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, 2020
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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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Trading
Symbol
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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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NDRA
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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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NDRAW
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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 has filed a report on and attestation
to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of
the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report.
☐
Indicate by check
mark whether the registrant has filed a report on and attestation
to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of
the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report.
☐
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 30, 2020, was
approximately $23,166,096 based on the closing sales price of the
common stock on such date as reported on the Nasdaq Capital
Market.
As of
March 24, 2021, there were 41,599,709 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, 2020. Portions of such proxy statement are
incorporated by reference into Part III of this Form
10-K.
ENDRA LIFE SCIENCES INC.
TABLE OF CONTENTS
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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 or other submissions with respect to
U.S. Food and Drug Administration
(“FDA”) or other regulatory agency
approval;
●
our
ability to maintain CE mark certification, and secure required 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;
3
●
our ability to
maintain compliance with Nasdaq listing standards;
●
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.
4
RISK FACTOR SUMMARY
Below
is a bulleted summary of our principal risk factors, however this
list does not fully represent all of our known risk factors.
We encourage you to carefully review the full risk factors
contained in this Annual Report in their entirety for additional
information regarding the material factors that make an investment
in our securities speculative or risky. These risks and
uncertainties include, but are not limited to, the
following:
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.
●
Our efforts may
never result in the successful development of commercial
applications based on our TAEUS technology, on which our success is
substantially dependent.
●
Our TAEUS platform
applications may not achieve adequate market acceptance by the
physicians, patients, third-party payors and others in the medical
community.
●
The outbreak of
COVID-19 could adversely impact our business, including our
pre-sales activities, clinical trials and ability to obtain
regulatory approvals.
●
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.
●
We have limited
resources and depend on third parties to design and manufacture,
and seek regulatory approval of, our TAEUS
applications.
●
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.
●
Competition in the
medical imaging market is intense and we may be unable to
successfully compete.
●
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.
●
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.
●
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.
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.
●
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.
●
Intellectual
property rights may not provide adequate protection, which may
permit third parties to compete against us more
effectively.
Risks Related to Government Regulation
●
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.
●
Healthcare reform
measures could hinder or prevent our planned products' commercial
success.
●
If we fail to
comply with healthcare regulations, we could face substantial
penalties and our business, operations and financial condition
could be adversely affected.
5
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 stock price has
fluctuated in the past, has recently been volatile and may be
volatile in the future for reasons unrelated to our operating
performance or prospects, and as a result, investors in our common
stock could incur substantial losses.
●
We may be subject
to securities litigation, which is expensive and could divert
management attention.
●
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.
●
Our disclosure
controls and procedures may not prevent or detect all errors or
acts of fraud.
●
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.
●
Our charter
documents and Delaware law may inhibit a takeover that stockholders
consider favorable.
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 were
incorporated as a Delaware corporation in 2007. 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, service
support and party for our Nexus 128 system in July 2019 in order to
focus our resources exclusively 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 focuses on
quantifying fat in the liver and stage progression of nonalcoholic
fatty liver disease (“NAFLD”) which, untreated, can
progress to Nonalcoholic Steatohepatitis (“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, Ontario, Canada. We reported the completion and
top-level findings of this study in September 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 and, in June 2020, we completed the 510(k) Premarket
Notification submission to the FDA for the
application.
6
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.
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 2018, there were only approximately 63,000 CT systems and 50,000
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 people 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.
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.
7
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
TAEUS technology uses a pulsed energy source – specifically,
radio-frequency (“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:
8
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 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.
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.
9
ENDRA’s
first clinical product is 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.
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 NASH, cirrhosis and liver cancer. In 2015, 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.
10
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 Pfizer, Viking
Theraputics, Inventiva, Madrigal Pharmaceuticals, Inc. and Galmed
Pharmaceuticals.
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.
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 December 16, 2020, we and GE
Healthcare entered into an amendment to our agreement, extending
its term to December 16, 2022.
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 was conducted in
collaboration with the widely respected Robarts Research Institute
in London, Canada. The data Robarts Research Institute collected
with our investigational device included 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.
11
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 in September 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.
In 2019
we entered into clinical evaluation agreements with Rocky Vista
University College of Osteopathic Medicine (RVUCOM) and the
University of Pittsburgh Medical Center (UPMC).
During
the year ended December 31, 2020 we entered into agreements with
several new sites for additional clinical evaluations including
Medical College of Wisconsin (MCW), Universitätsmedizin der
Johannes Gutenberg-Universität Mainz and Centre Hospitalier
Universitaire d'Angers, France (CHU Angers).
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.
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.
12
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.
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.
13
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.
As of
the date of this Annual Report, we maintain a patent portfolio
consisting of fourteen (14) patents issued in the United States and
thirteen (13) issued patents in foreign jurisdictions, twenty-one
(21) 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 mostly cover certain innovations relating to fat
imaging, fat quantitation, and temperature monitoring in the liver
and other tissues. In addition, we have three (3) licensed U.S.
patents.
