Helius Medical Technologies(HSDT) - 2023 Q3 - Quarterly Report

Part I. Financial Information Presents Helius Medical Technologies' unaudited condensed consolidated financial statements and explanatory notes Item 1. Condensed Consolidated Financial Statements Provides Helius Medical Technologies' unaudited condensed consolidated financial statements and related notes for the reporting period Unaudited Condensed Consolidated Balance Sheets Presents the company's financial position, detailing assets, liabilities, and equity at specific reporting dates Condensed Consolidated Balance Sheets Highlights (in thousands) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------- | :----------------- | :----------------- | | Cash and cash equivalents | $6,596 | $14,549 | | Total current assets | $8,576 | $16,697 | | Total assets | $8,854 | $17,287 | | Total current liabilities | $1,435 | $1,988 | | Derivative liability | $4,239 | $6,917 | | Total liabilities | $5,833 | $9,136 | | Total stockholders' equity | $3,021 | $8,151 | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss Details the company's revenues, expenses, and net loss over the specified reporting periods Condensed Consolidated Statements of Operations and Comprehensive Loss Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total revenue | $143 | $196 | $510 | $505 | | Gross profit (loss) | $(44) | $95 | $17 | $192 | | Loss from operations | $(3,153) | $(4,853) | $(10,182) | $(12,847) | | Net loss | $(3,663) | $(1,030) | $(7,805) | $(9,186) | | Basic Loss per share | $(5.49) | $(2.90) | $(13.60) | $(53.77) | Unaudited Condensed Consolidated Statements of Stockholders' Equity Outlines changes in the company's equity accounts, including common stock and accumulated deficit Condensed Consolidated Statements of Stockholders' Equity Highlights (in thousands, except share data) | Metric | Balance as of July 1, 2023 | Balance as of September 30, 2023 | Balance as of January 1, 2023 | | :-------------------------------- | :------------------------- | :--------------------------- | :-------------------------- | | Class A Common Stock (Shares) | 565,358 | 687,799 | 564,094 | | Additional Paid-In Capital | $160,470 | $162,391 | $159,645 | | Accumulated Deficit | $(155,249) | $(158,912) | $(151,107) | | Total Stockholders' Equity | $4,572 | $3,021 | $8,151 | - Issuance of common stock in public offering generated $284 thousand in additional paid-in capital for the nine months ended September 30, 2023[11] - Exercise of warrants contributed $1,270 thousand to additional paid-in capital for the nine months ended September 30, 2023[11] Unaudited Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | Change | | :------------------------------------ | :----------------------------- | :----------------------------- | :----- | | Net cash used in operating activities | $(8,382) | $(12,167) | $3,785 | | Net cash used in investing activities | $(26) | $(13) | $(13) | | Net cash provided by financing activities | $455 | $17,869 | $(17,414) | | Net increase (decrease) in cash | $(7,953) | $5,683 | $(13,636) | | Cash and cash equivalents at end of period | $6,596 | $16,688 | $(10,092) | Notes to Unaudited Condensed Consolidated Financial Statements Provides detailed explanations of accounting policies, significant transactions, and financial statement items 1. BASIS OF PRESENTATION Explains the foundational principles and significant events impacting the financial statement presentation - The company completed a 1-for-50 reverse stock split effective August 16, 2023, retroactively adjusting all share and per share amounts[15][16] - As of September 30, 2023, the company had $7.0 million in cash and warrant proceeds, an operating loss of $10.2 million for the nine months, and an accumulated deficit of $158.9 million, indicating substantial doubt about its ability to continue as a going concern[17] - The company plans to fund ongoing activities by utilizing current cash, sales of its PoNS device, and raising additional capital through equity or debt financings, with no assurance of success[19] 2. RECENT ACCOUNTING PRONOUNCEMENTS Discusses the impact of newly adopted accounting standards on the company's financial reporting - The adoption of Accounting Standards Update 2016-13, effective January 1, 2023, for smaller reporting companies, did not have a material impact on the company's unaudited condensed consolidated financial statements[23] 3. SUPPLEMENTAL BALANCE SHEET DISCLOSURES Provides additional detail on specific balance sheet accounts