| Significant Accounting Policies | 2.
SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s reporting currency is the U.S. Dollar (“USD$”). Use of Estimates The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosure of contingent assets and liabilities. Significant estimates include the assumptions used in the valuation of the fair value-pricing model for stock-based compensation, derivative financial instruments and deferred income tax asset valuation allowance. Financial statements include estimates, which, by their nature, are uncertain. Actual results could differ from those estimates. Principles of Consolidation The accompanying consolidated financial statements reflect the operations of Helius Medical Technologies, Inc. and its wholly owned subsidiaries. The usual condition for a controlling financial interest is ownership of a majority of the voting interests of an entity. However, a controlling financial interest may also exist through arrangements that do not involve controlling voting interests. As such, the Company applies the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 – Consolidation , Concentrations of Credit Risk The Company is subject to credit risk with respect to its cash. Amounts invested in such instruments are limited by credit rating, maturity, industry group, investment type and issuer. The Company maintains cash in excess of federally insured limits in certain banks. However, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk related to cash. 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 receivables are stated at their net realizable value. In determining the appropriate allowance for doubtful accounts, the Company considers a combination of factors, such as the aging of trade receivables, its customers’ financial strength, and payment history. Changes in these factors, among others, may lead to adjustments in the Company’s allowance for doubtful accounts. The calculation of the allowance requires judgment by Company management. As of December 31, 2021, the Company’s accounts receivable of $0.1 million, is net of an allowance for doubtful accounts of $0.4 million and is the result of revenue from product sales. As of December 31, 2020, the Company’s accounts receivable of $0.1 million, is net of an allowance for doubtful accounts of $0.4 million and is the result of revenue from product sales. Other receivables included Goods and Services Tax (“GST”), Quebec Sales Tax (“QST”) refunds related to the Company’s Canadian expenditures of $0.2 million, and refunds from research and development (“R&D”) tax credits of $1 thousand as of December 31, 2021. Other receivables included and GST and QST refunds related to the Company’s Canadian expenditures of $0.1 million refunds, from rent deposits of $18 thousand and receivable from R&D tax credits of $1 thousand as of December 31, 2020. Inventory The Company’s inventory consists of raw materials, work in progress and finished goods of the PoNS device. Inventory is stated at the lower of cost (average cost method) or net realizable value. Adjustments to reduce the cost of inventory to its net realizable value are made if required. The Company calculates provisions for excess inventory based on inventory on hand compared to anticipated sales or usage. Management uses its judgment to forecast sales or usage and to determine what constitutes a reasonable period. There can be no assurance that the amount ultimately realized for inventories will not be materially different than that assumed in the calculation of the reserves. No inventory markdowns to net realizable value were recorded during the year ended December 31, 2021. Inventory markdowns to net realizable value of $205 thousand were recorded during the year ended December 31, 2020. As of December 31, 2021 and 2020, inventory consisted of the following (amounts in thousands):
As of
As of
December 31, 2021
December 31, 2020
Raw materials
$
171
$
160
Work-in-process
528
440
Finished goods
32
44
Inventory
$
731
$
644
Inventory reserve
(255
)
(255
)
Total inventory, net of reserve
$
476
$
389
Property and Equipment Property and equipment are carried at cost, less accumulated depreciation. Depreciation is recognized using the straight-line method over the useful lives of the related asset or the term of the related lease. Expenditures for maintenance and repairs, which do not improve or extend the expected useful life of the assets, are expensed to operations while major repairs are capitalized. The estimated useful life of its leasehold improvements is over the shorter of its lease term or useful life of 5 years, the estimated useful life of furniture and fixtures is 7 years; equipment has an estimated useful life of 15 years and computer software and hardware has an estimated useful life of 3 to 5 years. The following tables summarizes the Company’s property and equipment as of December 31, 2021 and 2020 (amounts in thousands):
As of December 31,
2021
2020
Leasehold improvement
$
—
$
64
Furniture and fixtures
65
93
Equipment
373
335
Computer hardware and software
212
197
Property and equipment
650
689
Less accumulated depreciation
(241
)
(203
)
Property and equipment, net
$
409
$
486