Each of
our utility patents generally has a term of 20 years from its
respective priority (earliest filing) date. Design patents have a
term of 14 years from a respective filing date. Among our issued
utility patents in the U.S., the first patent is set to expire in
2033 and the last patent is set to expire in 2039. Our licensed
patents are set to expire on June 19, 2021.
Sales and Marketing
During
2019 we hired our 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 have begun 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.
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 contracted with StarFish Product Engineering, Inc.
(“StarFish”), a medical device contract manufacturing
company, to develop ENDRA’s prototype TAEUS device into a
clinical product that met CE regulatory requirements required for
commercial launch. We leveraged StarFish’s expertise in the
preparation and submission of our CE Technical File documentation,
submitted in December 2019, which enabled us to secure the European
Union CE Mark for the TAEUS liver application in March 2020.
We also leveraged StarFish’s
expertise in preparation of documentation for the 510(k) submission
made to the FDA in June 2020.
14
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 sought
initial approval of our applications for sale in the European
Union, followed by the United States and plan to seek additional
approval in 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, 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
2021, Regulation (EU)2017/745 on medical devices (the
“Medical Device Regulation” or “MDR”) will
come into effect. The MDR imposes significant additional
obligations on medical device-related companies. Changes imposed by
the MDR include more restrictive requirements for clinical evidence
and pre-market assessment of safety and performance, revised
classifications to indicate risk levels, stricter requirements for
third party testing by government accredited groups for some types
of medical devices, and tightened and streamlined quality
management system assessment procedures. These new rules could
impose additional requirements on our business, such as a
requirement to conduct clinical trials to maintain our existing and
obtain additional CE mark applications for existing and new
products. Also, the MDR provides for additional post-market
surveillance obligations, and 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.
In June
2020, we submitted to the FDA our application under the Food, Drug
and Cosmetic Act (the “FD&C Act”) to sell our NAFLD
TAEUS application in the U.S. The application was submitted for
approval under Section 510(k) of the FD&C Act and we anticipate
that any other TAEUS applications that we develop will similarly be
submitted under Section 510(k). 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.
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. In the European Union, applications
incorporating our TAEUS technology are 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 regularly
recertified 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.
15
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 provides the certifications necessary to fix a CE
mark to the products. 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,
clearance of a
premarket notification, or
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 an order finding substantial equivalence. Historically, the
typical 510(k) review time has been approximately nine to twelve
months from the date of the initial 510(k) submission. However, the
COVID-19 pandemic has resulted in the FDA reallocating a number of
its reviewers to address emergency use authorizations for
COVID-19-related products, which may result in longer 510(k) review
times for other devices.
In many
instances, the 510(k) pathway for product marketing requires only
non-clinical testing as proof of substantial equivalence to a
lawfully marketed predicate device for a given indication. However,
in some instances the FDA may require clinical studies to
demonstrate substantial equivalence to the predicate device.
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. If the FDA determines that
the changed product does not qualify for 510(k) clearance, then a
company must submit, and the FDA must approve, a PMA before
marketing can begin.
16
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 PMA 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.
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.
17
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, 2020, we had 18 employees, all of whom are employed on
a full-time basis. 12 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. Geographically we employ 14 people in the United
States, 3 people in Canada, and 1 person in the United Kingdom.
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.
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, 2020, we
had an accumulated deficit of $57,338,489. Our independent
registered public accounting firm, in its report on our financial
statements for the year ended December 31, 2020, has raised
substantial doubt about our ability to continue as a going
concern.
18
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;
●
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;
19
●
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. We have received
regulatory clearance for the commercial sale of our NAFLD
application in the European Union but otherwise do not have any
applications for our TAEUS technology approved for sale.
Applications for our TAEUS technology, even if approved for sale,
may never 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 all 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.
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.
20
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.
Our
TAEUS applications that receive regulatory approval 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.
The outbreak of the novel strain of coronavirus, SARS-CoV-2, which
causes COVID-19, has adversely impacted our business, including our
pre-sales activities, clinical trials and ability to obtain
regulatory approvals.
21
Public
health crises such as pandemics or similar outbreaks could
adversely impact our business. In December 2019, a novel strain of
coronavirus, SARS-CoV-2, which causes coronavirus disease 2019
(“COVID-19”), surfaced in Wuhan, China. Since then,
COVID-19 has spread to countries around the world and has been
declared a pandemic by the World Health Organization. The level and
nature of the disruption caused by COVID-19 is unpredictable, may
be cyclical and long-lasting and may vary from location to
location. Beginning in March 2020, we undertook temporary
precautionary measures to help minimize the risk of the virus to
our employees, including by requiring most employees to work
remotely, pausing all non-essential travel worldwide for our
employees, and limiting employee attendance at industry events and
in-person work-related meetings, to the extent those events and
meetings are continuing. As a cash-conserving measure taken in
light of the adverse economic conditions caused by the COVID-19
pandemic, in April 2020 we reduced the cash salaries of members of
management by 33% for the remainder of 2020, including the salaries
of our executive officers. In lieu of cash, the Company paid this
portion of management salaries in the form of restricted stock
units that vested over the remainder of the year. Additionally, we
amended our Non-Employee Director Compensation Policy to provide
that our non-employee directors’ annual retainers for the
second, third and fourth fiscal quarters of 2020 were paid in in
the form of restricted stock units rather than cash. We may take
additional measures to mitigate the effects to our business caused
by COVID-19, any of which could negatively affect our
business.
