ENDRA LIFE SCIENCES INC.
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark
One)
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☒
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the
Fiscal Year Ended
December 31, 2019
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☐
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the
transition period from __________________ to
__________________
Commission
file number:
001-37969
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ENDRA Life Sciences Inc.
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(Exact
Name of Registrant as Specified in Its Charter)
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Delaware
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26-0579295
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(State
or Other Jurisdiction of Incorporation or
Organization)
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(I.R.S.
Employer Identification No.)
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3600
Green Court, Suite 350, Ann Arbor, MI
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48105-1570
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(734) 335-0468
(Registrant’s
telephone number, including area code)
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Title
of each class
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Name of
each exchange on which registered
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Common
Stock, par value $0.0001 per share
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The
Nasdaq Stock Market LLC
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Warrants,
each to purchase one share of Common Stock
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The
Nasdaq Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes
☐
No
☒
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
☐
No
☒
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes
☒
No
☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes
☒
No
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See definitions of "large
accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☒
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Smaller
reporting company
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☒
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Emerging
growth company
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☒
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act): Yes
☐
No
☒
The
aggregate market value of voting and non-voting common equity held
by non-affiliates of the registrant, as of June 28, 2019, was
approximately $12,170,900 based on the closing sales price of the
common stock on such date as reported on the Nasdaq Capital
Market.
As of
March 23, 2020, there were 13,483,125 shares of the
registrant’s common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The
registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days after the end of the fiscal year
ended December 31, 2019. Portions of such proxy statement are
incorporated by reference into Part III of this Form
10-K.
ENDRA LIFE SCIENCES INC.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K (this “Annual Report”)
contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended,
that are intended to be covered by the “safe harbor”
created by those sections. Forward-looking statements, which are
based on certain assumptions and describe our future plans,
strategies and expectations, can generally be identified by the use
of forward-looking terms such as “believe,”
“expect,” “may,” “will,”
“should,” “would,” “could,”
“seek,” “intend,” “plan,”
“goal,” “project,” “estimate,”
“anticipate,” “strategy”,
“future”, “likely” or other comparable
terms and references to future periods. All statements other than
statements of historical facts included in this Annual Report
regarding our strategies, prospects, financial condition,
operations, costs, plans and objectives are forward-looking
statements. Examples of forward-looking statements include, among
others, statements we make regarding: expectations for revenues,
cash flows and financial performance, the anticipated results of
our development efforts and the timing for receipt of required
regulatory approvals and product launches.
Forward-looking
statements are neither historical facts nor assurances of future
performance. Instead, they are based only on our current beliefs,
expectations and assumptions regarding the future of our business,
future plans and strategies, projections, anticipated events and
trends, the economy and other future conditions. Because
forward-looking statements relate to the future, they are subject
to inherent uncertainties, risks and changes in circumstances that
are difficult to predict and many of which are outside of our
control. Our actual results and financial condition may differ
materially from those indicated in the forward-looking statements.
Therefore, you should not rely on any of these forward-looking
statements. Important factors that could cause our actual results
and financial condition to differ materially from those indicated
in the forward-looking statements include, among others, the
following:
● our
limited commercial experience, limited cash and history of
losses;
● our
ability to obtain adequate financing to fund our business
operations in the future;
● our
ability to achieve profitability;
● our
ability to develop a commercially feasible application based on our
Thermo-Acoustic Enhanced Ultrasound (“TAEUS”)
technology;
● market
acceptance of our technology;
● uncertainties associated with COVID-19 or coronavirus,
including its possible effects on our
operations;
● results
of our human studies, which may be negative or
inconclusive;
● our
ability to find and maintain development partners;
● our
reliance on third parties, collaborations, strategic alliances and
licensing arrangements to complete our business
strategy;
● the
amount and nature of competition in our industry;
● our
ability to protect our intellectual property;
● potential
changes in the healthcare industry or third-party reimbursement
practices;
● delays
and changes in regulatory requirements, policy and guidelines
including potential delays in submitting required regulatory
applications for Conformité Européene (“CE”)
mark certification or U.S. Food and Drug Administration
(“FDA”) approval;
● our ability
to obtain and maintain CE mark certification and secure required
Food and Drug Administration (“FDA”) and other
governmental approvals for our TAEUS applications;
● our ability
to comply with regulation by various federal, state, local and
foreign governmental agencies and to maintain necessary regulatory
clearances or approvals;
● our
dependence on our senior management team; and
● the other
risks and uncertainties described in the Risk Factors and in
Management’s Discussion and Analysis of Financial Condition
and Results of Operations sections of this Annual
Report.
Any
forward-looking statement made by us in this report is based only
on information currently available to us and speaks only as of the
date on which it is made. We undertake no obligation to publicly
update any forward-looking statement, whether written or oral, that
may be made from time to time, whether as a result of new
information, future developments or otherwise.
2
P
ART I
As used
in this Annual Report, unless the context otherwise requires, the
terms “ENDRA,” “we,” “us,”
“our,” and the “Company” refer to ENDRA
Life Sciences Inc., a Delaware corporation.
I
tem 1. Business
Overview
We are
leveraging experience with pre-clinical enhanced ultrasound devices
to develop technology for increasing the capabilities of clinical
diagnostic ultrasound in order to broaden patient access to the
safe diagnosis and treatment of a number of significant medical
conditions in circumstances where expensive X-ray computed
tomography (“CT”) and magnetic resonance imaging
(“MRI”) technology, or other diagnostic technologies
such as surgical biopsy, are unavailable or
impractical.
In
2010, we began marketing and selling our Nexus 128 system, which
combined light-based thermoacoustics and ultrasound to address the
imaging needs of researchers studying disease models in
pre-clinical applications. Building on this expertise in
thermoacoustics, we have developed a next-generation technology
platform — Thermo Acoustic Enhanced Ultrasound, or TAEUS
— which is intended to enhance the capability of clinical
ultrasound technology and support the diagnosis and treatment of a
number of significant medical conditions that currently require the
use of expensive CT or MRI imaging or where imaging is not
practical using existing technology. We ceased production of our
Nexus 128 system as of January 1, 2019 and stopped providing
service support and parts for all existing Nexus 128 systems as of
July 1, 2019 in order to focus our resources on the development of
our TAEUS technology.
Unlike
the near-infrared light pulses used in our legacy Nexus 128 system,
our TAEUS technology uses radio frequency (“RF”) pulses
to stimulate tissues, using a small fraction (less than 1%) of the
energy that would be transmitted into the body during an MRI scan.
The use of RF energy allows our TAEUS technology to penetrate deep
into tissue, enabling the imaging of human anatomy at depths
equivalent to those of conventional ultrasound. The RF pulses are
absorbed by tissue and converted into ultrasound signals, which are
detected by an external ultrasound receiver and a digital
acquisition system that is part of the TAEUS system. The detected
ultrasound is processed into images and other forms of data using
our proprietary algorithms and displayed to complement conventional
gray-scale ultrasound images.
As
described below, our first TAEUS platform application will focus on
quantifying fat in the liver and stage progression of nonalcoholic
fatty liver disease (“NAFLD”) which, untreated, can
progress to Nonalcoholic Steatohepatitis, or NASH, cirrhosis and
liver cancer. In April 2016, we entered into a Collaborative
Research Agreement with General Electric Company, acting through
its GE Healthcare business unit and the GE Global Research Center
(collectively, “GE Healthcare”), under which GE
Healthcare has agreed to assist us in our efforts to commercialize
this application. In November 2017, we contracted with the Centre
for Imaging Technology Commercialization (“CIMTEC”) to
initiate human studies, through Canada-based Robarts Research
Institute, with our TAEUS device targeting NAFLD. In October 2018,
we received an Investigational Testing Authorization
(“ITA”) from Health Canada to commence the first human
studies in healthy volunteers with our TAEUS clinical system
targeting NAFLD, guiding our algorithm development, and comparing
our technology to MRI. The feasibility study, the first of several
planned human studies, was conducted in collaboration with the
widely respected Robarts Research Institute in London, Canada. We
reported the completion and top-level findings of this study on
September 26, 2019. The data collected from the study, including
additional usability inputs, was included in our TAEUS liver device
technical file submission for device CE mark, which we submitted in
December 2019. We received CE mark approval for our NAFLD TAEUS
application in March 2020.
Each of
our TAEUS platform applications will require regulatory approvals
before we are able to sell or license the application. Based on
certain factors, such as the installed base of ultrasound systems,
availability of other imaging technologies, such as CT and MRI,
economic strength and applicable regulatory requirements, we intend
to seek initial approval of our applications for sale in the
European Union, followed by the United States and
China.
Diagnostic Imaging Technologies
Diagnostic
imaging technologies such as CT, MRI and ultrasound allow
physicians to look inside a person’s body to guide treatment
or gather information about medical conditions such as broken
bones, cancers, signs of heart disease or internal bleeding. The
type of imaging technology a physician uses depends on a
patient’s symptoms and the part of the body being examined.
CT technology is well suited for viewing bone injuries, diagnosing
lung and chest problems, and detecting cancers. MRI technology
excels at examining soft tissue in ligament and tendon injuries,
spinal cord injuries, and brain tumors. CT scans can take as little
as 5 minutes, while an MRI scan can take up to 30
minutes.
3
Unfortunately,
while CT and MRI systems are versatile and create high quality
images, they are also expensive and not always accessible to
patients. A CT system costs approximately $1 million and an MRI
system can cost up to $3 million. CT and MRI systems are large and
can weigh several tons, typically requiring significant
modifications to existing healthcare facilities to safely site the
CT and MRI equipment. Because of their size and weight, CT and MRI
systems are usually fixed-in-place at major medical facilities. As
a result, they are less accessible to primary care and rural
clinics, economically developing markets, and patient bedsides. As
of 2013, there were only approximately 64,000 CT systems and 32,000
MRI systems in the world, approximately 50% of which were located
in the U.S. and Japan.
While
CT and MRI systems create high quality images, their use is not
always practical. For example, the diagnosis and treatment of the
estimated 1.4 billion patients suffering from NAFLD requires
ongoing surveillance of the patients’ livers to assess the
progression of the disease and the efficacy of treatment. However,
the use of CT and MRI systems to perform that surveillance is
impractical for a number of reasons, including the high cost of the
scan, the limited availability of CT and MRI systems and the
required use of contrast agents, including those containing
radioactive substances that can cause allergic reactions and
reduced kidney functions. Patient exposure to the ionizing
radiation generated by a CT system must be limited for safety
reasons. Similarly, because of the strong magnetic field created by
an MRI machine, patients with metal joint replacements or cardiac
pacemakers cannot be imaged with an MRI system.
Because
of CT and MRI’s limited availability and practical
limitations, a patient who would otherwise be a candidate for CT or
MRI scanning must often rely on less effective or less practical
methods. For example, MRI scans are not typically used to measure
tissue temperature during thermoablative (temperature based)
surgery. Instead, physicians use printed manufacturer guidelines to
time the thermal surgery or insert surgical temperature probes in
an attempt to guide treatment. As a result, the treatment is often
imprecise or comes with additional risks, such as
infection.
These
limitations have led to a decrease in the number of CT scans.
According to the American College of Radiology, the overall number
of CT scans performed in the United States under Medicare Part B
fell approximately 8% from 2009 to 2014. The decline in CT scans
has been accompanied by increased use of alternative scanning
technologies. The American College of Radiology reported that the
overall number of ultrasound scans performed in the United States
under Medicare Part B increased approximately 6% from 2009 to 2014.
During the same period MRI usage increased by 5%, but remains
significantly below the use of ultrasound technology, even in the
United States.
Ultrasound Technology
An
ultrasound machine transmits sound waves, which bounce off tissues,
organs and blood in the body. The ultrasound machine captures these
echoes and uses them to create an image. Ultrasound technology
excels at imaging the structure of internal organs, muscles and
bone surfaces. Due to its utility, cost-effectiveness and safety
profile, ultrasound imaging is frequently used in a
physician’s examination room or at a patient’s bedside
as a first-line diagnostic tool, which has resulted in an overall
increase in the number of ultrasound scans performed.
Ultrasound
systems are more broadly available to patients than either CT or
MRI systems. There are an estimated one million ultrasound systems
globally in use today. Ultrasound systems are relatively
inexpensive compared to CT and MRI systems, with smaller portable
ultrasound systems costing as little as $10,000 and new cart-based
ultrasound systems costing between $75,000 and $200,000. Ultrasound
systems are also more mobile than CT and MRI systems and many are
designed to be moved by an operator from room to room, or closer to
patients. Ultrasound technology does not present the same safety
concerns as CT and MRI technology, since ultrasound does not emit
ionizing radiation and ultrasound contrast agents are generally
considered to be safe.
However,
ultrasound’s imaging capabilities are more limited compared
to CT and MRI technology. For example, ultrasound systems cannot
measure tissue temperature during thermal ablation surgery, or
quantify fat to diagnose early stage liver disease -- instances
where CT and MRI systems are used.
4
Ultrasound Market
Sales
of ultrasound diagnostic equipment were approximately $4.4 billion
globally in 2017 and are expected to grow at approximately 4.4%
annually. There are an estimated one million installed systems
generating over 400 million annual diagnostic ultrasound procedures
globally. Additionally, an estimated 30,000 to 50,000 new and
replacement systems are sold into the market each year. These
numbers include both portable and cart-based ultrasound systems,
and cover all types of diagnostic ultrasound procedures, including
systems intended for cardiology, prenatal and abdominal use. We do
not currently intend to address ultrasound systems focused on
applications in prenatal care, where we believe our TAEUS
technology will not substantially impact patient care. Accordingly,
we define our addressable market for one or more of our TAEUS
applications at approximately 365,000 cart-based ultrasound systems
currently in use throughout the world.
We
believe that demand for ultrasound systems is driven primarily by
the following factors:
● Population
growth and age demographics that increase the demand for diagnostic
screening for cancer, cardiology, and prenatal
applications.
● Economic
development broadening investment in healthcare in underserved
markets such as China and Latin America, where ultrasound
technology has significant appeal due to its price point and
flexibility at point-of-care.
● Expanding
ultrasound applications and improving image quality that drive
demand for new ultrasound technologies, such as software
enhancements, bi-axial probes, and dedicated single application
systems.
● Positive
insurance reimbursement rate trends for ultrasound diagnostics due
to the technology’s safety and
cost-effectiveness.
Unmet Need
We
believe that the limited availability of high-utility and
cost-effective imaging technology represents a significant unmet
medical need. We believe that expanding the capability of
ultrasound technology to perform more of the imaging tasks
presently available only on expensive CT and MRI systems will
satisfy this unmet need.
Our Solutions
Our
Thermo-Acoustic Enhanced Ultrasound, or TAEUS, technology uses a
pulsed energy source – specifically, radio-frequency, or RF
– to generate ultrasonic waves in tissue. These waves are
then detected with ultrasound equipment and used to create
high-contrast images and other forms of data using our proprietary
algorithms. Unlike conventional ultrasound, which creates images
based on the scattering properties of tissue, thermoacoustic
imaging provides tissue absorption maps of the pulsed energy,
similar to those generated by CT scans. Ultrasound is only utilized
to transmit the absorption signal to the imaging system outside of
the body.
Our TAEUS Technology Platform for Clinical
Applications
To
increase the utility of our thermoacoustic technology, in 2013 we
began to develop our TAEUS technology platform. Unlike the
near-infrared light pulses used in our earlier photoacoustic
systems, our TAEUS technology uses RF pulses to stimulate tissues,
using a small fraction of the energy transmitted into the body
during an MRI scan. Using RF energy enables our TAEUS technology to
penetrate deep into tissue, enabling the imaging of human anatomy
at depths equivalent to those of conventional ultrasound. The RF
pulses are absorbed by tissue and converted into ultrasound
signals, which are detected by an external ultrasound receiver and
a digital acquisition system that is part of the TAEUS system. Our
RF-based thermoacoustics imaging is not adversely affected by
blood-filled organs, enabling our TAEUS technology to be used in
clinical liver applications, among others. The detected ultrasound
can then be processed into ultrasound overlays or quantitative data
that may be translated into clinically useful metrics using our
proprietary algorithms and displayed to complement conventional
gray-scale ultrasound images. The TAEUS imaging concept is
illustrated below:
5
After
required regulatory approvals, our TAEUS technology can be added as
an accessory to existing ultrasound systems, helping to improve
clinical decision-making on the front lines of patient care,
without requiring substantially new clinical workflows or large
capital investments. We are also developing TAEUS for incorporation
into new ultrasound systems manufactured by companies such as GE
Healthcare, described more fully below.
We
believe that our TAEUS technology has the potential to add a number
of new capabilities to conventional ultrasound and thereby enhance
the utility of both existing and new ultrasound systems and extend
the use of ultrasound technology to circumstances that either
currently require the use of expensive CT or MRI imaging systems,
where imaging is not practical using existing technology, or where
other assessment tools such as surgical biopsy are required. To
demonstrate the capabilities of our TAEUS platform, we have
conducted various internal ex-vivo laboratory experiments and
limited internal in-vivo large animal studies. In our ex-vivo and
in-vivo testing, we have demonstrated that the TAEUS platform has
the following capabilities and potential clinical
applications:
● Tissue
Composition: Our TAEUS technology enables ultrasound to distinguish
fat from lean tissue. This capability would enable the use of
TAEUS-enhanced ultrasound for the early identification, staging and
monitoring of NAFLD, a precursor to nonalcoholic steatohepatitis
(“NASH”), liver fibrosis, cirrhosis and liver
cancer.
● Temperature
Monitoring: Our TAEUS technology enables traditional ultrasound to
visualize changes in tissue temperature, in real time. This
capability would enable the use of TAEUS-enhanced ultrasound to
guide thermoablative therapy, which uses heat or cold to remove
tissue, such as in the treatment of cardiac atrial fibrillation, or
removal of cancerous liver and kidney lesions, with greater
accuracy.
● Vascular
Imaging: Our TAEUS technology enables ultrasound to view blood
vessels from any angle, using only a saline solution contrasting
agent, unlike Doppler ultrasound, which requires precise viewing
angles. This capability would enable the use of TAEUS-enhanced
ultrasound to easily identify arterial plaque or malformed
vessels.
● Tissue
Perfusion: Our TAEUS technology enables ultrasound to image blood
flow at the capillary level in a region, organ or tissue. This
capability could be used to assist physicians in characterizing
microvasculature fluid flows symptomatic of damaged tissue, such as
internal bleeding from trauma, or diseased tissue, such as certain
cancers.
6
Because
of the large number of traditional ultrasound systems currently in
global use, we are first developing our TAEUS technology for sale
as an aftermarket accessory that works with existing ultrasound
systems. Because our TAEUS technology is designed to enhance the
utility of, not replace, conventional ultrasound, we believe
healthcare providers will be able to increase the utilization of,
and generate new revenue from, their existing ultrasound systems
once we obtain required regulatory approval for specific
applications. We further believe that clinicians will be attracted
to our technology because it will enable them to perform more
procedures with existing ultrasound equipment, thereby retaining
more imaging patients in their clinics rather than referring
patients out to a regional medical center for a CT or MRI
scan.
ENDRA’s
first clinical product will be designed to interface with a
conventional ultrasound scanner, utilizing the scanner’s
B-mode imaging to guide the selected region for assessment of liver
fat content. The following sub-systems will comprise ENDRA’s
first generation product.
Radio
Frequency (RF) Source and Computer:
The RF
source consists of a low power waveform generator and an amplifier.
Together, these components provide the characteristic pulses
required to excite thermoacoustic signals in tissue. The computer
provides processing capability to both utilize the conventional
ultrasound data for navigation to the measurement site of interest,
and the calculations required to convert digitized thermoacoustic
signals to measurements of fat in liver tissue. The entire
sub-system will reside in a single enclosure, on wheels, and sit
adjacent to the ultrasound imaging system.
Specialized
Transducer:
A
single channel ‘receive only’ ultrasound transducer is
specifically designed and optimized for thermoacoustic imaging. The
transducer sub-system will detect thermoacoustic signals excited by
the RF source within the liver. The transducer assembly includes
electronics for signal amplification, digitization, and signal
processing. The specialized transducer will attach to the
conventional ultrasound probe used for liver imaging.
RF
Applicator:
The RF
applicator transmits pulses of energy, provided by the RF source,
into tissue. The applicator is positioned in proximity to the
target region for measurement.
A
second generation product is expected to provide two dimensional
imaging with a transducer composed of multiple receive elements.
The RF source and applicator would be similar to those in the first
generation product but the multi-element transducer would allow for
multiple applications including: reading tissue composition,
temperature, vascular flow, tissue perfusion, and other potential
applications. Ultimately, we expect our technology will be
incorporated into conventional ultrasound systems and our business
model will transition from producing stand-alone systems to
licensing our technology, IP and specialized components to
ultrasound OEMs. Existing ultrasound equipment already includes
power supplies, computation, high speed electronics, and ultrasound
transducers, which may be leveraged by our thermoacoustic imaging
applications. The RF source and applicator are the principal
hardware components that will be added to OEM ultrasound systems
for the OEM fully integrated form of our product.
We are
following a model that mirrors the approach used by companies in
the past to introduce new ultrasound imaging capabilities to
existing conventional ultrasound scanners. Color Doppler,
elastography, 3-D imaging, and high channel count systems were all
introduced by new companies (not already involved in conventional
ultrasound imaging). Historically, ultrasound imaging has grown
through the introduction of unique technology and capabilities that
expanded the applications and use of clinical ultrasound in a form
that often added separate hardware to existing ultrasound systems.
Ultimately, as these new technologies gained acceptance in the
marketplace they were incorporated into OEM-designed and built
systems that were sold by the leading ultrasound imaging
vendors.
7
Potential Clinical Applications for our TAEUS
Technology
Early Diagnosis and Monitoring of Nonalcoholic Fatty Liver Disease,
or NAFLD
Our
first TAEUS platform application will focus on quantifying fat in
the liver and stage progression of NAFLD which, untreated, can
progress to Nonalcoholic Steatohepatitis, or NASH, cirrhosis and
liver cancer. In 2011, over 1.4 billion people were affected by
NAFLD/NASH. The World Gastroenterology Organisation considers
NAFLD/NASH a global pandemic affecting rich and poor countries
alike. Obesity, hepatitis, and diabetes are leading contributors to
the development of NAFLD.
Left
untreated, an estimated 30% of NAFLD cases progress to NASH, a
condition in which liver fat causes inflammation and decreased
liver function, possibly resulting in fatigue, weight loss, muscle
pain and abdominal pain. Excess liver fat remains a root cause of
and key clinical concern for both of NASH and NAFLD.
Approximately
25% of NASH cases progress to liver fibrosis, in which liver
inflammation causes scar tissue which eventually prevents the liver
from functioning properly. The scar tissue blocks the flow of blood
through the liver and slows the processing of nutrients, hormones,
drugs, and naturally produced toxins. It also slows the production
of proteins and other substances made by the liver. Once a patient
develops cirrhosis of the liver, the only life-saving therapy is a
liver transplant. Additionally, cirrhosis patients may develop
liver cancer. In 2018, the World Health Organization estimated that
liver cancer kills 782,000 people annually. Because of the
increased incidence of obesity, hepatitis and diabetes throughout
the world, NAFLD has become the most common chronic liver disease
and an important cause of cirrhosis and liver cancer
worldwide.
Despite
the increased incidence of NAFLD and its role in the development of
NASH, cirrhosis and liver cancer, we believe that no low-cost,
accurate and safe method exists for measuring fat in the liver.
Current liver enzyme blood tests are indicative, but cannot
reliably confirm early stage NAFLD or NASH, and liver enzyme levels
are normal in a large percentage of patients with NAFLD. Existing
ultrasound technology can only measure fat qualitatively in the
liver at moderate to severe levels, typically greater than 30%
liver fat, and ultrasound has low accuracy when used on obese
patients. While early stage NAFLD and NASH can be confirmed by an
MRI scan, an MRI scan is expensive, and MRI systems are not widely
available or practical for many patients. A surgical biopsy can be
used to confirm NAFLD and NASH, but is also expensive, involves a
painful procedure and exposes patients to the risk of infection and
bleeding. Furthermore, MRIs and surgical biopsies are impractical
for repeated screening and monitoring of liver disease. We believe
these limitations negatively impact the diagnosis and treatment of
patients with NAFLD.
Patients
diagnosed with NAFLD and related liver diseases are typically
treated with therapies such as statins, insulin sensitizers and
other compounds and are encouraged to adopt lifestyle changes to
improve their overall health.
A
significant number of pharmaceutical compounds targeting liver
disease are in development by companies such as Bristol-Myers
Squibb Company, Intercept Pharmaceuticals, Inc., Genfit SA,
Allergan plc, Madrigal Pharmaceuticals, Inc. and Immuron
Limited.
Billions
of dollars are spent annually on the diagnosis and treatment of
NAFLD and related liver diseases. In the United States alone, the
median Medicare inpatient charge per NAFLD patient is estimated to
be $36,000 and the total annual direct medical costs for NAFLD
are estimated to be $103 billion. Identification and staging of
NAFLD is central to determining the course of
treatment.
In
addition, patients receiving treatment for NAFLD-spectrum liver
diseases must continue to be monitored to assess disease
progression and the efficacy of treatment. Because of the high cost
and limited global availability, CT and MRI technology is not
typically used for this function.
We
believe our TAEUS technology will enable primary care physicians,
radiologists and hepatologists to diagnose NAFLD earlier and
monitor patients with NAFLD-spectrum liver diseases more accurately
and cost-effectively than is possible with existing
technology.
8
In
April 2016, we entered into a Collaborative Research Agreement with
General Electric Company, acting through its GE Healthcare business
unit and the GE Global Research Center (collectively, “GE
Healthcare”). Under the terms of the agreement, GE Healthcare
has agreed to assist us in our efforts to commercialize our TAEUS
technology for use in a fatty liver application by, among other
things, providing equipment and technical advice, and facilitating
introductions to GE Healthcare clinical ultrasound customers. In
return for this assistance, we have agreed to afford GE Healthcare
certain rights of first offer with respect to manufacturing and
licensing rights for the target application. More specifically, we
have agreed that, prior to commercially releasing our NAFLD TAEUS
application, we will offer to negotiate an exclusive ultrasound
manufacturer relationship with GE Healthcare for a period of at
least one year of commercial sales. The commercial sales would
involve, within our sole discretion, either our commercially
selling GE Healthcare ultrasound systems as the exclusive
ultrasound system with our TAEUS fatty liver application embedded,
or GE Healthcare being the exclusive ultrasound manufacturer to
sell ultrasound systems with our TAEUS fatty liver application
embedded. The agreement with GE Healthcare does not prevent us from
selling our TAEUS fatty liver application technology to
distributors or directly to non-manufacturer purchasers.
Additionally, the agreement provides that (1) prior to offering to
license any of our TAEUS fatty liver application intellectual
property to a third party, we will first offer to negotiate to
license our TAEUS fatty liver application intellectual property to
GE Healthcare and (2) prior to selling any equity interests to a
healthcare device manufacturer, we must first offer to negotiate in
good faith to sell such equity interests to GE Healthcare. The
agreement is subject to termination by either party upon not less
than 60 days’ notice. On January 13, 2020, we and GE
Healthcare entered into an amendment to our agreement, extending
its term by 12 months to January 14, 2021 and modifying GE
Healthcare’s rights of first offer.
In
November 2017 we engaged two firms that specialize in medical
device software development to commence productization of our TAEUS
device targeting NAFLD. The agreements call for these vendors to
provide us with the specialized engineering resources necessary to
translate our current prototype TAEUS device into a clinical
product that meets CE regulatory requirements required for
commercial launch in the European Union followed by FDA submission
for the U.S. market.