Depreciation expense was $112 thousand and $119 thousand for the years ended December 31, 2021 and 2020, respectively. During the second quarter of 2020, the Company sold furniture and fixtures with a net book value of $118 thousand for $61 thousand. Additionally, the Company abandoned leasehold improvements with a net book value of $53 thousand. The loss on the disposal of the furniture and fixtures and leasehold improvements of $110 thousand was recorded as selling, general and administrative expense in the consolidated statements of operations and comprehensive loss. During the fourth quarter of 2021, the Company abandoned leasehold improvements with a net book value of $7 thousand and wrote down furniture and fixtures with a net book value of $17 thousand to $6 thousand. The loss on the disposal of the leasehold improvements and furniture and fixtures of $18 thousand was recorded as selling, general and administrative expense in the consolidated statements of operations and comprehensive loss. Goodwill and Other Intangible Assets Goodwill represents the excess of purchase price over the fair values underlying net assets acquired in an acquisition. All of the Company’s goodwill as of December 31, 2021 is the result of the acquisition of Heuro in October 2019. Goodwill is not amortized, but rather is tested annually for impairment or more frequently if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company tests goodwill for impairment annually in the fourth quarter of each year using data as of October 1 of that year. Goodwill is allocated to, and evaluated for impairment at the Company’s one identified reporting unit. Goodwill is tested for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. The Company may elect not to perform the qualitative assessment for its reporting unit and perform the quantitative impairment test. The quantitative goodwill impairment test requires the Company to compare the carrying value of the reporting unit’s net assets to the estimated fair value of the reporting unit. If the estimated fair value exceeds the carrying value, no further evaluation is required, and no impairment loss is recognized. If the carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value, the excess of the carrying value over the estimated fair value is recorded as an impairment loss, the amount of which is not to exceed the total amount of goodwill allocated to the reporting unit. The Company’s methodology for estimating the fair value of our reporting unit, if required, utilizes the income approach. The income approach is based on the Discounted Cash Flow (“DCF”) method, which is based on the present value of future cash flows. The principal assumptions utilized in the DCF methodology include long-term growth rates, operating margins, discount rates and future economic and market conditions. There can be no assurance that the Company’s estimates and assumptions regarding forecasted cash flow, long-term growth rates and operating margins made for purposes of the annual goodwill impairment test will prove to be accurate predictions of the future. The COVID-19 pandemic and its continuing impact was considered a triggering event for testing whether goodwill is impaired throughout 2020 and the first half of 2021. The Company performed quantitative assessments at each quarter end in 2020 and at March 31, 2021 and June 30, 2021. As a result of these assessments, the Company determined that the estimated fair value of the reporting unit exceeded the carrying value of the reporting unit. Therefore, the Company concluded that goodwill was not impaired as of any of the aforementioned periods. The Company will continue to monitor the impacts of the COVID-19 pandemic in future periods. The Company performed a qualitative assessment for its annual impairment analysis as of October 1, 2021. Qualitative factors included in the assessment included, but were not limited to, economic conditions, industry and market conditions, cost factors, overall financial performance of the reporting unit and reporting unit specific events. Based on that assessment, the Company determined that it was not “more likely than not” that the fair value of its reporting unit was less than its carrying amount and therefore goodwill was not impaired. The following is a summary of the activity for the years ended December 31, 2021 and December 31, 2020 for goodwill:
Carrying amount at December 31, 2019
$
1,242
Business acquisition fair value allocation adjustment
(503
)
Foreign currency translation
20
Carrying amount at December 31, 2020
$
759
Foreign currency translation
4
Carrying amount at December 31, 2021
$
763
Definite-lived intangibles consist principally of acquired customer relationships, proprietary software and reacquired rights as well as internally developed software. All are amortized straight-line over their estimated useful lives. Amortization expense related to intangible assets was $0.2 million and $0.4 million during the year ended December 31, 2021 and the year ended December 31, 2020, respectively. During the year ended December 31, 2020, the Company incurred an intangible asset impairment loss of $0.2 million related to the customer relationships, all of which was incurred during the first quarter of 2020, which is included in selling, general and administrative expenses in the accompanying consolidated statement of operations and comprehensive loss. Intangible assets as of December 31, 2021 and December 31, 2020 consist of the following:
