an entity in evaluating its contracts with customers. The Company expects to adopt the standard effective January 1, 2018 and apply the guidance retrospectively to contracts at the date of adoption. The Company also expects to elect the practical expedient available under Topic 606 for measuring progress toward complete satisfaction of a performance obligation and for disclosure requirements of remaining performance obligations. The practical expedient allows an entity to recognize revenue in the amount to which the entity has the right to invoice such that the entity has a right to the consideration in an amount that corresponds directly with the value to the customer for performance completed to date by the entity. The Company continues to assess the new standard with a focus on identifying the performance obligations included within any revenue arrangements with customers and will evaluate the methods of estimating the amount and timing of variable consideration. The Company does not currently have, and has not previously held, any significant contracts with customers. Accordingly, the Company does not believe the adoption of Topic 606 on January 1, 2018 will have a material impact on its financial statements.

3.    COMMON STOCK AND WARRANTS

As of September 30, 2017, the Company’s certificate of incorporation authorized the Company to issue unlimited shares of common stock. Each share of common stock is entitled to have the right to vote at any shareholder meeting on the basis of one vote per share. Each share of common stock held entitles the holder to receive dividends as declared by the directors. No dividends have been declared since inception of the Company through September 30, 2017. In the event of a liquidation, dissolution or winding-up of the Company, other distribution of assets of the Company among its shareholders for the purposes of winding-up its affairs or upon a reduction of capital, the shareholders shall, share equally, share for share, in the remaining assets and property of the Company.

The Company is subject to a shareholders’ agreement, which places certain restrictions on the Company’s common stock and its shareholders. 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 shareholders, right of co-sale whereby certain shareholders may be enabled to participate in a sale of the common stock of other shareholders to obtain the same price, terms and conditions on a pro-rata basis, rights of first offer of new security issuances to current shareholders on a pro-rata basis and certain other restrictions.

On October 9, 2015, the Company entered into a $7.0 million funding commitment with A&B Company Limited (“A&B”), in the form of a convertible promissory note consisting of an initial $2.0 million note and a $5.0 million funding commitment. On October 9, 2015, the Company received the conversion notice on the promissory note and in November 2015, the Company issued 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. The shares of common stock and the warrants were issued on November 10, 2015. On December 29, 2015, the Company drew down the $5.0 million funding commitment through the issuance of 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.

On April 18, 2016, the Company closed a short form prospectus offering in Canada and a concurrent U.S. private placement (the “April 2016 Offering”) of units, at a price of CAD $1.00 per unit, with gross proceeds to the Company of $7.2 million. Each unit consisted of one share of common stock 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 (“Mackie”), acted as agent and sole bookrunner in connection with the April 2016 Offering. The Company paid Mackie a cash commission of $0.3 million and granted Mackie 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 April 2016 Offering. The Company incurred other cash issuance costs of $1.1 million related to the April 2016 Offering.

On May 2, 2016, the Company closed the sale of an additional 1,090,125 units issued pursuant to the exercise of the over-allotment option granted to Mackie in connection with the April 2016 Offering for additional gross proceeds to the Company of $0.9 million, bringing the total aggregate gross proceeds to $8.1 million. In connection with this closing, the Company paid Mackie a cash commission of $0.1 million and granted Mackie compensation options exercisable to purchase an additional 65,407 units for a period of 24 months from the closing of the April 2016 Offering.

The warrants issued in connection with the April 2016 Offering were classified within equity in the Company’s condensed consolidated balance sheets. The proceeds from the April 2016 Offering were allocated on a relative fair value basis between the common stock and the warrants issued. These warrants represent additional share issuance costs and are recorded within equity in the Company’s condensed consolidated balance sheets at their fair value.

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The fair value of the warrants granted in the April 2016 Offering were estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

The fair value of the compensation options granted during the April 2016 Offering were estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

On June 6, 2016, the Company received proceeds of $1.4 million from the exercise of 1,825,600 outstanding warrants issued in connection with the Company’s May 2014 private placement of subscription. The remaining 6,604,400 warrants issued in this offering expired unexercised.

