(The accompanying notes are an integral part of these
consolidated financial statements.)
(The accompanying notes are an integral part of these
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
The Companys condensed consolidated financial statements have
been prepared on the basis of continuity of operations, realization of assets
and the satisfaction of liabilities in the ordinary course of business. The
Company has incurred a net loss of $3,084,424 for the three months ended June
30, 2016 and, as of June 30, 2016, the Company has an accumulated deficit of
$29,389,687. The Company has not generated any product revenues and has not
achieved profitable operations. Until the Company generates a level of revenue
to support its cost structure, the Company expects to continue to incur
substantial operating losses and net cash outflows. There is no assurance that
profitable operations will ever be achieved, and, if achieved, will be sustained
on a continuing basis.
While the Company had cash and cash equivalents of $7,973,437
as of June 30, 2016, management does not believe these resources will be
sufficient to meet the Companys operating and capital needs through the end of
its fiscal year ended March 31, 2017.
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. This material uncertainty gives rise to
substantial doubt about the Companys ability to continue as a going concern.
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 quarters 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.
8
The effects of this revision on the Companys Condensed
Consolidated Statements of Equity and Operations and Comprehensive Loss were as follows:
|
|
Three Months Ended June 30, 2015
|
|
|
|
As Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
Revised
|
|
Additional paid-in capital
|
$
|
2,053,907
|
|
$
|
149,898
|
|
$
|
2,203,805
|
|
Research & development
|
$
|
1,370,926
|
|
$
|
149,898
|
|
$
|
1,520,824
|
|
Loss from operations
|
$
|
(2,835,775
|
)
|
$
|
(149,898
|
)
|
$
|
(2,985,673
|
)
|
Net loss
|
$
|
(2,404,469
|
)
|
$
|
(149,898
|
)
|
$
|
(2,554,367
|
)
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
$
|
(0.04
|
)
|
$
|
-
|
|
$
|
(0.04
|
)
|
Total comprehensive loss
|
$
|
(2,363,843
|
)
|
$
|
(149,898
|
)
|
$
|
(2,513,741
|
)
|
2.
|
SIGNIFICANT ACCOUNTING
POLICIES
|
Basis of Presentation
The accompanying condensed consolidated financial statements of Helius Medical Technologies, Inc. are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America, or 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. Our condensed consolidated financial statements have also been prepared on a basis substantially consistent with, and should be read in conjunction with, our audited consolidated financial statements for the year ended March 31, 2016, which were included in our 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 our 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 our operations for any other interim period or for a full fiscal year.
The accompanying condensed consolidated financial statements reflect the operations of Helius Medical Technologies, Inc. and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in
accordance with U.S. Generally Accepted Accounting Principles ( 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
In the opinion of management, the accompanying unaudited financial statements include all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s interim financial information.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash at banks and on hand,
and short-term highly liquid investments that have an insignificant interest
rate risk and an original maturity of 3 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 June 30, 2016, the accounts receivable balance consisted primarily of GST and
QST refunds as well as reimbursements from the US army related to the Companys
expenditures.
Stock-Based Compensation
9
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.
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 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.
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 Exchange
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 loss.
For the three months ended June 30, 2016, there was a foreign
exchange gain of $219,322 and for the three months ended June 30, 2015 there was
a foreign exchange loss of $81,425 recognized in the condensed consolidated
statements of operations and comprehensive 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 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 loss.
Research and Development Expenses
10
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.
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 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 settlement
of the derivative instrument is expected within 12 months of the consolidated
balance sheet date.
Fair Value Measurements
The Companys financial instruments consist primarily of cash
and cash equivalents, receivables, and 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
as at June 30, 2016 and 2015. Unobservable inputs used in the valuation of these
liabilities includes volatility of the underlying share price and the expected
term. See Note 3. for the inputs used in the Black Scholes model at June 30,
2016 and the rollforward of the warrant liability and see Note 4. for the inputs
used in the Black Scholes model at June 30, 2016 and 2015 for the rollforward of
the derivative liability for non-employee options.