The
COVID-19 pandemic has impacted our clinical trial activities.
Patient visits in ongoing clinical trials have been delayed, for
example, due to prioritization of hospital resources toward the
COVID-19 outbreak, travel restrictions imposed by governments, and
the inability to access sites for initiation and monitoring. The
continued spread of COVID-19 could further 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. In addition, COVID-19 has had an effect on
the business at FDA and other health authorities by causing them to
reallocate resources to addressing the pandemic, which has resulted
in delays of reviews and approvals, including with respect to our
NAFLD TAEUS application.
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 have taken, and
may continue to take, 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 affects our business, including by
attending industry events and conducting marketing activities
virtually rather than in-person.
In
addition to the foregoing effects, as a result of the COVID-19
outbreak or similar pandemics we have and may in the future
experience disruptions that could severely impact our business,
preclinical studies and clinical trials, including:
●
interruption of key
clinical trial activities and attendance at industry events due to
limitations on travel imposed or recommended by federal or state
governments, employers and others or interruption of clinical trial
subject visits and study procedures;
●
delays or
difficulties in enrolling patients in clinical trials of our TAEUS
FLIP device;
●
interruption or
delays in the operations of the FDA and comparable foreign
regulatory agencies, which may impact approval
timelines;
●
absenteeism or loss
of employees at the Company, or at our collaborator companies, due
to health reasons or government restrictions or otherwise, that are
needed to develop, validate, manufacture and perform other
necessary functions for our operations;
●
supply chain
disruptions making it difficult for our collaborator companies to
order and receive materials needed for the manufacture of our TAEUS
product;
●
government
responses including orders that make it difficult for us, our
supplier and our potential customers to remain open for business,
and other seen and unforeseen actions taken by government
agencies;
●
equipment failures,
loss of utilities and other disruptions that could impact our
operations or render them inoperable; and
●
effects of a local
or global recession or depression that could depress economic
conditions for a prolonged period and limit access to capital by
the Company.
These
and other factors arising from the COVID-19 pandemic could worsen
in the United States or locally at the location of our offices or
clinical trials, each of which could further adversely impact our
business generally, and could have a material adverse impact on our
operations and financial condition and results.
22
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.
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. 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. This data enabled us to obtain CE
mark approval for our NAFLD TAEUS application and make a 510(k)
submission to the FDA for that application. However, there can be
no assurance that results from these studies are indicative of
results that would be achieved in future animal studies or human
clinical studies of this or any future TAEUS applications, 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 applications of our technology and the
necessary regulatory approvals are obtained, the commercial success
of any of such application will depend upon their acceptance by
patients, the medical community, and third-party payers and on our
partners’ ability to successfully manufacture and
commercialize a device for such application.
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 December 16,
2022 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.
23
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;
●
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.
24
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 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.
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. Although we have begun to hire a small
internal sales and marketing team to engage and support channel
partners and clinical customers, further developing these functions
will be 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.
25
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;
●
local outbreaks of
sickness or disease, including COVID-19;
●
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.
26
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. For any products for
which we obtain regulatory approval and begin commercializing 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;
27
●
a
diversion of management’s time and our
resources;
●
substantial
monetary awards to trial participants or patients;
●
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 withdrawal from the European Union may have a
negative effect on global economic conditions, financial markets
and our business and operations.
The
United Kingdom exited from the European Union on January 31, 2020
(often referred to as “Brexit”). On December 24, 2020,
the U.K. and the European Union entered into a trade and
cooperation agreement (the “Trade and Cooperation
Agreement”), which was applied on a provisional basis from
January 1, 2021. While the economic integration does not reach the
level that existed during the time the U.K. was a member state of
the European Union, the Trade and Cooperation Agreement sets out
preferential arrangements in areas such as trade in goods and in
services, digital trade and intellectual property. Negotiations
between the U.K. and the European Union are expected to continue in
relation to the relationship between the U.K. and the European
Union in certain other areas which are not covered by the Trade and
Cooperation Agreement. The long term effects
of Brexit will depend on the effects of the
implementation and application of the Trade and Cooperation
Agreement and any other relevant agreements between the U.K. and
the European Union. It is still unclear what terms, if any, may be
agreed within the U.K. and between the U.K. and other countries on
many aspects of fiscal policy, cross-border trade and international
relations, both in the final outcome and for any transitional
period. The withdrawal of the U.K. from the European Union could
potentially disrupt the free movement of goods, services and people
between the U.K. and the European Union, including in Ireland where
we have significant manufacturing operations, undermine bilateral
cooperation in key geographic areas and significantly disrupt trade
between the U.K. and the European Union or other nations as the
U.K. pursues independent trade relations. In
addition, Brexit could lead to legal uncertainty and
potentially divergent national laws and regulations as the U.K.
determines which European Union laws to replace or replicate.