In
October 2018, we received an Investigational Testing Authorization
(“ITA”) from Health Canada to commence the first human
studies in healthy volunteers with our TAEUS clinical system
targeting NAFLD, guiding our algorithm development, and comparing
our technology to MRI. The feasibility study is being conducted in
collaboration with the widely respected Robarts Research Institute
in London, Canada. The data Robarts Research Institute is
collecting with our investigational device includes the
following:
● Integration
evaluation of hardware and software design elements of the TAEUS
platform;
● Substantial
user and patient human-factors data, including clinical workflow
and ergonomic considerations to support our CE mark application and
commercial product design; and
● Quantitative
MRI liver fat fraction measurements for each study subject, that
will both guide our algorithm development and provide data for
initial correlation to the TAEUS measurements.
In
December 2018, Robarts Research Institute completed its initial
healthy subject enrollment and data collection of 25 subjects and
received authorization from Health Canada to expand the study to 50
subjects. We reported the completion of this expanded study and
reported top-level findings on September 26, 2019. The data
collected from the study, including additional usability inputs,
was included in our TAEUS liver device technical file submission
for device CE mark.
Temperature Monitoring of Thermoablative Surgery
We also
intend to develop a TAEUS platform application to guide thermal
ablation surgery, such as in the treatment of cardiac atrial
fibrillation, chronic pain and lesions of the liver, thyroid,
kidneys and other soft tissues. We plan to target clinical users of
thermoablative technology, including interventional radiologists,
cardiologists, gynecologists and surgical oncologists.
Thermoablation
involves the use of heat or cold to remove malfunctioning or
diseased tissue in surgical oncology, cardiology, neurology,
gynecology, and urology applications. Thermoablative technologies
include RF, microwave, laser and cryogenic ablation. The worldwide
market for RF surgical ablation procedures alone was estimated in
2015 to be $3.7 billion per annum, generating over 5 million annual
RF ablation procedures and growing at approximately 18% annually.
We believe that the growth of this market is driven primarily by
the aging global population requiring more cardiac and cancer
procedures, as well as the relative ease-of-use and low cost of
thermoablative technologies when compared to open
surgery.
9
However,
RF and other thermoablative surgery technologies pose risks,
including under-treatment of diseased tissue and unintended thermal
damage to areas outside the treatment area. For example, it has
been reported that patients receiving RF ablation of liver tumors
have experienced thermal injury to the diaphragm, gallbladder, bile
ducts and gastrointestinal tract, some of which have resulted in
patient deaths.
Clinicians
must rely on printed manufacturer guidelines to plan procedures
using thermal ablation technologies or, when available, monitor
tissue temperature changes in real-time with MRI imaging or
surgical temperature probes. We believe these existing methods
either lack real-time precision or are impractical due to cost,
poor availability and other factors.
We
believe that the ability to visualize changes in tissue temperature
in real time could potentially enhance the effectiveness and safety
of thermoablation therapies and that our TAEUS technology platform
combined with traditional ultrasound has the potential to guide
thermoablation surgery more cost-effectively and more accurately
than existing methods.
Image below: Depiction of ex-vivo TAEUS tissue temperature analysis
overlaid on traditional ultrasound image.
Vascular Imaging
We
believe that our TAEUS technology can be used to image blood
vessels and distinguish them from the surrounding tissue. In
addition to our NAFLD and thermoablation applications, we intend to
develop a cardiovascular application based on our TAEUS technology
that, with the use of a standard saline contrast agent, can enable
existing ultrasound systems to perform a number of cardiovascular
diagnostic functions, such as identifying arterial plaque or
blocked or malformed vessels, as well as safely guiding biopsies
away from vital vasculature.
Conventional
ultrasound imaging systems use Doppler imaging in a variety of
vascular applications. Doppler ultrasound, which images the
velocity of blood, is effective in larger vessels and regions where
blood velocity is high. However, Doppler ultrasound is not
sufficiently sensitive for use in very small vessels or in vascular
imaging applications where blood velocities are very low. For these
applications, contrast enhanced CT and MRI angiography is used
which requires the patient to be injected with a contrast agent,
iodinated compounds and gadolinium, respectively. Contrast-enhanced
CT and MRI scans both require referral for examination after
initial screening with ultrasound and carry risks associated with
their respective contrast agents. We believe that our TAEUS
platform has the potential to offer the advantages of CT and MR
contrast enhanced imaging at the point of care using only a safe
electrolyte solution as the contrast agent.
10
Tissue Perfusion or “Leakiness”
We
believe that our TAEUS technology can be used to image tissue
perfusion, or the absorption of fluids into an organ or tissue. We
intend to develop an application for our TAEUS platform that would
enable ultrasound detection of microvasculature fluid flows
symptomatic of tissue compromised by trauma or
disease.
When a
person’s body is affected by disease or trauma, blood and
other fluids may leak from damaged tissues in subtle ways.
Traditional ultrasound cannot effectively image these disruptions
in microvascular permeability, but we believe ultrasound combined
with our TAEUS technology can.
We
believe that, using our TAEUS technology, physicians will be able
to quickly and clearly see tissue compromised by disease, such as
cancer or trauma, especially with the use of a standard saline
contrast agent, when CT or MRI is not readily
available.
Intellectual Property
We rely
on a combination of patent, copyright, trademark and trade secret
laws and other agreements with employees and third parties to
establish and protect our proprietary intellectual property rights.
We require our officers, employees and consultants to enter into
standard agreements containing provisions requiring confidentiality
of proprietary information and assignment to us of all inventions
made during the course of their employment or consulting
relationship. We also enter into nondisclosure agreements with our
commercial counterparties and limit access to, and distribution of,
our proprietary information.
We are
committed to developing and protecting our intellectual property
and, where appropriate, filing patent applications to protect our
technology. Our issued and pending patents claims are directed at
the following areas related to our technology:
● Methods
to induce and enhance thermoacoustic signal
generation;
● System
configurations, devices and novel hardware for transmission of RF
pulses into tissue and detection of acoustic signals;
● Methods
for integrating our devices with existing conventional ultrasound
systems; and
● Methods
and algorithms for signal processing, image formation and
analysis.
We
currently maintain a patent portfolio consisting of seven (7)
patents issued in the United States and four (4) issued patents in
foreign jurisdictions, twenty-four (24) patent applications pending
in the United States and twenty-six (26) patent applications
pending in foreign jurisdictions relating to our technology. These
patents and patent applications cover certain innovations relating
to contrast-enhanced imaging as well as several aspects of fat
imaging and fat quantitation in the liver and other tissues. In
addition, we have in-licensed license three (3) U.S.
patents.
Each of
our patents generally has a term of 20 years from its respective
priority filing date. Among our issued patents, the first
patent is set to expire in 2035 and the last patent is set to
expire in 2037.
Sales and Marketing
During
2019 we hired a Chief Commercial Officer and began planning to
build a sales and marketing team dedicated to our TAEUS clinical
applications. In parallel to securing all necessary government
marketing approvals, we intend to hire a small internal sales and
marketing team to engage and support channel partners and clinical
customers. As we previously did with our Nexus 128 system, we
intend to partner with several geographically-focused independent
clinical ultrasound equipment distributors to market and sell our
TAEUS applications. We believe that these distributors have
existing customer relationships, a strong knowledge of diagnostic
imaging technology and the capabilities to support the
installation, customer training and post-sale service of capital
equipment and software.
We also
intend to work with original equipment manufacturers, or OEMs, of
ultrasound and thermal ablation equipment to sell our TAEUS
applications alongside their own new systems and into their
existing installed base systems. We believe that these OEMs will
find our applications attractive as the applications would enable
them to generate additional revenue from their installed systems
– as they currently do with aftermarket accessory portfolios.
We believe our relationship with GE Healthcare will facilitate this
strategy.
Based
on our design work and our understanding of the ultrasound
accessory market, we intend to price our initial NAFLD TAEUS
application at a price point approximating $35,000 to $55,000,
which should enable purchasers to recoup their investment in less
than one year by performing a relatively small number of additional
ultrasound procedures.
11
Some of
our future TAEUS offerings are expected to be implemented via a
hardware platform that can run multiple individual software
applications that we plan to offer TAEUS users for a one-time
licensing fee, enabling users to perform more procedures with their
existing ultrasound equipment and retaining more patients in their
clinics rather than referring them out to a regional imaging
medical center for a CT or MRI scan.
We also
intend to offer a license for our TAEUS technology to OEMs, such as
GE Healthcare, for incorporation in their new ultrasound
systems.
Engineering, Design and Manufacturing
Development of TAEUS Device
We have
contracted with StarFish Product Engineering, Inc.
(“StarFish”), a medical device contract manufacturing
company, to commence the productization of our NAFLD TAEUS
application. In particular, we have retained StarFish to develop
ENDRA’s current prototype TAEUS device into a clinical
product that meets CE regulatory requirements required for
commercial launch. We have leveraged StarFish’s expertise in
the preparation and submission of our CE Technical File
documentation, submitted in December 2019, that will enable us to
sell the application in the European Union as a Class IIa medical
device once a final design for our TAEUS device has been developed
and tested, and expect StarFish to lead the preparation of
documentation for regulatory approval submission in the United
States. In order to foster collaboration, our Chief Technology
Officer regularly visits StarFish’s facilities to monitor the
TAEUS application manufacturing process.
We
believe that our contract manufacturers will either supply
necessary components internally or obtain them from third-party
sources. At this time, we do not know whether any components are or
will be single sourced.
Regulatory Approval Pathway and Human Study
Each of
our TAEUS platform applications will require regulatory approvals
before we are able to sell or license the application. Based on
certain factors, such as the installed base of ultrasound systems,
availability of other imaging technologies, such as CT and MRI,
economic strength and applicable regulatory requirements, we are
seeking initial approval of our applications for sale in the
European Union, and plan to seek additional approval in the United
States and China.
The
first TAEUS application we intend to commercialize is our NAFLD
TAEUS application. Our initial target market for this application
is the European Union. For commercial reasons and to support our
application for CE marking, which is required before we can sell
the application in the European Union we contracted with CIMTEC, a
medical imaging research group, to conduct human studies through
Canada-based Robarts Research Institute to demonstrate our NAFLD
TAEUS application’s ability to distinguish fat from lean
tissue. In December 2018, Robarts Research Institute completed its
initial healthy subject enrollment and data collection of 25
subjects and received authorization from Health Canada to expand
the study to 50 subjects. In September 2019, we announced the
completion and reported top-level findings of the expanded study,
which was included in our TAEUS liver device technical file
submission for device CE mark. We received CE mark approval for our
NAFLD TAEUS application in March 2020.
We are now in the process of
notifying the competent authorities that we have received the CE
mark and registering the product in each of the initial target
markets.
In
2012, the European Commission proposed a new regulatory scheme
that, once implemented, will impose significant additional
obligations on medical device companies. Expected changes include
stricter requirements for clinical evidence and pre-market
assessment of safety and performance, new classifications to
indicate risk levels, requirements for third party testing by
government accredited groups for some types of medical devices, and
tightened and streamlined quality management system assessment
procedures. Such new rules could impose additional requirements on
our business, such as a requirement to conduct clinical trials for
future CE mark applications we make and post-market surveillance
obligations, as well as the further requirements for the
traceability of products, transparency, refined responsibilities
for economic operators (including manufacturer, distributors and
importers) as well as a tightened and more comprehensive quality
management system.
Simultaneously
with the process of obtaining CE mark approval for a CE mark for
our NAFLD TAEUS application, we have begun preparing for submission
to the U.S. Food and Drug Administration (the “FDA”) an
application under the Food, Drug and Cosmetic Act (the
“FD&C Act”) to sell our NAFLD TAEUS application in
the U.S. We anticipate that the application, as well as those for
any other TAEUS applications that we develop, will be submitted for
approval under Section 510(k) of the FD&C Act. We expect that
our initial FDA clearance will allow us to sell the NAFLD TAEUS
application in the U.S. with general imaging claims. However, we
will need to obtain additional FDA clearances to be able to make
diagnostic claims for fatty tissue content determination.
Accordingly, to support our commercialization efforts we expect
that, following receipt of our initial FDA clearance, we would
submit one or more additional applications to the FDA, each of
which would need to include additional clinical trial data, so that
following receipt of the necessary clearances we may make those
diagnostic claims.
12
Regulation
European Union
The
primary regulatory environment in Europe is the European Union,
which consists of 27 member states encompassing most of the major
countries in Europe. We believe that in the European Union
applications incorporating our TAEUS technology will be regulated
as Class IIa medical devices by the European Medicines Agency (the
“EMA”) and the European Union Commission. As described
above, our NAFLD TAEUS application has received, and we expect our
future applications will need to receive, a CE mark from an
appropriate Competent Authority or government-accredited group (a
“Notified Body”), as the case may be, as a result of
successful review of one or more submissions prepared by our
contract engineering and manufacturer(s), so that such applications
can be marketed and distributed within the European Economic Area.
Each of our applications will be required to be recertified each
year for CE marking, which recertification may require an annual
audit. The audit procedure, which will include on-site visits at
our facility, and the contract manufacturer’s(s’)
facility(ies), will require us to provide the contract
manufacturer(s) with information and documentation concerning our
quality management system and all applicable documents, policies,
procedures, manuals, and other information.
In the
European Union, the manufacturer of medical devices is subject to
current Good Manufacturing Practice, or cGMP, as set forth in the
relevant laws and guidelines of the European Union and its member
states. Compliance with cGMP is generally assessed by a Notified
Body accredited by a Competent Authority. For a Class IIa device,
typically, quality system evaluation is performed by the Notified
Body, which also recommends to the relevant Competent Authority for
the European community whether a device will receive a CE mark. The
Notified Body may conduct inspections of relevant facilities, and
review manufacturing procedures, operating systems and personnel
qualifications. In addition to obtaining approval for each
application, in many cases each device manufacturing facility must
be audited on a periodic basis by the Notified Body. Further
inspections may occur over the life of the
application.
FDA Regulation
Each of
our products must be approved or cleared by the FDA before it is
marketed in the United States. Before and after approval or
clearance in the United States, our applications are subject to
extensive regulation by the FDA under the FD&C Act and/or the
Public Health Service Act, as well as by other regulatory bodies.
The FDA regulations govern, among other things, the development,
testing, manufacturing, labeling, safety, storage, record-keeping,
market clearance or approval, advertising and promotion, import and
export, marketing and sales, and distribution of medical devices
and pharmaceutical products.
FDA Approval or Clearance of Medical Devices
In the
United States, medical devices are subject to varying degrees of
regulatory control and are classified in one of three classes
depending on the extent of controls the FDA determines are
necessary to reasonably ensure their safety and
efficacy:
● Class
I: general controls, such as labeling and adherence to quality
system regulations;
● Class
II: special controls, 510(k) submission, specific controls such as
performance standards, patient registries and post-market
surveillance and additional controls such as labeling and adherence
to quality system regulations; and
● Class
III: special controls and approval of a premarket approval, or PMA,
application.
We
expect all of our products to be classified as Class II medical
devices and thus require FDA authorization prior to marketing by
means of a 510(k) clearance rather than a PMA
application.
To
request marketing authorization by means of a 510(k) clearance, we
must submit a notification demonstrating that the proposed device
is substantially equivalent to another legally marketed medical
device, has the same intended use, and is as safe and effective as
a legally marketed device and does not raise different questions of
safety and effectiveness than a legally marketed device. 510(k)
submissions generally include, among other things, a description of
the device and its manufacturing, device labeling, medical devices
to which the device is substantially equivalent, safety and
biocompatibility information and the results of performance
testing. In some cases, a 510(k) submission must include data from
human clinical studies. Marketing may commence only when the FDA
issues a clearance letter finding substantial equivalence. The
typical duration to receive a 510(k) approval is approximately nine
to twelve months from the date of the initial 510(k) submission,
although there is no guarantee that the timing will not be
longer.
13
In the
past, the 510(k) pathway for product marketing has required only
proof of substantial equivalence in technology for a given
indication with a previously cleared device. Recently, there has
been a trend of the FDA requiring additional clinical work to prove
efficacy in addition to technological equivalence and basic safety.
Whether clinical data is provided or not, the FDA may decide to
reject the substantial equivalence argument we present. If that
happens, the device is automatically designated as a Class III
device. The device sponsor must then fulfill more rigorous PMA
requirements, or can request a risk-based classification
determination for the device in accordance with the “de
novo” process, which may determine that the new device is of
low to moderate risk and that it can be appropriately be regulated
as a Class I or II device. If a de novo request is granted, the
device may be legally marketed and a new classification is
established. If the device is classified as Class II, the device
may serve as a predicate for future 510(k) submissions. If the
device is not approved through de novo review, then it must go
through the standard PMA process for Class III
devices.
After a
device receives 510(k) clearance, any product modification that
could significantly affect the safety or effectiveness of the
product, or that would constitute a significant change in intended
use, requires a new 510(k) clearance or, if the device would no
longer be substantially equivalent, a PMA. If the FDA determines
that the product does not qualify for 510(k) clearance, then a
company must submit, and the FDA must approve, a PMA before
marketing can begin.
A PMA
application must provide a demonstration of safety and
effectiveness, which generally requires extensive pre-clinical and
clinical trial data. Information about the device and its
components, device design, manufacturing and labeling, among other
information, must also be included in the PMA. As part of the PMA
review, the FDA will inspect the manufacturer’s facilities
for compliance with quality system regulation requirements, which
govern testing, control, documentation and other aspects of quality
assurance with respect to manufacturing. If the FDA determines the
application or manufacturing facilities are not acceptable, the FDA
may outline the deficiencies in the submission and often will
request additional testing or information. Notwithstanding the
submission of any requested additional information, the FDA
ultimately may decide that the application does not satisfy the
regulatory criteria for approval. During the review period, a FDA
advisory committee, typically a panel of clinicians and
statisticians, is likely to be convened to review the application
and recommend to the FDA whether, or upon what conditions, the
device should be approved. The FDA is not bound by the advisory
panel decision. While the FDA often follows the panel’s
recommendation, there have been instances in which the FDA has not.
The FDA must find the information to be satisfactory in order to
approve the PMA. The PMA approval can include post-approval
conditions, including, among other things, restrictions on
labeling, promotion, sale and distribution, or requirements to do
additional clinical studies after approval. Even after approval of
a PMA, a new PMA or PMA supplement is required to authorize certain
modifications to the device, its labeling or its manufacturing
process. Supplements to a PMA often require the submission of the
same type of information required for an original PMA, except that
the supplement is generally limited to that information needed to
support the proposed change from the product covered by the
original PMA. The typical duration to receive PMA approval is
approximately two years from the date of submission of the initial
PMA application, although there is no guarantee that the timing
will not be longer.
Clinical Trials of Medical Devices
One or
more clinical trials are generally required to support a PMA
application and more recently are becoming necessary to support a
510(k) submission. Clinical studies of unapproved or uncleared
medical devices or devices being studied for uses for which they
are not approved or cleared (investigational devices) must be
conducted in compliance with FDA requirements. If an
investigational device could pose a significant risk to patients,
the sponsor company must submit an investigational device exemption
application to the FDA prior to initiation of the clinical study.
An investigational device exemption application must be supported
by appropriate data, such as animal and laboratory test results,
showing that it is safe to test the device on humans and that the
testing protocol is scientifically sound. The investigational
device exemption will automatically become effective 30 days after
receipt by the FDA unless the FDA notifies the company that the
investigation may not begin. Clinical studies of investigational
devices may not begin until an institutional review board has
approved the study.
During
the study, the sponsor must comply with the FDA’s
investigational device exemption requirements. These requirements
include investigator selection, trial monitoring, adverse event
reporting, and record keeping. The investigators must obtain
patient informed consent, rigorously follow the investigational
plan and study protocol, control the disposition of investigational
devices, and comply with reporting and record keeping requirements.
The sponsor, the FDA, or the institutional review board at each
institution at which a clinical trial is being conducted may
suspend a clinical trial at any time for various reasons, including
a belief that the subjects are being exposed to an unacceptable
risk. During the approval or clearance process, the FDA typically
inspects the records relating to the conduct of one or more
investigational sites participating in the study supporting the
application.
14
Post-Approval Regulation of Medical Devices
After a
device is cleared or approved for marketing, numerous and pervasive
regulatory requirements continue to apply. These
include:
● the
FDA quality systems regulation, which governs, among other things,
how manufacturers design, test, manufacture, exercise quality
control over, and document manufacturing of their
products;
● labeling
and claims regulations, which prohibit the promotion of products
for unapproved or “off-label” uses and impose other
restrictions on labeling; and
● the
Medical Device Reporting regulation, which requires reporting to
the FDA of certain adverse experiences associated with use of the
product.
Good Manufacturing Practices Requirements
Manufacturers
of medical devices are required to comply with the good
manufacturing practices set forth in the quality system regulation
promulgated under Section 520 of the FD&C Act. Current good
manufacturing practices regulations require, among other things,
quality control and quality assurance as well as the corresponding
maintenance of records and documentation. The manufacturing
facility for an approved product must be registered with the FDA
and meet current good manufacturing practices requirements to the
satisfaction of the FDA pursuant to a pre-PMA approval inspection
before the facility can be used. Manufacturers, including third
party contract manufacturers, are also subject to periodic
inspections by the FDA and other authorities to assess compliance
with applicable regulations. Failure to comply with statutory and
regulatory requirements subjects a manufacturer to possible legal
or regulatory action, including the seizure or recall of products,
injunctions, consent decrees placing significant restrictions on or
suspending manufacturing operations, and civil and criminal
penalties. Adverse experiences with the product must be reported to
the FDA and could result in the imposition of marketing
restrictions through labeling changes or in product withdrawal.
Product approvals may be withdrawn if compliance with regulatory
requirements is not maintained or if problems concerning safety or
efficacy of the product occur following the approval.
China Regulation
China’s
regulatory approval framework includes nationwide approval based on
a showing that the device for which approval is sought has been
previously approved in the country of origin. Alternatively, we
understand it is also possible to receive approval at the
provincial level or to work exclusively with hospitals that do not
require such nationwide or provincial approval. We intend to
explore these potential paths to regulatory compliance in
China.
Other Regulations
We will
become subject to regulations and product registration requirements
in many foreign countries in which we may sell our products,
including in the areas of product standards, packaging
requirements, labeling requirements, import and export restrictions
and tariff regulations, duties and tax requirements. Additionally,
third parties designing, manufacturing or conducting human studies
of our devices will be subject to local regulations, such as those
of Health Canada. The time required to obtain clearance required by
foreign countries may be longer or shorter than that required for
EMA or FDA clearance, and requirements for licensing a product in a
foreign country may differ significantly from EMA and FDA
requirements.
Competition
While
we believe that we are the only company developing RF-based
thermoacoustic ultrasound products, we will face direct and
indirect competition from a number of competitors, many of whom
have greater financial, sales and marketing and other resources
than we do.
Manufacturers
of CT and MRI systems include multi-national corporations such as
Royal Philips, Siemens AG and Hitachi, Ltd., many of whom also
manufacture and sell ultrasound equipment. In the NAFLD diagnosis
market we will compete with makers of surgical biopsy tools, such
as Cook Medical and Sterylab S.r.l. In the thermal ablation market,
we will compete with manufacturers of surgical temperature probes,
such as Medtronic plc and St. Jude Medical, Inc.
Employees
As of
December 31, 2019, we had 15 employees, all of whom are employed on
a full-time basis. 9 full-time employees were engaged in research
and development activities, 2 full-time employees were engaged in
sales activities, 1 full-time employee was engaged in product
assembly, and 3 full-time employees were engaged in administrative
activities. None of our employees are covered by a collective
bargaining agreement, and we believe our relationship with our
employees is good.
We also
employ technical advisors, on an as-needed basis, to supplement
existing staff. We believe that these technical advisors provide us
with necessary expertise in clinical ultrasound applications,
ultrasound technology, and intellectual property.
15
I
tem 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You
should carefully consider the following risks and all other
information contained in this Annual Report, including our
financial statements and the related notes, before investing in our
securities. The risks and uncertainties described below are not the
only ones we face, but include the most significant factors
currently known by us that make investing in our securities
speculative or risky. Additional risks and uncertainties that we
are unaware of, or that we currently believe are not material, also
may become important factors that affect us. If any of the
following risks materialize, our business, financial condition and
results of operations could be materially harmed. In that case, the
trading price of our securities could decline, and you may lose
some or all of your investment.
Risks Related to Our Business
We have a history of operating losses, we may never achieve or
maintain profitability, and we will need to raise significant
additional capital if we are going to continue as a going
concern.
We have limited commercial experience upon which investors may
evaluate our prospects. We have only generated limited revenues to
date and have a history of losses from operations. As of December
31, 2019, we had an accumulated deficit of approximately $45.2
million. Our independent registered public accounting firm, in its
report on our financial statements for the year ended December 31,
2019, has raised substantial doubt about our ability to continue as
a going concern.
We will
require additional capital in the near term to continue as a going
concern to proceed with the commercialization of our planned TAEUS
applications and to meet our growth and profitability targets. We
have expended and expect to continue to expend significant
resources on hiring of personnel, payroll and benefits, continued
scientific and potential product research and development,
potential product testing and pre-clinical and clinical
investigations, expenses associated with the development of
relationships with strategic partners, intellectual property
development and prosecution, marketing and promotion, capital
expenditures, working capital, and general and administrative
expenses. We also expect to incur costs and expenses related to
consulting, laboratory development, and the hiring of scientists
and other operational personnel.
We may not be able to secure financing on favorable terms, or at
all, to meet our future capital needs and our failure to obtain
financing when needed could force us to delay, reduce or eliminate
our product development programs and commercialization
efforts.
We will
need to raise additional capital in order to finance the full
commercialization of our first TAEUS application in the European
Union and to complete the development of any other TAEUS
application through public or private equity offerings, debt
financings, corporate collaboration and licensing arrangements or
other financing alternatives.
To
date, we have financed our operations primarily through the net
proceeds from offerings of common stock and convertible notes, as
well as sales of our discontinued Nexus 128 system. We do not know
when or if our operations will generate sufficient cash to fund our
ongoing operations. Therefore, we will require additional capital
in order to: (i) continue to conduct research and development
activities; (ii) continue to conduct clinical studies; (iii) fund
the costs of seeking regulatory approval of TAEUS applications;
(iv) expand our sales and marketing infrastructure; (v) acquire
complementary business technology or products; and (vi) respond to
business opportunities, challenges, increased regulatory
obligations or unforeseen circumstances. Our future funding
requirements will depend on many factors, including, but not
limited to:
● the
costs, timing and outcomes of regulatory reviews associated with
our future products, including TAEUS applications;
● the
progress, timing, costs and outcomes of our clinical trials,
including the ability to timely enroll patients in our planned and
potential future clinical trials;
● the
costs and expenses of expanding our sales and marketing
infrastructure;
● the
costs and timing of developing variations of our TAEUS applications
and, if necessary, obtaining regulatory clearance of such
variations;
● the
degree of success we experience in commercializing our products,
particularly our TAEUS applications;
● the
extent to which our TAEUS applications are adopted by hospitals for
use by primary care physicians, hepatologists, radiologists and
oncologists for diagnosis of fatty liver disease and the thermal
ablation of lesions;
● the
number and types of future products we develop and
commercialize;
16
● the
costs of preparing, filing and prosecuting patent applications and
maintaining, enforcing and defending intellectual property-related
claims;
● the
extent and scope of our general and administrative
expenses;
● the
outcome, timing and cost of regulatory approvals, including the
potential that the FDA or comparable regulatory authorities may
require that we perform more studies than those that we currently
expect;
● the
amount of sales and other revenues from technologies and products
that we may commercialize, if any, including the selling prices for
such potential products and the availability of adequate
third-party reimbursement;
● selling
and marketing costs associated with our potential products,
including the cost and timing of expanding our marketing and sales
capabilities;
● the
terms and timing of any potential future collaborations, licensing
or other arrangements that we may establish;
● cash
requirements of any future acquisitions and/or the development of
other products;
● the
costs of operating as a public company;
● the
cost and timing of completion of commercial-scale, outsourced
manufacturing activities; and
● the
time and cost necessary to respond to technological and market
developments.
