Filing and reporting period
The supplied filing is Helius Medical Technologies, Inc.’s unaudited Form 10-Q for the three months ended June 30, 2016, its fiscal first quarter. This does not match the request metadata identifying Solana Co. and “2016 Q1”; investors should confirm the intended issuer and filing. Figures are in U.S. dollars unless stated otherwise.
Helius is a pre-revenue medical technology company developing the PoNS neuromodulation device for neurological rehabilitation. It reports one operating segment.
Financial results and liquidity
| Metric | Quarter ended June 30, 2016 | Comparable 2015 period |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $653,883 | $1,520,824 |
| General and administrative expense | $1,449,981 | $1,464,849 |
| Total operating expenses / operating loss | $2,103,864 / $(2,103,864) | $2,985,673 / $(2,985,673) |
| Net loss | $(3,084,424) | $(2,554,367) |
| Basic and diluted loss per share | $(0.04) | $(0.04) |
| Cash used in operating activities | $(2,368,629) | $(2,146,000) |
No meaningful operating margin can be calculated because the company had no revenue. The $109,500 of other income was attributed primarily to sales of prototype PoNS devices to trial sites; the filing does not report this as product revenue. A $1,309,382 loss from changes in derivative fair value and a $219,322 foreign-exchange gain affected the quarter’s net loss. The filing says derivative liabilities are non-cash.
At June 30, 2016, cash and cash equivalents were $7,973,437, total current assets $9,096,151, current liabilities $4,340,043, and working capital $4,756,108. The principal reported liability was a $3,303,277 derivative liability; the filing reports no interest expense for the quarter. Cash rose by $5,329,500, primarily due to $7,791,672 of net financing cash inflow, including the public offering and warrant exercises. There was no investing cash flow in the quarter.
Material changes and unusual items
- R&D expense fell by $866,941 year over year, which management attributed primarily to lower activity while preparing for an additional clinical build with Ximedica. G&A expense was broadly unchanged.
- Net loss increased by $530,057 year over year, despite lower operating expenses, largely reflecting the swing from a derivative fair-value gain in 2015 to a loss in 2016.
- During the quarter, the company issued shares and warrants in an offering and over-allotment, and received $1,397,679 from warrant exercises. Shares outstanding increased to 84,323,934 at June 30, from 72,193,209 at March 31.
- The company revised its previously reported June 2015 results for non-employee stock compensation: R&D expense and net loss each increased by $149,898. Management said the revision was not material to that interim period but could have materially misstated fiscal 2016 results if left uncorrected.
Outlook, risks, and controls
Management stated that the $7.97 million cash balance was not expected to fund operating and capital needs through March 31, 2017. The company expects further losses and cash outflows and plans to use existing cash and seek additional equity or debt financing; there is no assurance funding will be available on acceptable terms. The filing identifies substantial doubt about the company’s ability to continue as a going concern. Commercial revenue depends on, among other things, completing the clinical trial, obtaining FDA clearance, manufacturing a commercially viable device, and securing customer orders.
- The USAMRMC cost-sharing contract may reimburse up to $2,996,244, approximately 62% of estimated registrational-trial costs; $1,628,627 had been received by June 30, 2016. The contract could expire December 31, 2016, and management was seeking an extension into 2017.
- Wicab had challenged the validity and inventorship of two PoNS-related patents and could pursue U.S. Patent Office proceedings. The company said an adverse result could impair its intellectual-property position; it considered the likelihood of an economic outlay remote.
- A contractual penalty of $2 million may apply if the company fails to meet specified FDA-clearance or U.S. Government availability conditions for PoNS by December 31, 2017, subject to a stated exemption. Management considered the likelihood of payment remote.
- Disclosure controls were ineffective as of June 30, 2016. Management cited a material weakness in warrant-classification controls and insufficient technical accounting expertise, and said remediation was ongoing.
- Management reported no material changes to risk factors previously disclosed in its fiscal 2016 Form 10-K.
Important facts for investors to verify
- Confirm that Helius Medical Technologies—not Solana Co.—is the intended issuer and that the June 30, 2016 quarter is the intended reporting period.
- Review the financing runway, cash burn, and prospects and terms for additional capital, given management’s stated funding shortfall through fiscal year-end.
- Track clinical-trial timing, any USAMRMC contract extension, and the regulatory and manufacturing milestones required for commercialization.
- Assess the status of the Wicab patent dispute and the $2 million contractual penalty conditions.
- Review remediation of the disclosed control weaknesses and the accounting judgments underlying derivative fair values and the prior-period revision.