Because this is an unprecedented event, it is unclear what
long-term economic, financial, trade and legal
implications Brexit would have and how it would affect
the regulation applicable to our business globally and in the
region. Any of these developments, along with any political,
economic and regulatory changes that may occur, could cause
political and economic uncertainty in Europe and internationally
and harm our business and financial results. Although we have not
observed a material financial impact or identified any trends or
potential changes to critical accounting estimates as a result
of Brexit at this time, we will continue to assess the
impact of Brexit on our business and operations. The
effects of Brexit and the application of the Trade and
Cooperation Agreement could adversely affect our business,
financial condition or future results.
28
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.
As of
the date of this Annual Report, we maintain a patent portfolio
consisting of fourteen (14) patents issued in the United States and
thirteen (13) issued patents in foreign jurisdictions, twenty-one
(21) 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 mostly cover certain innovations relating to fat
imaging, fat quantitation, and temperature monitoring in the liver
and other tissues. In addition, we have three (3) licensed U.S.
patents.
Each of
our utility patents generally has a term of 20 years from its
respective priority (earliest filing) date. Design patents have a
term of 14 years from a respective filing date. Among our issued
utility patents in the U.S., the first patent is set to expire in
2033 and the last patent is set to expire in 2039. Our licensed
patents are set to expire on June 19, 2021.
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.
29
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.
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.
30
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 was originally meant to apply as from May 26, 2020 (the
“Date of Application” or “DoA”) but, in
light of the COVID-19 pandemic, the Date of Application was
postponed to May 26, 2021. The changes to the regulatory system
implemented by the MDR include stricter requirements for clinical
evidence and pre-market assessment of safety and performance,
refined 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 for the duration of
such approvals or conformity assessments and such products may be
made available for this transitional period, but no later than June
2024. In March 2020, 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.
31
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.
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
many instances, the 510(k) pathway for product marketing requires
only non-clinical testing proof of substantial equivalence to a
lawfully marketed predicate device for a given indication. However,
in some instances the FDA may require clinical studies to
demonstrate substantial equivalence to the predicate device.
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
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.
32
If any
of these events were to occur, our business and financial condition
would be harmed.
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.
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.
33
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 Biden Administration and U.S.
Congress may take further action regarding the Affordable Care Act.
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;
●
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.
34
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;
●
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;
35
●
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, 2020 through December 31, 2020, intra-day
trading prices on the Nasdaq Capital Market have fluctuated from a
low of $0.60 to a high of $2.25 with respect to shares of our
common stock, and from a low of $0.06 to a high of $0.60 with
respect to our warrants, and may continue to fluctuate
significantly in the future.
Our stock price has fluctuated in the past, has recently been
volatile and may be volatile in the future for reasons unrelated to
our operating performance or prospects, and as a result, investors
in our common stock could incur substantial losses.
Our
stock price has fluctuated in the past, has recently been volatile
and may be volatile in the future. By way of example, on December
29, 2020, the price of our common stock closed at $0.71 per share
while on January 26, 2021, our stock price closed at $2.85 per
share with no discernible material announcements or developments
relating to our operations. On January 20, 2021, the intra-day
sales price of our common stock fluctuated between a reported low
sale price of $1.81 and a reported high sales price of $2.58. We
may incur rapid and substantial decreases in our stock price in the
foreseeable future that are unrelated to our operating performance
or prospects. In addition, the COVID-19 pandemic has caused broad
stock market and industry fluctuations. The stock market in general
and the market for healthcare companies in particular have
experienced extreme volatility that has often been unrelated to the
operating performance of particular companies. As a result of this
volatility, investors may experience losses on their investment in
our common stock.
These
broad market and industry factors may seriously harm the market
price of our common stock, regardless of our operating performance.
In the past, following periods of volatility in the market,
securities class-action litigation has often been instituted
against companies. Such litigation, if instituted against us, could
result in substantial costs and diversion of management’s
attention and resources, which could materially and adversely
affect our business, financial condition, results of operations and
growth prospects. There can be no guarantee that our stock price
will remain at current prices or that future sales of our common
stock will not be at prices lower than those sold to
investors.
Additionally,
recently, securities of certain companies have experienced
significant and extreme volatility in stock price due to a sudden
increase in demand for stock resulting in aggregate short positions
in the stock exceeding the number of shares available for purchase,
forcing investors with short exposure to pay a premium to
repurchase shares for delivery to share lenders. This is known as a
“short squeeze.” These short squeezes have led to the
price per share of those companies to trade at a significantly
inflated rate that is disconnected from the underlying value of the
company. Many investors who have purchased shares in those
companies at an inflated rate face the risk of losing a significant
portion of their original investment as the price per share
declines steadily as interest in those stocks abates. While we have
no reason to believe our shares would be the target of a short
squeeze, there can be no assurance that they will not be in the
future, and you may lose a significant portion or all of your
investment if you purchase our shares at a rate that is
significantly disconnected from our underlying value.
