Solana Co: Form 10-Q for the period ended Sep 30, 2023

Unless otherwise specified or the context otherwise requires, references to “we,” “us,” “our,” “Helius” or “Company” mean Helius Medical Technologies, Inc. and its wholly owned operating subsidiaries, Helius Medical, Inc. (“HMI”) and Helius Medical Technologies (Canada), Inc. (“HMC”). 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 year ended December 31, 2022, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) on March 9, 2023 (the “2022 10-K”). All financial information is stated in U.S. dollars unless otherwise specified. Our Unaudited 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 the Company’s market, strategy, competition, capital needs, business plans and expectations. 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. Forward-looking statements are made, without limitation, in relation to the Company’s future growth and operational progress including expected enrollment, receipt of prescriptions and progress of commercialization of the PoNS device in the U.S., the impacts of the current global macroeconomic environment on the Company, the issuance by CMS of rules regarding coverage of emerging technologies, clinical development plans, product development activities, the safety and effectiveness of the Company’s product, the manufacturing plans for the Company’s product, sufficiency of cash and availability of funds, and operating costs. Such forward-looking statements involve risks and uncertainties, known and unknown, including capital requirements to achieve the Company’s business objectives, the impact on the Company of global macroeconomic conditions including effects from supply chain constraints, logistics challenges, labor shortages, disruptions in the banking system and financial markets, high levels of inflation and increased interest rates on the Company’s ability to operate its business and access capital markets, the success of the Company’s business plan, including the Company’s ability to secure contracts with rehabilitation clinics, obtain national Medicare coverage and a reimbursement code so that the PoNS device is covered by Medicare and Medicaid, to build internal commercial infrastructure, secure state distribution licenses, build a commercial team and build relationships with Key Opinion Leaders, neurology experts and neurorehabilitation centers, market awareness of the PoNS device, availability of funds, manufacturing, the Company’s ability to maintain and enforce its intellectual property rights, clinical trials and the clinical development process, the product development process, the regulatory submission review and approval process, the Company’s operating costs and use of cash, and the Company’s ability to achieve significant revenues and other factors discussed in the section entitled “Item 1A. Risk Factors” in our 2022 10-K and those described from time to time in the Company’s future reports filed with the SEC. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith, based on information available to the Company as of the date hereof, and reflect the Company’s current judgment regarding its business plans, Helius cannot guarantee future results, events, levels of activity, performance or achievement and its actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. The Company does not intend, and undertakes no obligation, to update or revise any of the forward-looking statements as a result of new information, future events or otherwise or to conform these statements to actual results, except as required by applicable law, including the securities laws of the United States.

The following discussion and analysis of the Company’s 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.

Company Overview

We are a neurotechnology company focused on neurological wellness. Our purpose is to develop, license or acquire non-implantable technologies targeted at reducing symptoms of neurological disease or trauma.

Our product, known as the Portable Neuromodulation Stimulator, or PoNS®, is an innovative non-implantable medical device, inclusive of a controller and mouthpiece, which delivers mild electrical stimulation to the surface of the tongue to provide treatment of gait deficit and chronic balance deficit. PoNS TherapyTM is integral to the overall PoNS solution and is the physical therapy applied by patients during use of the PoNS neuromodulation stimulator. PoNS has marketing clearance in the U.S. for use as a short-term treatment of gait deficit due to mild-to-moderate symptoms for MS, and is to be used as an adjunct to a supervised therapeutic exercise program in patients 22 years of age and over by prescription only. We began accepting prescriptions for PoNS in the U.S. in March 2022, and commercial sales of PoNS commenced in April 2022. PoNS is authorized for sale in Canada for three indications: (i) as a short term treatment (14 weeks) of chronic balance deficit due to mild-to-moderate traumatic brain injury, or mmTBI, and is to be used in conjunction with physical therapy; (ii) as a short term treatment (14 weeks) of gait deficit due to mild and moderate symptoms from MS and it is to be used in conjunction with physical therapy; and (iii) as a short term treatment (14 weeks) of gait deficit due to mild and moderate symptoms from stroke, to be used in conjunction with physical therapy. It has been commercially available in Canada since March 2019. PoNS is authorized for sale as a Class IIa medical device in Australia and we have been seeking a business partner to commercialize and distribute PoNS in Australia.