On February 16, 2017, the Company completed an underwritten registered public offering and issued an aggregate of 6,555,000 shares of common stock for gross proceeds of $9.2 million. The offering was made by means of written prospectuses and prospectus supplements, dated February 9, 2017, that form part of the Company’s existing Canadian multi-jurisdictional disclosure system (“MJDS”) short-form base shelf prospectus dated January 26, 2017, in Canada, and U.S. shelf registration statement on Form S-3 that became effective on January 6, 2017, in the U.S. The Company incurred cash issuance costs of $1.2 million in connection with this offering.

On June 28, 2017, the Company completed a non-brokered private placement of 4,000,000 shares of common stock for gross proceeds of $5.4 million. The Company incurred approximately $9 thousand in share issuance cost related to the private placement.

Pursuant to the guidance of ASC 815 Derivatives and Hedging, the Company determined that the warrants issued in the May 2014 private placement as well as the warrants issued in January 2016 in connection with the funding commitment with A&B were required to be accounted for as liabilities because they were considered not to be indexed to the Company’s stock due to the exercise price being denominated in a currency other than the Company’s functional currency. Consequently, the Company determined the fair value of each warrant issuance using the Black-Scholes option pricing model, with the remainder of the proceeds allocated to the common shares.

The 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 nine months ended September 30, 2017 and 2016 (amounts in thousands):

 

 

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

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The fair value of the warrants classified as derivative financial instruments outstanding as of September 30, 2017 and December 31, 2016 were estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

The following is a summary of the Company’s warrant activity during the nine months ended September 30, 2017:

 

 

The Company’s warrants outstanding and exercisable as of September 30, 2017 were as follows:

 

 

4.    SHARE BASED PAYMENTS

On June 18, 2014, the Company’s Board of Directors authorized and approved the adoption of the June 2014 Equity Incentive Plan (“2014 Plan”), under which an aggregate of 12,108,016 shares of common stock was authorized to 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 could be granted to directors, officers, employees and eligible consultants. Vesting and the term of an option is determined at the discretion of the Company’s Board of Directors. The Company has now granted awards for the full amount of the shares authorized under the 2014 Plan, and no future awards may be made under the 2014 Plan. On August 22, 2017, the Company’s Board of Directors approved the amended and restated 2014 Plan to correct for a formulaic error included in the deemed net stock and cashless exercise equation within the 2014 Plan. This amendment had no impact on the Company’s condensed consolidated financial statements.

On August 8, 2016, the Company’s Board of Directors authorized and approved the adoption of the 2016 Omnibus Incentive Plan (“2016 Plan”), 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 Company’s Board of Directors.

As of September 30, 2017, there were an aggregate of 12,804,626 shares of common stock remaining available for grant under the 2016 Plans.

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The following is a summary of the Company’s stock option activity during the nine months ended September 30, 2017:

 

 

The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2017 was $2.1 million.

 

The Company’s stock options outstanding and exercisable as of September 30, 2017 were as follows:

 

 

 

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, 2017, the unrecognized compensation expense related to non-vested stock options outstanding was $7.5 million to be recognized over a weighted-average remaining vesting period of approximately 2.87 years. The Company recognizes compensation expense for only the portion of awards that are expected to vest. During the nine months ended September 30, 2017 and 2016, the Company applied an expected forfeiture rate of 0% based on its historical experience.

The fair value of employee and director stock options granted during the nine months ended September 30, 2017, had a weighted average grant date fair value of $1.55 per option and were estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

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During the second quarter of 2017, the Company granted restricted stock units to certain employees under the 2016 Plan that vest over a three-year period beginning on the date of the grant. The fair value of the restricted stock units is based on the closing price of the Company’s common stock on the date of grant.

 

The following is a summary of the Company’s restricted stock unit activity during the nine months ended September 30, 2017:

 

 

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 NHC are required to be accounted for as derivative financial instruments once the services have been performed and the options have vested because they are considered not to be indexed to the Company’s stock due to their exercise price being denominated in a currency other than NHC’s functional currency. Stock options awarded to non-employees that have 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 Company’s condensed consolidated statements of operations and comprehensive loss.