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.
36
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, 2020 to December 31, 2020 was
approximately 301,478 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.
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.
37
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.
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;
38
●
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.
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, which
will expand to approximately 7,200 square feet effective May 1,
2021, under a lease that is due to expire in December 2025. The
rent is approximately $8,232 per month, increasing to $15,452 per
month effective May 1, 2021, 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.
39
PART 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 25, 2021, there were 25 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.
40
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”and “Risk Factor Summary” 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, 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, service
support and parts for our Nexus 128 system in 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.
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. On
December 16, 2020, we and GE Healthcare entered into an amendment
to our agreement, extending its term to December 16,
2022.
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.
In March 2020, 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 and other CE mark
geographies, including the 27 EU member states.
In June 2020, we submitted a 510(k) Application to the FDA for our
TAEUS FLIP System.
41
Financial Operations Overview
Revenue
No revenue has been generated by our TAEUS technology, which we
have not commercially sold as of December 31, 2020.
Cost of Goods Sold
No cost of goods sold has been generated by our TAEUS technology,
which we have not commercially sold as of December 31,
2020.
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 are building a
small sales and marketing team to train and support global
ultrasound distributors, and expect to execute traditional
marketing activities such as promotional materials, electronic
media and participation in industry events and conferences. In
September 2020, we hired a full-time sales representative in the
United Kingdom.
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 for accounting, consulting and legal
services.
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 stock options and other stock awards 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,
2021, the pool of shares issuable under the Omnibus Plan
automatically increased by 1,599,570 shares from 5,861,658 shares
to 7,461,228. As of December 31, 2020, prior to the 1,599,570 share
increase, there were 3,891,521 shares of common stock remaining
available for issuance under the Omnibus Plan.
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.
42
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.
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, 2020 and 2019
Revenue
We had no revenue during the years ended December 31, 2020 and
2019.
Cost of Goods Sold
We had no cost of goods sold during the years ended December 31,
2020 and 2019.
Research and Development
Research and development expenses were $5,917,944 for the year
ended December 31, 2020, as compared to $6,574,999 for the year
ended December 31, 2019, a decrease of $657,055, or 10%. The costs
include primarily wages, fees and equipment for the development of
our TAEUS product line. Research and development expenses decreased
from the same period for the prior year as we completed development
of our initial TAEUS product and began focusing our spending on
commercialization of the product that has been
developed.
Sales and Marketing
Sales and marketing expenses were $581,893 for the year ended
December 31, 2020, as compared to $412,434 for the year ended
December 31, 2019, an increase of $169,459, or 41%. 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. Subsequent to the period ending December 31, 2020 we
began hiring and training additional staff to support our sales
efforts.
General and Administrative
Our general and administrative expenses for the year ended December
31, 2020 were $5,002,080, compared to $3,856,159 for the year ended
December 31, 2019, an increase of $1,145,921, or 30%. Our wage and
related expenses for the year ended December 31, 2020 were
$2,070,747, compared to $1,878,265 for the year ended December 31,
2019. Wage and related expenses in the year ended December 31, 2020
included $215,988 for bonuses and $811,871 of stock compensation
expense related to the issuance and vesting of options and
RSU’s, compared to $147,915 for bonuses, $720,030 of stock
compensation expense related to the issuance and vesting of
options, for the year ended December 31, 2019. Our professional
fees, which include legal, audit, and investor relations, for the
year ended December 31, 2020 were $2,512,878, compared to
$1,455,346 for the year ended December 31, 2019. The increase was
due to additional costs for investor relations related activity,
and legal fees associated with our financing
transactions.
Amortization of Debt Discount
During the year ended December 31, 2020, we incurred non-cash
expenses of $232,426 related to the amortization of debt discount
incurred as result of our issuance of our convertible notes and
warrants issued in July 2019. 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
our convertible notes and warrants issued in July
2019.
43
Net Loss
As a result of the foregoing, for the year ended December 31, 2020,
we recorded a net loss of $11,725,501, compared to a net loss of
$13,305,964 for the year ended December 31, 2019.
Liquidity and Capital Resources
To date we have funded our operations through private and public
sales of our securities. As of December 31, 2020, we had $7,227,316
in cash. We completed the following financing events from January
2019 through December 2020:
●
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 accrued
interest at a rate of 10% per annum until maturity on April 26,
2020.
●
In
December 2019, we completed private 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 issued in July 2019 and
deducting offering expenses of approximately $766,000 payable by
us.
●
In
March 2020, we entered into an at-the-market equity offering sales
agreement (the “HCW ATM Agreement”) with H.C.