Recent Developments

Corporate Updates

On September 28, 2023, the Company announced that Wolters Kluwer Health – Medi-Span® assigned universal product code numbers to the Company’s PoNS system and mouthpiece. The NDC/UPC/HRI codes for the PoNS system is 64288-00046 at $25,700 and the PoNS mouthpiece is 64288-00043 at $7,900.

On August 31, 2023, we received formal notification (the “Notification”) from Nasdaq confirming that we have regained compliance, and that we satisfy all other applicable criteria for continued listing on the Nasdaq Stock Market. On March 21, 2023, we received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying the Company that Nasdaq granted the Company a 180-day extension, until September 18, 2023, to regain compliance with the requirement for the Company’s Class A common stock (“Common Stock”), to maintain a minimum bid price of $1.00 per share for continued listing on the Nasdaq Stock Market, as set forth in Nasdaq Listing Rule 5550(a)(2). As a result of the determination, the listing matter is closed.

At the annual meeting of stockholders on May 24, 2023, stockholders voted to approve a reverse stock split of our outstanding Common Stock at a ratio in the range of 1-for-10 to 1-for-80 to be determined at the discretion of the Company’s Board of Directors. Effective 5:00 p.m. on August 16, 2023, the company completed a 1-for-50 reverse stock split of its Common Stock. All share and per share amounts in this Quarterly Report have been reflected on a post-split basis.

On August 11, 2023, our Board of Directors approved a 1-for-50 reverse stock split of the Company’s issued and outstanding shares of Common Stock (the “Reverse Stock Split”) effective August 16, 2023. On August 15, 2023, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to its Certificate of Incorporation to effect the Reverse Stock Split. The Reverse Stock Split became effective as of 5:00 p.m. Eastern Time on August 16, 2023, and the Company’s Common Stock began trading on a split-adjusted basis when the Nasdaq Stock Market opened on August 17, 2023.

During the third quarter of 2023, the Company began implementing the transition of the manufacturing of PoNS systems and mouthpieces to Minnetronix, Inc. from its current contract manufacturer, Key Tronic Corporation. The Company expects the bulk of this transition to be completed by the end of 2023 and fully completed by mid-2024.

Presently, PoNS Therapy is not covered by Center for Medicare and Medicaid (“CMS”) or reimbursed by any third-party payers in the U.S. We are pursuing commercial insurance coverage and Medicare reimbursement for PoNS within the Durable Medical Equipment, or DME, benefit category. While there are currently no applicable Healthcare Common Procedure Coding System, or HCPCS, codes to describe the PoNS device or mouthpiece, we intend to use miscellaneous codes – E1399 (Miscellaneous durable medical equipment) and A9999 (Miscellaneous DME supply or accessory, not otherwise specified) until specific HCPCS codes are created. We initially applied for unique HCPCS codes during the third quarter of 2021. In order to address CMS’s request for additional information to “further understand the PoNS device indication for use,” we decided to move forward and collect additional clinical and real-world data. As such, through our ongoing PoNSTEP study and ongoing registry program, in the second quarter of 2023, resubmitted for unique HCPCS codes upon availability of a body of evidence that we consider adequate and sufficient to address CMS’s questions. We expect to receive a preliminary response to our application from CMS in the fourth quarter of 2023.

We will continue to monitor the development of CMS’s new pathway for coverage of innovative new devices, Transitional Coverage of Emerging Technology (“TCET”), which is replacing the repealed Medicare Coverage of Innovative Technologies rule. CMS is expected to provide additional information about TCET to the public for comments in 2023. As we follow the evolution of TCET, we will continue to assess our evidence generation strategy to reach the greatest potential to gain CMS reimbursement benefits as a result of our Breakthrough designation in MS.