11
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee options
|
|
1,188,770
|
|
|
-
|
|
|
-
|
|
|
1,188,770
|
|
Warrants
|
|
2,114,507
|
|
|
-
|
|
|
-
|
|
|
2,114,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee options
|
|
521,179
|
|
|
-
|
|
|
-
|
|
|
521,179
|
|
Warrants
|
|
1,204,581
|
|
|
-
|
|
|
-
|
|
|
1,204,581
|
|
There were no transfers between any of the levels during the
three months ended June 30, 2016 and 2015.
Basic and Diluted Income (Loss) per Share
Earnings or loss per share (EPS) is computed by dividing net
income (loss) available to common stockholders 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 loss per share for the three months ended
June 30, 2016 and 2015 were calculated as follows:
|
|
Three Months
Ended
|
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, basic and diluted
|
|
(3,084,424
|
)
|
|
(2,554,367
|
)
|
Denominator
|
|
|
|
|
|
|
Basic and dilutive weighted
average common shares outstanding
|
|
81,003,020
|
|
|
63,722,378
|
|
|
|
|
|
|
|
|
Basic and dilutive net loss
per share
|
$
|
(0.04
|
)
|
$
|
(0.04
|
)
|
The following outstanding securities for the three months ended
June 30, 2016 and 2015 have been excluded from the computation of diluted
weighted shares outstanding, as they would have been anti-dilutive:
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
Options outstanding
|
|
6,520,000
|
|
|
4,920,000
|
|
Warrants outstanding
|
|
10,182,629
|
|
|
9,068,741
|
|
Total
|
|
16,702,629
|
|
|
13,988,741
|
|
12
Recent Accounting Pronouncements
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.
3.
|
COMMON STOCK AND WARRANTS
|
As of June 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 June 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.
13
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.
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.
14
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 three months
ended June 30, 2016 was estimated using the Black-Scholes option pricing model
with the following weighted average assumptions:
|
June 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
three months ended June 30, 2016 was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
|
June 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.
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 three months
ended June 30, 2016 and 2015:
|
Three months ended
June 30, 2016
$
|
Three months ended
June 30, 2015
$
|
|
|
|
Fair value of warrants, beginning of the period
|
1,204,581
|
-
|
Issuance
|
-
|
495,954
|
Change in fair value of warrants during the period
|
909,926
|
(86,538)
|
Fair value of warrants, end of the period
|
2,114,507
|
409,416
|
15
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 loss at the
end of each reporting period. 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 as
of June 30, 2016 were estimated using the Black-Scholes option pricing model
with the following weighted average assumptions:
|
June 30, 2016
|
Stock price
|
$1.11
|
Exercise Price
|
$1.62
|
Expected life
|
2.40 years
|
Expected volatility
|
87.06%
|
Risk free interest rate
|
0.62%
|
Dividend rate
|
0.00%
|
The continuity of warrants for the three months ended June 30,
2016 is as follows:
|
|
Number of warrants
|
|
|
Weighted Average Exercise Price
|
|
|
|
CAD
|
|
|
US
|
|
|
CAD
|
|
|
US
|
|
Balance, March 31, 2016
|
|
8,430,000
|
|
|
4,528,609
|
|
$
|
1.00
|
|
|
1.62
|
|
Granted
|
|
5,152,563
|
|
|
-
|
|
$
|
1.50
|
|
|
-
|
|
Granted (Agent Compensation)
|
|
501,457
|
|
|
-
|
|
$
|
1.00
|
|
|
-
|
|
Expired
|
|
(6,604,400
|
)
|
|
-
|
|
$
|
1.00
|
|
|
-
|
|
Exercised
|
|
(1,825,600
|
)
|
|
-
|
|
$
|
1.00
|
|
|
-
|
|
Balance, June 30, 2016
|
|
5,654,020
|
|
|
4,528,609
|
|
$
|
1.46
|
|
|
1.62
|
|
The warrants outstanding and exercisable at June 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
|
|
501,457
|
|
CAD $1.00
|
|
|
April 18, 2018
|
|
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. At June 30, 2016, there were 5,588,016 common shares remaining
available for grant under the 2014 Plan.