Wainwright & Co., LLC (“Wainwright”) to sell shares
of our common stock for aggregate gross proceeds of up to $7.2
million, from time to time, through an “at-the-market”
equity offering program under which Wainwright acts as sales agent.
On September 18, 2020 we terminated the HCW ATM Agreement with H.C.
Wainwright & Co. We issued an aggregate of 1,421,858 shares of
our common stock in return for gross proceeds of $1,372,437 from
the at-the-market facility.
●
On
September 25, 2020, we entered into an at-the-market equity
offering sales agreement (the “Ascendiant ATM
Agreement”) with Ascendiant Capital Markets, LLC
(“Ascendiant”) to sell shares of our common stock for
aggregate gross proceeds of up to $6.8 million, from time to time,
through an “at-the-market” equity offering program
under which Ascendiant acts as sales agent. The Ascendiant ATM
Agreement was terminated by the Company on December 15, 2020 after
we had issued an aggregate of 583,633 shares of our common stock
under the Ascendiant ATM Agreement for gross proceeds of
approximately $473,000.
●
On
December 18, 2020, we completed an underwritten public offering of
7,857,286 shares of common stock for net proceeds of approximately
$4.9 million pursuant to an underwriting agreement with
ThinkEquity, a division of Fordham Financial Management, Inc.,
dated December 15, 2020. The shares issued upon the closing of the
offering included 714,286 shares of common stock issued pursuant
the underwriter’s option to purchase additional shares to
cover over-allotments, which it exercised in full.
●
During
the year ended December 31, 2020, certain holders of our warrants
issued in private placements indicated to the Company that they
were willing to exercise their Private Warrants at reduced exercise
prices. Our board of directors approved the Company’s
partially waiving the exercise prices of Private Warrants to
provide for reduced exercised prices which resulted in a deemed
dividend. Prices were subsequently agreed upon between the Company
and each exercising warrant holder, and the Company obtaining
stockholder approval for the issuance of an aggregate number of
shares of the Company’s common stock upon the exercise of
Private Warrants greater than 19.99% of the number of shares
outstanding prior to any such issuance, in compliance with Nasdaq
Listing Rule 5635(d). As a result we issued an aggregate of
7,098,108 shares of its common stock upon Private Warrant exercises
for net proceeds of $4,757,011.
●
During
the year ended December 31, 2020, we received a total of $337,084
in proceeds from loans from both First Republic Bank under the U.S.
Small Business Administration’s Paycheck Protection Program
and Toronto-Dominion Bank, in each case in connection with
coronavirus aid legislation. Please see Note 6 to the notes
accompanying the consolidated financial statements included with
this Annual Report on Form 10-K for a further description of these
loans.
We believe that cash on hand at December 31, 2020 will be
sufficient to fund our current operations into the fourth quarter
of 2021. 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 also exploring potential financing
options that may be available to us, including additional sales of
our common stock through our At-The-Market Issuance Sales Agreement
with Ascendiant Capital Markets, LLC, dated February 19, 2021 (the
“2021 Ascendiant ATM Agreement”), and by causing the
mandatory exercise of outstanding warrants issued in December 2019
for cash in accordance with their terms. However, except for 2021
Ascendiant ATM Agreement, we have no commitments to obtain any
additional funds, and there can be no assurance funds will be
available in sufficient amounts or on acceptable terms. If we are
unable to obtain sufficient 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.
44
The consolidated 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 consolidated financial statements,
during the year ended December 31, 2020, we incurred net losses of
$11,725,501 and used cash in operations of $10,746,595. 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, 2020, we used $10,746,595 of
cash in operating activities primarily as a result of our net loss
of $11,725,501, offset by share-based compensation of $2,102,352,
amortization of debt discount of $232,426, depreciation expense of
$99,342, amortization of Right of Use assets of $65,907, and net
changes in operating assets and liabilities of
$(1,521,121).
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.
Investing Activities
During the year ended December 31, 2020, the Company used $75,333
in investing activities related to purchases of
equipment.
During the year ended December 31, 2019, the Company used $43,595
in investing activities related to purchase of
equipment.
Financing Activities
During the year ended December 31, 2020, financing activities
provided $11,875,037, including $6,780,942 in proceeds from
issuance of common stock, $4,757,011 in proceeds from warrant
exercises, and $337,084 in proceeds from loans.
During the year ended December 31, 2019, financing activities
provided $8,335,278, including $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, $2,490,501 in proceeds
from the placement of senior secured convertible promissory notes
and warrants, and $125,000 from the issuance common stock and
warrants.
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 TAEUS FLIP
system;
●
complete
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;
●
expand
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.
45
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. As described below, the COVID-19
pandemic has impacted our business operations to some extent and is
expected to continue to do so and, in light of the effect of such
pandemic on financial markets, these impacts may include reduced
access to capital. 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.
Coronavirus (“COVID-19”) Pandemic
The COVID-19 pandemic has prompted governments and regulatory
bodies throughout the world to issue “stay-at-home” or
similar orders, and enact restrictions on the performance of
“non-essential” services, public gatherings and
travel.