The non-employee stock options that are required to be accounted for as liabilities and classified as derivative financial instruments are summarized as follows (amounts in thousands):

 

 

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

The fair value of non-employee stock options classified as derivative financial instruments as of September 30, 2017 and December 31, 2016 was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

Stock-based compensation expense is classified in the Company’s condensed consolidated statements of operations and comprehensive loss as follows (amounts in thousands):

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5.    COMMITMENTS AND CONTINGENCIES

The future minimum lease payments related to the Company’s non-cancellable operating lease commitments were as follows (amounts in thousands):

 

On February 14, 2017, Mackie Research Capital Corporation (“Mackie”), a Canadian investment banking firm, filed a statement of claim in the Ontario Superior Court of Justice alleging that the Company breached a term of the agency agreement dated March 23, 2016 between the Company and Mackie in connection with its public offering of common stock, which closed on February 16, 2017 by not complying with Mackie’s right of first refusal to serve as the lead underwriter in the offering. In April 2017, the Company settled with Mackie for an amount which is insignificant to the Company’s condensed consolidated financial statements. The settlement expense is reflected in the Company’s condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2017.

6.    RELATED PARTY TRANSACTIONS

During the three months ended September 30, 2017 and 2016, the Company paid $0 and $40,000 respectively, in consulting fees to certain directors of the Company. During the nine months ended September 30, 2017 and 2016, the Company paid $21,000 and $60,975 respectively, in consulting fees to certain directors of the Company. As of September 30, 2017, and December 31, 2016, the Company owed $5,292 and $2,550, respectively, to a director for consulting services.

In April 2016, the Company entered into a consulting agreement with Montel Media, Inc. (“Montel Media”), pursuant to which Montel Media provides consulting services for the promotion of the Company’s clinical trials and ongoing media and marketing strategies. Under the agreement, Montel Media received $15,000 per month. During the three months ended September 30, 2017 and 2016, the Company paid Montel Media $45,000, in each period pursuant to the consulting agreement. During the nine months ended September 30, 2017 and 2016, the Company paid Montel Media $0.1 million in each period, pursuant to the consulting agreement. Montel Media is owned by Montel Williams, who beneficially owns greater than 5% of the Company’s common stock.

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During the three months ended September 30, 2017 and 2016, an expense of $1.4 million and a benefit of $0.1 million, respectively, was included in the change in fair value of derivative financial instruments as the fair value of stock-based compensation attributed to the options granted to a director, a former director and a consultant for consulting services rendered with respect to the design and development of the PoNS™ device. During the nine months ended September 30, 2017 and 2016, an expense of $1.5 million and $0.4 million, respectively, was included in the change in fair value of derivative financial instruments 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.       

7.    SOLE-SOURCE COST-SHARING AGREEMENT AND COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENT

In July 2015, the Company entered into a sole source cost sharing agreement 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 $3.0 million to conduct a registrational trial investigating the safety and effectiveness of the PoNS™ device the treatment of chronic balance deficits due to mild to moderate traumatic brain injury. Reimbursement of expenses under the agreement is based on a schedule of milestones related to the completion of subjects in the trial. The original contract expired on December 31, 2016; however, the Company extended the contract agreement through December 31, 2017. On November 7, 2017, the Company received another extension of the contract agreement to December 31, 2018. As of September 30, 2017, the Company has received a total of $2.7 million with respect to expenses reimbursed for amounts owed to the Company for completion of development milestones. 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. In addition, in September 2017, the Company announced the execution of an extension to its Cooperative Research and Development Agreement (“CRADA”) with the USAMRMC through 2018 and extended the deadline for commercialization of the PoNS™ device to December 31, 2021.

 

8.    SUBSEQUENT EVENTS

Amendment to A&B Asset Purchase Agreement

As discussed in Note 5, Commitment and Contingencies, On October 30, 2017, NHC executed an amendment to the asset purchase agreement entered into with A&B(HK) Company, Limited, dated as of October 9, 2015. The amendment extends the deadline to satisfy NHC’s obligations under the CRADA to obtain FDA marketing authorization for commercialization of or otherwise ensure that the PoNS™ device is available for purchase by the U.S. Government to December 31, 2021.