like inventory and prepaid expenses Inventory, net (in thousands) | Metric | September 30, 2023 | December 31, 2022 | | :---------------- | :----------------- | :----------------- | | Raw materials | $347 | $344 | | Work-in-process | $87 | $284 | | Finished goods | $153 | $39 | | Inventory, net | $521 | $589 | Prepaid expenses and other current assets (in thousands) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :----------------- | :----------------- | | Prepaid expenses | $421 | $817 | | Inventory related | $312 | $399 | | Deferred offering costs | $160 | $0 | | Total | $893 | $1,216 | Accrued and other current liabilities (in thousands) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------- | :----------------- | :----------------- | | Insurance payable | $0 | $592 | | Employees benefits | $602 | $509 | | Professional services | $42 | $119 | | Franchise tax | $126 | $0 | | Other | $79 | $60 | | Total | $849 | $1,280 | - The company granted Health Tech Connex Inc. (HTC) exclusive rights to provide PoNS Therapy in specific regions of British Columbia through an Exclusive Distribution Agreement, with deferred revenue from a previous agreement[28][29] 4. LEASES Details the company's operating lease commitments and related financial obligations - The company has two operating leases for office space with terms expiring in January 2024 and March 2025[30] Maturities of operating lease liabilities as of September 30, 2023 (in thousands) | Year | Amount | | :---------------- | :----- | | 2023 (remaining) | $14 | | 2024 | $46 | | 2025 | $12 | | Total lease payments | $72 | 5. FAIR VALUE MEASUREMENTS Describes the valuation methodologies and classifications for assets and liabilities measured at fair value - The company's derivative liability, primarily from warrants issued in the August 2022 Public Offering, is classified as Level 3 within the fair value hierarchy and is recorded at fair value on a recurring basis[36] 6. COMMON STOCK, PREFERRED STOCK AND WARRANTS Outlines transactions and characteristics related to the company's equity and warrant instruments - The company entered into an At-The-Market (ATM) offering program for up to $2.0 million, generating $0.3 million in net proceeds from 27,875 share issuances as of September 30, 2023[39] - Series B Preferred Stock was issued to facilitate a reverse stock split vote, granting 1,000,000 votes per share, and was largely redeemed after the stockholders approved the reverse stock split[40][42][46] - Public Warrants from the August 2022 offering are classified as a derivative liability (Level 3) due to potential price resets, with their exercise price reset to $6.9135 per share after the 1-for-50 reverse stock split[49][50] Fair Value Inputs for Warrants | Metric | September 30, 2023 | December 31, 2022 | | :-------------------- | :----------------- | :----------------- | | Stock price | $9.49 | $15.35 | | Warrant term (in years) | 3.86 | 4.61 | | Expected volatility | 88.70 % | 80.90 % | | Risk-free interest rate | 4.71 % | 4.04 % | | Dividend rate | 0.00 % | 0.00 % | - The fair value of the derivative liability decreased from $6.9 million as of December 31, 2022, to $4.2 million as of September 30, 2023[50] - 92,910 Public Warrants were exercised for $642 thousand in net proceeds during the nine months ended September 30, 2023, with $207 thousand received in cash and $435 thousand due from the transfer agent[50] 7. STOCK-BASED COMPENSATION Details the accounting for equity awards granted to employees and directors - The number of shares authorized for issuance under the 2022 Equity Incentive Plan increased from 22,425 to 264,319 on January 1, 2023[52] - During the nine months ended September 30, 2023, the company granted 223,268 stock options at a weighted average exercise price of $14.63 per share[53] Stock-Based Compensation Expense (in thousands) | Category | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost of sales | $0 | $5 | $4 | $11 | | Selling, general and administrative | $330 | $1,367 | $1,837 | $989 | | Research and development | $68 | $70 | $174 | $225 | | Total | $403 | $1,441 | $1,228 | $2,022 | - As of September 30, 2023, the total remaining unrecognized compensation expense related to nonvested stock options and restricted stock units was $2.9 million, to be amortized over a weighted-average remaining service period of 1.1 years[56] 8. BASIC AND DILUTED LOSS PER SHARE Presents the calculation of net loss per share, considering potential dilution from equity instruments Loss Per Share (in thousands, except share and per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss available to common stockholders | $(3,663) | $(1,030) | $(7,805) | $(9,186) | | Weighted average common shares outstanding | 667,809 | 355,754 | 573,950 | 170,823 | | Loss per share - basic/diluted | $(5.49) | $(2.90) | $(13.60) | $(53.77) | - Stock options, restricted stock units, and warrants were excluded from diluted net loss per share computations as they would have been anti-dilutive due to the net loss in each period[59][60] 9. COMMITMENTS AND CONTINGENCIES Discloses the company's contractual obligations and potential future liabilities - The company is obligated to pay a 4% royalty on net revenue from the sale of devices covered by patent-pending technology under a license agreement with Advanced NeuroRehabilitation, LLC[61] Royalty Expense from Device Sales (in thousands) | Period | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Royalty expense | $5 | $19 | $8 | $20 | 10. ENTERPRISE-WIDE DISCLOSURES Provides information on the company's operating segments and revenue disaggregation by geographic area - The company operates and manages its business within one operating and reportable segment related to the sale of PoNS devices directly to patients in the United States and to clinics in Canada[62] Revenue Disaggregated by Geographic Area (in thousands) | Region | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | United States | $60 | $139 | $310 | $202 | | Canada | $72 | $56 | $172 | $295 | | Total product sales, net | $132 | $195 | $482 | $497 | | Other revenue | $11 | $1 | $28 | $8 | | Total revenue | $143 | $196 | $510 | $505 | - Two customers accounted for 91% and 57% of net product sales for the three and nine months ended September 30, 2023, respectively, indicating significant customer concentration[64] 11. GOODWILL AND FIXED ASSET IMPAIRMENT Discusses impairment charges recognized for goodwill and long-lived tangible assets - An impairment charge of $159 thousand was recorded in the third quarter of 2023 for certain long-lived tangible assets due to a planned change in the company's contract manufacturing partner[65] - A goodwill impairment charge of $757 thousand was recorded as of September 30, 2022, reducing the goodwill balance to zero, triggered by a significant decline in the company's common stock price following its August 2022 public offering[66][67] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, liquidity, and critical accounting policies Company Overview Introduces Helius Medical Technologies and its primary neurotechnology product, PoNS - Helius Medical Technologies is a neurotechnology company focused on developing, licensing, or acquiring non-implantable technologies aimed at reducing symptoms of neurological disease or trauma[73] - The company's primary product, PoNS® (Portable Neuromodulation Stimulator), is a non-implantable medical device cleared in the U.S. for short-term treatment of gait deficit due to mild-to-moderate MS symptoms (adjunct to physical therapy) and authorized for sale in Canada for chronic balance deficit due to mmTBI, gait deficit due to MS, and gait deficit due to stroke[74] Recent Developments Highlights key corporate events and operational changes impacting the company - Wolters Kluwer Health – Medi-Span® assigned universal product code numbers to the PoNS system ($25,700) and mouthpiece ($7,900) on September 28, 2023[75] - The company regained compliance with Nasdaq's minimum bid price requirement on August 31, 2023, following a 1-for-50 reverse stock split effective August 16, 2023[76][77][78] - The manufacturing of PoNS systems and mouthpieces is transitioning from Key Tronic Corporation to Minnetronix, Inc., with the bulk of the transition expected by the end of 2023 and full completion by mid-2024[79] - PoNS Therapy is not currently covered by CMS or reimbursed by third-party payers in the U.S.; the company is pursuing commercial insurance coverage and Medicare reimbursement, resubmitting for unique HCPCS codes in Q2 2023, and expects a preliminary CMS response in Q4 2023[81] - The Patient Therapy Access Program (PTAP), which provided qualifying patients access to PoNS therapy at a significantly reduced price, terminated on June 30, 2023[84] Material Trends and Uncertainties Identifies significant economic and geopolitical factors influencing the company's business outlook - Global economic conditions, including geopolitical conflicts (Russia-Ukraine, Israel-Hamas), banking system disruptions, high