We may
raise funds in equity or debt financings or enter into credit
facilities in order to access funds for our capital needs. Any debt
financing obtained by us in the future would cause us to incur debt
service expenses and could include restrictive covenants relating
to our capital raising activities and other financial and
operational matters, which may make it more difficult for us to
obtain additional capital and pursue business opportunities. If we
raise additional funds through issuances of equity or convertible
debt securities, our existing stockholders could suffer significant
dilution in their percentage ownership of our Company, and any new
equity securities we issue could have rights, preferences and
privileges senior to those of holders of our common stock. See
“
Future sales and issuances
of our common stock or rights to purchase common stock, including
pursuant to our equity incentive plan, could result in dilution of
the percentage ownership of our stockholders and could cause the
price of our securities to fall.
” below. In addition,
if we raise additional funds through collaborations, strategic
alliances or marketing, distribution or licensing arrangements with
third parties, we may have to relinquish valuable rights to our
technologies, future revenue streams or products or to grant
licenses on terms that may not be favorable to us and our
collaborators and strategic partners may not perform as
expected.
General
market conditions or the market price of our common stock may not
support capital raising transactions such as a public or private
offering of our common stock or other securities. If we are unable
to obtain adequate financing or financing on terms satisfactory to
us when we require it, we may terminate or delay the development of
one or more of our products, or delay establishment of sales and
marketing capabilities or other activities necessary to
commercialize our products, or materially curtail or reduce our
operations. We could be forced to sell or dispose of our rights or
assets. Any inability to raise adequate funds on commercially
reasonable terms could have a material adverse effect on our
business, results of operation and financial condition, including
the possibility that a lack of funds could cause our business to
fail and liquidate with little or no return to
investors.
Our efforts may never result in the successful development of
commercial applications based on our TAEUS
technology.
Our
TAEUS technology is still in development and we do not have any
applications for our TAEUS technology approved for sale.
Applications for our TAEUS technology may never be approved, become
commercially viable or generate significant revenue. Our ability to
generate significant revenues and, ultimately, achieve
profitability will depend on whether we can obtain additional
capital when we need it, complete the development of our
technology, receive required regulatory approvals for our TAEUS
applications and find customers who will purchase our future
products or strategic partners that will incorporate our technology
into their products. Even if we develop commercially viable
applications for our TAEUS technology, which may include licensing,
we may never recover our research and development expenses and we
may never be able to produce material revenues or operate on a
profitable basis.
17
Our
research and development efforts remain subject to all of the risks
associated with the development of new products based on emerging
technologies, including, without limitation, unanticipated
technical or other problems, the inability to develop a product
that may be sold at an acceptable price point and the possible
insufficiency of funds needed in order to complete development of
these products. Technical problems may result in delays and cause
us to incur additional expenses that would increase our losses. If
we cannot complete, or if we experience significant delays in
developing applications based on, our TAEUS technology,
particularly after incurring significant expenditures, our business
may fail.
Our success is substantially dependent on the success of
applications for our TAEUS platform.
Our
ability to generate meaningful revenues in the future will depend
on the successful development and commercialization of our TAEUS
platform applications. The commercial success of our TAEUS platform
applications and our ability to generate revenues will depend on
many factors, including the following:
● our
successful development of applications for our TAEUS technology,
such as those we intend to pursue for the diagnosis of NAFLD and
the monitoring of thermal ablation surgery, and the acceptance in
the marketplace by physicians and patients of such
applications;
● the
successful design and manufacturing of a device or devices which
enable the use of our TAEUS technology by physicians on their
patients;
● receipt
of necessary regulatory approvals;
● sufficient
coverage or reimbursement by third-party payors;
● our
ability to successfully market our products;
● our
ability to demonstrate that our TAEUS applications have advantages
over competing products and procedures;
● the
amount and nature of competition from competing or alternative
imaging products; and
● our
ability to establish and maintain commercial manufacturing,
distribution and sales force capabilities.
Our TAEUS platform applications may not achieve adequate market
acceptance by the physicians, patients, third-party payors and
others in the medical community.
Even if
any of our TAEUS applications receives regulatory approval, it may
nonetheless fail to gain sufficient market acceptance by
physicians, patients, third-party payors and others in the medical
community. If our TAEUS applications do not achieve an adequate
level of acceptance, we may not generate significant product
revenues or any profits from sales. The degree of market acceptance
of products based on our TAEUS platform will depend on a number of
factors, including:
● potential
or perceived advantages or disadvantages compared to alternative
products;
● pricing
relative to competitive products and availability of third-party
coverage or reimbursement;
● the
timing of bringing our product to market as compared to possible
other new entrants to the market;
● our
ability to effectively raise market awareness and explain product
benefits and whether we have resources sufficient to do
so;
● relative
convenience, dependability and ease of administration;
and
● willingness
of the target patient population to try new products and of
physicians to utilize such products.
Our
revenues will be adversely affected if, due to these or other
factors, the products we are able to commercialize do not gain
significant market acceptance.
18
A pandemic, epidemic, or outbreak of an infectious disease, such as
COVID-19, or coronavirus, may materially and adversely affect our
business and our financial results.
The
spread of COVID-19 has affected segments of the global economy and
may affect our operations, including the potential interruption of
our clinical trial activities and our supply chain. The recent
outbreak of COVID-19 originated in Wuhan, China in December 2019
and has since spread to multiple countries and, in particular,
European countries comprising certain of our target markets. The
continued spread of COVID-19 may result in a period of business
disruption, including delays in our clinical trials or delays or
disruptions in our commercialization efforts. In addition, there
could be a potential effect of COVID-19 to the business at FDA or
other health authorities, which could result in delays of reviews
and approvals, including with respect to our product
candidates.
The
continued spread of COVID-19 globally could adversely affect our
clinical trial operations in the United States and elsewhere,
including our ability to recruit and retain patients and principal
investigators and site staff who, as healthcare providers, may have
heightened exposure to COVID-19 if an outbreak occurs in their
geography. Further, some patients may be unable to comply with
clinical trial protocols if quarantines or travel restrictions
impede patient movement or interrupt healthcare services, or if the
patients become infected with COVID-19 themselves, which would
delay our ability to conduct clinical trials or release clinical
trial results. COVID-19 may also affect employees of third-party
contract research organizations located in affected geographies
that we rely upon to carry out our clinical trials, which could
result in inefficiencies due to reductions in staff and disruptions
to work environments.
The
spread of COVID-19, or another infectious disease, could also
negatively affect the operations at our third-party manufacturers,
which could result in delays or disruptions in the
commercialization of our products. In addition, we may take
temporary precautionary measures intended to help minimize the risk
of the virus to our employees, including temporarily requiring all
employees to work remotely, suspending all non-essential travel
worldwide for our employees, and discouraging employee attendance
at industry events and in-person work-related meetings, which could
negatively affect our business.
We
cannot presently predict the scope and severity of any potential
business shutdowns or disruptions. If we or any of the third
parties with whom we engage, however, were to experience shutdowns
or other business disruptions, our ability to conduct our business
in the manner and on the timelines presently planned could be
materially and negatively affected, which could have a material
adverse impact on our business and our results of operation and
financial condition.
We may not remain commercially viable if there is an inadequate
level of reimbursement by governmental programs and other
third-party payors for our planned products or associated
procedures.
Medical
imaging products are purchased principally by hospitals, physicians
and other healthcare providers around the world that typically bill
various third-party payors, including governmental programs (e.g.,
Medicare and Medicaid in the United States), private insurance
plans and managed care programs, for the services provided to their
patients.
Third-party
payors and governments may approve or deny coverage for certain
technologies and associated procedures based on independently
determined assessment criteria. Reimbursement decisions by payors
for these services are based on a wide range of methodologies that
may reflect the services’ assessed resource costs, clinical
outcomes and economic value. These reimbursement methodologies and
decisions confer different, and sometimes conflicting, levels of
financial risk and incentives to healthcare providers and patients,
and these methodologies and decisions are subject to frequent
refinements. Third-party payors are also increasingly adjusting
reimbursement rates, often downwards, indirectly challenging the
prices charged for medical products and services. There can be no
assurance that our products will be covered by third-party payors,
that adequate reimbursement will be available or, even if payment
is available, that third-party payors’ coverage policies will
not adversely affect our ability to sell our products
profitably.
We have limited data regarding the efficacy of our TAEUS platform
applications. If any of our applications that receive regulatory
approval do not perform in accordance with our expectations, we are
unlikely to successfully commercialize our
applications.
Since
our success depends in large part on the medical and third-party
payors community’s acceptance of our TAEUS applications, even
if we receive regulatory approval for our applications, we believe
that we will need to obtain additional clinical data from users of
our applications to persuade medical professions to use our
applications. We may also be required to conduct post-approval
clinical testing to obtain such additional data. Clinical testing
is expensive, can take a significant amount of time to complete and
can have uncertain outcomes. Negative results of these clinical
studies could have a material, adverse impact on our
business.
19
We cannot be certain that results from limited animal and human
studies of any of our TAEUS applications will be indicative of
future studies or that any of our TAEUS applications will be
successfully commercialized.
To
successfully commercialize any application based on our TAEUS
platform technology, we expect it will be necessary to conduct
various pre-clinical and human studies to demonstrate that the
product is safe and effective for human use. In October 2018 we
initiated certain human studies of our TAEUS device targeting NAFLD
which are expected to provide key insights into clinical work flow
and quantitative methodologies for the device. In September 2019,
we reported top-level findings from a clinical study conducted by
CIMTEC relating to the feasibility of our TAEUS application for
NAFLD. However, there can be no assurance that results from this
study is indicative of results that would be achieved in future
animal studies or human clinical studies, which may be required in
order for our applications incorporating our technology to obtain
or maintain regulatory approval. Even if clinical trials or other
studies demonstrate safety and effectiveness of any of product
candidates incorporating our technology for a specific disease or
condition and the necessary regulatory approvals are obtained, the
commercial success of any of such product candidates will depend
upon their acceptance by patients, the medical community, and
third-party payers and on our partners’ ability to
successfully manufacture and commercialize such product
candidates.
Our limited commercial experience makes it difficult to evaluate
our business, predict our future results or forecast our financial
performance and growth.
We were
incorporated in 2007 and began commercializing our initial
pre-clinical Nexus 128 product in 2010. Our NAFLD TAEUS device has
obtained CE mark approval but has not yet been fully
commercialized. This limited commercial experience makes it
difficult to evaluate our business, predict our future results or
forecast our financial performance and growth. If our assumptions
regarding the risks and uncertainties we face, which we use to plan
our business, are incorrect or change due to circumstances in our
business or our markets, or if we do not address these risks
successfully, our operating and financial results could differ
materially from our expectations and our business could
suffer.
We have formed, and may in the future form or seek, strategic
alliances and collaborations or enter into licensing arrangements,
and we may not realize the benefits of such alliances,
collaborations or licensing arrangements.
In
April 2016, we entered into a Collaborative Research Agreement with
GE Healthcare, under which GE Healthcare has agreed to support our
efforts to commercialize our TAEUS technology for use in an NAFLD
application by, among other things, providing equipment and
technical advice, and facilitating introductions to GE Healthcare
clinical ultrasound customers. This agreement does not commit GE
Healthcare to a long-term relationship and it may disengage with us
at any time. This agreement has a term lasting until January 14,
2021 and is subject to termination by either party upon not less
than 60 days’ notice. See the section of this Annual Report
titled “Collaboration with GE Healthcare” under
“Item 1. Business” for further description of this
agreement.
We
intend in the future to form or seek additional strategic
alliances, create joint ventures or collaborations or enter into
licensing arrangements with third parties that we believe will
complement or augment our development and commercialization efforts
with respect to our technologies and applications.
Any of
these relationships may require us to incur non-recurring and other
charges, increase our near- and long-term expenditures, issue
securities that dilute our existing stockholders, restrict our
ability to collaborate with other third parties or otherwise
disrupt our management and business. In addition, we face
significant competition in seeking appropriate strategic partners
and the negotiation process is time-consuming and complex. If we
license technologies or applications, we may not be able to realize
the intended benefit of such transactions. Further, strategic
alliances and collaborations are subject to numerous risks, which
may include the following:
● collaborators
have significant discretion in determining the efforts and
resources that they will apply to a collaboration;
● collaborators
may not pursue development and commercialization of our
technologies and applications or may elect not to continue or renew
development or commercialization programs based on clinical trial
results, changes in their strategic focus due to the acquisition of
competitive products, availability of funding, or other external
factors, such as a business combination that diverts resources or
creates competing priorities;
20
● collaborators
may delay clinical trials, provide insufficient funding for a
clinical trial, stop a clinical trial, abandon the development of
an application, repeat or conduct new clinical trials, or require a
new formulation of an application for clinical
testing;
● collaborators
could independently develop, or develop with third parties,
products that compete directly or indirectly with our applications
and technologies;
● a
collaborator with marketing and distribution rights to one or more
applications may not commit sufficient resources to their marketing
and distribution;
● collaborators
may not properly maintain or defend our intellectual property
rights or may use our intellectual property or proprietary
information in a way that gives rise to actual or threatened
litigation that could jeopardize or invalidate our intellectual
property or proprietary information or expose us to potential
liability;
● disputes
may arise between us and a collaborator that cause the delay or
termination of the research, development or commercialization of
our technologies and applications, or that result in costly
litigation or arbitration that diverts management attention and
resources;
● collaborations
may be terminated and, if terminated, may result in a need for
additional capital to pursue further development or
commercialization of the applicable applications or technologies;
and
● collaborators
may own or co-own intellectual property covering our products that
results from our collaborating with them, and in such cases, we
would not have the exclusive right to commercialize such
intellectual property.
As a
result, if we enter into collaboration agreements and strategic
partnerships or license our applications or technologies, we may
not be able to realize the benefit of such transactions if we are
unable to successfully integrate them with our existing operations
and company culture, which could delay our timelines or otherwise
adversely affect our business. We also cannot be certain that,
following a strategic transaction or license, we will achieve the
revenue or specific net income that justifies such transaction. Any
delays in entering into new strategic partnership agreements
related to our applications could delay the development and
commercialization of our technologies and applications in certain
geographies or for certain applications, which would harm our
business prospects, financial condition and results of
operations.
We have limited resources and depend on third parties to design and
manufacture, and seek regulatory approval of, our TAEUS
applications. If any third party fails to successfully design,
manufacture or obtain regulatory approval of TAEUS applications,
our business will be materially harmed.
We do
not currently have, nor do we plan to acquire, the infrastructure
or capability to design or manufacture our TAEUS applications. To
support our design and manufacturing efforts, we have contracted
StarFish Product Engineering, Inc., a medical device contract
manufacturing company, rather than design or manufacture our TAEUS
applications ourselves. We have limited control over the efforts
and resources that these and any other third-party original
equipment manufacturers (“OEMs”) will devote to
developing and manufacturing our TAEUS applications and their
capabilities to serve our needs, including quality control, quality
assurance and qualified personnel. In addition, we currently expect
to depend on OEMs to acquire CE marks for the device or devices
that they develop and manufacture which are necessary to permit
marketing of those devices in the European Union followed by
corresponding FDA approval.
An OEM
may not be able to successfully design and manufacture the products
it develops based on our TAEUS technology, may not devote
sufficient time and resources to support these efforts or may fail
in gaining the required regulatory approvals of our TAEUS
applications. The failure by an OEM to perform in accordance with
our expectations would substantially harm the value of our TAEUS
technology, brand and business.
21
We will need to develop marketing and distribution capabilities
both internally and through our relationships with third parties in
order to sell any of our TAEUS products receiving regulatory
approval. If we experience problems in developing these
capabilities, our ability to sell our products could be
limited.
We have
limited experience selling our products and will need to develop
marketing, sales and distribution capabilities in order to sell our
TAEUS applications that receive the necessary regulatory approval.
We have limited experience managing a sales force and customer
support operations and may be unable to attract, retain and manage
the collaborative manufacturing and distribution arrangements or
the specialized workforce necessary to successfully commercialize
our products. In addition, our sales and marketing organization
must effectively explain the uses and benefits of our products as
compared to alternatives in order to promote market acceptance and
demand for our products. Developing these functions is time
consuming and expensive and our efforts may not be
successful.
We
intend to partner with others to assist us with some or all of
these functions. However, we may be unable to find appropriate
third parties with which to enter into these arrangements and any
such third parties may not perform as expected.
Furthermore,
third-party distributors that are in the business of selling other
medical products may not devote a sufficient level of resources and
support required to generate awareness of our TAEUS applications
and grow or maintain product sales. If these distributors are
unwilling or unable to market and sell our products, or if they do
not perform to our expectations, we could experience delayed or
reduced market acceptance and sales of our products. In addition,
disagreements with our distributors or non-performance by these
third parties could lead to costly and time-consuming litigation or
arbitration and disrupt distribution channels for a period of time
and require us to re-establish a distribution channel.
If we are unable to manage the growth of our business, our future
revenues and operating results may be harmed.
Because
of our small size, growth in accordance with our business plan, if
achieved, will place a significant strain on our financial,
technical, operational and management resources. As we expand our
activities, there will be additional demands on these resources.
The failure to continually upgrade our technical, administrative,
operating and financial control systems or the occurrence of
unexpected expansion difficulties, including issues relating to our
research and development activities and retention of experienced
scientists, managers and technicians, could have a material adverse
effect on our business, financial condition and results of
operations and our ability to timely execute our business plan. If
we are unable to implement these actions in a timely manner, our
results may be adversely affected.
Competition in the medical imaging market is intense and we may be
unable to successfully compete.
In
general, competition in the medical imaging market is very
significant and characterized by extensive research and development
and rapid technological change. Competitors in this market include
very large companies with significantly greater resources than we
have. To successfully compete in this market we will need to
develop TAEUS applications that offer significant advantages over
alternative imaging products and procedures for such
applications.
While
we believe the technology behind our TAEUS platform is unique in
the industry, developments by other medical imaging companies of
new or improved products, processes or technologies may make our
products or proposed products obsolete or less competitive.
Alternative medical imaging devices may be more accepted or
cost-effective than our products. Competition from these companies
for employees with experience in the medical imaging industry could
result in higher turnover of our employees. If we are unable to
respond to these competitive pressures, we could experience delayed
or reduced market acceptance of our products, higher expenses and
lower revenue. If we are unable to compete effectively with current
or new entrants to these markets, we will be unable to generate
sufficient revenue to maintain our business.
22
Changes in the healthcare industry could result in a reduction in
the size of the market for our products or may require us to
decrease the selling price for our products, either of which could
have a negative impact on our financial performance.
Trends
toward managed care, healthcare cost containment, and other changes
in government and private sector initiatives in Europe, the United
States and China are placing increased emphasis on lowering the
cost of medical services, which could adversely affect the demand
for or the prices of our products. For example:
● major
third-party payors of hospital and non-hospital based healthcare
services could revise their payment methodologies and impose
stricter standards for reimbursement of imaging procedures charges
and/or a lower or more bundled reimbursement;
● there
has been a consolidation among healthcare facilities and purchasers
of medical devices who prefer to limit the number of suppliers from
whom they purchase medical products, and these entities may decide
to stop purchasing our products or demand discounts on our
prices;
● there
is economic pressure to contain healthcare costs in markets
throughout the world; and
● there
are proposed and existing laws and regulations in international and
domestic markets regulating pricing and profitability of companies
in the healthcare industry.
These
trends could lead to pressure to reduce prices for our products and
could cause a decrease in the demand for our products in any given
market that could adversely affect our revenue and profitability,
which could harm our business.
We intend to market our TAEUS applications, if approved, globally,
in which case we will be subject to the risks of doing business
outside of the United States.
Because
we intend to market our TAEUS applications, if approved, globally,
our business may be subject to risks associated with doing business
globally. Accordingly, our business and financial results in the
future could be adversely affected due to a variety of factors,
including:
● changes
in a specific country’s or region’s political and
cultural climate or economic condition;
● unexpected
changes in laws and regulatory requirements in local
jurisdictions;
● difficulty
of effective enforcement of contractual provisions in local
jurisdictions;
● inadequate
intellectual property protection in certain countries;
● trade-protection
measures, import or export licensing requirements such as Export
Administration Regulations promulgated by the United States
Department of Commerce and fines, penalties or suspension or
revocation of export privileges;
● effects
of applicable local tax structures and potentially adverse tax
consequences; and
● significant
adverse changes in currency exchange rates.
We depend on our senior management team and the loss of one or more
key employees or an inability to attract and retain highly skilled
employees could harm our business.
Our
success largely depends upon the continued services of our
executive management team and key employees. The loss of one or
more of our executive officers or key employees could harm us and
directly impact our financial results. Our employees may terminate
their employment with us at any time. Our executive management team
has significant experience and knowledge of medical devices and
ultrasound systems, and the loss of any team member could impair
our ability to design, identify, and develop new intellectual
property and new scientific or product ideas. Additionally, if we
lose the services of any of these persons, we would likely be
forced to expend significant time and money in the pursuit of
replacements, which may result in a delay in the implementation of
our business plan and plan of operations. We can give no assurance
that we could find satisfactory replacements for these individuals
on terms that would not be unduly expensive or burdensome to
us.
23
To
execute our growth plan, we must attract and retain highly
qualified personnel. Competition for skilled personnel is intense,
especially for engineers with high levels of experience in
designing and developing medical devices. In addition, we will need
to identify and hire sales executives and competition for
commercial and marketing talent is significant. We may experience
difficulty in hiring and retaining employees with appropriate
qualifications. Many of the companies with which we compete for
experienced personnel have greater resources than we have. In
addition, we invest significant time and expense in training our
employees, which increases their value to competitors who may seek
to recruit them. If we fail to attract new personnel or fail to
retain and motivate our current personnel, our business and future
growth prospects would be harmed.
Our employees, independent contractors, consultants, commercial
partners and vendors may engage in misconduct or other improper
activities, including noncompliance with regulatory standards and
requirements.
We are
exposed to the risk of fraud, misconduct or other illegal activity
by our employees, independent contractors, consultants, commercial
partners and vendors. Misconduct by these parties could include
intentional, reckless and negligent conduct that fails to: comply
with the FD&C Act and similar laws of other countries, or the
rules and regulations of the FDA and other similar foreign
regulatory bodies; provide true, complete and accurate information
to the FDA and other similar foreign regulatory bodies; comply with
manufacturing standards we establish; comply with healthcare fraud
and abuse laws in the United States and similar foreign fraudulent
misconduct laws; or report financial information or data accurately
or to disclose unauthorized activities to us. If we obtain
European, Chinese or FDA approval of any of our products and begin
commercializing those products in Europe, China or the United
States, respectively, our potential exposure under such laws will
increase significantly, and our costs associated with compliance
with such laws are also likely to increase. In particular, the
promotion, sales and marketing of healthcare items and services, as
well as certain business arrangements in the healthcare industry,
are subject to extensive laws designed to prevent fraud, kickbacks,
self-dealing and other abusive practices. These laws and
regulations may restrict or prohibit a wide range of pricing,
discounting, marketing and promotion, structuring and commissions,
certain customer incentive programs and other business arrangements
generally. It is not always possible to identify and deter
misconduct by employees and other parties, and the precautions we
take to detect and prevent this activity may not be effective in
controlling unknown or unmanaged risks or losses or in protecting
us from governmental investigations or other actions or lawsuits
stemming from a failure to comply with these laws or regulations.
If any such actions are instituted against us, and we are not
successful in defending ourselves or asserting our rights, those
actions could have a significant impact on our business, including
the imposition of significant fines or other
sanctions.
Misdiagnosis, warranty and other claims, as well as product field
actions and regulatory proceedings, initiated against us could
increase our costs, delay or reduce our sales and damage our
reputation, adversely affecting our financial
condition.
Our
business exposes us to the risk of malpractice, warranty or product
liability claims inherent in the sale and support of medical device
products, including those based on claims that the use or failure
of one of our products resulted in a misdiagnosis or harm to a
patient. Such claims may cause financial loss, damage our
reputation by raising questions about our products’ safety
and efficacy, adversely affect regulatory approvals and interfere
with our efforts to market our products. Although to date we have
not been involved in any medical malpractice or product liability
litigation, we may incur significant liability if such litigation
were to occur. We may also face adverse publicity resulting from
product field actions or regulatory proceedings brought against us.
Claims could also be asserted under state consumer protection acts.
If we cannot successfully defend ourselves against product
liability or related claims, we may incur substantial liabilities
or be required to limit distribution of our products. Even a
successful defense would require significant financial and
management resources. Regardless of the merits or eventual outcome,
liability claims may result in:
● decreased
demand for our products;
● injury
to our reputation and negative media attention;
● initiation
of investigations by regulators;
● costs
to defend the related litigation;
● a
diversion of management’s time and our
resources;
● substantial
monetary awards to trial participants or patients;
24
● product
recalls, withdrawals or labeling, marketing or promotional
restrictions;
● loss
of revenue;
● exhaustion
of any available insurance and our capital resources;
● the
inability to commercialize a product at all or for particular
applications; and
● a
decline in the price of our securities.
Although
we currently maintain liability insurance in amounts we believe are
commercially reasonable, any liability we incur may exceed our
insurance coverage. Our insurance policies may also have various
exclusions, and we may be subject to a claim for which we have no
coverage. Liability insurance is expensive and may cease to be
available on acceptable terms, if at all. A malpractice, warranty,
product liability or other claim or product field action not
covered by our insurance or exceeding our coverage could
significantly impair our financial condition. In addition, a
product field action or a liability claim against us could
significantly harm our reputation and make it more difficult to
obtain the funding and commercial relationships necessary to
maintain our business.
Our internal computer systems, or those used by third-party
manufacturers or other contractors or consultants, may fail or
suffer security breaches.
Despite
the implementation of security measures, our internal computer
systems and those of our future manufacturers and other contractors
and consultants are vulnerable to damage from computer viruses and
unauthorized access. Although to our knowledge we have not
experienced any such material system failure or security breach to
date, if such an event were to occur and cause interruptions in our
operations, it could result in a material disruption of our
research and development programs and our business operations. To
the extent that any disruption or security breach were to result in
a loss of, or damage to, our data or applications, or inappropriate
disclosure of confidential or proprietary information, we could
incur liability and the further development and commercialization
of our products could be delayed.
The United Kingdom’s leaving the European Union has uncertain
effects and could adversely affect us.
In June
2016, the United Kingdom held a referendum in which a majority of
voters voted to exit the European Union (“EU”),
commonly referred to as “Brexit”, and in March 2017,
notified the EU that it intended to exit as provided in Article 50
of the Treaty of Lisbon. The United Kingdom exited the EU on
January 31, 2020 and entered a transition period which extends
through December 31, 2020. The effects of Brexit depend in part on
any agreements the United Kingdom makes to retain access to EU
markets either during this transitional period or more permanently.
Brexit could adversely affect European and worldwide economic and
market conditions and could contribute to instability in global
financial and foreign exchange markets, including volatility in the
value of the Sterling and Euro. In addition, Brexit could lead to
legal uncertainty and potentially divergent national laws and
regulations as the United Kingdom determines which EU laws to
replace or replicate. Furthermore, Brexit may lead other EU member
countries to consider referendums regarding their EU membership.