 

 

 

 

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ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise specified or the context otherwise requires, 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. The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the nine months ended December 31, 2016, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company’s Transition Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission, or the SEC, on April 3, 2017, or the Transition Report. All financial information is stated in U.S. dollars unless otherwise specified. The Company’s condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“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, its ability to maintain and enforce its intellectual property rights, government regulations, operating costs, and its 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 the “Risk Factors” sections of our Transition Report and this report. 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 Transition Report 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.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with its unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

Overview

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

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

Business Update

We completed our registrational clinical trial of the PoNS™ device for the treatment of chronic balance deficits due to mild to moderate TBI during the third quarter of 2017 as planned. On November 9, 2017, we announced positive results from our registrational clinical trial evaluating the safety and effectiveness of the PoNS™ device for the treatment of subjects with chronic balance deficits due to mild-to-moderate TBI. The multi-center registrational trial titled, “A double-blind, randomized, sham-controlled study of the safety and effectiveness of the Portable Neuromodulation Stimulator (PoNS™) 4.0 device for cranial nerve noninvasive neuromodulation or CN-NINM, training in subjects with a chronic balance deficit due to mild-to-moderate TBI”, evaluated a total of 122 randomized subjects (61 active and 61 control). Subjects, age 18 to 65, received 5 weeks of treatment (2 weeks in-clinic and 3 weeks at-home) consisting of physical therapy and either a high-frequency PoNS™ device (active) or a low-frequency PoNS™ device (control).

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Endpoints for effectiveness were assessed using the Sensory Organization Test or SOT, measuring balance using computerized dynamic posturography. A responder rate analysis was used for the primary endpoint. A responder was defined as a subject with an improvement of at least 15 points on the composite SOT score compared to baseline after 5 weeks of PoNS™ therapy.

Secondary effectiveness endpoints were contingent on the outcome of the primary endpoint and determining the clinical effectiveness of the low-frequency device. As the low-frequency device demonstrated, on average, statistically significant improvements on composite SOT scores compared to baseline (P<0.025) – the secondary effectiveness endpoints evaluated for the study were the mean change in composite SOT score from baseline at 2 and 5 weeks, for both arms combined.

Endpoints for safety were assessed by frequency of falls, frequency of headaches, and Adverse Events (AEs). Falls and headaches were measured by daily activity logs and the Headache Disability Index, respectively.

Study results highlights:

We continue to conduct the commercial design and manufacturing testing to meet the requirements of the applications for commercial clearance with the U.S. Food and Drug Administration, Health Canada, CE Mark in Europe and the Therapeutic Goods Administration in Australia and expect to complete this testing and submit to the FDA for clearance in the first half of 2018. We also anticipate finalization of the selection of our contract scale manufacturer for the manufacturing of our PoNS™ device during the fourth quarter of 2017. It is our expectation to complete all requirements for the various regulatory submissions during the first half of 2018 and, to the extent the FDA completes its review in 120 days, we anticipate clearance in the second half of 2018. We also anticipate a similar timeline for the foreign regulatory clearances.

Results of Operations

Three Months Ended September 30, 2017 compared to the Three Months Ended September 30, 2016

The following table summarizes our results of operations for the three months ended September 30, 2017 and 2016 (amounts in thousands):

 

 

Revenue

During the three months ended September 30, 2017 and 2016, we did not generate any revenue.

Research and Development Expense

Research and development or R&D, expense was $3.8 million during the three months ended September 30, 2017 compared to $1.4 million during the three months ended September 30, 2016, an increase of $2.4 million. The increase was driven by a $1.8 million increase related to the

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manufacturing, design and engineering verification testing of the PoNS™ device, a $0.4 million increase related to the completion of our registrational clinical trial and a $0.2 million increase in regulatory costs in preparation for our FDA submission. This was partially offset by a $0.2 million reduction relating to invoices for reimbursement from the U.S. Army as a result of milestones met under the sole source cost sharing contract.

General and Administrative Expense

General and administrative or G&A, expense was $2.2 million during the three months ended September 30, 2017 compared to $2.0 million from the three months ended September 30, 2016, an increase of $0.2 million. The increase was primarily due to a business email compromise fraud which involved impersonation of our employees and fraudulent demands for wire transfers that targeted our finance department. See Item 4 for a further discussion.

Change in Fair Value of Derivative Financial Instruments

The change in fair value of derivative financial instruments was a loss of $6.0 million during the three months ended September 30, 2017 compared to a gain of $0.3 million during the three months ended September 30, 2016. The change in fair value of derivative financial instruments was primarily attributable to the change in volatility and our stock price during the period. The change in the fair value of derivative financial instruments is a non-cash item.