inflation, and increased interest rates, create uncertainty and may adversely affect the company's access to capital, cost of capital, and overall business operations[85][86] Results of Operations (Three Months Ended September 30, 2023 compared to the Three Months Ended September 30, 2022) Analyzes the company's financial performance for the third quarter of 2023 compared to the prior year Q3 2023 vs Q3 2022 Financial Performance (in thousands) | Metric | Q3 2023 | Q3 2022 | Change | | :---------------------------------- | :------ | :------ | :----- | | Total revenue | $143 | $196 | $(53) | | Product sales, net (United States) | $60 | $139 | $(79) | | Product sales, net (Canada) | $72 | $56 | $16 | | Cost of revenue | $187 | $101 | $86 | | Gross profit (loss) | $(44) | $95 | $(139) | | Selling, general and administrative expenses | $2,196 | $3,393 | $(1,197) | | Research and development expenses | $722 | $751 | $(29) | | Loss from operations | $(3,153) | $(4,853) | $1,700 | | Net loss | $(3,663) | $(1,030) | $(2,633) | - The decrease in net product sales was primarily attributable to decreased unit sales of PoNS systems in the U.S. following the termination of the PTAP on June 30, 2023, partially offset by increased net product sales in Canada[88] - Gross loss for the three months ended September 30, 2023, was $44 thousand, compared to a gross profit of $95 thousand in the prior year, primarily due to reduced absorption of fixed overhead costs across lower unit volume of PoNS system sales[90] - Selling, general and administrative expenses decreased by $1.2 million, primarily due to a decrease in performance-based stock-based compensation[91] - The change in fair value of derivative liability decreased by $0.4 million, primarily due to the effect of the exercise price reset of the Public Warrants following the Reverse Stock Split[96] Results of Operations (Nine Months Ended September 30, 2023 compared to the Nine Months Ended September 30, 2022) Examines the company's financial performance for the nine months ended September 30, 2023, versus the prior year YTD Sep 30, 2023 vs 2022 Financial Performance (in thousands) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | Change | | :---------------------------------- | :----------------------------- | :----------------------------- | :----- | | Total revenue | $510 | $505 | $5 | | Product sales, net (United States) | $310 | $202 | $108 | | Product sales, net (Canada) | $172 | $295 | $(123) | | Cost of revenue | $493 | $313 | $180 | | Gross profit (loss) | $17 | $192 | $(175) | | Selling, general and administrative expenses | $7,639 | $8,673 | $(1,034) | | Research and development expenses | $2,292 | $3,468 | $(1,176) | | Loss from operations | $(10,182) | $(12,847) | $2,665 | | Net loss | $(7,805) | $(9,186) | $1,381 | - Net product sales in the U.S. increased due to patients securing favorable PTAP pricing prior to its termination and the later commencement of commercial sales in April 2022, while Canada product sales decreased, partly due to prior year sales including non-cash consideration from an acquisition[99] - Gross profit decreased by $175 thousand, primarily due to increased fixed overhead costs and a greater mix of lower-margin PoNS system sales under the PTAP in the U.S.[101] - Selling, general and administrative expenses decreased by $1.0 million, mainly from reduced stock-based compensation and personnel costs[102] - Research and development expenses decreased by $1.2 million, reflecting a transition in focus from product development and clinical trials to U.S. commercialization activities[103] - The change in fair value of derivative liability for the nine months ended September 30, 2023, was a gain of $2.0 million, primarily due to a decrease in the company's stock price, partially offset by the effect of the exercise price reset on the Public Warrants[106] Liquidity and Capital Resources Discusses the company's cash position, working capital, and funding sources Cash and Working Capital (in thousands) | Metric | September 30, 2023 | December 31, 2022 | | :------------------------ | :----------------- | :----------------- | | Cash and cash equivalents | $6,596 | $14,549 | | Working capital | $7,141 | $14,709 | - The company's primary sources of cash have been public and private offerings of common stock, including $0.3 million from an ATM program and $0.2 million from warrant exercises during the nine months ended September 30, 2023[109][113] - Net cash used in operating activities decreased by $3.8 million