Any of these effects of Brexit, and others we cannot anticipate,
could adversely affect our business, results of operations,
financial condition and cash flows.
Risks Related to Intellectual Property and Other Legal
Matters
If we are unable to protect our intellectual property, which
entails significant expense and resources, then our financial
condition, results of operations and the value of our technology
and products could be adversely affected.
Much of
our value arises out of our proprietary technology and intellectual
property for the design, manufacture and use of medical imaging
systems, including development of our TAEUS applications. We rely
on patent, copyright, trade secret and trademark laws to protect
our proprietary technology and limit the ability of others to
compete with us using the same or similar technology. Third parties
may infringe or misappropriate our intellectual property, which
could harm our business.
We
currently maintain a patent portfolio consisting of seven (7)
patents issued in the United States, four (4) issued patents in
foreign jurisdictions, twenty-four (24) patent applications pending
in the United States and twenty-six (26) patent applications
pending in foreign jurisdictions relating to our technology. These
patents and patent applications cover certain innovations relating
to contrast-enhanced imaging as well as several aspects of fat
imaging and fat quantitation in the liver and other tissues. In
addition, we have in-licensed license three (3) U.S.
patents.
25
Expenses
related to a patent portfolio include periodic maintenance fees,
renewal fees, annuity fees, various other governmental fees on
patents and/or applications due in several stages over the lifetime
of patents and/or applications, as well as the cost associated with
complying with numerous procedural provisions during the patent
application process. We may or may not choose to pursue or maintain
protection for particular inventions. In addition, there are
situations in which a failure to make certain payments or
noncompliance with certain requirements in the patent process can
result in abandonment or lapse of a patent or patent application,
resulting in partial or complete loss of patent rights in the
relevant jurisdiction.
Policing unauthorized use of our proprietary rights can be
difficult, expensive and time-consuming, and we might be unable to
determine the extent of this unauthorized use
Policing
unauthorized use of our intellectual property is difficult, costly
and time-intensive. We may fail to stop or prevent misappropriation
of our technology, particularly in countries where the laws may not
protect our proprietary rights to the same extent as do the laws of
the United States. Proceedings to enforce our patent and other
intellectual property rights in non-U.S. jurisdictions could result
in substantial costs and divert our efforts and attention from
other aspects of our business. If we cannot prevent other companies
from using our proprietary technology or if our patents are found
invalid or otherwise unenforceable, we may be unable to compete
effectively against other manufacturers of ultrasound systems,
which could decrease our market share. In addition, the breach of a
patent licensing agreement by us may result in termination of a
patent license.
We may
not be able to prevent the unauthorized disclosure or use of our
technical knowledge or other trade secrets by consultants, vendors
or former or current employees, despite the existence generally of
confidentiality agreements and other contractual restrictions.
Monitoring unauthorized use and disclosure of our intellectual
property is difficult, and we do not know whether the steps we have
taken to protect our intellectual property will be
adequate.
If we are unable to protect the confidentiality of our proprietary
information and know-how, the value of our technology and products
could be adversely affected.
In
addition to our patent activities, we rely upon, among other
things, unpatented proprietary technology, processes, trade secrets
and know-how. Any involuntary disclosure to or misappropriation by
third parties of our confidential or proprietary information could
enable competitors to duplicate or surpass our technological
achievements, potentially eroding our competitive position in our
market. We seek to protect confidential or proprietary information
in part by confidentiality agreements with our employees,
consultants and third parties. While we require all of our
employees, consultants, advisors and any third parties who have
access to our proprietary know-how, information and technology to
enter into confidentiality agreements, we cannot be certain that
this know-how, information and technology will not be disclosed or
that competitors will not otherwise gain access to our trade
secrets or independently develop substantially equivalent
information and techniques. These agreements may be terminated or
breached, and we may not have adequate remedies for any such
termination or breach. Furthermore, these agreements may not
provide meaningful protection for our trade secrets and know-how in
the event of unauthorized use or disclosure. To the extent that any
of our staff was previously employed by other pharmaceutical,
medical technology or biotechnology companies, those employers may
allege violations of trade secrets and other similar claims in
relation to their former employee’s therapeutic development
activities for us.
We may in the future be a party to intellectual property litigation
or administrative proceedings that could be costly and could
interfere with our ability to sell our TAEUS
applications.
The
medical device industry has been characterized by extensive
litigation regarding patents, trademarks, trade secrets, and other
intellectual property rights, and companies in the industry have
used intellectual property litigation to gain a competitive
advantage. It is possible that U.S. and foreign patents and pending
patent applications or trademarks controlled by third parties may
be alleged to cover our products, or that we may be accused of
misappropriating third parties’ trade secrets. Other medical
imaging market participants, many of which have substantially
greater resources and have made substantial investments in patent
portfolios, trade secrets, trademarks, and competing technologies,
may have applied for or obtained or may in the future apply for or
obtain, patents or trademarks that will prevent, limit or otherwise
interfere with our ability to make, use, sell and/or export our
products or to use product names. We may become a party to patent
or trademark infringement or trade secret claims and litigation as
a result of these and other third party intellectual property
rights being asserted against us. The defense and prosecution of
these matters are both costly and time consuming. Vendors from whom
we purchase hardware or software may not indemnify us in the event
that such hardware or software is accused of infringing a third
party’s patent or trademark or of misappropriating a third
party’s trade secret.
26
Further,
if such patents, trademarks, or trade secrets are successfully
asserted against us, this may harm our business and result in
injunctions preventing us from selling our products, license fees,
damages and the payment of attorney fees and court costs. In
addition, if we are found to willfully infringe third-party patents
or trademarks or to have misappropriated trade secrets, we could be
required to pay treble damages in addition to other penalties.
Although patent, trademark, trade secret, and other intellectual
property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated
with such arrangements may be substantial and could include ongoing
royalties. We may be unable to obtain necessary licenses on
satisfactory terms, if at all. If we do not obtain necessary
licenses, we may not be able to redesign our TAEUS applications to
avoid infringement.
Similarly,
interference or derivation proceedings provoked by third parties or
brought by the U.S. Patent and Trademark Office
(“USPTO”) may be necessary to determine the priority of
inventions or other matters of inventorship with respect to our
patents or patent applications. We may also become involved in
other proceedings, such as re-examination, inter partes review, or
opposition proceedings, before the USPTO or other jurisdictional
body relating to our intellectual property rights or the
intellectual property rights of others. Adverse determinations in a
judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing and selling
our TAEUS applications or using product names, which would have a
significant adverse impact on our business.
Additionally,
we may need to commence proceedings against others to enforce our
patents or trademarks, to protect our trade secrets or know-how, or
to determine the enforceability, scope and validity of the
proprietary rights of others. These proceedings would result in
substantial expense to us and significant diversion of effort by
our technical and management personnel. We may not prevail in any
lawsuits that we initiate and the damages or other remedies
awarded, if any, may not be commercially meaningful. We may not be
able to stop a competitor from marketing and selling products that
are the same or similar to our products or from using product names
that are the same or similar to our product names, and our business
may be harmed as a result.
Intellectual property rights may not provide adequate protection,
which may permit third parties to compete against us more
effectively.
In
order to remain competitive, we must develop and maintain
protection of the proprietary aspects of our technologies. We rely
on a combination of patents, copyrights, trademarks, trade secret
laws and confidentiality and invention assignment agreements to
protect our intellectual property rights. Any patents issued to us
may be challenged by third parties as being invalid, or third
parties may independently develop similar or competing technology
that avoids our patents. Should such challenges be successful,
competitors might be able to market products and use manufacturing
processes that are substantially similar to ours. Consequently, we
may be unable to prevent our proprietary technology from being
exploited abroad, which could affect our ability to expand to
international markets or require costly efforts to protect our
technology. To the extent our intellectual property protection is
incomplete, we are exposed to a greater risk of direct competition.
In addition, competitors could purchase our products and attempt to
replicate some or all of the competitive advantages we derive from
our development efforts or design around our protected technology.
Our failure to secure, protect and enforce our intellectual
property rights could substantially harm the value of our TAEUS
platform, brand and business.
Risks Related to Government Regulation
Failure to comply with laws and regulations could harm our
business.
Our
business is or in the future may be subject to regulation by
various federal, state, local and foreign governmental agencies,
including agencies responsible for monitoring and enforcing
employment and labor laws, workplace safety, environmental laws,
consumer protection laws, anti-bribery laws, import/export
controls, securities laws and tax laws and regulations. In certain
jurisdictions, these regulatory requirements may be more stringent
than those in the United States. Noncompliance with applicable
regulations or requirements could subject us to investigations,
sanctions, mandatory recalls, enforcement actions, adverse
publicity, disgorgement of profits, fines, damages, civil and
criminal penalties or injunctions and administrative actions. If
any governmental sanctions, fines or penalties are imposed, or if
we do not prevail in any possible civil or criminal litigation, our
business, operating results and financial condition could be
harmed. In addition, responding to any action will likely result in
a significant diversion of management's attention and our resources
and substantial costs. Enforcement actions and sanctions could
further harm our business, operating results and financial
condition.
27
If we fail to obtain and maintain necessary regulatory clearances
or approvals for our TAEUS applications, or if clearances or
approvals for future applications and indications are delayed or
not issued, our commercial operations will be harmed.
The
medical devices that we manufacture and market will be subject to
regulation by numerous worldwide regulatory bodies, including the
EMA, FDA and other comparable regulatory agencies. Additionally,
third parties designing, manufacturing or conducting human studies
of our devices will be subject to local regulations, such as those
of Health Canada. These agencies and regulations require
manufacturers of medical devices to comply with applicable laws and
regulations governing development, testing, manufacturing,
labeling, marketing and distribution of medical devices. Devices
are generally subject to varying levels of regulatory control,
based on the risk level of the device. Governmental regulations
specific to medical devices are wide-ranging and govern, among
other things:
● product
design, development and manufacture;
● laboratory,
pre-clinical and clinical testing, labeling, packaging storage and
distribution;
● premarketing
clearance or approval;
● record
keeping;
● product
marketing, promotion and advertising, sales and distribution;
and
● post-marketing
surveillance, including reporting of deaths or serious injuries and
recalls and correction and removals.
The
European Union has revised its regulatory system for medical
devices by implementing regulation (EU) 2017/745 on medical devices
(“Medical Device Regulation” or “MDR”) and
regulation (EU) 2017/746 on in vitro diagnostic medical devices.
The MDR will apply as from 26 May 2020 (the “Date of
Application” or “DoA”), though given recent
developments in connection with COVID-19, the European commission
has proposed postponing the DoA by one year. The details of such
proposal are not yet published and we do not yet know whether there
may be additional changes to the MDR at this stage. The changes to
the regulatory system implemented by the MDR include stricter
requirements for clinical evidence and pre-market assessment of
safety and performance, new classifications to indicate risk
levels, requirements for third party testing by Notified Bodies,
tightened and streamlined quality management system assessment
procedures and additional requirements for the quality management
system, additional requirements for traceability of products and
transparency as well a refined responsibility of economic
operators.
We are currently in a transitional period, where our products will
be required to comply with applicable medical device directives
(including the Medical Devices Directive and the Active Implantable
Medical Devices Directive) and, as of the DoA, with the Medical
Device Regulation and to obtain CE mark certification in order to
market medical devices. The CE mark is applied following approval
from an independent notified body or declaration of conformity. It
is an international symbol of adherence to quality assurance
standards and compliance with applicable European Medical Devices
Directives
or the MDR, as
the case may be. CE mark approvals issued prior to the DoA will
remain in place and such products may be made available for a
transitional period. Subsequent to the period ending December 31,
2019 we received CE mark approval for our TAEUS FLIP (Fatty Liver
Imaging Probe) System. The CE marking indicates that TAEUS FLIP
System complies with all applicable European Directives and
Regulations in the European Union, including the MDR, and other CE
mark geographies, including the 27 EU member states. We believe
that future TAEUS applications will qualify for sale in the
European Union as Class IIa medical devices. Although existing
regulations do not require clinical trials to obtain CE marks for
Class IIa medical devices, the MDR requires a clinical evaluation
for all medical devices and clinical trials for selected medical
devices. Depending on the classification of our applications,
future CE mark certifications or recertification of our
applications may require additional clinical evaluations or trials,
as the case may be.
We are
also required to comply with the regulations of each other country
where we commercialize products, such as the requirement that we
obtain approval from the FDA and the China Food and Drug
Administration before we can launch new products in the United
States and China, respectively.
International
sales of medical devices manufactured in the United States that are
not approved by the FDA for use in the United States, or that are
banned or deviate from lawful performance standards, are subject to
FDA export requirements. Exported devices are subject to the
regulatory requirements of each country to which the device is
exported. Frequently, regulatory approval may first be obtained in
a foreign country prior to application in the United States due to
differing regulatory requirements; however, other countries, such
as China for example, require approval in the country of origin
first.
Before
a new medical device or a new intended use for an existing product
can be marketed in the United States, a company must first submit
and receive either 510(k) clearance or premarketing approval, or
PMA, from the FDA, unless an exemption applies. The typical
duration to receive a 510(k) approval is approximately nine to
twelve months from the date of the initial 510(k) submission and
the typical duration to receive a PMA approval is approximately two
years from the date of submission of the initial PMA application,
although there is no guarantee that the timing will not be
longer.
28
We
expect all of our products to be classified as Class II medical
devices that may be approved by means of a 510(k) clearance. In the
past, the 510(k) pathway for product marketing has required only
proof of substantial equivalence in technology for a given
indication with a previously cleared device. Recently, there has
been a trend of the FDA requiring additional clinical work to prove
efficacy in addition to technological equivalence and basic safety.
Whether clinical data is provided or not, the FDA may decide to
reject the substantial equivalence argument we present. If that
happens, the device is automatically designated as a Class III
device. The device sponsor must then fulfill more rigorous PMA
requirements, or can request a risk-based classification
determination for the device in accordance with the “de
novo” process, which may determine that the new device is of
low to moderate risk and that it can be appropriately regulated as
a Class I or II device. Thus, although at this time we do not
anticipate that we will be required to do so, it is possible that
one or more of our other products may require approval through the
510(k) de novo process or by means of a PMA.
We may
not be able to obtain the necessary clearances or approvals or may
be unduly delayed in doing so, which could harm our business.
Furthermore, even if we are granted regulatory clearances or
approvals, they may include significant limitations on the
indicated uses for the product, which may limit the market for the
product. Therefore, even if we believe we have successfully
developed our TAEUS technology, we may not be permitted to market
TAEUS applications in the United States if we do not obtain FDA
regulatory clearance to market such applications. Delays in
obtaining clearance or approval could increase our costs and harm
our revenues and growth.
In
addition, we are required to timely file various reports with the
FDA, including reports required by the medical device reporting
regulations that require us to report to certain regulatory
authorities if our devices may have caused or contributed to a
death or serious injury or malfunctioned in a way that would likely
cause or contribute to a death or serious injury if the malfunction
were to recur. If these reports are not filed timely, regulators
may impose sanctions and sales of our products may suffer, and we
may be subject to product liability or regulatory enforcement
actions, all of which could harm our business.
If we
initiate a correction or removal for one of our devices to reduce a
risk to health posed by the device, we would be required to submit
a publicly available Correction and Removal report to the FDA and,
in many cases, similar reports to other regulatory agencies. This
report could be classified by the FDA as a device recall which
could lead to increased scrutiny by the FDA, other international
regulatory agencies and our customers regarding the quality and
safety of our devices. Furthermore, the submission of these reports
has been and could be used by competitors against us in competitive
situations and cause customers to delay purchase decisions or
cancel orders and would harm our reputation.
The FDA
and the Federal Trade Commission (the “FTC”) also
regulate the advertising and promotion of our planned products to
ensure that the claims we make are consistent with our regulatory
clearances, that there are adequate and reasonable data to
substantiate the claims and that our promotional labeling and
advertising is neither false nor misleading in any respect. If the
FDA or FTC determines that any of our advertising or promotional
claims are misleading, not substantiated or not permissible, we may
be subject to enforcement actions, including warning letters, and
we may be required to revise our promotional claims and make other
corrections or restitutions.
The FDA
and state authorities have broad enforcement powers. Our failure to
comply with applicable regulatory requirements could result in
enforcement action by the FDA or state agencies, which may include
any of the following sanctions:
● adverse
publicity, warning letters, fines, injunctions, consent decrees and
civil penalties;
● repair,
replacement, refunds, recall or seizure of our
products;
● operating
restrictions, partial suspension or total shutdown of
production;
● refusing
our requests for 510(k) clearance or premarket approval of new
products, new intended uses or modifications to existing
products;
● withdrawing
510(k) clearance or premarket approvals that have already been
granted; and
● criminal
prosecution.
If any
of these events were to occur, our business and financial condition
would be harmed.
29
Our TAEUS applications may require recertification or new
regulatory clearances or premarket approvals and we may be required
to recall or cease marketing our TAEUS applications until such
recertification or clearances are obtained.
Most
countries outside of the United States require that product
approvals be recertified on a regular basis, generally every five
years. The recertification process requires that we evaluate any
device changes and any new regulations or standards relevant to the
device and, where needed, conduct appropriate testing to document
continued compliance. Where recertification applications are
required, they must be approved in order to continue selling our
products in those countries.
In the
United States, material modifications to the intended use or
technological characteristics of our TAEUS applications will
require new 510(k) clearances or premarket approvals or require us
to recall or cease marketing the modified devices until these
clearances or approvals are obtained. Based on FDA published
guidelines, the FDA requires device manufacturers to initially make
and document a determination of whether or not a modification
requires a new approval, supplement or clearance; however, the FDA
can review a manufacturer’s decision. Any modification to an
FDA-cleared device that would significantly affect its safety or
efficacy or that would constitute a major change in its intended
use would require a new 510(k) clearance or possibly a premarket
approval.
We may
not be able to obtain recertification or additional 510(k)
clearances or premarket approvals for our applications or for
modifications to, or additional indications for, our TAEUS
technology in a timely fashion, or at all. Delays in obtaining
required future governmental approvals would harm our ability to
introduce new or enhanced products in a timely manner, which in
turn would harm our future growth. If foreign regulatory
authorities or the FDA require additional approvals, we may be
required to recall and to stop selling or marketing our TAEUS
applications, which could harm our operating results and require us
to redesign our applications. In these circumstances, we may be
subject to significant enforcement actions.
If any OEMs fail to comply with the FDA’s Quality System
Regulations or other regulatory bodies’ equivalent
regulations, manufacturing operations could be delayed or shut down
and the development of our TAEUS platform could
suffer.
The
manufacturing processes of OEMs are required to comply with the
FDA’s Quality System Regulations and other regulatory
bodies’ equivalent regulations, which cover the procedures
and documentation of the design, testing, production, control,
quality assurance, labeling, packaging, storage and shipping of our
TAEUS applications. They may also be subject to similar state
requirements and licenses and engage in extensive recordkeeping and
reporting and make available their manufacturing facilities and
records for periodic unannounced inspections by governmental
agencies, including the FDA, state authorities and comparable
agencies in other countries. If any OEM fails such an inspection,
our operations could be disrupted and our manufacturing
interrupted. Failure to take adequate corrective action in response
to an adverse inspection could result in, among other things, a
shut-down of our manufacturing operations, significant fines,
suspension of marketing clearances and approvals, seizures or
recalls of our products, operating restrictions and criminal
prosecutions, any of which would cause our business to suffer.
Furthermore, these OEMs may be engaged with other companies to
supply and/or manufacture materials or products for such companies,
which would expose our OEMs to regulatory risks for the production
of such materials and products. As a result, failure to meet the
regulatory requirements for the production of those materials and
products may also affect the regulatory clearance of a third-party
manufacturers’ facility. If the FDA or a foreign regulatory
agency does not approve these facilities for the manufacture of our
products, or if it withdraws its approval in the future, we may
need to find alternative manufacturing facilities, which would
impede or delay our ability to develop, obtain regulatory approval
for or market our products, if approved. Additionally, our key
component suppliers may not currently be or may not continue to be
in compliance with applicable regulatory requirements, which may
result in manufacturing delays for our product and cause our
results of operations to suffer.
Our TAEUS applications may in the future be subject to product
recalls that could harm our reputation.
Governmental
authorities in Europe, the United States and China have the
authority to require the recall of commercialized products in the
event of material regulatory deficiencies or defects in design or
manufacture. A government-mandated or voluntary recall by us could
occur as a result of component failures, manufacturing errors or
design or labeling defects. Recalls of our TAEUS applications would
divert managerial attention, be expensive, harm our reputation with
customers and harm our financial condition and results of
operations. A recall announcement would negatively affect the price
of our securities.
30
Healthcare reform measures could hinder or prevent our planned
products' commercial success.
There
have been, and we expect there will continue to be, a number of
legislative and regulatory changes to the healthcare system in ways
that could harm our future revenues and profitability and the
future revenues and profitability of our potential customers. In
the EU, the Medical Devices Directive is being replaced with the
more expansive Medical Devices Regulation, which may increase the
costs of obtaining and maintaining required regulatory approvals
for our products. We cannot predict what other healthcare
initiatives, if any, will be implemented by EU member countries, or
the effect any future legislation or regulation will have on
us.
In the
United States, federal and state lawmakers regularly propose and,
at times, enact legislation that would result in significant
changes to the healthcare system, some of which are intended to
contain or reduce the costs of medical products and services. For
example, one of the most significant healthcare reform measures in
decades, the Patient Protection and Affordable Care Act, as amended
by the Health Care and Education Affordability Reconciliation Act
(the “Affordable Care Act”), was enacted in 2010. The
Affordable Care Act contains a number of provisions, including
those governing enrollment in federal healthcare programs,
reimbursement changes and fraud and abuse measures, all of which
will impact existing government healthcare programs and will result
in the development of new programs. The Affordable Care Act, among
other things, imposes an excise tax of 2.3% on the sale of most
medical devices, including ours, and any failure to pay this amount
could result in the imposition of an injunction on the sale of our
products, fines and penalties.
It
remains unclear whether changes will be made to the Affordable Care
Act, or whether it will be repealed or materially modified. For
example, the Tax Cuts and Jobs Act of 2017 modified certain aspects
of the Affordable Care Act and the Trump Administration and U.S.
Congress may take further action regarding the APA. Therefore, we
cannot assure you that the Affordable Care Act, as currently
enacted or as may be further amended or discontinued in the future,
will not harm our business and financial results and we cannot
predict how future federal or state legislative or administrative
changes relating to healthcare reform will affect our
business.
There
likely will continue to be legislative and regulatory proposals at
the federal and state levels directed at containing or lowering the
cost of healthcare. We cannot predict the initiatives that may be
adopted in the future or their full impact. The continuing efforts
of the government, insurance companies, managed care organizations
and other payors of healthcare services to contain or reduce costs
of healthcare may harm:
● our
ability to set a price that we believe is fair for our
products;
● our
ability to generate revenues and achieve or maintain profitability;
and
● the
availability of capital.
If we fail to comply with healthcare regulations, we could face
substantial penalties and our business, operations and financial
condition could be adversely affected.
Even
though we do not and will not control referrals of healthcare
services or bill directly to Medicare, Medicaid or other third
party payors, certain federal and state healthcare laws and
regulations pertaining to fraud and abuse and patients’
rights are and will be applicable to our business. We could be
subject to healthcare fraud and abuse and patient privacy
regulation by both the federal government and the states in which
we conduct our business. Other jurisdictions such as the European
Union have similar laws. The regulations that will affect how we
operate include:
● the
federal healthcare program Anti-Kickback Statute, which prohibits,
among other things, any person from knowingly and willfully
offering, soliciting, receiving or providing remuneration, directly
or indirectly, in exchange for or to induce either the referral of
an individual for, or the purchase, order or recommendation of, any
good or service for which payment may be made under federal
healthcare programs, such as the Medicare and Medicaid
programs;
● the
federal False Claims Act, which prohibits, among other things,
individuals or entities from knowingly presenting, or causing to be
presented, false claims, or knowingly using false statements, to
obtain payment from the federal government;
● federal
criminal laws that prohibit executing a scheme to defraud any
healthcare benefit program or making false statements relating to
healthcare matters;
● the
federal Physician Payment Sunshine Act, created under the
Affordable Care Act, and its implementing regulations, which
require manufacturers of drugs, medical devices, biologicals and
medical supplies for which payment is available under Medicare,
Medicaid, or the Children’s Health Insurance Program to
report annually to the U.S. Department of Health and Human
Services, or HHS, information related to payments or other
transfers of value made to physicians and teaching hospitals, as
well as ownership and investment interests held by physicians and
their immediate family members;
31
● HIPAA,
as amended by the Health Information Technology for Economic and
Clinical Health Act, which governs the conduct of certain
electronic healthcare transactions and protects the security and
privacy of protected health information; and
● state
law equivalents of each of the above federal laws, such as
anti-kickback and false claims laws which may apply to items or
services reimbursed by any third-party payor, including commercial
insurers.
The
Affordable Care Act, among other things, amends the intent
requirement of the Federal Anti-Kickback Statute and criminal
healthcare fraud statutes. A person or entity no longer needs to
have actual knowledge of this statute or specific intent to violate
it. In addition, the Affordable Care Act provides that the
government may assert that a claim including items or services
resulting from a violation of the Federal Anti-Kickback Statute
constitutes a false or fraudulent claim for purposes of the False
Claims Act.
Efforts
to ensure that our business arrangements will comply with
applicable healthcare laws may involve substantial costs. It is
possible that governmental and enforcement authorities will
conclude that our business practices do not comply with current or
future statutes, regulations or case law interpreting applicable
fraud and abuse or other healthcare laws and regulations. If any
such actions are instituted against us, and we are not successful
in defending ourselves or asserting our rights, those actions could
have a significant impact on our business, including the imposition
of civil, criminal and administrative penalties, damages,
disgorgement, monetary fines, possible exclusion from participation
in Medicare, Medicaid and other federal and similar foreign
healthcare programs, contractual damages, reputational harm,
diminished profits and future earnings, and curtailment of our
operations, any of which could harm our ability to operate our
business and our results of operations.
Compliance with environmental laws and regulations could be
expensive. Failure to comply with environmental laws and
regulations could subject us to significant liability.
Our
research and development and manufacturing operations may involve
the use of hazardous substances and are subject to a variety of
federal, state, local and foreign environmental laws and
regulations relating to the storage, use, discharge, disposal,
remediation of, and human exposure to, hazardous substances and the
sale, labeling, collection, recycling, treatment and disposal of
products containing hazardous substances. In addition, our research
and development and manufacturing operations produce biological
waste materials, such as human and animal tissue, and waste
solvents, such as isopropyl alcohol. These operations are permitted
by regulatory authorities, and the resultant waste materials are
disposed of in material compliance with environmental laws and
regulations. Liability under environmental laws and regulations can
be joint and several and without regard to fault or negligence.
Compliance with environmental laws and regulations may be expensive
and non-compliance could result in substantial liabilities, fines
and penalties, personal injury and third part property damage
claims and substantial investigation and remediation costs.
Environmental laws and regulations could become more stringent over
time, imposing greater compliance costs and increasing risks and
penalties associated with violations. We cannot assure you that
violations of these laws and regulations will not occur in the
future or have not occurred in the past as a result of human error,
accidents, equipment failure or other causes. The expense
associated with environmental regulation and remediation could harm
our financial condition and operating results.
Risks Related to Owning Our Securities, Our Financial Results and
Our Need for Financing
Our quarterly and annual results may fluctuate significantly, may
not fully reflect the underlying performance of our business and
may result in volatility in the price of our
securities.