As of December 31, 2021
As of December 31, 2020
Useful Life
Gross Carrying Amount
Accumulated Amortization
Net Carrying Value
Gross Carrying Amount
Accumulated Amortization
Net Carrying Value
Customer relationships (1)
1.25 years
$
—
$
—
$
-
$
237
$
(228
)
$
9
Acquired proprietary software
5 years
151
(66
)
85
150
(35
)
115
Reacquired rights
3.87 years
505
(283
)
222
503
(152
)
351
Internally developed software
3 years
84
(58
)
26
82
(30
)
52
Total intangible assets
$
740
$
(407
)
$
333
$
972
$
(445
)
$
527
(1) During the year ended Amortization expense is anticipated to be as follows in future years:
For the Year Ending December 31,
2022
$
185
2023
123
2024
25
$
333
Internally Developed Software Costs The Company follows ASC 350-40, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, in accounting for its internally developed software costs. Costs incurred during the preliminary project work stage or conceptual stage, such as determining the performance requirements, system requirements and data conversion, are expensed as incurred. Costs incurred in the application development phase, such as coding, testing for new software and upgrades that result in additional functionality, are capitalized and are amortized using the straight-line method over the useful life of the software, which was determined to be three years. Amortization of these capitalized costs commences when the software becomes ready for its intended use. Costs incurred during the post-implementation stage, such as maintenance and application training, are expensed as incurred. Leases The Company accounts for its leases under ASU No. 2016-02, Leases The Company does not record an operating lease ROU asset and corresponding lease liability for leases with an expected term of twelve months or less and recognizes lease expense for these leases as incurred over the lease term. As of December 31, 2021 and 2020, the Company had only one operating lease, which was for its headquarters office in Newtown, Pennsylvania. As the new Lease Agreement is not effective until January 1, 2022, there is no impact to the Company’s financial statements as of December 31, 2021. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term. The Company does not have a public credit rating and as such used a corporate yield with a “CCC” rating by S&P Capital IQ with a term commensurate with the term of its lease as its incremental borrowing rate in determining the present value of lease payments. Lease expense is recognized on a straight-line basis over the lease term. The Company’s lease arrangement does not have lease and non-lease components which are to be accounted for separately (see Note 7). Foreign Currency The Company’s functional currency is the U.S. dollar. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates in effect at the balance sheet date. Opening balances related to non-monetary assets and liabilities are based on prior period translated amounts, and non-monetary assets acquired, and non-monetary liabilities incurred after April 1, 2018 are translated at the approximate exchange rate prevailing at the date of the transaction. Revenue and expense transactions are translated at the approximate exchange rate in effect at the time of the transaction. Foreign exchange gains and losses are included in the consolidated statement of operations and comprehensive loss as foreign exchange gain (loss). The functional currency of HMC and HCA, the Company’s Canadian subsidiaries, is the CAD$ and the functional currency of HMI and HNR is the USD$. Transactions in foreign currencies are recorded 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. Revenues, expenses and cash flows are translated at the weighted-average rates of exchanges for the reporting period. The resulting currency translation adjustments are not included in the Company’s consolidated statements of operations and comprehensive loss for the reporting period, but rather are accumulated and gains and losses are recorded in foreign exchange gain (loss), as a component of comprehensive loss, within the consolidated statements of operations and comprehensive loss. Stock-Based Compensation The Company accounts for all stock-based payments and awards under the fair value-based method. The Company recognizes its stock-based compensation expense using the straight-line method. Compensation cost is not adjusted for estimated forfeitures, but instead is adjusted upon an actual forfeiture of a stock option. The Company accounts for the granting of stock options to employees and non-employees using the fair value method whereby all awards are measured at fair value on the date of the grant. The fair value of all employee stock options is expensed over the requisite service period with a corresponding increase to additional paid-in capital. Upon exercise of stock options, the consideration paid by the option holder is recorded in additional paid-in capital, while the par value of the shares received is reclassified from additional paid in