for the nine months ended September 30, 2023, primarily due to lower selling, general, administrative, and research and development expenses[110][111] - Net cash provided by financing activities significantly decreased from $17.9 million in the nine months ended September 30, 2022, to $0.5 million in the same period of 2023[110] Cash Requirements Outlines the company's future capital needs and going concern considerations - The company incurred net losses of $7.8 million and $9.2 million for the nine months ended September 30, 2023 and 2022, respectively, with an accumulated deficit of $158.9 million, indicating substantial doubt about its ability to continue as a going concern[117] - Existing capital resources are expected to fund operations through 2023, but additional funding through equity or debt financing will be required thereafter, especially for planned clinical trials for stroke[118] - Failure to raise sufficient additional capital may compel the company to reduce operations, sell assets, or potentially cease or liquidate operations[119] Critical Accounting Policies and Estimates Identifies accounting policies requiring significant judgment and estimation - There have been no material changes in critical accounting policies and estimates from those described in the company's 2022 Form 10-K[121] Recently Issued Accounting Pronouncements Refers to disclosures regarding new accounting standards impacting the financial statements - Information on recently issued accounting pronouncements is incorporated by reference from Note 2 to the Unaudited Condensed Consolidated Financial Statements[122] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that the company has no material quantitative or qualitative disclosures about market risk to report - This section is not applicable to the company[123] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of September 30, 2023, and reports no material changes in internal control over financial reporting during the period - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[124] - There has been no material change in the company's internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q[125] Part II. Other Information Provides additional disclosures not covered in the financial statements or management's discussion and analysis Item 1. Legal Proceedings This section states that the company is not currently a party to any material legal proceedings - The company is not currently a party to any material legal proceedings, nor is it aware of any pending or threatened legal proceedings that could have a material adverse effect on its business, operating results, or financial condition[126] Item 1A. Risk Factors This section refers to the risk factors previously disclosed in the company's 2022 Form 10-K, with an update regarding potential risks associated with the ongoing transition of manufacturing functions - Risk factors have not materially changed from those disclosed in the 2022 10-K, except for the added risk of potential delays or disruptions in the manufacturing process due to the ongoing transition of manufacturing functions to a new contract manufacturer, Minnetronix, Inc.[127][128] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates that there were no unregistered sales of equity securities or use of proceeds to report during the period - There were no unregistered sales of equity securities or use of proceeds to report[129] Item 3. Defaults Upon Senior Securities This section states that there are no defaults upon senior securities to report - This section is not applicable[130] Item 4. Mine Safety Disclosures This section states that there are no mine safety disclosures to report - This section is not applicable[131] Item 5. Other Information This section indicates that there is no other information to report - No other information to report[132] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, certifications, and XBRL data files - The exhibits include various corporate documents (e.g., Certificate of Amendment to Certificate of Incorporation, Bylaws), certifications (e.g., CEO and CFO certifications pursuant to Sarbanes-Oxley Act), and Inline XBRL data files[134] Signatures This section contains the official signatures of the company's principal executive and financial officers, certifying the accuracy of the report - The report is signed by Dane C. Andreeff (President and Chief Executive Officer) and Jeffrey S. Mathiesen (Chief Financial Officer, Treasurer and Secretary) on November 9, 2023[138]