Our
operating results will be affected by numerous factors such
as:
● variations
in the level of expenses related to our proposed
products;
● status
of our product development efforts;
● execution
of collaborative, licensing or other arrangements, and the timing
of payments received or made under those arrangements;
● intellectual
property prosecution and any infringement lawsuits to which we may
become a party;
● regulatory
developments affecting our products or those of our competitors,
including the timing and success of obtaining various regulatory
approvals for our products’ testing, production and
marketing;
32
● our
ability to obtain and maintain FDA clearance and approval from
foreign regulatory authorities for our products, which have not yet
been approved for marketing;
● market
acceptance of our TAEUS applications;
● the
availability of reimbursement for our TAEUS
applications;
● our
ability to attract new customers and grow our business with
existing customers;
● the
timing and success of new product and feature introductions by us
or our competitors or any other change in the competitive dynamics
of our industry, including consolidation among competitors,
customers or strategic partners;
● the
amount and timing of costs and expenses related to the maintenance
and expansion of our business and operations;
● changes
in our pricing policies or those of our competitors;
● general
economic, industry and market conditions;
● the
hiring, training and retention of key employees, including our
ability to expand our sales team;
● litigation
or other claims against us;
● our
ability to obtain additional financing; and
● advances
and trends in new technologies and industry standards.
Any or
all of these factors could adversely affect our cash position
requiring us to raise additional capital which may be on
unfavorable terms and result in substantial dilution. Additionally,
the risks surrounding our business, as well as the limited market
for our common stock, have resulted, and will likely continue to
result, in volatility in the price of our common stock and
warrants. From January 1, 2019 through December 31, 2019, intra-day
trading prices on the Nasdaq Capital Market have fluctuated from a
low of $0.62 to a high of $3.49 with respect to shares of our
common stock, and from a low of $0.14 to a high of $1.20 with
respect to our warrants, and may continue to fluctuate
significantly in the future.
We may be subject to securities litigation, which is expensive and
could divert management attention.
In the
past, companies that have experienced volatility in the market
price of their securities have been subject to an increased
incidence of securities class action litigation. We may be the
target of this type of litigation in the future. Securities
litigation against us could result in substantial costs and divert
our management’s attention from other business concerns,
which could seriously harm our business.
There is a limited market for our common stock.
Although
our common stock is traded on the Nasdaq Capital Market, the volume
of trading has historically been limited. Our average daily trading
volume of our shares from January 1, 2019 to December 31, 2019 was
approximately 167,251 shares. Thinly traded stock can be more
volatile than stock trading in a more active public market. While
we have made efforts to increase trading in our stock, we cannot
predict the extent to which an active public market for our common
stock will develop or be sustained. Therefore, a holder of our
common stock who wishes to sell his or her shares may not be able
to do so immediately or at an acceptable price.
If securities or industry analysts do not publish research reports
about our business, or if they issue an adverse opinion about our
business, the price of our securities and trading volume could
decline.
The
trading market for our securities is influenced by the research and
reports that industry or securities analysts publish about us or
our business. We do not currently have and may never obtain
research coverage by securities and industry analysts. If no or few
analysts commence research coverage of us, or one or more of the
analysts who cover us issues an adverse opinion about our company,
the price of our securities would likely decline. If one or more of
these analysts ceases research coverage of us or fails to regularly
publish reports on us, we could lose visibility in the financial
markets, which in turn could cause the price of our securities or
trading volume to decline.
33
If we are unable to implement and maintain effective internal
control over financial reporting, including by remediating current
material weaknesses in our internal control over financial
reporting, investors may lose confidence in the accuracy and
completeness of our financial reports and the market price of our
securities may decrease.
As a
public company, we are required to maintain internal control over
financial reporting and to report any material weaknesses in such
internal controls. Section 404 of the Sarbanes-Oxley Act of 2002
(the “Sarbanes-Oxley Act”) requires that we evaluate
and determine the effectiveness of our internal control over
financial reporting and provide a management report on our internal
control over financial reporting.
Currently,
we have material weaknesses in our internal control over financial
reporting and, as a result, we may not detect errors on a timely
basis and our financial statements may be materially misstated.
Specifically, we have insufficient personnel resources within the
accounting function to segregate the duties over financial
transaction processing and reporting. We are in the process of
improving our internal control over financial reporting, which
process is time-consuming, costly and complicated and could limit
our ability to maintain effective internal controls over financial
reporting.
Until
such time as we are no longer an “emerging growth
company” or a smaller reporting company, our auditors will
not be required to attest as to our internal control over financial
reporting. If we continue to identify material weaknesses in our
internal control over financial reporting, if we are unable to
comply with the requirements of Section 404 in a timely manner, if
we are unable to assert that our internal control over financial
reporting is effective or, if required, if our independent
registered public accounting firm is unable to attest that our
internal control over financial reporting is effective, investors
may lose confidence in the accuracy and completeness of our
financial reports and the market price of our common stock could
decrease. We could also become subject to stockholder or other
third-party litigation as well as investigations by the stock
exchange on which our securities are listed, the Securities and
Exchange Commission (the “SEC”) or other regulatory
authorities, which could require additional financial and
management resources and could result in fines, trading suspensions
or other remedies.
Our disclosure controls and procedures may not prevent or detect
all errors or acts of fraud.
We are
subject to the periodic reporting requirements of the Exchange Act.
Our disclosure controls and procedures are designed to reasonably
assure that information required to be disclosed by us in reports
we file or submit under the Exchange Act is accumulated and
communicated to management, and recorded, processed, summarized and
reported within the time periods specified by the rules and forms
of the SEC. We believe that any disclosure controls and procedures
or internal controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met.
These
inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion
of two or more people or by an unauthorized override of the
controls. Accordingly, because of the inherent limitations in our
control system, misstatements due to error or fraud may occur and
not be detected.
We are an “emerging growth company” under the JOBS Act
and we cannot be certain if the reduced disclosure requirements
applicable to emerging growth companies will make our securities
less attractive to investors.
We are
an “emerging growth company,” as defined in the
Jumpstart Our Business Startups Act of 2012 (the “JOBS
Act”), and we may take advantage of certain exemptions from
various reporting requirements applicable to other public companies
that are not “emerging growth companies” including, but
not limited to, not being required to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act,
reduced disclosure obligations regarding executive compensation in
our periodic reports and proxy statements, and exemptions from the
requirements of holding a nonbinding advisory vote on executive
compensation and stockholder approval of any golden parachute
payments not previously approved. We cannot predict if investors
will find our securities less attractive because we may rely on
these exemptions. If some investors find our securities less
attractive as a result, there may be a less active trading market
for our securities and the price of our securities may be more
volatile.
We will
remain an “emerging growth company” until December 31,
2022, the end of the fiscal year following the fifth anniversary of
the date of our May 2017 initial public offering, although we will
lose that status sooner if our annual revenues exceed $1.07
billion, if we issue more than $1 billion in non-convertible debt
in a three year period, or if the market value of our common stock
that is held by non-affiliates exceeds $700 million as of any June
30.
34
We have not paid dividends in the past and have no immediate plans
to pay dividends.
We plan
to reinvest all of our earnings, to the extent we have earnings, in
order to further develop our technology and potential products and
to cover operating costs. We do not plan to pay any cash dividends
with respect to our securities in the foreseeable future. We cannot
assure you that we will, at any time, generate sufficient surplus
cash that would be available for distribution to the holders of our
common stock as a dividend.
We incur significant costs as a result of being a public company
that reports to the SEC and our management is required to devote
substantial time to meet compliance obligations.
As a
public company listed in the United States, we incur significant
legal, accounting and other expenses relating to our compliance
obligations. We are subject to reporting requirements of the
Exchange Act and the Sarbanes-Oxley Act, as well as rules
subsequently implemented by the SEC and Nasdaq that impose
significant requirements on public companies, including requiring
the establishment and maintenance of effective disclosure and
financial controls and corporate governance practices. In addition,
there are significant corporate governance and executive
compensation-related provisions in the Dodd-Frank Act Wall Street
Reform and Protection Act that contribute to our legal and
financial compliance costs, make some activities more difficult,
time-consuming or costly and also place undue strain on our
personnel, systems and resources. Our management and other
personnel need to devote a substantial amount of time to these
compliance initiatives. Furthermore, these rules and regulations
may make it more difficult and more expensive for us to obtain
director and officer liability insurance, and we may be required to
accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. As a result,
it may be more difficult for us to attract and retain qualified
people to serve on our board of directors, our board committees or
as executive officers.
Future sales and issuances of our common stock or rights to
purchase common stock, including pursuant to our equity incentive
plan, could result in dilution of the percentage ownership of our
stockholders and could cause the price of our securities to
fall.
We
expect that significant capital will be needed in the future to
continue our planned operations. To the extent we raise capital by
issuing common stock, convertible securities or other equity
securities, our stockholders may experience substantial dilution,
and new investors could gain rights superior to our existing
stockholders.
Our charter documents and Delaware law may inhibit a takeover that
stockholders consider favorable.
Certain
provisions of our Fourth Amended and Restated Certificate of
Incorporation (our “Certificate of Incorporation”) and
Amended and Restated Bylaws (our “Bylaws”) and
applicable provisions of Delaware law may delay or discourage
transactions involving an actual or potential change in control or
change in our management, including transactions in which
stockholders might otherwise receive a premium for their shares, or
transactions that our stockholders might otherwise deem to be in
their best interests. The provisions in our Certificate of
Incorporation and Bylaws:
● authorize
our board of directors to issue preferred stock without stockholder
approval and to designate the rights, preferences and privileges of
each class; if issued, such preferred stock would increase the
number of outstanding shares of our capital stock and could include
terms that may deter an acquisition of us;
● limit
who may call stockholder meetings;
● do
not provide for cumulative voting rights;
● provide
that all vacancies in our board of directors may be filled by the
affirmative vote of a majority of directors then in office, even if
less than a quorum;
● provide
that stockholders must comply with advance notice procedures with
respect to stockholder proposals and the nomination of candidates
for director;
● provide
that stockholders may only amend our Certificate of Incorporation
upon a supermajority vote of stockholders; and
● provide
that the Court of Chancery of the State of Delaware will be the
exclusive forum for certain legal claims.
In
addition, section 203 of the Delaware General Corporation Law
limits our ability to engage in any business combination with a
person who beneficially owns 15% or more of our outstanding voting
stock unless certain conditions are satisfied. This restriction
lasts for a period of three years following any such person’s
share acquisition. These provisions may have the effect of
entrenching our management team and may deprive stockholders of the
opportunity to sell their shares to potential acquirers at a
premium over prevailing prices. This potential inability to obtain
a control premium could reduce the price of our common
stock.
35
I
tem 1B. Unresolved Staff
Comments
Not
applicable.
I
tem 2. Properties
Our
principal office is located at 3600 Green Court, Suite 350, Ann
Arbor, Michigan 48105-1570. We currently lease approximately 3,950
square feet of office and light industrial/research space under a
lease that is due to expire in 2024. The rent is approximately
$7,992 per month, subject to moderate annual
increases.
We also
maintain an office in London, Ontario, Canada under a lease that is
terminable by either party with 60 days’ written notice. The
rent is approximately $900 per month per the agreement with the
landlord, subject to moderate annual increases at the discretion of
the landlord.
We
believe that, with respect to both of our facilities, equivalent
suitable space is available at similar rents.
I
tem 3. Legal Proceedings
We are
not currently a party to any pending legal proceedings that we
believe will have a material adverse effect on our business or
financial conditions. We may, however, be subject to various claims
and legal actions arising in the ordinary course of business from
time to time.
I
tem 4. Mine Safety
Disclosures
Not
applicable.
36
P
ART II
I
tem 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
Our
common stock and our warrants issued in our initial public offering
have been listed on the Nasdaq Capital Market under the symbols
“NDRA” and “NDRAW,” respectively, since
June 28, 2017 upon the separation of units sold in our initial
public offering. Prior to that date, our common stock and such
warrants traded together as units beginning on May 9, 2017. Each of
our publicly traded warrants is exercisable for a share of our
common stock at a price of $6.25 per share and expires on May 12,
2022.
As of
March 26, 2020, there were 32 holders of record of our common stock
and one holder of record of our publicly traded
warrants.
Dividend Policy
We have
never paid cash dividends on our securities and we do not
anticipate paying any cash dividends on our shares of common stock
in the foreseeable future. We intend to retain any future earnings
for reinvestment in our business. Any future determination to pay
cash dividends will be at the discretion of our board of directors,
and will be dependent upon our financial condition, results of
operations, capital requirements and such other factors as our
board of directors deems relevant.
I
tem 6. Selected Financial
Data
Not
required for smaller reporting companies.
I
tem 7. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial
statements and the related notes thereto included elsewhere in this
Annual Report. This discussion and analysis contain forward-looking
statements that are based on our management’s current beliefs
and assumptions, which statements are subject to substantial risks
and uncertainties. Our actual results may differ materially from
those expressed or implied by these forward-looking statements as a
result of many factors, including those discussed in “Risk
Factors” in Item 1A of this Annual Report. Please also see
“Cautionary Note Regarding Forward Looking Statements”
at the beginning of this Annual Report.
Overview
We are leveraging experience with pre-clinical enhanced ultrasound
devices to develop technology for increasing the capabilities of
clinical diagnostic ultrasound, to broaden patient access to the
safe diagnosis and treatment of a number of significant medical
conditions in circumstances where expensive X-ray computed
tomography (“CT”) and magnetic resonance imaging
(“MRI”) technology is unavailable or
impractical.
In 2010, we began marketing and selling our Nexus 128 system, which
combined light-based thermoacoustics and ultrasound to address the
imaging needs of researchers studying disease models in
pre-clinical applications. Building on this expertise in
thermoacoustics, we have developed a next-generation technology
platform — Thermo Acoustic Enhanced Ultrasound, or TAEUS
— which is intended to enhance the capability of clinical
ultrasound technology and support the diagnosis and treatment of a
number of significant medical conditions that currently require the
use of expensive CT or MRI imaging or where imaging is not
practical using existing technology. We ceased production of our
Nexus 128 system as of January 1, 2019 and stopped providing
service support and parts for all existing Nexus 128 systems as of
July 1, 2019 in order to focus our resources on the development of
our TAEUS technology.
Unlike the near-infrared light pulses used in our legacy Nexus 128
system, our TAEUS technology uses radio frequency
(“RF”) pulses to stimulate tissues, using a small
fraction of the energy that would be transmitted into the body
during an MRI scan. The use of RF energy allows our TAEUS
technology to penetrate deep into tissue, enabling the imaging of
human anatomy at depths equivalent to those of conventional
ultrasound. The RF pulses are absorbed by tissue and converted into
ultrasound signals, which are detected by an external ultrasound
receiver and a digital acquisition system that is part of the TAEUS
system. The detected ultrasound is processed into images using our
proprietary algorithms and displayed to complement conventional
gray-scale ultrasound images.
37
We expect that the first-generation TAEUS application will be a
standalone ultrasound accessory designed to cost-effectively
quantify fat in the liver and stage progression of nonalcoholic
fatty liver disease (“NAFLD”), which can only be
achieved today with impractical surgical biopsies or MRI scans.
Subsequent TAEUS offerings are expected to be implemented via a
second generation hardware platform that can run multiple clinical
software applications that we will offer TAEUS users for a one-time
licensing fee – adding ongoing customer value to the TAEUS
platform and a growing software revenue stream for our
Company.
In April 2016, we entered into a Collaborative Research Agreement
with General Electric Company, acting through its GE Healthcare
business unit and the GE Global Research Center (collectively,
“GE Healthcare”). Under the terms of the agreement, GE
Healthcare has agreed to assist us in our efforts to commercialize
our TAEUS technology for use in a fatty liver application by, among
other things, providing equipment and technical advice, and
facilitating introductions to GE Healthcare clinical ultrasound
customers. In return for this assistance, we have agreed to afford
GE Healthcare certain rights of first offer with respect to
manufacturing and licensing rights for the target
application.
In November 2017, we engaged two firms that specialize in medical
device software development to commence productization of our TAEUS
device targeting NAFLD. The agreements call for these vendors to
provide us with the specialized engineering resources necessary to
translate our current prototype TAEUS device into a clinical
product that meets CE regulatory requirements required for
commercial launch in the European Union followed by FDA submission
for the U.S. market.
Each of our TAEUS platform applications will require regulatory
approvals before we are able to sell or license the application.
Based on certain factors, such as the installed base of ultrasound
systems, availability of other imaging technologies, such as CT and
MRI, economic strength and applicable regulatory requirements, we
intend to seek initial approval of our applications for sale in the
European Union and the United States, followed by
China.
On
March 9, 2020, we announced that we received Conformité
Européene (“CE”) mark approval for our TAEUS FLIP
(Fatty Liver Imaging Probe) System. The CE marking indicates that
TAEUS FLIP System complies with all applicable European Directives
and Regulations in the European Union and other CE mark
geographies, including the 27 EU member states. We next intend to
submit to the FDA an application for approval of the TAEUS
FLIP.
Financial Operations Overview
Revenue
To date our revenue has been generated by the placement and sale of
our discontinued Nexus 128 thermoacoustic imaging systems for use
in pre-clinical applications, and related service revenue. No
revenue has been generated by our TAEUS technology, which we have
not yet commercially sold.
Cost of Goods Sold
Our cost of goods sold is related to our direct costs associated
with the development and shipment of our discontinued Nexus 128
systems placed in pre-clinical settings, and costs associated with
service provided for these systems. No cost of goods sold has been
generated by our TAEUS technology, which we have not yet
commercially sold.
Research and Development Expenses
Our research and development expenses primarily include wages, fees
and equipment for the development of our TAEUS technology platform
and the proposed applications. Additionally, we incur certain costs
associated with the protection of our products and inventions
through a combination of patents, licenses, applications and
disclosures.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of headcount and
consulting costs, and marketing and tradeshow expenses. Currently,
our marketing efforts are through our website and attendance of key
industry meetings and conferences. In connection with the
commercialization of our TAEUS applications, we expect to
build a small sales and marketing team to train and support global
ultrasound distributors, as well as execute traditional marketing
activities such as promotional materials, electronic media and
participation in industry events and conferences.
38
General and Administrative Expenses
General and administrative expenses consist primarily of salaries
and related expenses for our management and personnel, and
professional fees, such as accounting, consulting and
legal.
Critical Accounting Policies and Estimates
Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of
contingent liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
Management makes estimates that affect certain accounts including
deferred income tax assets, accrued expenses, fair value of equity
instruments and reserves for any other commitments or
contingencies. Any adjustments applied to estimates are recognized
in the period in which such adjustments are
determined.
Share-based Compensation
Our 2016 Omnibus Incentive Plan (the “Omnibus Plan”)
permits the grant of share options and shares to our employees,
consultants and non-employee members of our board of directors.
Each January 1 the pool of shares available for issuance under the
Omnibus Plan automatically increases by an amount equal to the
lesser of (i) the number of shares necessary such that the
aggregate number of shares available under the Omnibus Plan equals
25% of the number of fully-diluted outstanding shares on the
increase date (assuming the conversion of all outstanding shares of
preferred stock and other outstanding convertible securities and
exercise of all outstanding options and warrants to purchase
shares) and (ii) if the board of directors takes action to set a
lower amount, the amount determined by the board. On January 1,
2020, the pool of shares available for issuance under the Omnibus
Plan automatically increased by 3,202,280 shares from 2,649,378
shares to 5,861,658.
We record share-based compensation in accordance with the
provisions of the Share-based Compensation Topic of the FASB
Codification. The guidance requires the use of option-pricing
models that require the input of highly subjective assumptions,
including the option’s expected life and the price volatility
of the underlying stock. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option
valuation model which uses certain assumptions related to risk-free
interest rates, expected volatility, expected life of the common
stock options, and future dividends, and the resulting charge is
expensed using the straight-line attribution method over the
vesting period.
Stock compensation expense recognized during the period is based on
the value of share-based awards that were expected to vest during
the period adjusted for estimated forfeitures. The estimated fair
value of grants of stock options and warrants to non-employees is
charged to expense, if applicable, in the financial
statements.
Debt Discount and Detachable Debt-Related Warrants
The
Company accounts for debt discounts originating in connection with
conversion features that are embedded in the notes related warrants
in accordance with ASC Subtopic 470-20,
Debt with Conversion and Other Options
.
These costs are classified on the consolidated balance sheet as a
direct deduction from the debt liability. The Company amortizes
these costs over the term of the securities as interest
expense-debt discount in the consolidated statement of operations.
Debt discounts relate to the relative fair value of warrants issued
in conjunction with the debt and are also recorded as a reduction
to the debt balance and accreted over the expected term of the
securities to interest expense.
39
Recent Accounting Pronouncements
See Note 2 of the accompanying financial statements for a
discussion of recently issued accounting standards.
Results of Operations
Years Ended December 31, 2019 and 2018
Revenue
We had
no revenue during the year ended December 31, 2019, as compared to
$6,174 for the year ended December 31, 2018. The 2018 revenue was a
result of service activity on our installed base of Nexus 128
pre-clinical systems. During the year ended December 31, 2019, we
ceased production of our Nexus 128 system and stopped providing
service support and parts for all existing systems as of July 1,
2019, in order to focus our resources on the development of our
TAEUS technology.
Cost of Goods Sold
There
was no cost of goods sold for each of the years ended December 31,
2019 and 2018.
Research and Development
Research
and development expenses were $6,574,999 for the year ended
December 31, 2019, as compared to $4,722,465 for the year ended
December 31, 2018, an increase of $1,852,534, or 39%. The costs
include primarily wages, fees and equipment for the development of
our TAEUS product line. Research and development expenses increased
from the same period for the prior year due primarily to increased
spending to develop TAEUS applications, which included expenses for
our contracted development vendors.
Sales and Marketing
Sales
and marketing expenses were $412,434 for the year ended December
31, 2019, as compared to $262,641 for the year ended December 31,
2018, an increase of $149,793, or 57%. The increase was primarily
due to additional headcount and pre-selling activities for our
TAEUS product line. Currently, our marketing efforts are through
our website and attendance of key industry meetings. We expect that
our future clinical business will involve hiring and training
additional staff to support our sales efforts. As we seek to
complete the development and commercialization of our TAEUS
applications, we intend to build a small sales and marketing team
to train and support global ultrasound distributors, as well as
execute traditional marketing activities such as promotional
materials, electronic media and participation in industry
conferences.
General and Administrative
Our
general and administrative expenses for the year ended December 31,
2019 were $3,856,159, compared to $3,752,535 for the year ended
December 31, 2018, an increase of $103,624, or 3%. Our wage and
related expenses for the year ended December 31, 2019 were
$1,892,455, compared to $1,607,568 for the year ended December 31,
2018. Wage and related expenses in the year ended December 31, 2019
included $147,915 for bonuses and $720,030 of stock compensation
expense related to the issuance and vesting of options, compared to
$264,200 for bonuses, $617,250 of stock compensation expense
related to the issuance and vesting of options for the same period
in 2018. Our professional fees which include legal, audit, and
investor relations for the year ended December 31, 2019 were
$1,436,734, compared to $1,612,076 for the year ended December 31,
2018.
Impairment of Inventory
During
the year ended December 31, 2018, we had a one-time write down of
inventory available for our Nexus 128 product of $287,541. There
was no such expense during the year ended December 31,
2019.
40
Impairment of Receivable
During
the year ended December 31, 2019, we incurred an expense of
$249,256 related to the return of taxes paid to the Canada Revenue
Agency which we had previously accounted for as an other current
asset. There was no such expense during the year ended December 31,
2018.
Amortization of Debt Discount
During
the year ended December 31, 2019, we incurred non-cash expenses of
$2,355,469 related to the amortization of debt discount incurred as
result of our issuance of the convertible note and warrants in July
2019. During the year ended December 31, 2018, we incurred non-cash
expenses of $729,241 related to the amortization of debt discount
incurred as result of our issuance of the convertible note and
warrants in June 2018.
Net Loss
As a
result of the foregoing, for the year ended December 31, 2019, we
recorded a net loss of $13,305,964, compared to a net loss of
$9,796,261 for the year ended December 31, 2018.
Liquidity and Capital Resources
To date we have funded our operations through private and public
sales of our securities. As of December 31, 2019, we had $6,174,207
in cash. We have completed the following:
●
In May 2017, we completed our initial public offering, raising net
proceeds of approximately $8.6 million after deducting
approximately $0.8 million in underwriting discounts, commissions
and expenses and approximately $0.3 million in offering expenses
payable by us.
●
In June 2018, we completed the placement of senior secured
convertible promissory notes and warrants, raising net proceeds of
approximately $935,000 after deducting offering expenses of
approximately $142,000 payable by us.
●
In October 2018, we completed an underwritten public offering of
1,477,750 shares of our common stock. The net proceeds from this
offering were approximately $2.7 million, after deducting
underwriting discounts and commissions and other offering
expenses.
●
In November 2018, we completed an underwritten public offering of
1,385,750 shares of our common stock. The net proceeds from this
offering were approximately $4.9 million, after deducting
underwriting discounts and commissions and other offering expenses.
In connection with this and the October 2018 underwritten public
offering, the promissory notes issued in June 2018 automatically
converted into common stock pursuant to their
terms.
●
In July 2019, we completed a private
placement of senior secured convertible promissory notes and
warrants, raising net proceeds of approximately $2.5 million after
deducting offering expenses of approximately $314,500 payable by
us. The promissory notes bear interest at a rate of 10% per annum
until maturity on April 26, 2020.
●
In December 2019,
we completed
placements of shares of Series A Preferred Stock, shares of Series
B Preferred Stock, shares of common stock and warrants, raising net
proceeds of approximately $5.8 million after using approximately
$1.9 million to repay debt represented by convertible promissory
notes and deducting offering expenses of approximately $766,000
payable by us.
41
We
believe that cash on hand at December 31, 2019 will be sufficient
to fund our current operations into the third quarter of 2020.
However, we will need additional capital to execute our
commercialization plan and if we do not raise additional capital in
the next several months we will need to significantly slow or pause
our business activities until such time as we are able to raise
additional capital. We continue to evaluate and manage our capital
needs to support our clinical, regulatory and operational
activities and prepare for the results of our human studies data
and EU commercialization. We are currently exploring potential
financing options that may be available to us, including additional
sales of our common stock and the causing the mandatory exercise of
our warrants issued on December 11, 2019 for cash. However, we have
no commitments to obtain any additional funds, and there can be no
assurance such funds will be available on acceptable terms or at
all. If we are unable to obtain additional financing in a timely
fashion and on terms acceptable to us, our financial condition and
results of operations may be materially adversely affected and we
may not be able to continue operations or execute our stated
commercialization plan.
The financial statements included in this Form 10-K have been
prepared assuming we will continue as a going concern, which
contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. As
reflected in the accompanying financial statements, during the year
ended December 31, 2019, we incurred net losses of $13,305,964 and
used cash in operations of $8,588,851. These and other factors
raise substantial doubt about our ability to continue as a going
concern for one year from the issuance of the accompanying
financial statements. The financial statements do not include any
adjustments that might be necessary should we be unable to continue
as a going concern.
Operating Activities
During
the year ended December 31, 2019, we used $8,588,851 of cash in
operating activities primarily as a result of our net loss of
$13,305,964 offset by share-based compensation of $1,399,547,
depreciation and amortization expenses of $80,577, amortization of
debt discount of $2,355,469, and net changes in operating assets
and liabilities of $597,830.
During
the year ended December 31, 2018, we used $7,702,481 of cash in
operating activities primarily as a result of our net loss of
$9,796,261 offset by share-based compensation of $1,367,762,
depreciation and amortization expenses of $68,316, amortization of
debt discount of $729,241, impairment of inventory of $287,541 and
net changes in operating assets and liabilities of
$(359,079).
