Filing summary
Issuer clarification: The supplied filing is Helius Medical Technologies, Inc.’s Form 10-Q, not a filing for Solana Co. It covers the quarter and nine months ended September 30, 2017. Financial amounts below are in U.S. dollars unless noted.
Business context and reporting period
Helius is a pre-revenue medical technology company developing the PoNS device and therapy platform for neurological symptoms. Its principal program targets chronic balance deficits associated with mild-to-moderate traumatic brain injury (TBI). The financial statements are unaudited and prepared under U.S. GAAP.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development | $3.8 million | $1.4 million | $11.1 million | $3.2 million |
| General and administrative | $2.2 million | $2.0 million | $5.9 million | $5.2 million |
| Operating loss | $6.0 million | $3.4 million | $17.0 million | $8.4 million |
| Net loss | $12.9 million | $3.0 million | $24.3 million | $9.9 million |
| Loss per share, basic and diluted | $0.13 | $0.04 | $0.26 | $0.12 |
| Operating cash used | Not provided for quarter | Not provided for quarter | $14.2 million | $5.8 million |
No revenue was reported, so a revenue margin is not meaningful. Q3 net loss included a $6.0 million noncash loss from changes in derivative fair value and a $1.0 million foreign-exchange loss. For the nine months, the corresponding losses were $5.5 million and $1.9 million.
At September 30, 2017, cash was $2.6 million, current assets were $3.6 million, and current liabilities were $13.9 million, including $9.9 million of derivative financial instrument liabilities. Working capital excluding those noncash derivative liabilities was negative $0.4 million. Total liabilities were $13.9 million and stockholders’ deficit was $10.1 million. The filing reports no conventional debt balance; derivative liabilities are not characterized as borrowings.
Nine-month investing cash use was $0.2 million, primarily for office leasehold improvements. Financing provided $14.2 million, principally from the February public offering, June private placement, and exercises of options and warrants. Cash declined by $0.1 million from year-end 2016. The company reported 96.4 million shares outstanding at quarter-end and 96.5 million as of November 7, 2017.
Material changes versus prior comparable periods
- Nine-month R&D expense increased $8.0 million, mainly from clinical-trial device manufacturing and design/testing ($5.6 million), the registrational TBI trial ($2.8 million), and regulatory work; Army cost-sharing reimbursements partly offset costs.
- Nine-month operating loss increased $8.6 million and net loss increased $14.4 million year over year. The larger net loss also reflected increased derivative fair-value and foreign-exchange losses.
- Cash used in operations rose by $8.5 million year over year. Equity financing supported operations, but cash remained low and working capital excluding derivative liabilities turned negative.
- Accounts payable increased to $3.6 million from $2.2 million at December 31, 2016; derivative liabilities increased to $9.9 million from $4.5 million.
Outlook, risks, contingencies, and unusual items
- Going concern: Management stated that substantial doubt exists about the company’s ability to continue as a going concern. It expected September 30 cash to fund current operations only into December 2017 and said substantial additional financing was required. Failure to raise capital could force reduced operations, asset sales, or cessation of operations.
- Clinical and regulatory outlook: The company completed its registrational TBI trial in Q3. Results announced November 9, after quarter-end, showed a 75.4% responder rate for high-frequency treatment versus 60.7% for low-frequency treatment; the primary endpoint was not met because the low-frequency control also had a significant therapeutic effect. Combined groups improved mean SOT scores by 18.3 points at two weeks and 24.6 points at five weeks; no device-related serious adverse events were reported. The company expected to submit to FDA in the first half of 2018 and anticipated possible FDA clearance in the second half of 2018, assuming a 120-day review. These are expectations, not assurances.
- Army agreements and contingency: The Army cost-sharing agreement reimbursed up to $3.0 million; $2.7 million had been received by September 30. The agreement was later extended to December 31, 2018. An October 30 amendment extended the related U.S. government availability/FDA authorization deadline to December 31, 2021; a potential $2.0 million contractual penalty was assessed by the company as remote.
- Fraud and controls: A business-email-compromise fraud caused an approximately $0.2 million loss in Q3; no funds had been recovered by the filing date. Management concluded disclosure controls were ineffective due to a material weakness in internal control over financial reporting. Payment-verification controls were enhanced, but remediation was ongoing and not assured.
- Other commitments: The company entered a Newtown office lease with future minimum payments of $1.3 million. Its technology license includes a 4% royalty on specified future net revenue; no royalty payments had been made. A prior Mackie litigation claim was settled in April 2017 for an amount described as insignificant.
- Equity-linked valuation risk: Derivative liabilities are Level 3 fair-value measurements based on significant unobservable inputs. Changes in share price and volatility can materially affect reported earnings without corresponding cash flows.
Important facts for investors to verify
- Confirm issuer identity: the filing is for Helius Medical Technologies, Inc., despite the request metadata naming Solana Co.
- Review post-quarter financing and cash runway; the filing states existing cash was expected to last only into December 2017.
- Track FDA submission and clearance milestones, manufacturing readiness, and the clinical interpretation of the trial’s missed primary endpoint.
- Assess whether the $0.2 million fraud loss is recoverable and whether internal-control weaknesses have been remediated.
- Monitor the assumptions and potential volatility of the $9.9 million derivative liability, along with share issuance and dilution.