Foreign Exchange Loss

Foreign exchange loss was $1.0 million during the three months ended September 30, 2017 compared to a gain of $0.1 million during the three months ended September 30, 2016. This was primarily due to fluctuations in the foreign exchange rate as it relates to the amount of Canadian dollars held at the end of each reporting period.

 

Nine Months Ended September 30, 2017 compared to the Nine Months Ended September 30, 2016

The following table summarizes our results of operations for the nine months ended September 30, 2017 and 2016 (amounts in thousands):

 

 

Revenue

During the nine months ended September 30, 2017 and 2016, we did not generate any revenue.

Research and Development Expense

R&D expenses were $11.1 million during the nine months ended September 30, 2017 compared to $3.2 million during the nine months ended September 30, 2016. The increase of $8.0 million was primarily attributable to an increase in our activities with respect to our devices and our clinical trials. We incurred $5.6 million related to the manufacturing of clinical trial devices, and the design and engineering verification testing of our PoNS™ devices. In addition, we incurred approximately $2.8 million in expenses related to our registrational clinical trial for mild-to-moderate TBI, which included start-up and operating costs which supported an increase in the number of clinical sites, a traditional and digital advertising campaign as well as payment to sites for the completion of trial subjects. We also incurred $0.4 million in regulatory costs in anticipation of our FDA submission for clearance to commercialize our PoNS™ device These costs were partially offset by a $0.8 million reduction relating to invoices for reimbursement from the U.S. Army as a result of milestones met under the sole source cost sharing contract.

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General and Administrative Expense

G&A expenses were $5.9 million during the nine months ended September 30, 2017 compared to $5.2 million during the nine months ended September 30, 2016. The increase of $0.6 million was related to higher professional service fees of $0.4 million primarily the result of higher legal fees and an $0.2 million charge due to a business email compromise fraud which involved impersonation of our employees and fraudulent demands for wire transfers that targeted our finance department. See Item 4 for a further discussion.

Change in Fair Value of Derivative Financial Instruments

The change in fair value of derivative financial instruments was a loss of $5.5 million during the nine months ended September 30, 2017 compared to a loss of $1.1 million during the nine months ended September 30, 2016. The change in fair value of derivative financial instruments was primarily attributable to the change in our stock price and volatility during the period. The change in the fair value of derivative financial instruments is a non-cash item.

Foreign Exchange Loss

Foreign exchange loss was $1.9 million during the nine months September 30, 2017 compared to a loss of $0.5 million during the nine months ended September 30, 2016. This was 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

The following table summarizes our cash flows for the nine months ended September 30, 2017 and 2016 (amounts in thousands):

 

 

Net Cash Used in Operating Activities

Net cash used in operating activities during the nine months ended September 30, 2017 was $14.2 million. This was comprised of a net loss of $24.3 million adjusted for non-cash items including the change in fair value of derivative financial instruments of $5.5 million, stock-based compensation expense of $1.5 million, unrealized foreign exchange loss of $1.8 million and change in operating assets and liabilities of $1.4 million.

Net cash used in operating activities during the nine months ended September 30, 2016 was $5.8 million. This was comprised of a net loss of $9.9 million adjusted for non-cash items such as change in fair value of derivative financial instruments of $1.1 million, stock-based compensation expense of $1.7 million, unrealized foreign exchange loss of $0.8 million and change in operating assets and liabilities of $0.6 million.

Net Cash Used in Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2017 was $0.2 million, which was primarily related to leasehold improvements at our new office space.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2017 was $14.2 million, which was comprised of $14.5 million received from the sale of 6,555,000 shares of our common stock related to the February 2017 offering and 4,000,000 shares of our common stock related to the June 2017 private placement, as well as $0.9 million received from the exercise of stock options and warrants. These amounts were partially offset by $1.2 million in share issuance costs incurred in connection with the February 2017 offering.

During the nine months ended September 30, 2016, financing activities provided cash of $7.9 million. Financing activities during the nine months ended September 30, 2016 consisted of: $7.9 million in proceeds from the issuance of common stock and warrants related to the April 2016 offering and $1.5 million in proceeds from the exercise of warrants, partially offset by $1.5 million in share issuance costs incurred in connection with the April 2016 offering.

Liquidity and Capital Resources

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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 the Company be unable to continue in operation.