Investing Activities
During
the year ended December 31, 2019, the Company used $43,595 in
investing activities related to purchase of equipment.
During
the year ended December 31, 2018, the Company used $100,000 in
investing activities related to purchase of equipment.
Financing Activities
During
the year ended December 31, 2019, financing activities provided
$8,335,278, including $2,490,501 in proceeds from the placement of
senior secured convertible promissory notes and warrants,
$5,344,257 from the issuance of Series A Preferred Stock and
warrants, $375,520 from the issuance of Series B Preferred Stock
and warrants, and $125,000 from the issuance common stock and
warrants.
During
the year ended December 31, 2018, financing activities provided
$7,736,678 in proceeds from issuance of common stock and $935,300
in proceeds from the placement of senior secured convertible
promissory notes and warrants.
42
Funding Requirements
We have
not completed the commercialization of any of our TAEUS technology
platform applications. We expect to continue to incur significant
expenses for the foreseeable future. We anticipate that our
expenses will increase substantially as we:
●
advance the engineering design and development of our NAFLD TAEUS
application;
●
acquire parts and build finished goods inventory of the FLIP
system;
●
prepare regulatory filings required for marketing approval of our
NAFLD TAEUS application in the United States;
●
seek to hire a small internal marketing team to engage and support
channel partners and clinical customers for our NAFLD TAEUS
application;
●
commence marketing of our NAFLD TAEUS application;
●
advance development of our other TAEUS applications;
and
●
add operational, financial and management information systems and
personnel, including personnel to support our product development,
planned commercialization efforts and our operation as a public
company.
It is
possible that we will not achieve the progress that we expect
because the actual costs and timing of completing the development
and regulatory approvals for a new medical device are difficult to
predict and are subject to substantial risks and delays. We have no
committed external sources of funds. We do not expect that our
existing cash will be sufficient for us to complete the
commercialization of our NAFLD TAEUS application or to complete the
development of any other TAEUS application and we will need to
raise substantial additional capital for those purposes. As a
result, we will need to finance our future cash needs through
public or private equity offerings, debt financings, corporate
collaboration and licensing arrangements or other financing
alternatives. Our forecast of the period of time through which our
financial resources will be adequate to support our operations is a
forward-looking statement and involves risks and uncertainties, and
actual results could vary as a result of a number of factors,
including the factors discussed in the section of this Annual
Report on Form 10-K entitled “Risk Factors”. We have
based this estimate on assumptions that may prove to be wrong, and
we could utilize our available capital resources sooner than we
currently expect.
Until
we can generate a sufficient amount of revenue from our TAEUS
platform applications, if ever, we expect to finance future cash
needs through public or private equity offerings, debt financings
or corporate collaborations and licensing arrangements. Additional
funds may not be available when we need them on terms that are
acceptable to us, or at all. If adequate funds are not available,
we may be required to delay, reduce the scope of or eliminate one
or more of our research or development programs or our
commercialization efforts or perhaps even cease the operation of
our business. To the extent that we raise additional funds by
issuing equity securities, our stockholders may experience
additional dilution, and debt financing, if available, may involve
restrictive covenants. To the extent that we raise additional funds
through collaborations and licensing arrangements, it may be
necessary to relinquish some rights to our technologies or
applications or grant licenses on terms that may not be favorable
to us. We may seek to access the public or private capital markets
whenever conditions are favorable, even if we do not have an
immediate need for additional capital at that time.
Nasdaq Capital Market Listing
Our
common stock is currently traded on the Nasdaq Stock Market LLC
(the “Nasdaq”). The Nasdaq imposes, among other
requirements, listing maintenance standards including minimum bid
price and stockholders’ equity requirements. In particular,
Nasdaq rules require us to maintain a minimum stockholders’
equity of $2.5 million. On August 14, 2019, we received a
notification letter from the Listing Qualifications Staff of the
Nasdaq notifying us that, based on our Quarterly Report on Form
10-Q for the quarter ended June 30, 2019, we no longer maintained
the minimum $2.5 million stockholders’ equity required for
continued listing on The Nasdaq Capital Market under Marketplace
Rule 5550(b)(1) (the “Equity Rule”). In response to the
notification letter, we submitted a plan to regain compliance and,
on October 23, 2019 the Nasdaq notified us that it had accepted the
plan and granted us an extension until February 10, 2020 to regain
compliance with the Equity Rule. Based on our ability to obtain
additional equity during December 2019, we were notified on
December 18, 2019 by the Nasdaq that we had regained compliance
with the Equity Rule as of that date.
Off-Balance Sheet Transactions
At
December 31, 2019, the Company did not have any transactions,
obligations or relationships that could be considered off-balance
sheet arrangements.
I
tem 7A. Quantitative and Qualitative
Disclosures About Market Risk.
Not
applicable.
43
I
tem 8. Financial
Statements and Supplementary Data.
Index to Financial Statements
ENDRA Life Sciences Inc.
December 31, 2019
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F-1
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F-2
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F-3
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F-4
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F-5
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F-6
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44
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
ENDRA
Life Sciences Inc. and Subsidiary
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of ENDRA Life
Sciences Inc. and subsidiary (The “Company”) as of
December 31, 2019 and 2018 and the related consolidated statements
of operations, stockholders’ equity, and cash flows for each
of the years in the two-year period ended December 31, 2019, and
the related notes (collectively referred to as the consolidated
financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the
consolidated financial position of the Company as of December 31,
2019 and 2018, and the consolidated results of its operations and
its cash flows for each of the years in the two-year period ended
December 31, 2019, in conformity with accounting principles
generally accepted in the United States of America.
Change in Accounting Principles
As
discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for leases in 2019 due to
the adoption of ASU No. 2016-02, Leases (Topic 842), as amended,
effective January 1, 2019, using the modified retrospective
approach.
The Company's Ability to Continue as a Going
Concern
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the financial statements, the Company has an
accumulated deficit, recurring losses, and expects continuing
future losses that raise substantial doubt about the
Company’s ability to continue as a going concern.
Management's evaluation of the events and conditions and
management’s plans regarding these matters are also described
in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
|
/s/
RBSM LLP
|
|
|
We have
served as the Company’s auditor since 2015.
|
|
|
|
|
|
Henderson,
Nevada
|
|
|
March
26, 2020
|
|
F-1
R
eport of Independent Registered
Public Accounting Firm
ENDRA Life Sciences Inc.
C
onsolidated Balance Sheets
|
|
December
31,
|
December
31,
|
|
Assets
|
2019
|
2018
|
|
Assets
|
|
|
|
Cash
|
$
6,174,207
|
$
6,471,375
|
|
Prepaid
expenses
|
116,749
|
145,424
|
|
Inventory
|
113,442
|
59,444
|
|
Other current
assets
|
130,701
|
273,315
|
|
Total Current
Assets
|
6,535,099
|
6,949,558
|
|
Other
Assets
|
|
|
|
Fixed assets,
net
|
236,251
|
273,233
|
|
Right of use
assets
|
404,919
|
-
|
|
Total
Assets
|
$
7,176,269
|
$
7,222,791
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts payable
and accrued liabilities
|
$
1,708,525
|
$
974,583
|
|
Convertible notes
payable, net of discount
|
298,069
|
-
|
|
Lease liabilities,
current portion
|
66,193
|
-
|
|
Total Current
Liabilities
|
2,072,787
|
974,583
|
|
|
|
|
|
Long
Term Debt:
|
|
|
|
Lease
liabilities
|
342,812
|
-
|
|
Total Long Term
Debt
|
342,812
|
-
|
|
|
|
|
|
Total
Liabilities
|
2,415,599
|
974,583
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
Series A
Convertible Preferred Stock, $0.0001 par value; 10,000 shares
authorized; 6,338.490 shares issued and
outstanding
|
1
|
-
|
|
Series B
Convertible Preferred Stock, $0.0001 par value; 1,000 shares
authorized; 351.711 shares issued and
outstanding
|
-
|
-
|
|
Common stock,
$0.0001 par value; 50,000,000 shares authorized; 8,421,401 and
7,422,642 shares issued and outstanding
|
842
|
742
|
|
Additional paid in
capital
|
49,933,736
|
33,939,162
|
|
Stock
payable
|
43,528
|
-
|
|
Accumulated
deficit
|
(
45,217,437
)
|
(27,691,696
)
|
|
Total
Stockholders’ Equity
|
4,760,670
|
6,248,208
|
|
Total
Liabilities and Stockholders’ Equity
|
$
7,176,269
|
$
7,222,791
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-2
ENDRA Life Sciences Inc.
C
onsolidated Statements of
Operations
|
|
Year
Ended
|
Year
Ended
|
|
|
December
31,
|
December
31,
|
|
|
2019
|
2018
|
|
Revenue
|
$
-
|
$
6,174
|
|
|
|
|
|
Cost of Goods
Sold
|
-
|
-
|
|
|
|
|
|
Gross
Profit
|
-
|
6,174
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
Research and
development
|
6,574,999
|
4,722,465
|
|
Sales and
marketing
|
412,434
|
262,641
|
|
General and
administrative
|
3,856,159
|
3,752,535
|
|
Impairment
of inventory
|
-
|
287,541
|
|
Total operating
expenses
|
10,843,592
|
9,025,182
|
|
|
|
|
|
Operating
loss
|
(10,843,592
)
|
(9,019,008
)
|
|
|
|
|
|
Other
Expenses
|
|
|
|
Amortization of
debt discount
|
(2,355,469
)
|
(729,241
)
|
|
Other
expense
|
(106,903
)
|
(48,012
)
|
|
Total other
expenses
|
(2,462,372
)
|
(777,253
)
|
|
|
|
|
|
Loss from
operations before income taxes
|
(13,305,964
)
|
(9,796,261
)
|
|
|
|
|
|
Provision for
income taxes
|
-
|
-
|
|
|
|
|
|
Deemed dividend related to Preferred
Stock
|
$
(
4,219,777
)
|
-
|
|
|
|
|
|
Net
Loss attributable to common stockholders
|
$
(
17,525,741
)
|
$
(9,796,261
)
|
|
|
|
|
|
Net
loss per share – basic and diluted
|
$
(2.34
)
|
$
(2.17
)
|
|
|
|
|
|
Weighted
average common shares – basic and diluted
|
7,499,984
|
4,504,873
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-3
ENDRA Life Sciences Inc.
C
onsolidated Statements of
Stockholders’ Equity
|
|
Series A
Convertible Preferred Stock
|
Series B
Convertible Preferred Stock
|
Common
stock
|
|
|
|
|
|||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional Paid in
Capital
|
Stock
Payable
|
Accumulated
Deficit
|
Total
Stockholders'
Equity
|
|
Balance as
of December 31, 2017
|
-
|
$
-
|
-
|
$
-
|
3,923,027
|
$
392
|
$
23,170,531
|
$
-
|
$
(17,895,435
)
|
$
5,275,488
|
|
Common stock issued for
cash
|
-
|
-
|
-
|
-
|
2,863,500
|
286
|
7,736,392
|
-
|
-
|
7,736,678
|
|
Common stock issued for note
conversion
|
-
|
-
|
-
|
-
|
636,115
|
64
|
1,076,936
|
-
|
-
|
1,077,000
|
|
Common stock issued for
services
|
-
|
-
|
-
|
-
|
-
|
-
|
47,865
|
-
|
-
|
47,865
|
|
Warrants issued for
services
|
-
|
-
|
-
|
-
|
-
|
-
|
71,756
|
-
|
-
|
71,756
|
|
Fair value of vested stock
options
|
-
|
-
|
-
|
-
|
-
|
-
|
1,248,141
|
-
|
-
|
1,248,141
|
|
Debt
discount
|
-
|
-
|
-
|
-
|
-
|
-
|
587,541
|
-
|
-
|
587,541
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(9,796,261
)
|
(9,796,261
)
|
|
Balance as
of December 31, 2018
|
-
|
$
-
|
-
|
$
-
|
7,422,642
|
$
742
|
$
33,939,162
|
$
-
|
$
(27,691,696
)
|
$
6,248,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as
of December 31, 2018
|
-
|
-
|
-
|
-
|
7,422,642
|
742
|
33,939,162
|
-
|
(27,691,696
)
|
6,248,208
|
|
Series A Convertible
Preferred Stock issued
|
6,338.490
|
1
|
-
|
-
|
904,526
|
90
|
7,412,361
|
-
|
-
|
7,412,452
|
|
Series B Convertible
Preferred Stock issued
|
-
|
-
|
351.711
|
-
|
-
|
-
|
375,520
|
-
|
-
|
375,520
|
|
Common stock issued for
note conversions
|
-
|
-
|
-
|
-
|
94,233
|
10
|
140,396
|
-
|
-
|
140,406
|
|
Fair value of vested stock
options
|
-
|
-
|
-
|
-
|
-
|
-
|
1,399,547
|
-
|
-
|
1,399,547
|
|
Debt
discount
|
-
|
-
|
-
|
-
|
-
|
-
|
2,490,501
|
-
|
-
|
2,490,501
|
|
Deemed dividend on preferred
stock
|
|
|
|
|
|
|
4,219,777
|
|
(4,219,777
)
|
|
|
Stock to be
issued
|
-
|
-
|
-
|
-
|
-
|
-
|
(43,528
)
|
43,528
|
-
|
-
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(13,305,964
)
|
(13,305,964
)
|
|
Balance as
of December 31, 2019
|
6,338.490
|
1
|
351.711
|
-
|
8,421,401
|
842
|
49,933,736
|
43,528
|
(45,217,437
)
|
4,760,670
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-4
ENDRA Life Sciences Inc.
C
onsolidated Statements of Cash
Flows
|
|
Year Ended
|
Year Ended
|
|
|
December 31,
|
December 31,
|
|
|
2019
|
2018
|
|
Cash
Flows from Operating Activities
|
|
|
|
Net
loss
|
$
(13,305,964
)
|
$
(9,796,261
)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation and
amortization
|
80,577
|
68,316
|
|
Common stock,
options and warrants issued for services
|
1,399,547
|
1,367,762
|
|
Amortization of
debt discount
|
2,355,469
|
729,241
|
|
Impairment
of other assets
|
249,256
|
-
|
|
Impairment of
inventory
|
-
|
287,541
|
|
Amortization
of right of use assets
|
34,434
|
-
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Increase in
accounts receivable
|
-
|
6,850
|
|
Increase in prepaid
expenses
|
28,675
|
(77,928
)
|
|
Decrease in lease
liability
|
(30,348
)
|
-
|
|
Increase in
inventory
|
(53,998
)
|
(155,305
)
|
|
Decrease in other
asset
|
(106,642
)
|
(259,066
)
|
|
Increase in
accounts payable and accrued liabilities
|
760,143
|
126,368
|
|
Net cash used in
operating activities
|
(8,588,851
)
|
(7,702,481
)
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
Purchases of fixed
assets
|
(43,595
)
|
(100,000
)
|
|
Net cash used in
investing activities
|
(43,595
)
|
(100,000
)
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
Proceeds from
senior secured convertible promissory notes, net of
fees
|
2,490,501
|
935,300
|
|
Proceeds from
issuance of Series A Convertible Preferred Stock
|
5,344,257
|
-
|
|
Proceeds from
issuance of Series B Convertible Preferred Stock
|
375,520
|
-
|
|
Proceeds from
issuance of common stock
|
125,000
|
7,736,678
|
|
Net cash provided
by financing activities
|
8,335,278
|
8,671,978
|
|
|
|
|
|
Net decrease in
cash
|
(297,168
)
|
869,497
|
|
|
|
|
|
Cash, beginning of
period
|
6,471,375
|
5,601,878
|
|
|
|
|
|
Cash,
end of period
|
$
6,174,207
|
$
6,471,375
|
|
|
|
|
|
Supplemental
disclosures of cash items
|
|
|
|
Interest
paid
|
$
-
|
$
40,085
|
|
Income
tax paid
|
$
-
|
$
-
|
|
|
|
|
|
Supplemental
disclosures of non-cash items
|
|
|
|
Discount on
convertible notes
|
$
2,490,501
|
$
587,541
|
|
Conversion of
convertible notes and accrued interest
|
$
140,406
|
$
1,077,000
|
|
Exchange of balance
in convertible notes and accrued interest for Series A preferred
stock
|
$
1,943,195
|
$
-
|
|
Deemed
Dividend
|
$
4,219,777
|
$
-
|
|
Right of use
asset
|
$
404,919
|
$
-
|
|
Lease
liability
|
$
409,005
|
$
-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-5
ENDRA Life Sciences Inc.
N
otes to Consolidated Financial
Statements
For the years ended December 31, 2019 and 2018
Note 1 – Nature of the Business
ENDRA Life Sciences Inc. (“ENDRA” or the
“Company”) is developing technology for increasing the
capabilities of clinical diagnostic ultrasound, to broaden patient
access to the safe diagnosis and treatment of a number of
significant medical conditions in circumstances where expensive
X-ray computed tomography (“CT”) and magnetic resonance
imaging (“MRI”) technology is unavailable or
impractical.
ENDRA was incorporated on July 18, 2007 as a Delaware
corporation.
ENDRA Life Sciences Canada Inc. was organized under the laws of
Ontario, Canada on July 6, 2017, and is wholly owned by the
Company.
Note 2 – Summary of Significant Accounting
Policies
Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of
contingent liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
Management makes estimates that affect certain accounts including
deferred income tax assets, accrued expenses, fair value of equity
instruments and reserves for any other commitments or
contingencies. Any adjustments applied to estimates are recognized
in the period in which such adjustments are
determined.
Principles of Consolidation
The Company’s consolidated financial statements include all
accounts of the Company and its consolidated subsidiary and/or
entities as of reporting period ending date(s) and for the
reporting period(s) then ended. All inter-company balances and
transactions have been eliminated.
Basis of Presentation
The accompanying consolidated financial statements and related
notes have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission (the
“SEC”).
Cash and Cash Equivalents
The Company considers all cash on hand and in banks, including
accounts in book overdraft positions, certificates of deposit and
other highly-liquid investments with maturities of one year or
less, when purchased, to be cash. As of December 31, 2019 and
December 31, 2018, the Company had no cash equivalents. The Company
maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced
any losses in such accounts and periodically evaluates the credit
worthiness of the financial institutions and has determined the
credit exposure to be negligible.
Inventory
The Company’s inventory is stated at the lower of cost or
estimated net realizable value, with cost primarily determined on a
weighted-average cost basis on the first-in, first-out method. The
Company periodically determines whether a reserve should be taken
for devaluation or obsolescence of inventory.
F-6
Capitalization of Fixed Assets
The Company capitalizes expenditures related to property and
equipment, subject to a minimum rule, that have a useful life
greater than one year for: (1) assets purchased; (2) existing
assets that are replaced, improved or the useful lives have been
extended; or (3) all land, regardless of cost. Acquisitions of new
assets, additions, replacements and improvements (other than land)
costing less than the minimum rule in addition to maintenance and
repair costs, including any planned major maintenance activities,
are expensed as incurred.
Revenue Recognition
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2014-09, “Revenue from Contracts with
Customers” (“ASC Topic 606”). This standard
provides a single set of guidelines for revenue recognition to be
used across all industries and requires additional disclosures. The
updated guidance introduces a five-step model to achieve its core
principal of the entity recognizing revenue to depict the transfer
of goods or services to customers at an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. The Company adopted the
updated guidance effective January 1, 2018 using the full
retrospective method. The new standard did not have a material
impact on its financial position and results of operations, as it
did not change the manner or timing of recognizing
revenue.
Under ASC Topic 606, in order to recognize revenue, the Company is
required to identify an approved contract with commitments to
perform respective obligations, identify rights of each party in
the transaction regarding goods to be transferred, identify the
payment terms for the goods transferred, verify that the contract
has commercial substance and verify that collection of
substantially all consideration is probable. The adoption of ASC
Topic 606 did not have an impact on the Company’s operations
or cash flows.
Research and Development Costs
The Company follows FASB Accounting Standards Codification
(“ASC”) Subtopic 730-10, “Research and
Development”. Research and development costs are charged to
the statement of operations as incurred. During the years ended
December 31, 2019 and 2018, the Company incurred $6,574,999 and
$4,722,465 of expenses related to research and development costs,
respectively.
Income Taxes
The
Company utilizes ASC Topic 740, “Income Taxes,” which
requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on
the difference between the tax basis of assets and liabilities and
their financial reporting amounts based on enacted tax laws and
statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation
allowance is recorded when it is “more likely-than-not”
that a deferred tax asset will not be realized.
The
Company generated a deferred tax asset through net operating loss
carry-forwards. However, a valuation allowance of 100% has been
established due to the uncertainty of the Company’s
realization of the net operating loss carry forward prior to its
expiration.
Net Earnings (Loss) Per Common Share
The Company computes earnings per share under ASC Subtopic 260-10,
“Earnings Per Share”. Basic earnings (loss) per share
is computed by dividing the net income (loss) attributable to the
common stockholders (the numerator) by the weighted average number
of shares of common stock outstanding (the denominator) during the
reporting periods. Diluted loss per share is computed by increasing
the denominator by the weighted average number of additional shares
that could have been outstanding from securities convertible into
common stock (using the “treasury stock” method),
unless their effect on net loss per share is anti-dilutive. There
were 24
,949,725
and 3,900,939
potentially dilutive shares, which include outstanding common stock
options, warrants, and convertible notes, as of December 31, 2019
and
December 31, 2018,
respectively.
F-7
The potential shares, which are excluded from the determination of
basic and diluted net loss per share as their effect is
anti-dilutive, are as follows:
|
|
December
31,
2019
|
December
31,
2018
|
|
Options to purchase
common stock
|
3,449,319
|
1,272,911
|
|
Warrants to
purchase common stock
|
13,496,924
|
2,628,028
|
|
Shares issuable
upon conversion of notes
|
362,568
|
-
|
|
Shares issuable
upon conversion of Series A Preferred Stock
|
7,285,651
|
-
|
|
Shares issuable
upon conversion of Series B Preferred
Stock
|
355,263
|
-
|
|
Potential
equivalent shares excluded
|
24,949,725
|
3,900,939
|
Fair Value Measurements
Disclosures about fair value of financial instruments require
disclosure of the fair value information, whether or not recognized
in the balance sheet, where it is practicable to estimate that
value.
In accordance with ASC Topic 820, “Fair Value Measurements
and Disclosures,” the Company measures certain financial
instruments at fair value on a recurring basis. ASC Topic 820
defines fair value, established a framework for measuring fair
value in accordance with accounting principles generally accepted
in the United States, and expands disclosures about fair value
measurements.
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC Topic 820
established a three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements).
These tiers include:
●
Level 1, defined as
observable inputs such as quoted prices for identical instruments
in active markets;
●
Level 2, defined as
inputs other than quoted prices in active markets that are either
directly or indirectly observable such as quoted prices for similar
instruments in active markets or quoted prices for identical or
similar instruments in markets that are not active;
and
●
Level 3, defined as
unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions, such
as valuations derived from valuation techniques in which one or
more significant inputs or significant value drivers are
unobservable.
Financial assets are considered Level 3 when their fair values are
determined using pricing models, discounted cash flow methodologies
or similar techniques and at least one significant model assumption
or input is unobservable.
The carrying amounts of the Company’s financial assets and
liabilities, including cash, accounts receivable, prepaid expenses,
accounts payable, accrued expenses, and other current liabilities,
approximate their fair values because of the short maturity of
these instruments. The fair value of notes payable and convertible
notes approximates their fair values since the current interest
rates and terms on these obligations are the same as prevailing
market rates.
Share-based Compensation
The
Company’s 2016 Omnibus Incentive Plan (the “Omnibus
Plan”) permits the grant of stock options and other
share-based awards to its employees, consultants and non-employee
members of the board of directors. Each January 1 the pool of
shares available for issuance under the Omnibus Plan automatically
increases by an amount equal to the lesser of (i) the number of
shares necessary such that the aggregate number of shares available
under the Omnibus Plan equals 25% of the number of fully-diluted
outstanding shares on the increase date (assuming the conversion of
all outstanding shares of preferred stock and other outstanding
convertible securities and exercise of all outstanding options and
warrants to purchase shares) and (ii) if the board of directors
takes action to set a lower amount, the amount determined by the
board. On January 1, 2020, the pool of shares available for
issuance under the Omnibus Plan automatically increased by
3,202,280 shares from 2,649,378 shares to
5,861,658.
F-8
The Company records share-based compensation in accordance with the
provisions of the Share-based Compensation Topic of the FASB
Codification. The guidance requires the use of option-pricing
models that require the input of highly subjective assumptions,
including the option’s expected life and the price volatility
of the underlying stock. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option
valuation model, and the resulting charge is expensed using the
straight-line attribution method over the vesting
period.
Stock compensation expense recognized during the period is based on
the value of share-based awards that were expected to vest during
the period adjusted for estimated forfeitures. The estimated fair
value of grants of stock options and warrants to non-employees of
the Company is charged to expense, if applicable, in the financial
statements. These options vest in the same manner as the employee
options granted under the stock incentive plan as described
above.
Debt
Discount
The Company determines if its outstanding convertible promissory
notes should be accounted for as liability or equity under ASC
Topic 480, “Liabilities — Distinguishing Liabilities
from Equity.” ASC Topic 480 applies to certain contracts
involving a company’s own equity, and requires that issuers
classify the following freestanding financial instruments as
liabilities: mandatorily redeemable financial instruments,
obligations that require or may require repurchase of the
issuer’s equity shares by transferring assets (e.g., written
put options and forward purchase contracts), and certain
obligations where at inception the monetary value of the obligation
is based solely or predominantly on:
●
A fixed monetary amount known at inception (for example, a payable
settleable with a variable number of the issuer’s equity
shares with an issuance date fair value equal to a fixed dollar
amount);
●
Variations in something other than the fair value of the
issuer’s equity shares (for example, a financial instrument
indexed to the S&P 500 and settleable with a variable number of
the issuer’s equity shares); or
●
Variations inversely related to changes in the fair value of the
issuer’s equity shares (for example, a written put that could
be net share settled).
Beneficial Conversion Feature
If the
conversion feature of conventional convertible debt provides for a
rate of conversion that is below market value, this feature is
characterized as a beneficial conversion feature
(“BCF”). A BCF is recorded by the Company as a debt
discount pursuant to ASC Topic 470-20 “Debt with Conversion
and Other Options.” In those circumstances, the convertible
debt is recorded net of the discount related to the BCF and the
Company amortizes the discount to interest expense over the life of
the debt using the effective interest method.
If the Company determines the instrument meets the guidance under
ASC Topic 480, the instrument is accounted for as a liability with
a respective debt discount. The Company has previously recorded
debt discounts in connection with raising funds through the
issuance of promissory notes. These costs are amortized to noncash
interest expense over the life of the debt. If a conversion of the
underlying debt occurs, a proportionate share of the unamortized
amounts is immediately expensed. See Note 6, Convertible Notes, for
further discussion on the Company’s accounting treatment for
the outstanding notes.
Going Concern
The Company’s financial statements are prepared using
accounting principles generally accepted in the United States
(“U.S. GAAP”) applicable to a going concern, which
contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has
limited commercial experience and had a cumulative net loss from
inception to December 31, 2019 of $45,217,437. The Company had
working capital of $4,462,311 as of December 31, 2019. The Company
has not established an ongoing source of revenue sufficient to
cover its operating costs and to allow it to continue as a going
concern. The accompanying financial statements for the period ended
December 31, 2019 have been prepared assuming the Company will
continue as a going concern. The Company’s cash resources
will likely be insufficient to meet its anticipated needs during
the next twelve months. The Company will require additional
financing to fund its future planned operations, including research
and development and commercialization of its
products.