We also intend to provide broad access and reimbursement for the PoNS Therapy over time through commercial insurers. Prior to the initiation of CMS or broad commercial payer coverage, we anticipate the primary source of sales will be self-pay patients. We expect to support the cost of the PoNS Therapy by offering a cash pay discount, collaborating with third parties to provide self-pay patients with financing options as well as working with advocacy groups and charitable organizations to help self-pay patients access our technology. In general, we anticipate that it will take at least 24 months to obtain broad coverage and reimbursement among government and private payers.

Our Patient Therapy Access Program (“PTAP”), launched in June 2022 and effective through June 2023, provided qualifying patients access to PoNS therapy at a significantly reduced price. The PTAP was not renewed and terminated on June 30, 2023.

Material Trends and Uncertainties

Global Economic Conditions

Generally, worldwide economic conditions remain uncertain, particularly due to the conflicts between Russia and Ukraine, as well as in the Middle East between Israel and Hamas, disruptions in the banking system and financial markets and increased inflation. The general economic and capital market conditions both in the U.S. and worldwide, have been volatile in the past and at times have adversely affected our access to capital and increased the cost of capital. The capital and credit markets may not be available to support future capital raising activity on favorable terms. If economic conditions decline, our future cost of equity or debt capital and access to the capital markets could be adversely affected.

Changes in economic conditions, supply chain constraints, logistics challenges, labor shortages, the conflicts in Ukraine and the Middle East, disruptions in the banking system and financial markets, high levels of inflation and an increase in interest rates have increased costs and have had and may continue to have a negative impact on the Company’s business. Although we have taken and may continue to take measures to mitigate these impacts, if these measures are not effective, our business, financial condition, results of operations, and liquidity could be materially adversely affected.

Results of Operations

Three Months Ended September 30, 2023 compared to the Three Months Ended September 30, 2022

The following table summarizes our results of operations for the three months ended September 30, 2023 and 2022 (in thousands):

Revenue

The decrease in net product sales for the three months ended September 30, 2023 as compared with the same period in the prior year 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.

Cost of Revenue

The increase in cost of revenue for the three months ended September 30, 2023 as compared with the same period in the prior year is due to fixed overhead costs, which were primarily comprised of salaries and benefits of employees involved in management of the supply chain and certain production costs.

Gross Profit (Loss)

Gross loss for the three months ended September 30, 2023 was $44 thousand compared to gross profit of $95 thousand for the same period in the prior year. This was a result of reduced absorption of fixed overhead costs across the lower unit volume of PoNS system sales in the third quarter of 2023 as compared to the prior year comparable period.

Selling, General and Administrative Expense

The decrease in selling, general and administrative expenses in the third quarter of 2023 as compared to 2022 resulted primarily from a $1.2 million decrease in performance based stock-based compensation, partially offset by a $0.2 million increase in salaries and wages during the current year period.

Research and Development Expense

Research and development expense was relatively flat year-to-year and was primarily comprised of clinical research and support.

Amortization Expense

Amortization expense was primarily comprised of the amortization of acquired finite-lived intangible assets. The change in amortization expense period over period is primarily due to certain intangible assets becoming fully amortized.

Goodwill and Fixed Asset Impairment

During the three months ended September 30, 2023, we recorded an impairment of $159 thousand for certain machinery used in the production of our inventory. During the three months ended September 30, 2022, we recorded a goodwill impairment charge of $757 thousand, reducing the goodwill balance to zero.

Nonoperating income (expense)

Interest Income (Expense), Net

Net interest income for the three months ended September 30, 2023 was primarily attributable to interest income earned on investments of excess cash in an unrestricted money market savings account, money market mutual funds, treasury bills and a certificate of deposit.

Change in Fair Value of Derivative Liability

As discussed in more detail in Note 6 to our Unaudited Condensed Consolidated Financial Statements, the warrants issued in connection with the public offering completed on August 9, 2022 are being accounted for as a derivative liability instrument. The decrease in the change in fair value of derivative liability for the three months ended September 30, 2023 of $0.4 million was primarily due to the effect of the exercise price reset of the Public Warrants following the Reverse Stock Split.