The following table summarizes our cash and its working capital which excludes non-cash items (derivative financial instruments) as of September 30, 2017 and December 31, 2016 (amounts in thousands):

 

 

We currently have limited working capital and liquid assets. Based on management’s assessment, there is substantial doubt about our ability to continue as a going concern. This means that there is substantial doubt that we can continue as an on-going business for the next twelve months. Our cash as of September 30, 2017 was $2.6 million. We expect that this cash will allow us to maintain our current operations into December 2017.

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, FDA clearance of the PoNS™ device for the treatment of movement, gait and balance disorders in patients with mild- to moderate TBI, manufacturing of a commercially-viable version of the PoNS™ device and demonstration of its effectiveness in combination with a functional targeted therapy sufficient to generate commercial orders by customers for our product. We do not currently have sufficient resources to accomplish these conditions necessary for us to generate revenue. We will therefore require substantial additional funds to continue to conduct the R&D 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. We will require additional funding to fund our ongoing activities. There can be no assurance that we will be successful in raising additional capital or that such capital, if available, will be on terms that are acceptable to us. If we are unable to raise sufficient additional capital, we may be compelled to reduce the scope of our operations and planned capital expenditure or sell certain assets, including intellectual property, and we may be forced to cease or wind down operations, seek protection under the provisions of the U.S. Bankruptcy Code, or liquidate and dissolve our company.  

Off Balance Sheet Arrangements

We have 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

This 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.

Our critical accounting policies and estimates are described in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” of our Transition Report. There have been no changes in critical accounting policies in the current year from those described in our Transition Report.

Recently Issued Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock 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 updated accounting guidance was effective for us on January 1, 2017 and it did not have a material effect on our condensed consolidated financial statements and any deferred tax benefits would be offset by a valuation allowance.

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 statement of operations. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the condensed consolidated financial statements, with certain practical expedients available. We are currently evaluating the potential impact of the standard on our condensed consolidated financial statements.

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In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which was further amended through various updates issued by the FASB thereafter. The amendments of Topic 606 completed the joint effort between the FASB and the IASB, to develop a common revenue standard for GAAP and IFRS, and to improve financial reporting. The guidance under Topic 606 provides that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for the goods or services provided and establishes a five-step model to be applied by an entity in evaluating its contracts with customers. The Company expects to adopt the standard effective January 1, 2018 and apply the guidance retrospectively to contracts at the date of adoption. The Company also expects to elect the practical expedient available under Topic 606 for measuring progress toward complete satisfaction of a performance obligation and for disclosure requirements of remaining performance obligations. The practical expedient allows an entity to recognize revenue in the amount to which the entity has the right to invoice such that the entity has a right to the consideration in an amount that corresponds directly with the value to the customer for performance completed to date by the entity. The Company continues to assess the new standard with a focus on identifying the performance obligations included within any revenue arrangements with customers and will evaluate the methods of estimating the amount and timing of variable consideration. The Company does not currently have, and has not previously held, any significant contracts with customers. Accordingly, the Company does not believe the adoption of Topic 606 on January 1, 2018 will have a material impact on its financial statements.

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

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Exchange Act, under the direction of the Chief Executive Officer and the Chief Financial Officer, the Company has evaluated its disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report due to the material weakness in our internal controls over financial reporting as discussed below. Notwithstanding this material weakness, our management has concluded that the financial statements included elsewhere in this Quarterly Report present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with generally accepted accounting principles.

In August 2017, we became aware that we had been a victim of a criminal fraud that law enforcement authorities refer to as business email compromise fraud, which involved impersonation of our employees and fraudulent demands for wire transfers that targeted our finance department. We immediately responded to the criminal fraud. Despite our response, the fraud resulted in a transfer of approximately $0.2 million. To date, no funds have been recovered. The Company’s investigation into this matter continues as further discussed in Item 1A. During the third quarter of 2017, enhancements were made to our controls relating to electronic payments, including by wire transfer of funds. These enhancements include additional verification and documentation procedures to be followed prior to the initiation or approval of electronic payments by or for us. We believe these enhancements increase the ability of our personnel to identify and block attempts by third parties to fraudulently initiate electronic payments from us. Our management believes that the foregoing actions will help improve our internal controls over financial reporting. We are actively working to implement effective internal control over financial reporting, which includes remediation of these material weaknesses. However, such compliance is not guaranteed, and we cannot provide any assurance that our internal control over financial reporting will be effective as a result of these efforts.