The continuity of stock options for the year ended June 30,
2016 is as follows:
16
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise Price
|
|
|
Intrinsic Value
|
|
|
|
Number
|
|
|
(CAD)
|
|
|
(CAD)
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding at March
31, 2016
|
|
6,675,360
|
|
$
|
1.08
|
|
$
|
1,580,883
|
|
Forfeited
|
|
(31,250
|
)
|
|
0.60
|
|
|
-
|
|
Cancelled
|
|
(124,110
|
)
|
|
0.60
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding at June 30, 2016
|
|
6,520,000
|
|
$
|
1.09
|
|
$
|
4,127,200
|
|
|
|
|
|
|
|
|
|
|
|
Balance exercisable at June 30, 2016
|
|
5,510,835
|
|
$
|
1.10
|
|
$
|
3,574,184
|
|
The options outstanding and exercisable at June 30, 2016 are as
follows:
|
|
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
remaining
|
|
|
|
|
|
|
|
|
Number of
|
|
Number of
|
|
|
|
|
contractual life
|
|
|
Exercise
|
|
|
Grant date fair
|
|
|
options
|
|
options
|
|
Expiry date
|
|
|
(years)
|
|
|
Price (CAD)
|
|
|
value (CAD)
|
|
|
exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,520,000
|
|
June 18, 2019
|
|
|
2.97
|
|
$
|
0.60
|
|
$
|
0.26
|
|
|
3,520,000
|
|
100,000
|
|
July 14, 2017
|
|
|
1.04
|
|
$
|
2.52
|
|
$
|
1.05
|
|
|
100,000
|
|
450,000
|
|
December 8, 2019
|
|
|
3.44
|
|
$
|
2.92
|
|
$
|
1.65
|
|
|
450,000
|
|
100,000
|
|
December 8, 2019
|
|
|
3.44
|
|
$
|
2.92
|
|
$
|
1.31
|
|
|
66,667
|
|
400,000
|
|
December 8, 2019
|
|
|
3.44
|
|
$
|
2.96
|
|
$
|
1.29
|
|
|
400,000
|
|
100,000
|
|
March 16, 2020
|
|
|
3.71
|
|
$
|
3.20
|
|
$
|
1.42
|
|
|
66,667
|
|
50,000
|
|
August 15, 2020
|
|
|
4.13
|
|
$
|
0.98
|
|
$
|
0.39
|
|
|
16,667
|
|
750,000
|
|
October 21, 2020
|
|
|
4.31
|
|
$
|
0.87
|
|
$
|
0.36
|
|
|
187,500
|
|
550,000
|
|
October 28, 2020
|
|
|
4.33
|
|
$
|
0.84
|
|
$
|
0.44
|
|
|
550,000
|
|
400,000
|
|
October 28,2020
|
|
|
4.33
|
|
$
|
0.84
|
|
$
|
0.36
|
|
|
120,000
|
|
100,000
|
|
December 31,
2020
|
|
|
4.51
|
|
$
|
1.24
|
|
$
|
0.50
|
|
|
33,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,520,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,510,835
|
|
Included in the table above are non-employee awards that are
subject to remeasurement 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 June 30, 2016, the unrecognized compensation
cost related to non-vested stock options outstanding, was $240,993 to be
recognized over a weighted-average remaining vesting period of approximately
2.02 years. The Company recognizes compensation expense for only the portion of
awards that are expected to vest. For the three months ended June 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 loss.
The non-employee stock options that are required to be
accounted for as liabilities are summarized as follows for the three months
ended June 30, 2016 and 2015:
17
|
Three months ended
June 30, 2016
$
|
Three months ended
June 30, 2015
$
|
|
|
|
Fair value of non-employee options, beginning of the period
|
521,179
|
1,581,444
|
Issuance
|
-
|
-
|
Reallocation of vested non-employee options
|
268,135
|
690,885
|
Change in fair value of non-employee stock options during
the period
|
399,456
|
(426,246)
|
|
|
|
Fair value of non-employee options, end of the period
|
1,188,770
|
1,846,083
|
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
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.