Beginning in March 2020, we undertook precautionary measures
intended to help minimize the risk of the virus to our employees,
including requiring most employees to work remotely, pausing all
non-essential travel worldwide for our employees, and limiting
employee attendance at industry events and in-person work-related
meetings, to the extent those events and meetings are continuing.
As a cash-conserving measure taken in light of the adverse economic
conditions caused by the COVID-19 pandemic, in April 2020 we
reduced the cash salaries of members of management by 33% for the
remainder of 2020, including the salaries of our executive
officers. In lieu of cash, the Company paid this portion of
management salaries in the form of restricted stock units that
vested over the remainder of the year. Additionally, we amended our
Non-Employee Director Compensation Policy to provide that our
non-employee directors’ annual retainers for the second,
third and fourth fiscal quarters of 2020 would be paid in in the
form of restricted stock units rather than cash. To date we do not
believe these actions have had a significant negative impact on our
operations. However, these actions or additional measures we may
undertake may ultimately delay progress on our developmental goals
or otherwise negatively affect our business. In addition,
third-party actions taken to contain its spread and mitigate its
public health effects of COVID-19 may negatively affect our
business.
The COVID-19 pandemic has impacted our clinical
trial activities. Patient visits in ongoing clinical trials have
been delayed, for example, due to prioritization of hospital
resources toward the COVID-19 outbreak, travel restrictions imposed
by governments, and the inability to access sites for initiation
and monitoring. COVID-19 has also had an effect on the business at
the FDA and other health authorities by causing them to reallocate
resources to addressing the pandemic, which has resulted in delays
of reviews and approvals, including with respect to our NAFLD TAEUS
application.
Nasdaq Capital Market Listing
Our common stock and our public warrants are currently traded on
the Nasdaq Capital Market. The Nasdaq Capital Market imposes, among
other requirements, listing maintenance standards including minimum
bid price and stockholders’ equity requirements. In
particular, Nasdaq rules require a listed company’s primary
equity securities to have a minimum bid price of at least $1.00 per
share and that a listed company maintain a minimum of $2.5 million
in stockholders’ equity. On April 24, 2020, we received
a notification letter from the Listing Qualifications Department of
The Nasdaq Stock Market LLC (“Nasdaq”) notifying us
that, because the closing bid price for our common stock
listed on Nasdaq was below $1.00 for 30 consecutive trading days,
we no longer met the minimum bid price requirement for
continued listing on The Nasdaq Capital Market under Nasdaq
Marketplace Rule 5550(a)(2) (the “Bid Price Rule”). On
August 19, 2020, we received a notification letter from the Listing
Qualifications Staff of Nasdaq notifying us that, based on our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2020,
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”).
On December 30, 2020, we filed a Current Report on Form 8-K to
report that, following the completion of the underwritten offering
of common stock on December 18, 2020, we had regained compliance
with the Equity Rule. On February 2, 2021, we received written
notice from the Listing Qualifications Staff Nasdaq notifying us
that for at least ten consecutive business days, from January 15,
2021 to February 1, 2021, the closing bid price for our common
stock was $1.00 per share or greater. Accordingly, the written
notice stated that we regained compliance with the Bid Price
Rule.
If we do not maintain compliance with the Bid Price Rule, Equity
Rule, and other rules for continued listing on the Nasdaq, our
securities may be delisted. If our securities were delisted from
the Nasdaq Capital Market, it could, among other things, lead to a
number of negative implications, including reduced liquidity in our
common stock, the loss of federal preemption of state securities
laws and greater difficulty in obtaining financing.
Off-Balance Sheet Transactions
At December 31, 2020, 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.
46
I
tem 8. Financial
Statements and Supplementary Data.
Index to Financial Statements
ENDRA Life Sciences Inc.
December 31, 2020
|
|
Page
|
|
|
|
|
F-1
|
|
|
|
|
|
F-2
|
|
|
|
|
|
F-3
|
|
|
|
|
|
F-4
|
|
|
|
|
|
F-5
|
|
|
|
|
|
F-6
|
47
R
EPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders of
ENDRA
Life Sciences Inc. and Subsidiaries
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of ENDRA Life
Sciences Inc. and Subsidiaries (collectively, the
“Company”) as of December 31, 2020 and 2019, the
related consolidated statements of operations, shareholders’
equity and cash flows for each of the two years in the period ended
December 31, 2020, and the related notes and schedules
(collectively referred to as the “financial
statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2020 and 2019, and the results of
its operations and its cash flows for each of the two years in the
period ended December 31, 2020, in conformity with accounting
principles generally accepted in the United States of
America.
The Company's Ability to Continue as a Going Concern
The
accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed
in Note 2 to the accompanying consolidated financial statements,
the Company has suffered recurring losses from operations,
generated negative cash flows from operating activities, has an
accumulated deficit and has stated that substantial doubt exists
about Company’s ability to continue as a going concern.