Changes in Internal Control Over Financial Reporting

Other than the actions described above, there has not been any change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

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PART II – OTHER INFORMATION

Item 1.    Legal Proceedings

From time to time, we are subject to litigation and claims arising in the ordinary course of business. We are not currently a party to any material legal proceedings and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results or financial condition.

Item 1A.  Risk Factors

 

The discussion of our business and operations discussed in this report should be read together with the risk factors contained in Item 1A of our Transition Report as filed with the SEC on April 3, 2017, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies, or prospects in a material and adverse manner. There are no material changes from the risk factors as previously disclosed in our Transition Report, except as noted below:

 

T Before giving effect to any potential sales of our securities, we estimate that our existing capital resources will only be sufficient to fund our operations into December 2017.

 

As of September 30, 2017, we had cash of $2.6 million. We expect that this cash will allow us to maintain our current operations into December 2017. Therefore, we will need to complete a financing or strategic transaction before the end of December 2017 to continue as a going concern, or we may be forced to reduce the scope of our operations and planned capital expenditure or sell certain assets, including intellectual property, and we may be forced to cease or wind down operations, seek protection under the provisions of the U.S. Bankruptcy Code, or liquidate and dissolve our company, which would have a material adverse effect on the value of our common stock.

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

In the three months ended September 30, 2017, we were the victim of a business email compromise, fraud which resulted in our incurring a loss of approximately $0.2 million. We are working with law enforcement authorities and the banks involved in the wire transfer to pursue recovery of the $0.2 million, but at this time we do not know whether we will be able to recover any of the funds, and we have been advised that it may take several months before we are better able to evaluate our recovery prospects. Enhancements have been made to our controls relating to electronic payments by or for us that we believe will reduce out risk of becoming a victim of future frauds related to our payments, including by wire transfers. However, cyber-related criminal activities continue to evolve and increase in sophistication, frequency and severity. As a result, the control enhancements that have been made, and any additional enhancements that may be made in the future, to our controls may not be successful in avoiding our becoming a victim to further cyber-related crimes.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.    Defaults Upon Senior Securities

Not applicable.

Item 4.    Mine Safety Disclosures

Not applicable.

Item 5.    Other Information

On November 7, 2017, NHC executed an amendment to the sole source cost sharing contract entered into with the USAMRMC, pursuant to which USAMRMC and the U.S. Army Medical Material Agency have agreed to cooperate with NHC on clinical studies and regulatory responsibilities necessary to obtain FDA marketing authorization of the PoNS™ device for the treatment of chronic balance deficits related to mild- to moderate-TBI. The amendment extends the agreement with USAMRMC to December 31, 2018 and is under NHC’s larger CRADA framework with the United States Army.

The preceding summary of the amendment is qualified in its entirety by reference to Amendment of Solicitation/Modification of Contract of Sole-Source Cost Sharing Agreement with the U.S. Army Medical Research and Materiel Command, which is filed herewith as Exhibit 10.2, Amendment to Performance Work Statement (filed as Exhibit 10.1 to the Form 8-K filed on November 21, 2016) and Performance Work Statement (filed as Exhibit 10.2 to the Form 8-K filed on November 21, 2016), each of which is incorporated by reference herein.

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Item 6.    Exhibits

 

 

* Filed herewith

** These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

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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.

 

 

 

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Exhibit 10.2

AMENDMENT  OF  SOLICITATION/MODIFICATION  OF CONTRACT

1. CONTRACT ID CODE

S

PAGE OF PAGES

 

 

1

12

2. AMENDMENT/MODIFICATION NO.

3. EFFECTIVE DATE

07-Nov-2017

4. REQUISITION/PURCHASE REQ. NO.

SEE SCHEDULE

5. PROJECT NO.(Ifapplicable)

6. ISSUED BYCODE

W81XWH

7. ADMINISTERED BY (Ifother than item6)CODE

 

USA MED RESEARCH ACQ ACTIVITY 820 CHANDLER ST

FORT DETRICK MD 21702-5014

See  Item 6

8. NAME AND ADDRESS OF CONT RACT OR (No., Street, County, State and Zip Code)

NEUROHABILITATION CORPORATION

642 NEWTOWN YARDLEY ROAD, SUITE 100

NEWTOWN PA 18940-1775

 

9A. AMENDMENT OF SOLICIT AT ION NO.