The fair value of non-employee liability classified awards at
June 30, 2016 and 2015 was estimated using the Black-Scholes option pricing
model with the following weighted-average assumptions:
|
June 30, 2016
|
June 30, 2015
|
|
|
|
Stock price
|
$1.46 CAD
|
$2.50 CAD
|
Exercise Price
|
$1.23 CAD
|
$1.52 CAD
|
Expected life
|
3.10 years
|
3.98 years
|
Expected volatility
|
83.83%
|
67.85%
|
Risk free interest rate
|
0.52%
|
1.31%
|
Dividend rate
|
0.00%
|
0.00%
|
Share-based payments are classified in the Companys statements
of operations and comprehensive loss as follows for the three months ended June
30, 2016 and 2015:
|
Three months ended
June 30, 2016
$
|
Three months ended
June 30, 2015
$
|
|
|
|
General and administrative
|
169,798
|
325,990
|
Research and development
|
106,932
|
134,148
|
|
|
|
|
276,730
|
460,138
|
5.
|
COMMITMENTS AND
CONTINGENCIES
|
(a)
|
On January 22, 2013, the Company entered into a license
agreement with 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 PoNS product solution suitable
for clinical trial and commercial sale. Under the program, the Company is
responsible for ensuring the device is in compliance with relevant laws
and regulations. The agreed budget for phase 1B of development is
$499,000; phase 2 is $1,065,000; Phase 3 and 4 is $1,389,000 and 2nd
software development cycle is $586,000, of which $5,414,111 was expensed
as research and development since inception to June 30,
2016.
|
18
|
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. The Company
recorded a prepaid expense of $274,000 to Ximedica for the upcoming
clinical build of the PoNS device. As of June 30, 2016, the Company has
expensed $154,626 of the $274,000 prepayment. As of June 30, 2016, the
Company had also recorded a $300,000 project initiation deposit which will
be applied once the development-to-supply program has been completed.
During the three months ended June 30, 2016 and 2015, the Company incurred
R&D charges of $222,743 and $818,020 pursuant to this
agreement.
|
|
|
(c)
|
On January 27, 2015, the Company received a demand letter
containing allegations that it had entered into a consulting arrangement
with the complainants and breached certain of its terms, and used certain
intellectual property in the form of business and marketing plans
allegedly prepared by the complainants, and seeking damages. On May 7,
2015, Mr. Rainier Maas and Dr. Jochen Scheld filed a complaint in the U.S.
District Court for the Eastern District of Pennsylvania seeking monetary
damages in excess of $225,000. On December 2, 2015 the Company entered
into a settlement agreement with the plaintiffs for an amount of €57,000
which was subsequently paid on January 12, 2016. The parties have since
executed the settlement agreement for the aforementioned amount and the
case has been dismissed without prejudice.
|
|
|
(d)
|
On January 5, 2015, Wicab Inc. (Wicab) filed a
complaint against the Company, NHC, its director Mitchell Tyler, and its
former director Yuri Danilov, and ANR in the U.S. District Court for the
Western District of Wisconsin. The complaint contained various state and
common law claims arising from Messrs. Danilovs and Tylers prior
employment with Wicab and the Companys two issued patents for the PoNS
device. The complaint alleged, among other things, that following their
departure from Wicab, Messrs. Danilov and Tyler knowingly filed patent
applications for and used ideas and inventions developed at Wicab in
violation of various non-competition and confidentiality agreements, and
that the Companys two issued patents are therefore rightfully the
property of Wicab. The complaint sought an unspecified amount of monetary
damages, an injunction preventing the Company from using the ideas and
inventions in the two patents, an order transferring ownership of the
patents from the Company to Wicab, and recovery of costs and attorneys
fees. The complaint was voluntarily dismissed without prejudice on January
14, 2015.