Foreign Exchange (Loss) Gain

The change in foreign exchange (loss) gain was primarily due to fluctuations in the Canadian to U.S. dollar exchange rates.

Nine Months Ended September 30, 2023 compared to the Nine Months Ended September 30, 2022

The following table summarizes our results of operations for the nine months ended September 30, 2023 and 2022 (in thousands):

Revenue

Net product sales of PoNS systems in the U.S. increased for the nine months ended September 30, 2023 as compared with the same period in the prior year, primarily attributable to patients’ efforts to secure favorable PTAP pricing prior to the termination of PTAP on June 30, 2023 as well as the fact that commercial product sales in the United States did not commence until April 2022. This increase was offset by lower Canada product sales resulting mostly from prior year sales including approximately $120 thousand of revenue recognized in connection with the delivery of the remaining 16 PoNS devices that had been included as noncash consideration in the Company’s acquisition of Heuro Canada, Inc.

Cost of Revenue

The increase in cost of revenue for the nine months ended September 30, 2023 as compared to the prior year was primarily attributable to increased fixed overhead costs, which were primarily comprised of salaries and benefits of employees involved in management of the supply chain.

Gross Profit

Gross profit for the nine months ended September 30, 2023, decreased compared to the same period in the prior year. The decrease in gross profit resulted primarily from the increase in fixed overhead costs year over year, and a greater mix of lower margin PoNS system sales under the PTAP in the U.S. during the current year period.

Selling, General and Administrative Expense

The decrease in selling, general and administrative expenses for the nine months ended September 30, 2023 was primarily the result of a decrease in stock-based compensation of $0.8 million along with decreased personnel costs of $0.4 million and a decrease in insurance of $0.2 million, offset by an increase of $0.3 million in professional services.

Research and Development Expense

The decrease in research and development expenses was driven primarily by a decrease in product development expenses and clinical trial activities as we transitioned our focus from product development and clinical trials to U.S. commercialization activities.

Amortization Expense

Amortization expense was primarily comprised of the amortization of acquired finite-lived intangible assets. The change in amortization expense period over period is primarily due to certain intangible assets becoming fully amortized.

Nonoperating income (expense)

Interest Income (Expense), Net

Net interest income for the nine months ended September 30, 2023 was primarily attributable to interest income earned on investments of excess cash in an unrestricted money market savings account, money market mutual funds, treasury bills and a certificate of deposit.

Change in Fair Value of Derivative Liability

As discussed in more detail in Note 6 to our Unaudited Condensed Consolidated Financial Statements, the warrants issued in connection with the public offering completed on August 9, 2022 are being accounted for as a derivative liability instrument. The change in fair value of derivative liability for the nine months ended September 30, 2023 of $2.0 million was due to a decrease in our stock price, partially offset by the effect of the exercise price reset on the Public Warrants due to the Reverse Stock Split.

Foreign Exchange (Loss) Gain

The change in foreign exchange (loss) gain was primarily due to fluctuations in the Canadian to U.S. dollar exchange rates.

Liquidity and Capital Resources

The following table summarizes our cash and cash equivalents and working capital as of the end of the periods indicated in the table below (in thousands):

Our available capital resources have been primarily used to expand our U.S. commercialization efforts, fund manufacturing activities for the PoNS device, conduct clinical trials and for working capital and general corporate purposes. Our primary sources of cash and cash equivalents have been proceeds from public and private offerings of our Common Stock, which most recently included $16.3 million in net proceeds we received from a public offering of our Common Stock and warrants completed in August 2022 (“August 2022 Public Offering”) as discussed in more detail in Note 8 to our Consolidated Financial Statements included our 2022 10-K. As discussed in more detail in Note 6 to our Unaudited Condensed Consolidated Financial Statements, the Company entered into a sales agreement related to our at-the-market offering program (“ATM”) under which we may offer and sell shares having gross proceeds up to $2.0 million. During the three months ended September 30, 2023 the Company issued and sold shares with gross proceeds of $0.3 million under the ATM. As discussed in more detail in Note 6, the Company received gross proceeds of $0.2 million from the issuance of shares upon the exercise of warrants in the three months ended September 30, 2023.