The
ability of the Company to continue as a going concern is dependent
on the Company obtaining adequate capital to fund operating losses
until it establishes a revenue stream and becomes profitable.
Management’s plans to continue as a going concern include
raising additional capital through sales of equity securities and
borrowing. However, management cannot provide any assurances that
the Company will be successful in accomplishing any of its plans.
If the Company is not able to obtain the necessary additional
financing on a timely basis, the Company will be required to delay,
reduce the scope of or eliminate one or more of the Company’s
research and development activities or commercialization efforts or
perhaps even cease the operation of its business. The ability of
the Company to continue as a going concern is dependent upon its
ability to successfully secure other sources of financing and
attain profitable operations. There is substantial doubt about the
ability of the Company to continue as a going concern for one year
from the issuance of the accompanying consolidated financial
statements. The accompanying consolidated financial statements do
not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
F-9
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from
Contracts with Customers.” ASU 2014-09 is a comprehensive
revenue recognition standard that superseded nearly all previous
revenue recognition guidance under U.S. GAAP and replaced it with a
principle-based approach for determining revenue recognition. Under
ASU 2014-09, revenue is recognized when a customer obtains control
of promised goods or services and is recognized in an amount that
reflects the consideration which the entity expects to receive in
exchange for those goods or services. In addition, the standard
requires disclosure of the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers.
The FASB has since issued ASU 2016-08, ASU 2016-10, ASU 2016-11,
ASU 2016-12, and ASU 2016-20, all of which clarify certain
implementation guidance within ASU 2014-09. ASU 2014-09 is
effective for interim and annual periods beginning after December
15, 2017. The standard can be adopted either retrospectively to
each prior reporting period presented (full retrospective method),
or retrospectively with the cumulative effect of initially applying
the guidance recognized at the date of initial application (the
cumulative catch-up transition method). The Company has reviewed
ASU 2014-09 and using the full retrospective method has determined
that its adoption has had no impact on its financial position,
results of operations or cash flows. The Company adopted the
provisions of this standard in the first quarter of fiscal
2018.
In February 2016, the FASB issued ASU No. 2016-02,
“Leases.” ASU 2016-02 requires a lessee to record a
right of use asset and a corresponding lease liability on the
balance sheet for all leases with terms longer than 12 months. ASU
2016-02 is effective for all interim and annual reporting periods
beginning after December 15, 2018. Early adoption is permitted. A
modified retrospective transition approach is required for lessees
for capital and operating leases existing at, or entered into
after, the beginning of the earliest period presented in the
financial statements. The Company evaluated the impact that the
application of the new standard has on its consolidated financial
statements and related disclosures, and determined that is should
record a total lease liability of $431,363, with a corresponding
right of use asset valued at $430,681. The Company adopted the
provisions of this standard in the first quarter of fiscal
2019.
Other recent accounting pronouncements issued by the FASB,
including its Emerging Issues Task Force, the American Institute of
Certified Public Accountants, and the SEC, did not or in
management’s opinion will not have a material impact on the
Company’s present or future consolidated financial
statements.
Note 3 – Inventory
As of December 31, 2019 and December
31,
2018
, inventory consisted of raw
materials and subassemblies to be used in the assembly of a TAEUS
system. As of December 31, 2019, the Company had no orders pending
for the sale of a TAEUS system.
As of December 31, 2018, the Company
took a full reserve against its available inventory of parts for
its discontinued Nexus 128 system.
As of December 31, 2019 and December
31, 2018, the Company had
inventory valued at $113,442 and $59,444,
respectively.
Note 4 – Fixed Assets
As of
December 31, 2019 and December 31, 2018, fixed assets consisted of
the following:
|
|
December
31,
2019
|
December
31,
2018
|
|
Property, leasehold
and capitalized software
|
$
679,179
|
$
679,179
|
|
TAEUS development
and testing
|
43,596
|
--
|
|
Accumulated
depreciation
|
(486,524
)
|
(405,946
)
|
|
Fixed assets,
net
|
$
236,251
|
$
273,233
|
Depreciation
expense for the years ended December 31, 2019 and 2018 was $80,577
and $68,316, respectively.
F-10
Note 5 – Accounts Payable and Accrued
Liabilities
As of
December 31, 2019 and December 31, 2018, current liabilities
consisted of the following:
|
|
December
31,
2019
|
December
31,
2018
|
|
Accounts
payable
|
$
1,278,431
|
$
631,472
|
|
Accrued
payroll
|
94,862
|
29,302
|
|
Accrued
bonuses
|
295,794
|
263,497
|
|
Accrued employee
benefits
|
5,750
|
27,804
|
|
Accrued
interest
|
9,738
|
--
|
|
Insurance premium
financing
|
23,950
|
22,508
|
|
Total
|
$
1,708,525
|
$
974,583
|
Note 6 – Convertible Notes
July 2019 Notes
On July 26, 2019 the Company conducted a private placement offering
in which the Company sold senior secured convertible promissory
notes (the “July 2019 Notes”) and warrants exercisable
for shares of the Company’s common stock (the “July
2019 Warrants”) to accredited investors for a purchase price
approximately $2.8 million. The purchase price covered the purchase
of $2,587,895 aggregate principal amount of July 2019 Note and July
2019 Warrants exercisable for an aggregate of 1,736,843 shares of
common stock. The net proceeds to the Company were approximately
$2.5 million, after deducting placement agent fees and other
offering expenses.
The Company sold the July 2019 Notes and July 2019 Warrants
pursuant to a Securities Purchase Agreement, dated July 26, 2019,
between the Company and each purchaser. The July 2019 Notes bear
interest at a rate of 10% per annum until maturity on April 26,
2020. Interest is paid in arrears on the outstanding principal
amount on the three month anniversary of the issuance of the July
2019 Notes, and each three month period thereafter, and finally on
the maturity date. Holders of July 2019 Notes are entitled to
convert principal and accrued, unpaid interest on the July 2019
Notes into shares of common stock. The July 2019 Notes are
convertible into common stock at a conversion price per share equal
to $1.49 and were initially convertible into 1,736,843 shares of
common stock. The July 2019 Notes provide for customary events of
default. In the case of an event of default, each noteholder may
declare its July 2019 Note to be due and payable immediately
without further action or notice. If an event of default occurs and
is continuing, interest on the July 2019 Notes will automatically
be increased to 18% until the default is cured.
Each July 2019 Warrants entitles the holder to purchase one share
of common stock for an exercise price per share equal to $1.49. The
July 2019 Warrants are exercisable for an aggregate of 1,736,843
shares of common stock commencing immediately upon issuance and
expire July 26, 2022. The July 2019 Warrants provide for cashless
exercise and customary anti-dilution protection. The terms of the
Placement Agent Warrant (as defined below) are the same as those of
the July 2019 Warrants.
National Securities Corporation (the “Placement Agent”)
acted as placement agent in the offering pursuant to a Placement
Agent Agreement, dated July 9, 2019 (the “Placement Agent
Agreement”). Pursuant to the Placement Agent Agreement, the
Company paid to the Placement Agent a commission of 10% of the
gross proceeds from the offering, reimbursed $30,000 of the
Placement Agent’s expenses and issued to the Placement Agent
a warrant exercisable for 173,685 shares of common stock (the
“Placement Agent Warrant”).
F-11
The July 2019 Notes and July 2019 Warrants include embedded
derivatives that require bifurcation from the host contract under
the provisions of ASC 815-40, “Derivatives and
Hedging.” The estimated fair value of the derivative warrant
instruments was calculated using a Black-Scholes valuation model.
At inception, the aggregate relative fair value of the 1,910,538
warrants issued to the investors and the Placement Agent in July
2019 was determined to be $1,993,714 using the Black-Scholes-Merton
Option Pricing model with the following average assumptions: (i)
volatility rate of 111%, (ii) discount rate of 0%, (iii) zero
expected dividend yield, and (iv) expected life of three years. Out
of such amount, $1,126,138 was recorded as debt discount upon
issuance using allocation of proceeds.
At the issuance of the
July 2019 Notes, the effective conversion price was analyzed at
$0.84 per share of common stock and the market price of the shares
on the date of conversion was $1.54 per share. As a result, the
Company recognized aggregate beneficial conversion features of
$1,440,638.
$1,147,257 was
recorded as debt discount upon issuance of the July 2019 Notes
using allocation of proceeds.
As a result, the
Company recorded a note discount of $2,587,895 to account for the
funding cost of $314,500 and the relative fair values of the
warrants’ and the notes’ beneficial conversion
features, which will be amortized as interest over the terms of the
warrants and the notes or in full upon exercise of the warrants and
conversion of the notes.
During the year ended December 31, 2019, the
Company amortized $2,355,469 of such discount to interest expense,
and the unamortized discount as of December 31, 2019 was
$224,050.
On December 11, 2019, the Company completed an offering of its
Series A Convertible Preferred Stock (“Series A Preferred
Stock”), described below under Note 7. In connection with the
offering, the Company retired $1,919,008 principal amount of the
July 2019 Notes and $24,184 in accrued interest, which amounts were
used by the noteholders to purchase 1,690.58 shares of Series A
Preferred Stock. As of December 31, 2019, we had a total of
$530,495 in principal amount of July 2019 Notes outstanding,
unamortized debt discount of $232,426, for a net balance of
$298,069 amount of the July 2019 Notes remained
outstanding.
June 2018 Notes
On June
28, 2018, the Company conducted a private placement offering in
which the Company sold $1,077,000 aggregate principal amount of
senior secured convertible promissory notes (the “June 2018
Notes”) to accredited investors and National Securities
Corporation, which served as placement agent in the offering.
Certain of the Company’s officers and directors participated
in the offering.
The
June 2018 Notes when issued were convertible into shares of the
Company’s common stock at a conversion price per share equal
to the lesser of (a) the lowest per share price at which common
stock was sold in a Qualified Financing (as defined below), less a
discount of 20%, or (b) $2.016, but in any event no less than a
conversion price floor of $1.40.
The
June 2018 Notes bore interest at a rate of 10% per annum until
maturity on December 31, 2018 (the “Maturity Date”).
Interest was paid in arrears on the outstanding principal amount on
the three month anniversary of the issuance of the June 2018 Notes
and each three month period thereafter and on the Maturity Date or
on the date of conversion in full of each such June 2018 Note.
Pursuant to their terms, the principal amount of the June 2018
Notes were automatically converted into shares of common stock upon
the consummation of a sale (or series of related sales) by the
Company of common stock resulting in aggregate gross cash proceeds
of at least $7.0 million, which occurred on November 13, 2018 upon
the consummation of an underwritten public offering..
In
addition, on June 28, 2018, the Company issued warrants exercisable
for 267,113 shares of the Company’s common stock to
accredited investors and issued to National Securities Corporation,
which served as placement agent in the offering, and its designees
warrants exercisable for 53,423 shares of common stock
(collectively, the “June 2018 Warrants”). Each July
2018 Warrant entitles the holder to purchase one share of common
stock for an exercise price per share equal to $2.52, which was the
closing bid price for a share of common stock on the Nasdaq Capital
Market on June 27, 2018. The July 2018 Warrants expire June 28,
2021. The fair value of these warrants was determined to be
$587,541 using the Black-Scholes-Merton option-pricing model based
on the following assumptions: (i) volatility rate of 99%, (ii)
discount rate of 0%, (iii) zero expected dividend yield, and (iv)
expected life of 3 years. The value of the July 2018 Warrants of
$587,541 was considered as debt discount upon issuance and is being
amortized as interest over the term of the notes or in full upon
the conversion of the corresponding notes. During year ended
December 31, 2018, the Company amortized $587,541 of such discount
to interest expense, and there was no unamortized discount as of
December 31, 2018.
On
September 12, 2018, the Company issued 24,801 shares of its common
stock at an effective price of $2.02 per share to convert $50,000
principal amount of its outstanding June 2018 Notes. On November
13, 2018, the remaining outstanding principal amount of June 2018
Notes ($1,027,000) was converted into 611,314 shares of
Company’s common stock at an effective price of $1.625 per
share. Accrued interest of $40,085 was paid in full in
cash.
F-12
Note 7 – Capital Stock
At
December 31, 2019, the authorized capital of the Company consisted
of 60,000,000 shares of capital stock, consisting of 50,000,000
shares of common stock with a par value of $0.0001 per share and
10,000,000 shares of preferred stock with a par value of $0.0001
per share. The Company has allocated 10,000 shares of its preferred
stock to Series A Preferred, 1,000 shares of its preferred stock to
Series B Preferred, and the remainder of 9,989,000 remains
Authorized but unallocated.
As of
December 31, 2019, there were 8,421,401 shares of common stock,
6,338.490 shares of Series A Preferred Stock, 351.711 shares of
Series B Preferred Stock issued and outstanding, and a dividend
payable balance of $43,528. As of December 31, 2018, there were
7,422,642 shares of common stock and no preferred stock issued and
outstanding.
During the year ended December 31, 2019, the Company issued 94,233
shares of its common stock upon the conversion of $140,406
principal amount of, and in respect of accrued interest on, July
2019 Notes.
During
the year ended December 31, 2018, the Company issued 636,115 shares
of common stock upon the conversion of $1,077,000 principal amount
of June 2018 Notes.
December 2019
Offering of Series A Preferred Stoc
k
, Common Stock and
Warrants
On December 11, 2019, the Company completed a private placement
offering in which the Company sold 6,338.49 shares of its Series A
Preferred Stock and 904,526 shares of its common stock, along with
warrants (the “December 11, 2019 Warrants”) exercisable
for an aggregate of 8,190,225 shares of common stock for
approximately $7.9 million of gross proceeds. The offering was made
pursuant to a Securities Purchase Agreement (the “Purchase
Agreement”), dated as of December 5, 2019, between the
Company and the investors. Pursuant to the Purchase Agreement, each
investor elected whether to receive shares of Series A Preferred
Stock or shares of common stock in the Offering. The Company used
approximately $1.9 million of the net proceeds from the offering to
repay debt represented by July 2019 Notes and plans to use the
remaining net proceeds for working capital and general corporate
purposes.
In connection with the closing of the offering, the Company filed a
Certificate of Designations of Series A Convertible Preferred Stock
(the “Series A Certificate of Designations”) with the
Secretary of State of the State of Delaware setting forth the
rights and preferences of the Series A Preferred Stock. Each share
of Series A Preferred Stock has a $1,000 issue price (the
“Issue Price”). Dividends accrue on the Issue Price at
a rate of 6.0% per annum and are payable to holders of Series A
Preferred Stock as, when and if declared by the Company’s
Board of Directors. Shares of Series A Preferred Stock, including
accrued but unpaid dividends, are convertible into common stock at
a conversion price of $0.87 per share. The conversion price is
subject to proportional adjustment for certain transactions
relating to the Company’s capital stock, including stock
splits, stock dividends and similar transactions. Holders of shares
of Series A Preferred Stock vote with the holders of common stock
and are entitled to a number of votes equal to the number of shares
of common stock into which such holder’s shares of Series A
Preferred Stock are then convertible. Holders of Series A Preferred
Stock are entitled to a liquidation preference in the event of any
liquidation, dissolution or winding up of the Company based on
their shares’ aggregate Issue Price and accrued and unpaid
dividends thereon. Holders may convert their shares of Series A
Preferred Stock into common stock at any time and the Company has
the right to cause each holder to convert their shares of Series A
Preferred Stock if at any time (i) the simple average of the daily
volume-weighted average price of Common Stock for 10 consecutive
trading days is greater than $1.74 (as adjusted for stock splits,
stock dividends and similar transactions) and (ii) there is then an
effective registration statement registering under the Securities
Act of 1933, as amended (the “Securities Act”), the
resale of the shares of common stock issuable upon such conversion
of Series A Preferred Stock (the “Series A Forced Conversion
Conditions”).
The simple average of the Daily VWAP (as defined in the Series A
Certificate of Designations) for the 10 consecutive trading days
from January 8, 2020 to January 22, 2020, inclusive, was $1.82,
satisfying the first Forced Conversion Condition. On January 27,
2020, the SEC declared effective the Company’s Registration
Statement on Form S-3 (File No. 333-235883) registering under the
Securities Act the resale of the shares of common stock issuable
upon the conversion of Series A Preferred Stock, shares of common
stock issued in the offering, and shares of common stock issuable
upon the exercise of December 11, 2019 Warrants and December 19,
2019 Warrants.
F-13
Each December 11, 2019 Warrant entitles the holder to purchase a
share of common stock for an exercise price equal to $0.87. The
December 11, 2019 Warrants are exercisable commencing immediately
upon issuance and expire on the date five years after the date of
issuance, unless earlier terminated pursuant to the terms of the
December 11, 2019 Warrant. If, during the term of the December 11,
2019 Warrants, the Series A Forced Conversion Conditions are met,
the Company may deliver notice thereof to the holders of the
December 11, 2019 Warrants and, after a 30-day period following
such notice, any unexercised December 11, 2019 Warrants will be
forfeited. The December 11, 2019 Warrants provide for cashless
exercise only if there is no effective registration statement
registering under the Securities Act the resale of the shares of
Common Stock issuable upon exercise of the December 11, 2019
Warrants. As described in the preceding paragraph, the Series A
Forced Conversion Conditions have been met with respect to the
December 11, 2019 Warrants.
The Securities Purchase
Agreement, dated December 5, 2019, includes customary
representations, warranties and covenants. In connection with the
offering, the Company paid to the placement agent a commission of
8.0% of the gross proceeds from the offering, will reimburse up to
$35,000 of the placement agent’s documented expenses and
issued to the placement agent and its designees warrants
exercisable for an aggregate of 327,606 shares of Common Stock (the
“Series A Placement Agent Warrant”). The terms of the
Series A Placement Agent Warrant are the same as those of the
December 11, 2019 Warrants.
Series A Preferred Stock Deemed Dividend, Beneficial Conversion
Calculation
After
factoring in the relative fair value of the warrants issued in
conjunction with the Series A Preferred Stock, the effective
conversion price is $0.45 per share, compared to the market price
of $0.90 per share on the date of issuance. As a result, a
$4,208,612 beneficial conversion feature was recorded as
a deemed dividend in the consolidated statement of
operations because the Series A Preferred Stock is immediately
convertible, with a credit to additional paid-in capital. The
relative fair value of the warrants issued with the Series A
Preferred Stock of $2,766,941 was recorded as a reduction to the
carrying amount of the preferred stock in the consolidated balance
sheet. The value of the warrants was determined utilizing the
binomial option pricing model using a term of 5 years, a volatility
of 114%, a risk-free interest rate of 1.64%, a 6% rate of
dividends, and a call multiple of 2.
December 2019 Offering of Series B Preferred Stock and
Warrants
On December 19, 2019, the Company completed a private placement
offering in which the Company sold 351.711 shares of its Series B
Preferred Stock and warrants (the “December 19, 2019
Warrants”) exercisable for an aggregate of 426,316 shares of
the Company’s common stock to the investors for approximately
$405,000 of gross proceeds. The Company plans to use the net
proceeds from the offering for working capital and general
corporate purposes.
In connection with the closing of the offering, the Company filed a
Certificate of Designations of Series B Convertible Preferred Stock
(the “Series B Certificate of Designations”) with the
Secretary of State of the State of Delaware setting forth the
rights and preferences of the Series B Preferred Stock. The Series
B Preferred Stock has substantially the same rights and preferences
as the Series A Preferred Stock, except for a different conversion
price and trading price of common stock at which the Series B
Preferred Stock becomes subject to automatic conversion. Each share
of Series B Preferred Stock has a $1,000 issue price (the
“Issue Price”). Dividends accrue on the Issue Price at
a rate of 6.0% per annum and are payable to holders of Preferred
Stock as, when and if declared by the Company’s Board of
Directors. Shares of Series B Preferred Stock, including accrued
but unpaid dividends, are convertible into Common Stock at a
conversion price of $0.99 per share of common stock. The conversion
price is subject to proportional adjustment for certain
transactions relating to the Company’s capital stock,
including stock splits, stock dividends and similar transactions.
Holders of shares of Series B Preferred Stock vote with the holders
of common stock and are entitled to a number of votes equal to the
number of shares of common stock into which such holder’s
shares of Series A Preferred Stock are then convertible. Holders of
Series B Preferred Stock are entitled to a liquidation preference
in the event of any liquidation, dissolution or winding up of the
Company based on their shares’ aggregate Issue Price and
accrued and unpaid dividends. Such liquidation preference of Series
B Preferred Stock holders is on a pari passu basis with holders of
Series A Preferred Stock. Holders may convert their shares of
Series B Preferred Stock into common stock at any time and the
Company has the right to cause each holder to convert their shares
of Series B Preferred Stock in the event that (i) the average of
the daily volume-weighted average price of Common Stock over any 10
consecutive trading days is greater than $1.98 (as adjusted for
stock splits, stock dividends and similar transactions) and (ii)
there is then an effective registration statement registering under
the Securities Act the resale of the shares of Common Stock
issuable upon such conversion of Preferred Stock (together, the
“Series B Forced Conversion Conditions”).
The average daily VWAP requirement of the Series B Forced
Conversion Conditions relating to daily volume-weighted average
price of our Common Stock has not yet been satisfied. On January
27, 2020, the SEC declared effective the Company’s
Registration Statement on Form S-3 (File No. 333-235883)
registering under the Securities Act the resale of the shares of
common stock issuable upon the conversion of Series B Preferred
Stock and upon the exercise of December 19, 2019
Warrants.
Each December 19, 2019 Warrant entitles the holder to purchase a
share of common stock for an exercise price equal to $0.99. The
December 19, 2019 Warrants are exercisable commencing immediately
upon issuance and expire on the date five years after the date of
issuance, unless earlier terminated pursuant to the terms of the
December 19, 2019 Warrant. If, during the term of the December 19,
2019 Warrants, the Series B Forced Conversion Conditions are met,
the Company may deliver notice thereof to the holders of the
December 19, 2019 Warrants and, after a 30-day period following
such notice, any unexercised December 19, 2019 Warrants will be
forfeited. The December 19, 2019 Warrants provide for cashless
exercise in the event there is no effective registration statement
registering under the Securities Act the resale of the shares of
common stock issuable upon exercise of such December 19, 2019
Warrants.
F-14
The Securities Purchase Agreement, dated December 19, 2019,
includes customary representations, warranties and covenants. In
connection with the closing of the offering, the Company paid to
the placement agent in the offering a commission of approximately
8.0% of the gross proceeds from the offering and issued to the
placement agent and its designees warrants exercisable for an
aggregate of 14,211 shares of common stock (the “Series B
Placement Agent Warrant”). The terms of the Series B
Placement Agent Warrant are the same as those of the
Warrants.
Series B Preferred Stock Deemed Dividend, Beneficial Conversion
Calculation
After
factoring in the relative fair value of the warrants issued in
conjunction with the Series B Preferred Stock, the effective
conversion price is $0.03 per share, compared to the market price
of $1.36 per share on the date of issuance. As a result, a $11,165
beneficial conversion feature was recorded as a deemed dividend in
the consolidated statement of operations because the Series A
Preferred Stock is immediately convertible, with a credit to
additional paid-in capital. The relative fair value of the warrants
issued with the Series A Preferred Stock of $364,355 was recorded
as a reduction to the carrying amount of the preferred stock in the
consolidated balance sheet. The value of the warrants was
determined utilizing the binomial option pricing model using a term
of 5 years, a volatility of 118%, a risk-free interest rate of
1.75%, a 0% rate of dividends, and a call multiple of
2.
October 2018 Offering of Common Stock
On October 11, 2018, the Company entered into an underwriting
agreement with National Securities Corporation (the
“Underwriter”), relating to an underwritten public
offering for the issuance and sale of 1,477,750 shares of the
Company’s common stock, which amount includes the
Underwriter's option to purchase up to an additional 192,750 shares
of common stock to cover over-allotments. The Underwriter exercised
in full its option to purchase the additional over-allotment shares
on October 12, 2018. The offering, including the issuance of the
shares of common stock sold pursuant to the Underwriter's
over-allotment option, closed on October 15, 2018. The net proceeds
to the Company from the offering were approximately $2.7 million,
after deducting underwriting discounts and commissions, and other
offering expenses. The common stock was offered to the public at
$2.10 per share.
November 2018 Offering of Common Stock
On November 8, 2018, the Company entered into an underwriting
agreement with the Underwriter relating to an underwritten public
offering for the issuance and sale of 1,385,750 shares of the
Company’s common stock, which amount includes the
Underwriter’s option to purchase up to an additional 180,750
shares of common stock to cover over-allotments. The Underwriter
exercised in full its option to purchase the additional
over-allotment shares on November 9, 2018. The common stock was
offered to the public at $3.90 per share.
Note 8 – Common Stock Options
Stock options are awarded to the Company’s employees,
consultants and non-employee members of the board of directors
under the 2016 Omnibus Incentive Plan and are generally granted
with an exercise price equal to the market price of the
Company’s common stock at the date of grant. The aggregate
fair value of these stock options granted by the Company during the
year ended December 31, 2019 was determined to be $2,377,537 using
the Black-Scholes-Merton option-pricing model based on the
following assumptions: (i) volatility rate of 103% to 124%, (ii)
discount rate of 0%, (iii) zero expected dividend yield, and (iv)
expected life of 7 to 10 years. A summary of option activity under
the Company’s stock options as of December 31, 2019, and
changes during the year then ended is presented below:
|
|
Number of
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual Term
(Years)
|
|
Balance outstanding
at December 31, 2018
|
1,272,911
|
$
4.56
|
6.31
|
|
Granted
|
2,257,473
|
1.13
|
9.81
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
|
Cancelled or
expired
|
(81,065
)
|
-
|
-
|
|
Balance outstanding
at December 31, 2019
|
3,449,319
|
$
2.32
|
8.26
|
|
Exercisable at
December 31, 2019
|
756,550
|
$
5.02
|
5.03
|
F-15
Note 9 – Common Stock Warrants
On July 26, 2019, the Company conducted a private placement
offering in which the Company issued 1,736,853 warrants to purchase
shares of common stock for an exercise price per share equal to
$1.49. The warrants expire July 26, 2022. The Company also issued
to the placement agent and its designees warrants exercisable for
an aggregate of 173,685 shares of common stock. The fair value of
these warrants was determined to be $1,993,714 using the
Black-Scholes-Merton option-pricing model based on the following
assumptions: (i) volatility rate of 111%, (ii) discount rate of 0%,
(iii) zero expected dividend yield, and (iv) expected life of 3
years.
On December 11, 2019, the Company conducted a private placement
offering in which the Company issued 8,190,225 warrants to purchase
shares of common stock for an exercise price per share equal to
$0.87. The warrants expire December 11, 2024. The Company also
issued to the placement agent and its designees warrants
exercisable for an aggregate of 327,606 shares of common
stock.
See
“
December 2019 Offering of Series
A Preferred Stock, Common Stock and Warrants” under Note
6.
On December 19, 2019, the Company conducted a private placement
offering in which the Company issued 426,316 warrants to purchase
shares of common stock for an exercise price per share equal to
$0.99. The warrants expire December 19, 2024. The Company also
issued to the placement agent and its designees warrants
exercisable for an aggregate of 14,211 shares of common
stock.
See “
December 2019
Offering of Series B Preferred Stock, Common Stock and
Warrants” under Note 6.