|
|
|
|
On October 12, 2015, the Company received a letter from
Wicab alleging that the two issued patents were invalid in view of prior
art cited in the letter, including scientific publications and patent
applications, and that Paul Bach-y-Rita, Wicabs founder, should have been
named as an inventor on these two issued patents. Wicab indicated in the
letter that it may file reexamination or inter partes review proceedings
with the U.S. Patent Office to attempt to invalidate the claims in the two
issued patents. Wicab also stated that it would consider an unspecified
business solution to resolve this matter. On December 10, 2015,
representatives of each of the Company and Wicab met to discuss the
parameters of a potential settlement. There can be no guarantee that a
settlement will be reached. In the event that a settlement with Wicab is
not reached, Wicab may file reexamination or inter partes review
proceedings with the U.S. Patent Office to challenge the validity of the
two issued patents. If the Company receives an adverse decision from the
U.S. Patent Office in connection with these proceedings, some or all of
the claims in the two patents may be invalidated or otherwise impaired,
which could prevent the Company from bringing an infringement suit against
a future competitor for making use of the PoNS technology for
neurorehabilitation, and could have a material adverse effect on the
Companys business, operating results and financial condition. Wicab may
also take other actions against the Company, its assets, intellectual
property rights, officers, directors, employees, agents or other persons
or entities which may also have a material effect on the Companys
business, operating results and financial condition. The Company believes
that the possibility of an economic outlay is remote.
|
|
|
(e)
|
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.
|
|
|
(f)
|
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.
|
6.
|
RELATED PARTY TRANSACTIONS
|
During the three months ended June 30, 2016 and 2015, the
Company paid $29,107 and $40,160 in consulting fees to directors of the Company.
This expense was included in research and development expense. At June 30, 2016
and 2015, the Company owed $Nil and $24,418 to a director for consulting
services.
19
During the three months ended June 30, 2016 and 2015, an
expense of $106,932 and a benefit of $15,750 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.
7.
|
SOLE-SOURCE COST-SHARING
AGREEMENT
|
During the fiscal year ended March 31, 2016, the Company
entered into a sole source cost sharing contract executed with the 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 trial expires on December 31, 2016 however the
Company is working with the USAMRMC to extend the contract into 2017 based on
the current trial forecast timelines. As of June 30, 2016, the Company has
received a total of $1,628,627 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.
Under the terms of the agreement, the USAMRMC may terminate
their obligation at any time with 30 days written notice.
8.
|
SUPPLEMENTAL CASH FLOW
INFORMATION
|
Investing and financing activities that do not have a direct
impact on current cash flows are excluded from the consolidated statements of
cash flows.
During the three months ended June 30, 2016, the Company had
the following non-cash financing transactions:
|
i)
|
Fair value of warrants issued to agent for services
provided in conjunction with the Offering was
$366,271.
|
During the three months ended June 30, 2015, the Company had
the following non-cash financing transactions:
|
i)
|
Fair value of liability classified warrants issued in
conjunction with private placement offerings was
$495,954
|
On July 7, 2016, 750 Agent Compensation options issued pursuant to the Offering were exercised for gross proceeds of CAD $750.
On July 13, 2016 the Securities and Exchange Commission (SEC)
declared effective the Companys registration statement on Form S-1 relating to
the resale of up to 11,953,115 shares of the Companys Class A common stock,
without par value (the Common Shares), 5,074,560 warrants to purchase shares of
the Companys Class A common stock at an exercise price of CAD$1.50 per share
(US$1.15 per share at the noon exchange rate as published by the Bank of Canada
on July 12, 2016) (the Warrants), and 5,074,560 shares of our Class A common
stock issuable upon the exercise of the Warrants held by certain security
holders of the Company named in the registration statement (the Warrant
Shares, and together with the Common Shares and the Warrants, the
Securities).
The registration statement, while effective, allows the selling
security holders named in the registration statement to publicly resell the
Securities. Helius will not receive any proceeds from the sale of the Securities
by the selling security holders. Upon the cash exercise of the Warrants, Helius
will receive the exercise price of the Warrants.
On August 4, 2016, the Board of Director selected Thomas E.
Griffin to the Board. Mr. Griffin was also appointed as the Chairman to Audit
Committee.
Mr. Griffin has not participated in any transactions with the
Company, nor are there currently any proposed transactions, requiring disclosure
pursuant to Item 404(a) of Regulation S-K.
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As a member of the Board of Directors, Mr. Griffin will be
eligible to receive non-employee director compensation consistent with that
provided to other non-employee directors: 100,000 stock options (75,000 as a
Board Member and 25,000 as a member of the Audit Committee). The options will
vest as follows: 25% upon date of issuance, 25% at one year anniversary of
issuance date and 50% at year 2 anniversary of issuance date. The strike price
will be set at the close of the market on the date of issuance.
21