Statement of Cash Flows

The following table summarizes our cash flows for the nine months ended September 30, 2023 and 2022 (in thousands):

Net Cash Used in Operating Activities

The lower level of cash used in operating activities in the nine months ended September 30, 2023 primarily resulted from the decrease in selling, general and administrative expenses and research and development expenses as compared with the same period in the prior year.

Net Cash Used in Investing Activities

Our investing activities are primarily related to the purchases of property and equipment.

Net Cash Provided by Financing Activities

During the nine months ended September 30, 2023, we received net proceeds of $0.3 million from the issuance and sale of shares under the ATM. In addition, we received $0.2 million in net proceeds from the exercise of warrants.

Net cash provided by financing activities during the nine months ended September 30, 2022 was $16.9 million, which consisted of $16.3 million in aggregate net proceeds from the issuances of Common Stock in the February 2021 public offering of Common Stock and under the Purchase Agreement, dated September 1, 2021, with Lincoln Park Capital Fund, LLC and $1.3 million from the exercise of warrants and stock options.

Cash Requirements

Our ability to generate product revenues sufficient to achieve profitability will depend heavily on the successful commercialization of PoNS Therapy in the U.S. Our net loss was $7.8 million and $9.2 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, we had an accumulated deficit of $158.9 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. These and other factors indicate substantial doubt about our ability to continue as a going concern. Refer to Note 1 to our Unaudited Condensed Consolidated Financial Statements for additional discussion about our going concern uncertainty.

We intend to use our available capital resources primarily to expand our U.S. commercialization efforts, fund manufacturing activities for the PoNS device, conduct clinical trials and for working capital and general corporate purposes. We believe that our existing capital resources will be sufficient to fund our operations through 2023, but we will be required to seek additional funding through the sale of equity or debt financing to continue to fund our operations thereafter. We will need additional funding for our planned clinical trial for stroke. The amount required to fund operations thereafter will depend on various factors, including timing of approval of clinical trials, duration and result of clinical trials and other factors that affect the cost of the clinical trial, manufacturing costs of product, development of our product for new indications and demand for our authorized products in the market.

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.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our Unaudited Condensed Consolidated 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 2022 10-K. There have been no changes in critical accounting policies in the current year from those described in our 2022 10-K.

Recently Issued Accounting Pronouncements

The information set forth in Note 2 to our Unaudited Condensed Consolidated Financial Statements under Part I, Item 1, “Condensed Consolidated Financial Statements” is incorporated herein by reference.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, under the direction of our Chief Executive Officer and our Chief Financial Officer, we have evaluated our 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 have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Our management has concluded that the financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with generally accepted accounting principles.

Changes in Internal Control over Financial Reporting

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 our internal control over financial reporting.

Our business is subject to risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our securities. During the nine months ended September 30, 2023, our risk factors have not changed materially from those risk factors previously disclosed in our 2022 10-K except as set forth below. You should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our 2022 10-K. The risks described in our 2022 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

We are currently in the process of transitioning our manufacturing functions to a new contract manufacturer and any delays in the manufacturing process as a result of this transition could harm our business.

We have depended on our third-party contract manufacturing partner, Key Tronic Corporation, to manufacture and supply our PoNS device for clinical and commercial purposes. During the third quarter of 2023, the Company began implementing the transition of the manufacturing of PoNS systems and mouthpieces to Minnetronix, Inc. While the Company expects this transition to be fully completed by mid-2024, it is possible that the transition could create delays or disruptions in the manufacturing process. Any delays or disruptions in the manufacturing of our PoNS device during this transition could negatively impact our business.