capital to common stock. Stock 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. In accordance with ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting The Company uses the Black-Scholes option-pricing model to calculate the fair value of stock 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. Awards of options that provide for an exercise price that is not denominated in: (a) the currency of a market in which a substantial portion of the Company's equity securities trades in, (b) the currency in which the employee's pay is denominated, or (c) the Company's functional currency, are required to be classified as liabilities. Revenue Recognition In accordance with FASB’s ASC 606, Revenue from Contracts with Customers be entitled in exchange for those goods or services, in an amount that reflects the consideration which the Company expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, it performs the following five steps:
(i)
identify the contract(s) with a customer;
(ii)
identify the performance obligations in the contract;
(iii)
determine the transaction price;
(iv)
allocate the transaction price to the performance obligations in the contract; and
(v)
recognize revenue when (or as) the entity satisfies a performance obligation. The Company applies the five-step model to contracts when it determines that it is probable it will collect substantially all of the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price, after consideration of variability and constraints, if any, that is allocated to the respective performance obligation when the performance obligation is satisfied. Product Sales P roduct sales were derived from the sale of the PoNS to clinics in Canada. According to the supply agreement with each of these clinics, the Company’s performance obligation was met when it delivered the PoNS device to the clinic’s facility and the clinic assumed title of the PoNS device upon acceptance. As such, revenue is recognized at a point in time. Shipping and handling costs associated with outbound freight before control of a product has been transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales. The Company’s payment terms are defined within each customer’s supply agreement and are all 30 days or less. For the year ended December 31, 2020, the Company recorded $0.6 million in product sales. As of December 31, 2020, the control of 21 of the 55 PoNS devices included as consideration in the Heuro acquisition had been transferred resulting in revenue of $0.1 million being recognized which is included in the aforementioned $0.6 million in product sales for the year ended December 31, 2020. For the year ended December 31, 2021, the Company recorded $0.5 million in product sales. During the year ended December 31, 2021, control of 18 of the 55 PoNS devices included as consideration in the Heuro acquisition had been transferred resulting in revenue of $0.1 million being recognized which is included in the aforementioned $0.5 million in product sales for the year ended December 31, 2021. The fair value of the remaining 16 devices is recorded as deferred revenue of $0.1 million on the consolidated balance sheet. The returns during 2021 were the result of warranty returns for defective products. These returns were insignificant during the year and any future replacements are expected to be insignificant. Fee Revenue During the first half of 2020, the Company earned fee revenue of $9 thousand for engaging new neuroplasticity clinics to provide the PoNS Therapy, before terminating these agreements in the second quarter of 2020. License Revenue In connection with the Heuro acquisition, the Company entered into a Clinical Research and Co-Promotion Agreement with HTC (the “Co-Promotion Agreement”). Under the Co-Promotion Agreement, subject to certain terms and conditions, the Company granted to HTC the exclusive right to provide the PoNS Therapy in the Fraser Valley and Vancouver metro regions of British Columbia, where HTC has operated a PoNS authorized clinic since February 2019. HTC will purchase the PoNS devices for use in these regions exclusively from the Company and on terms no less favorable than the then-current standard terms and conditions. The Co-Promotion Agreement had a fair value of CAD$360 thousand at the time of acquisition and a ten-year ten-year As of December 31, 2021, the Company had recorded $ 0.1 Cost of Sales Cost of product sales includes the cost to manufacture the PoNS device, royalty expenses, freight charges, customs duties, wages and salaries of employees involved in the management of the supply chain and logistics of fulfilling the Company’s sales orders. Income Taxes The Company accounts for income taxes using the asset and liability method. The asset and liability method provide 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 ASC 740 Income Taxes On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act has not had a material impact on the Company’s accounting for income taxes. Research and Development Expenses 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, development and manufacturing of clinical trial devices and devices for manufacturing testing and materials and supplies as well as regulatory costs related to post market surveillance, quality assurance complaint handling and adverse event reporting. 