The following table summarizes all stock warrant activity of the
Company for the year ended December 31, 2019:
|
|
Number of
Warrants
|
Weighted Average
Exercise Price
|
Weighted
Average
Remaining
Contractual Term
(Years)
|
|
|
Balance outstanding
at December 31, 2018
|
2,628,028
|
$
6.32
|
3.17
|
|
|
Granted
|
10,868,896
|
0.98
|
3.00
|
|
|
Exercised
|
-
|
-
|
-
|
|
|
Forfeited
|
-
|
|
-
|
|
|
Expired
|
-
|
-
|
-
|
|
|
Balance outstanding
at December 31, 2019
|
13,496,924
|
$
2.02
|
4.07
|
|
|
Exercisable at
December 31, 2019
|
13,496,924
|
$
2.02
|
4.07
|
|
Note 10 – Commitments & Contingencies
Office Lease
Effective January 1, 2015, the Company entered into an office lease
agreement with Green Court, LLC, a Michigan limited liability
company, for approximately 3,657 rentable square feet of space, for
the initial monthly rent of $5,986, which commenced on January 1,
2015 for an initial term of 60 months. On October 10, 2017 this
lease was amended increasing the rentable square feet of space to
3,950 and the monthly rent to $7,798. On July 16, 2019, the Company
exercised its option to extend the lease for an additional 5 years
past the initial term originally expiring on December 31, 2019,
such that the lease now expires on December 31, 2024.
The
Company records the lease asset and lease liability at the present
value of lease payments over the lease term. The lease typically do
not provide an implicit rate; therefore, the Company uses its
estimated incremental borrowing rate at the time of lease
commencement to discount the present value of lease payments. The
Company’s discount rate for operating leases at December 31,
2019 was 10%. Lease expense is recognized on a straight-line basis
over the lease term to the extent that collection is considered
probable. As a result, the Company has been recognizing rents as
they become payable based on the adoption of ASC Topic 842. The
weighted-average remaining lease term is 4.92 years.
F-16
As of
December 31, 2019, the maturities of operating lease liabilities
are as follows:
|
|
Operating
Lease
|
|
2020
|
$
98,790
|
|
2021
|
101,752
|
|
2022
|
104,793
|
|
2023
|
107,954
|
|
2024 and
beyond
|
111,192
|
|
Total
|
$
524,481
|
|
Less: amount
representing interest
|
(115,476
)
|
|
Present value of
future minimum lease payments
|
409,005
|
|
Less: current
obligations under leases
|
66,193
|
|
Long-term lease
obligations
|
$
342,812
|
For the years ended December 31, 2019 and 2018, the Company
incurred rent expenses of $105,514 and $104,805,
respectively.
Employment and Consulting Agreements
Francois Michelon
– Effective May 12, 2017, the Company
entered into an amended and restated employment agreement with
Francois Michelon, the Company’s Chief Executive Officer and
Chairman of the board of directors. The initial term of the
employment agreement runs through December 31, 2019 and continues
on a year-to-year basis thereafter. The employment agreement
provides for an annual base salary that is subject to adjustment at
the board of directors’ discretion. The annual base salary in
effect during the period covered by this Form 10-K was $355,350.
Under the employment agreement, Mr. Michelon is eligible for an
annual cash bonus based upon achievement of performance-based
objectives established by the board of directors. Pursuant to Mr.
Michelon’s employment agreement, in connection with the
closing of the Company’s initial public offering he was
granted options to purchase an aggregate 339,270 shares of common
stock. The options have a weighted average exercise price of $4.96
per share of common stock and vest in three equal annual
installments beginning on May 12, 2018. Upon termination without
cause, any portion of Mr. Michelon’s options scheduled to
vest within 12 months will automatically vest, and upon termination
without cause within 12 months following a change of control, the
entire unvested portion of the options will automatically vest.
Upon termination for any other reason, the entire unvested portion
of the options will terminate.
If Mr. Michelon’s employment is terminated by the Company
without cause, Mr. Michelon will be entitled to receive 12
months’ continuation of his current base salary and a lump
sum payment equal to 12 months of continued healthcare coverage (or
24 months’ continuation of his current base salary and a lump
sum payment equal to 24 months of continued healthcare coverage if
such termination occurs within one year following a change in
control).
Under his employment agreement, Mr. Michelon is eligible to receive
benefits that are substantially similar to those of the
Company’s other senior executive officers.
On December 27, 2019, the Company entered into an amendment to Mr.
Michelon’s employment agreement to provide that (i) Mr.
Michelon’s employment with the Company will continue until
terminated under the terms the employment agreements, and (ii) Mr.
Michelon will each receive certain payments if he is terminated by
the Company without Cause (as defined in the employment agreement
amendment) or for Good Reason (as defined in the employment
agreement amendment).
Michael
Thornton
–
Effective May 12, 2017, the Company entered into an amended and
restated employment agreement with Michael Thornton, the
Company’s Chief Technology Officer. The initial term of the
employment agreement runs through December 31, 2019 and continues
on a year-to-year basis thereafter. The employment agreement
provides for an annual base salary that is subject to adjustment at
the board of directors’ discretion. The annual base salary in
effect during the period covered by this Form 10-K was $267,800.
Under the employment agreement, Mr. Thornton is eligible for an
annual cash bonus based upon achievement of performance-based
objectives established by the board of directors. Pursuant to Mr.
Thornton’s employment agreement, in connection with the
closing of the Company’s initial public offering he was
granted options to purchase an aggregate 345,298 shares of common
stock. The options have a weighted average exercise price of $4.96
per share of common stock and vest in three equal annual
installments beginning on May 12, 2018. Upon termination without
cause, any portion of Mr. Thornton’s option scheduled to vest
within 12 months will automatically vest, and upon termination
without cause within 12 months following a change of control, the
entire unvested portion of the options will automatically vest.
Upon termination for any other reason, the entire unvested portion
of the options will terminate.
F-17
If Mr. Thornton’s employment is terminated by the Company
without cause, Mr. Thornton will be entitled to receive 12
months’ continuation of his current base salary and a lump
sum payment equal to 12 months of continued healthcare coverage (or
24 months’ continuation of his current base salary and a lump
sum payment equal to 24 months of continued healthcare coverage if
such termination occurs within one year following a change in
control).
Under his employment agreement, Mr. Thornton is eligible to receive
benefits that are substantially similar to those of the
Company’s other senior executive officers.
On December 27, 2019, the Company entered into an amendment to Mr.
Thornton’s employment agreement to provide that (i) Mr.
Thornton’s employment with the Company will continue until
terminated under the terms the employment agreements, and (ii) Mr.
Thornton will each receive certain payments if he is terminated by
the Company without Cause (as defined in the employment agreement
amendment) or for Good Reason (as defined in the employment
agreement amendment).
David Wells
–
On May 12, 2017, the Company entered into a consulting agreement
with StoryCorp Consulting (“StoryCorp”), pursuant to
which David Wells provided services to the Company as its Chief
Financial Officer. Pursuant to the consulting agreement, the
Company paid to StoryCorp a monthly fee of $9,000, and in May 2018
this monthly fee was increased to $9,540. Additionally, pursuant to
the consulting agreement, the Company granted to Mr. Wells a stock
option to purchase 15,000 shares of common stock in connection with
the closing of the Company’s initial public offering, having
an exercise price per share equal to $5.00 and vesting in twelve
equal quarterly installments, and, for so long as the consulting
agreement was in place, granted to Mr. Wells a stock option to
purchase the same number of shares of common stock with the same
terms on each annual anniversary of the date of the consulting
agreement. In May 2018, the annual stock option amount was
increased and on December 13, 2018, Mr. Wells was granted options
to purchase an additional 35,000 shares of common
stock.
On May
13, 2019, the Company entered into an employment agreement with
David Wells that supersedes the consulting agreement between the
Company and StoryCorp. The employment agreement provides for an
annual base salary of $230,000 and eligibility for an annual cash
bonus to be paid based on attainment of Company and individual
performance objectives to be established by the Company’s
board of directors (in 2019, the amount of such cash bonus if all
goals were achieved would be 30% of the base salary plus base fees
paid to StoryCorp under the consulting agreement). The employment
agreement also provides for eligibility to receive benefits
substantially similar to those of the Company’s other senior
executive officers.
Pursuant
to the employment agreement, on May 13, 2019 Mr. Wells was granted
stock options to purchase 56,000 shares of the Company’s
common stock. The stock options have an exercise price of $1.38 per
share, and vest in three equal annual installments beginning on the
first anniversary of the grant date.
Litigation
From time to time the Company may become a party to litigation in
the normal course of business. There are currently no legal matters
that management believes would have a material effect on the
Company’s financial position or results of
operations.
Note 11 – Income Taxes
Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company’s deferred
tax assets as of December 31, 2019 and 2018 are summarized
below.
F-18
|
|
2019
|
2018
|
|
Net operating loss
carryforward
|
$
(8,106,070
)
|
$
(7,062,038
)
|
|
Stock based
compensation
|
--
|
40,671
|
|
Fair value of
options
|
378,614
|
424,368
|
|
Total deferred tax
assets
|
(7,727,457
)
|
(6,596,999
)
|
|
Valuation
allowance
|
$
7,727,457
|
$
6,596,999
|
|
Net deferred tax
asset
|
$
-
|
$
-
|
In
assessing the potential realization of deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon the
Company attaining future taxable income during the periods in which
those temporary differences become deductible. As of December 31,
2019 and 2018, management was unable to determine if it is more
likely than not that the Company’s deferred tax assets will
be realized, and has therefore recorded an appropriate valuation
allowance against deferred tax assets at such dates.
The
Company has not completed its evaluation of net operating loss
(“NOL”) utilization limitations under Internal Revenue
Code, as amended (the “Code”), Section 382/383, change
of ownership rules. If the Company has had a change in ownership,
the NOL’s would be limited as to the amount that could be
utilized each year, or possibly eliminate, based on the Code, as
amended.
No
federal or state/local tax provision has been provided for the
years ended December 31, 2019 and 2018 due to the losses incurred
during such periods. Reconciled below is the difference between the
income tax rate computed by applying the U.S. federal statutory
rate and the effective tax rate for the years ended December 31,
2019 and 2018.
|
|
2019
|
2018
|
|
U.S. federal
statutory income tax
|
-21.00
%
|
-21.00
%
|
|
State tax, net of
federal tax benefit
|
-5.80
%
|
-5.80
%
|
|
Stock based
compensation
|
0.00
%
|
0.00
%
|
|
Change in valuation
allowance
|
26.80
%
|
26.80
%
|
|
Effective tax
rate
|
0.00
%
|
0.00
%
|
At
December 31, 2019, the Company has available net operating loss
carryforwards for federal and state income tax purposes of
approximately $28.8 million, which, if not utilized earlier, expire
through 2039.
ENDRA Life Sciences Canada Inc., the Company’s wholly-owned
subsidiary which was incorporated in 2017, is subject to income
taxes in the jurisdictions in which it operates, Canada, at a
current rate of approximately 26.6 percent for 2019. Significant
judgment is required in determining the provision for income tax.
There are many transactions and calculations undertaken during the
ordinary course of business for which the ultimate tax
determination is uncertain. The Company recognizes liabilities for
anticipated tax audit issues based on its current understanding of
the tax law. Where the final tax outcome of these matters is
different from the carrying amounts, such differences will impact
the current and deferred tax provisions in the period in which such
determination is made.
ENDRA Life Sciences Canada Inc.’s operations were not
material for tax purposes as of December 31, 2019 and 2018 and
therefore the entity had no significant impact on the year-end 2019
and 2018 tax provision. Generally, all expenses relating to
research & development that are incurred in Canada are the
responsibility and owned by the United States parent company, since
it is the owner of all of the Company’s
intangibles.
Note 12 – Subsequent Events
Conversion of July 2019 Notes
From
time to time subsequent to the period ending December 31, 2019
until the date of this Annual Report, the Company, at the request
of holders of certain July 2019 Notes, converted approximately
$493,800 of the July 2019 Notes and issued approximately 331,442
shares of common stock.
Conversion of Series A Preferred Stock and Series B Preferred
Stock
From
time to time subsequent to the period ending December 31, 2019
until the date of this Annual Report, the Company, at the request
of holders of certain shares of Series A Preferred Stock and Series
B Preferred Stock, converted an aggregate of 3,872.999 shares of
Series A Preferred Stock and 231.736 shares of Series B Preferred
Stock, including accrued but unpaid dividends on such shares, into
an aggregate of 4,685,181 shares of common stock.
Exercise of Warrants
From
time to time subsequent to the period ending December 31, 2019
until the date of this Annual Report, the Company, at the request
of holders of certain warrants received in the Series A Preferred
Stock transaction, received approximately $39,238 in proceeds from
the exercise of warrants, and issued approximately 45,101 shares of
common stock.
F-19
I
tem 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.
None.
I
tem 9A. Controls and
Procedures.
Evaluation of Disclosure Controls and Procedures
As of
the end of the period covered by this report, management performed,
with the participation of our principal executive and principal
financial officers, an evaluation of the effectiveness of our
disclosure controls and procedures as defined in Rules 13a-15(e)
and 15d-15(e) of the Exchange Act. Our disclosure controls and
procedures are designed to ensure that information required to be
disclosed in the reports we file or submit under the Exchange Act
is recorded, processed, summarized, and reported within the time
periods specified in the SEC’s forms, and that such
information is accumulated and communicated to our management,
including our principal executive officer and principal financial
officer, to allow timely decisions regarding required disclosures.
Based on the evaluation, our principal executive and principal
financial officers concluded that, as of December 31, 2019, our
disclosure controls and procedures were not effective due to a
material weakness in internal control over financial reporting, as
described below.
Management’s Report on Internal Control Over Financial
Reporting
Our
management is responsible for establishing and maintaining
effective internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control
over financial reporting is a process designed to provide
reasonable assurance to the Company’s management and board of
directors regarding the reliability of our financial reporting for
external purposes in accordance with accounting principles
generally accepted in the United States of America.
Because
of its inherent limitations, internal control over financial
reporting is not intended to provide absolute assurance that a
misstatement of our consolidated financial statements would be
prevented or detected. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate. Therefore, even those systems determined to be
effective can only provide reasonable assurance with respect to
financial statement preparation and presentation.
Management
conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework
in
Internal Control –
Integrated Framework (2013)
issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
A
material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented
or detected on a timely basis. Management identified the following
material weakness as of December 31, 2019: insufficient personnel
resources within the accounting function to segregate the duties
over financial transaction processing and reporting. Because of
this material weakness, management concluded that the
Company’s internal control over financial reporting was not
effective as of December 31, 2019. During the year ended December
31, 2019 the Company began drafting certain documents which outline
operating procedures which it intends to adopt during the current
year. The Company also engaged on a project basis an outside firm
with expertise in the area of proper controls and
procedures.
To
remediate our internal control weakness, management intends to
implement the following measures:
● Add
sufficient accounting personnel or outside consultants to properly
segregate duties and to effect timely, accurate preparation of the
financial statements.
45
●
Upon the hiring of additional accounting personnel or outside
consultants, develop and maintain adequate written accounting
policies and procedures.
The
additional hiring is contingent upon our efforts to obtain
additional funding and the results of our operations. Management
intends to secure funds in the coming fiscal year but provides no
assurances that it will be able to do so.
This
Annual Report does not include an attestation report of the
Company’s registered public accounting firm due to a
transition period established by rules of the SEC for newly public
companies.
Changes in Internal Control of Financial Reporting
There
were no changes in our internal control over financial reporting
during the quarter ended December 31, 2019 that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
I
tem 9B. Other Information.
Not
applicable.
46
P
ART III
I
tem 10. Directors, Executive Officers
and Corporate Governance.
The
information required by this Item is incorporated by reference to
our Proxy Statement on Schedule 14A relating to our 2020 annual
meeting of stockholders to be filed pursuant to Regulation 14A of
the Exchange Act within 120 days after the end of the
Company’s fiscal year ended December 31, 2019.
I
tem 11. Executive
Compensation
The
information required by this Item is incorporated by reference to
our Proxy Statement on Schedule 14A relating to our 2020 annual
meeting of stockholders to be filed pursuant to Regulation 14A of
the Exchange Act within 120 days after the end of the
Company’s fiscal year ended December 31, 2019.
I
tem 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholders
Matters.
The
information required by this Item is incorporated by reference to
our Proxy Statement on Schedule 14A relating to our 2020 annual
meeting of stockholders to be filed pursuant to Regulation 14A of
the Exchange Act within 120 days after the end of the
Company’s fiscal year ended December 31, 2019.
I
tem 13. Certain Relationships and
Related Transactions, and Director Independence
The
information required by this Item is incorporated by reference to
our Proxy Statement on Schedule 14A relating to our 2020 annual
meeting of stockholders to be filed pursuant to Regulation 14A of
the Exchange Act within 120 days after the end of the
Company’s fiscal year ended December 31, 2019.
I
tem 14. Principal Accountant Fees and
Services
The
information required by this Item is incorporated by reference to
our Proxy Statement on Schedule 14A relating to our 2020 annual
meeting of stockholders to be filed pursuant to Regulation 14A of
the Exchange Act within 120 days after the end of the
Company’s fiscal year ended December 31, 2019.
47
P
ART IV
I
tem 15. Exhibits, Financial Statements
and Schedules
(a)
List of documents filed as part of this report:
1. Financial
Statements (see “Financial Statements and Supplementary
Data” at Item 8 and incorporated herein by
reference)
2. Financial
Statement Schedules (Schedules to the Financial Statements have
been omitted because the information required to be set forth
therein is not applicable or is shown in the accompanying Financial
Statements or notes thereto)
3. Exhibits
The
following is a list of exhibits filed as part of this Annual
Report:
|
|
|
Incorporated by Reference
|
|||
|
Exhibit Number
|
Exhibit Description
|
Filed Herewith
|
Form
|
Exhibit
|
Filing Date
|
|
Fourth
Amended and Restated Certificate of Incorporation of the
Company
|
|
8-K
|
3.2
|
05/12/17
|
|
|
Amended
and Restated Bylaws of the Company
|
|
S-1
|
3.4
|
12/06/16
|
|
|
Specimen
Certificate representing shares of common stock of the
Company
|
|
S-1
|
4.1
|
11/21/16
|
|
|
Form
of Warrant Agreement and Warrant comprising a part of the
Company’s units issued in its 2017 initial public
offering
|
|
S-1
|
4.2
|
11/21/16
|
|
|
Form
of Underwriters’ Warrant issued to certain designees of the
underwriters in the Company’s 2017 initial public
offering
|
|
S-1
|
4.3
|
11/21/16
|
|
|
Form
of Warrant issued in June 2018 Private Placement
|
|
8-K
|
4.2
|
07/02/18
|
|
|
Form
of Underwriters’ Warrant issued to certain designees of the
underwriters in the Company’s October 2018
offering
|
|
10-Q
|
4.6
|
11/05/18
|
|
|
Form of
Convertible Promissory Note issued in July 2019 Private
Placement
|
|
8-K
|
4.1
|
07/29/19
|
|
|
Form of
Warrant issued in July 2019 Private Placement
|
|
8-K
|
4.2
|
07/29/19
|
|
|
Certificate
of Designations of Series A Convertible Preferred
Stock
|
|
8-K
|
4.1
|
12/11/19
|
|
|
Form of
Warrant issued in December 2019 Series A Convertible Preferred
Stock Offering
|
|
8-K
|
4.2
|
12/11/19
|
|
|
Certificate
of Designations of Series B Convertible Preferred
Stock
|
|
8-K
|
4.1
|
12/26/19
|
|
|
Form of
Warrant issued in December 2019 Series B Convertible Preferred
Stock Offering
|
|
8-K
|
4.2
|
12/26/19
|
|
|
Description
of Securities
|
X
|
|
|
|
|
|
ENDRA
Life Sciences Inc. 2016 Omnibus Incentive Plan *
|
|
S-1
|
10.4
|
12/06/16
|
|
|
First
Amendment to ENDRA Life Sciences Inc. 2016 Omnibus Incentive
Plan*
|
|
DEF
14A
|
Appx.
A
|
05/10/18
|
|
|
Form
of Stock Option Award under 2016 Omnibus Incentive
Plan*
|
|
S-1
|
10.5
|
12/06/16
|
|
|
Form
of Restricted Stock Unit Award under 2016 Omnibus Incentive
Plan*
|
|
S-1
|
10.6
|
12/06/16
|
|
|
Non-Employee
Director Compensation Policy*
|
|
10-Q
|
10.1
|
05/19/19
|
|
|
Form
of Indemnification Agreement by and between the Company and each of
its directors and executive officers*
|
|
S-1
|
10.8
|
11/21/16
|
|
|
Amended
and Restated Employment Agreement, dated May 12, 2017, by and
between the Company and Francois Michelon*
|
|
8-K
|
10.1
|
05/12/17
|
|
|
First
Amendment to Employment Agreement, dated December 27, 2019, by and
between the Company and Francois Michelon*
|
|
8-K
|
10.1
|
12/27/19
|
|
|
Amended
and Restated Employment Agreement, dated May 12, 2017, by and
between the Company and Michael Thornton*
|
|
8-K
|
10.2
|
05/12/17
|
|
|
First
Amendment to Employment Agreement, dated December 27, 2019, by and
between the Company and Michael Thornton*
|
|
8-K
|
10.2
|
12/27/19
|
|
|
Collaborative
Research Agreement, dated April 22, 2016, by and between the
Company and General Electric Company
|
|
S-1
|
10.17
|
11/21/16
|
|
|
Amendment
to Collaborative Research Agreement, dated April 21, 2017, by and
between the Company and General Electric Company
|
|
S-1
|
10.21
|
05/03/17
|
|
|
Amendment
2 to Collaborative Research Agreement, dated January 30, 2018, by
and between the Company and General Electric Company
|
|
8-K
|
10.1
|
01/30/18
|
48
|
Amendment
3 to Collaborative Research Agreement, dated January 13, 2020, by
and between the Company and General Electric Company
|
|
8-K
|
10.1
|
01/15/20
|
|
|
Gross
Lease, dated January 1, 2015, between the Company and Green Court
LLC
|
|
S-1
|
10.18
|
11/21/16
|
|
|
Amendment
to Gross Lease, dated October 10, 2017, by and between the Company
and Green Court LLC
|
|
10-Q
|
10.2
|
05/15/18
|
|
|
Sublicense
Agreement, dated August 2, 2007, by and between the Company and
Optosonics, Inc.
|
|
S-1
|
10.19
|
11/21/16
|
|
|
Amendment
to Sublicense Agreement, dated January 18, 2011, by and between the
Company and Optosonics, Inc.
|
|
S-1
|
10.20
|
11/21/16
|
|
|
Master
Services Agreement, dated October 24, 2017, by and between the
Company and CriTech Research, Inc.
|
|
10-K
|
10.15
|
03/20/18
|
|
|
Consulting
Agreement, dated October 31, 2017, by and between the Company and
StarFish Product Engineering, Inc.
|
|
10-K
|
10.16
|
03/20/18
|
|
|
Form
of Securities Purchase Agreement from June 2018 Private Placement,
dated June 28, 2018
|
|
8-K
|
10.1
|
07/02/18
|
|
|
Form
of Registration Rights Agreement from June 2018 Private Placement,
dated June 28, 2018
|
|
8-K
|
10.2
|
07/02/18
|
|
|
Form
of Security Agreement from June 2018 Private Placement, dated June
28, 2018
|
|
8-K
|
10.3
|
07/02/18
|
|
|
Employment
Agreement, dated May 13, 2019, by and between the Company and David
Wells*
|
|
10-Q
|
10.2
|
05/14/19
|
|
|
Employment
Agreement, dated April 20, 2019, by and between the Company and
Renaud Maloberti*
|
|
10-Q
|
10.2
|
08/08/19
|
|
|
Form of
Securities Purchase Agreement from July 2019 Private Placement,
dated July 26, 2019
|
|
8-K
|
10.1
|
07/29/19
|
|
|
Form of
Registration Rights Agreement from July 2019 Private Placement,
dated July 26, 2019
|
|
8-K
|
10.2
|
07/29/19
|
|
|
Form of
Security Agreement from July 2019 Private Placement, dated July 26,
2019
|
|
8-K
|
10.3
|
07/29/19
|
|
|
Form of
Securities Purchase Agreement from December 2019 Series A
Convertible Preferred Stock Offering, dated December 5,
2019
|
|
8-K
|
10.1
|
12/11/19
|
|
|
Form of
Registration Rights from December 2019 Series A Convertible
Preferred Stock Offering, dated December 5, 2019
|
|
8-K
|
10.2
|
12/11/19
|
|
|
Form of
Securities Purchase Agreement from December 2019 Series B
Convertible Preferred Stock Offering, dated December 19,
2019
|
|
8-K
|
10.1
|
12/26/19
|
|
|
Form of
Registration Rights from December 2019 Series B Convertible
Preferred Stock Offering, dated December 19, 2019
|
|
8-K
|
10.2
|
12/26/19
|
|
|
Subsidiaries
of the Company
|
X
|
|
|
|
|
|
Consent
of RBSM LLP, Independent Registered Public Accounting Firm (with
respect to Form S-3)
|
X
|
|
|
|
|
|
Consent
of RBSM LLP, Independent Registered Public Accounting Firm (with
respect to Form S-8)
|
X
|
|
|
|
|
|
Power
of Attorney (included on signature page)
|
X
|
|
|
|
|
|
Certification
Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934
|
X
|
|
|
|
|
|
Certification
Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934
|
X
|
|
|
|
|
|
Certification
Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
X
|
|
|
|
|
|
101.INS
|
XBRL
Instance Document
|
X
|
|
|
|
|
101.SCH
|
XBRL
Taxonomy Schema
|
X
|
|
|
|
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase
|
X
|
|
|
|
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase
|
X
|
|
|
|
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase
|
X
|
|
|
|
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase
|
X
|
|
|
|
*
Indicates management compensatory plan, contract or
arrangement.
I
tem 19. Form 10-K Summary
None.
49
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
ENDRA
Life Sciences Inc.
|
|
|
|
|
|
|
|
|
Dated:
March 26, 2020
|
By:
|
/s/ Francois
Michelon
|
|
|
|
|
Francois
Michelon
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Chief
Executive Officer and Director
(Principal
Executive Officer)
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P
OWER OF ATTORNEY AND
SIGNATURES
We, the
undersigned officers and directors of ENDRA Life Sciences Inc.,
hereby severally constitute and appoint Francois Michelon our true
and lawful attorney, with full power to him to sign for us and in
our names in the capacities indicated below, any amendments to this
Annual Report on Form 10-K, and generally to do all things in our
names and on our behalf in such capacities to enable ENDRA Life
Sciences Inc. to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all the requirements of the
Securities Exchange Commission.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
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Signatures
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Title
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Date
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/s/
Francois Michelon
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Chief
Executive Officer and Director (Principal Executive
Officer)
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March
26, 2020
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Francois
Michelon
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/s/
David Wells
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Chief
Financial Officer (Principal Financial and Accounting
Officer)
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March
26, 2020
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David
Wells
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/s/
Anthony DiGiandomenico
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Director
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March
26, 2020
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Anthony
DiGiandomenico
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/s/
Michael Harsh
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Director
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March
26, 2020
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Michael
Harsh
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/s/
Alexander Tokman
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Director
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March
26, 2020
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Alexander
Tokman
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50
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Nature Of The BusinessNote 2 Summary Of Significant Accounting PoliciesNote 3 InventoryNote 4 Fixed AssetsNote 5 Accounts Payable and Accrued LiabilitiesNote 6 Convertible NotesNote 7 Capital StockNote 8 Common Stock OptionsNote 9 Common Stock WarrantsNote 10 Commitments & ContingenciesNote 11 Income TaxesNote 12 Subsequent EventsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholders MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits, Financial Statements and SchedulesItem 19. Form 10-k Summary