 

 

9B. DATED (SEE ITEM 11)

 

X

10A. MOD. OF CONT RACT /ORDER NO.

W81XWH-15-C-0096

 

 

X

10B. DATED  (SEE ITEM 13)

01-Jul-2015

CODE    7BGE6

FACILIT Y CODE

 

 

11. T HIS ITEM ONLY APPLIES TO AMENDMENT S OF SOLICIT AT IONS

The above numbered solicitation is amended as set forth in Item14. The hour and date specified for receipt of Offeris extended,is not extended.

 

Offer must acknowledge receipt ofthis amendment prior to the hour and date specified in the solicitation or as amended by one ofthe following methods:

(a) By completing Items 8 and 15, and returningcopies ofthe amendment; (b) By acknowledging receipt ofthis amendment on each copy ofthe offer submitted; or (c) By separate letter or telegramwhich includes a reference to the solicitation and amendment numbers. FAILURE OF YOUR ACKNOWLEDGMENT TO BE RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR AND DATE SPECIFIED MAY RESULT IN

REJECTION OF YOUR OFFER. Ifby virtue ofthis amendment you desire to change an offer already submitted, such change may be made by telegramor letter, provided each telegramor letter makes reference to the solicitation and this amendment, and is received prior to the opening hour and date specified.

12. ACCOUNT ING AND APPROPRIAT ION DAT A (If required)

13. T HIS ITEM APPLIES ONLY TO MODIFICAT IONS OF CONT RACT S/ORDERS. IT MODIFIES T HE CONT RACT /ORDER NO. AS DESCRIBED IN ITEM 14.

 

A. T HIS CHANGE ORDER IS ISSUED PURSUANT T O: (Specify authority) T HE CHANGES SET FORT H IN ITEM 14 ARE MADE IN T HE CONT RACT ORDER NO. IN ITEM 10A.

 

B. T HE ABOVE NUMBERED CONT RACT /ORDER IS MODIFIED TO REFLECT T HE ADMINIST RAT IVE CHANGES (such as changes in paying office, appropriation date, etc.) SET FORT H IN ITEM 14, PURSUANT TO T HE AUT HORIT Y OF FAR 43.103(B).

X

C. T HIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:

52.243-2 Alt I Changes - Cost Reimbursement

 

D. OTHER (Specify type of modification and authority)

E. IMPORT ANT: Contractoris not,Xis required to sign this document and return1copies to the issuing office.

14. DESCRIPT ION OF AMENDMENT /MODIFICAT ION (Organized by UCF section headings, including solicitation/contract subject matter where feasible.)

Modification Control Number:csult18394 The purpose of this modification is to:

 

 

 

 

 

 

 

Except as provided herein, all terms and conditions of the document referenced in Item9A or 10A, as heretofore changed, remains unchanged and in full force and effect.

15A. NAME AND TITLE OF SIGNER (Type or print)

 

16A. NAME AND TITLE OF CONT RACT ING OFFICER (Type or print)

 

TEL:EMAIL:

15B. CONT RACT OR/OFFEROR

 

(

15C. DATE SIGNED

 

11/7/17

16B. UNIT ED ST AT ES OF AMERICA

BY

(Signature of Contracting Officer)

16C. DATE SIGNED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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W81XWH-15-C-0096

(csult18394) Page 2 of 12

 

 

 

 

SECTION SF 30 BLOCK 14 CONTINUATION PAGE

 

SUMMARY OF CHANGES

 

 

SECTION B - SUPPLIES OR SERVICES AND PRICES

 

Global Changes

 

CLIN 0001 -- CLIN 0003

The SIC code 3842 has been deleted.

 

 

SECTION C - DESCRIPTIONS AND SPECIFICATIONS

 

 

The following have been modified: PERFORMANCE WORK STATEMENT

Revised PWS – Mod P00003

a) Section 1.3. Changed the Period of Performance from 01 July 2015 – 31 December 2017 to 01 July 2015 – 31 December 2018.

 

 

PERFORMANCE WORK STATEMENT (PWS)

 

Development and U.S. Food and Drug Administration (FDA) Clearance of the Portable Neuromodulation Stimulator (PoNS™) Device