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 operates and manages its business within one operating and reportable segment. Accordingly, the Company reports the accompanying consolidated financial statements in the aggregate in one reportable segment. Derivative Financial Instruments 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 classification of derivative financial instruments, including whether such instruments should be recorded as liabilities/assets or as equity, is reassessed at the end of each reporting period. Derivative financial instruments that become subject to reclassification are reclassified at the fair value of the instrument on the reclassification date. Derivative financial instruments will be classified in the consolidated balance sheet as current if the right to exercise or settle the derivative financial instrument lies with the holder. The last of the warrants accounted for in accordance with ASC 815 expired in April 2021 Fair Value Measurements The Company accounts for financial instruments in accordance with ASC 820, Fair Value Measurements and Disclosures Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2 – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. The Company’s financial instruments recorded in its consolidated balance sheets consist primarily of cash, accounts receivable, other current receivables, operating lease ROU asset, accounts payable, accrued liabilities, operating lease liability and derivative financial instruments. The book values of these instruments, with the exception of derivative financial instruments, non-current lease liability, and operating lease ROU asset, approximate their fair values due to the immediate or short-term nature of these instruments. The Company’s derivative financial instruments are classified as Level 3 within the fair value hierarchy and are required to be recorded at fair value on a recurring basis. Unobservable inputs used in the valuation of these financial instruments include volatility of the underlying share price and the expected term. See Note 3 for the inputs used in the Black-Scholes option-pricing model as of December 31, 2020 and the roll forward of the derivative financial instruments. The Company’s derivative financial instruments are comprised of warrants which are classified as liabilities. The fair value of the derivative financial instruments as of December 31, 2020 was zero. The warrants classified as liabilities expired in April 2021 There were no transfers between any of the levels during the years ended December 31, 2021 and 2020. In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company's assets and liabilities are also subject to nonrecurring fair value measurements. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. Due to the COVID-19 pandemic and the related risks and uncertainties, the Company’s customer relationship intangible asset incurred an impairment loss during the year ended December 31, 2020 of $0.2 million, all of which was recorded during the first quarter of 2020, and had a remaining net book value of $9 thousand as of December 31, 2020. The fair value of this intangible asset was determined based on Level 3 measurements within the fair value hierarchy. Inputs to these fair value measurements included estimates of the amount and timing of the asset’s net future discounted cash flows based on historical data, current trends and market conditions. As of December 31, 2021, the Company’s customer relationship intangible asset had been fully amortized and written off. Basic and Diluted Net Income (Loss) per Share Earnings or loss per share (“EPS”) is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during 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, unless including the effects of these potentially dilutive securities would be anti-dilutive. The basic and diluted loss per share for the periods noted below is as follows (amounts in thousands, except for share and per share amounts):
For the Year Ended December 31,
2021
2020
Basic and Diluted
Numerator
Net loss
$
(18,132
)
$
(14,130
)
Denominator
Weighted-average shares of common stock outstanding - basic and diluted
2,456,782
1,197,774
Basic and diluted net loss per share
$
(7.38
)
$
(11.80
) No incremental common stock equivalents, consisting of outstanding stock options, warrants and restricted stock units, were included in calculating diluted loss per share because such inclusion would be anti-dilutive given the net loss reported for the years ended December 31, 2021 and 2020. Dilutive common stock equivalents excluded from the computation of diluted weighted average shares outstanding were 1,265,400 and 455,631 for the years ended December 31, 2021 and 2020, respectively. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement This ASU is effective for interim and annual reporting periods beginning after In November 2018, FASB issued ASU 2018-18, C ollaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, the adoption did not have a material impact on the Company’s consolidated financial statements In August 2020, FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) |