Management's evaluation of the events and conditions and
management’s plans in 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
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s 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.
We have
served as the Company’s auditor since 2015.
New
York, NY
March
25, 2021
F-1
ENDRA Life Sciences Inc.
Consolidated
B
alance
Sheets
|
|
December
31,
|
December
31,
|
|
Assets
|
2020
|
2019
|
|
Current
Assets
|
|
|
|
Cash
|
$
7,227,316
|
$
6,174,207
|
|
Prepaid
expenses
|
390,800
|
116,749
|
|
Inventory
|
589,620
|
113,442
|
|
Other current
assets
|
5,986
|
130,701
|
|
Total Current
Assets
|
8,213,722
|
6,535,099
|
|
Non-Current
Assets
|
|
|
|
Fixed assets,
net
|
212,242
|
236,251
|
|
Right of use
assets
|
339,012
|
404,919
|
|
Total
Assets
|
$
8,764,976
|
$
7,176,269
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
Current
Liabilities
|
|
|
|
Accounts payable
and accrued liabilities
|
$
910,183
|
$
1,708,525
|
|
Convertible notes
payable, net of discount
|
-
|
298,069
|
|
Lease liabilities,
current portion
|
76,480
|
66,193
|
|
Total Current
Liabilities
|
986,663
|
2,072,787
|
|
|
|
|
|
Long
Term Debt
|
|
|
|
Loans
|
337,084
|
-
|
|
Lease
liabilities
|
271,908
|
342,812
|
|
Total Long Term
Debt
|
608,992
|
342,812
|
|
|
|
|
|
Total
Liabilities
|
1,595,655
|
2,415,599
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
Series A
Convertible Preferred Stock, $0.0001 par value; 10,000 shares
authorized; 196.794 and 6,338.490 shares issued and outstanding,
respectively
|
1
|
1
|
|
Series B
Convertible Preferred Stock, $0.0001 par value; 1,000 shares
authorized; no shares and 351.711 shares issued and outstanding,
respectively
|
-
|
-
|
|
Common stock,
$0.0001 par value; 80,000,000 shares authorized; 34,049,704 and
8,421,401 shares issued and outstanding, respectively
|
3,404
|
842
|
|
Additional paid in
capital
|
64,493,611
|
49,933,736
|
|
Stock
payable
|
10,794
|
43,528
|
|
Accumulated
deficit
|
(57,338,489
)
|
(45,217,437
)
|
|
Total
Stockholders’ Equity
|
7,169,321
|
4,760,670
|
|
Total
Liabilities and Stockholders’ Equity
|
$
8,764,976
|
$
7,176,269
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-2
ENDRA Life Sciences Inc.
Consolidated Statements of
O
perations
|
|
Year Ended
|
Year Ended
|
|
|
December 31,
|
December 31,
|
|
|
2020
|
2019
|
|
Operating
Expenses
|
|
|
|
Research and
development
|
$
5,917,944
|
$
6,574,999
|
|
Sales and
marketing
|
581,893
|
412,434
|
|
General and
administrative
|
5,002,080
|
3,856,159
|
|
Total operating
expenses
|
11,501,917
|
10,843,592
|
|
|
|
|
|
Operating
loss
|
(11,501,917
)
|
(10,843,592
)
|
|
|
|
|
|
Other
Expenses
|
|
|
|
Amortization of
debt discount
|
(232,426
)
|
(2,355,469
)
|
|
Other income
(expense)
|
8,842
|
(106,903
)
|
|
Total other
expenses
|
(223,584
)
|
(2,462,372
)
|
|
|
|
|
|
Loss from
operations before income taxes
|
(11,725,501
)
|
(13,305,964
)
|
|
|
|
|
|
Provision for
income taxes
|
-
|
-
|
|
|
|
|
|
Net
Loss
|
$
(11,725,501
)
|
$
(13,305,964
)
|
|
|
|
|
|
Deemed
dividend
|
(395,551
)
|
(4,219,777
)
|
|
|
|
|
|
Net Loss
attributable to common stockholders
|
$
(12,121,052
)
|
$
(17,525,741
)
|
|
|
|
|
|
Net
loss per share – basic and diluted
|
$
(0.63
)
|
$
(2.34
)
|
|
|
|
|
|
Weighted
average common shares – basic and diluted
|
19,192,226
|
7,499,984
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-3
ENDRA Life Sciences Inc.
Consolidated Statements of
S
tockholders’ Equity
|
Year Ended December 31, 2019
|
Series
A Convertible
|
Series
B Convertible
|
|
|
|
|
|
Total
|
||
|
|
Preferred
Stock
|
Preferred
Stock
|
Common
stock
|
Additional
|
|
Accumulated
|
Stockholders'
|
|||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Paid
in Capital
|
Stock
Payable
|
Deficit
|
Equity
|
|
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
|
|
Year Ended December 31, 2020
|
Series
A Convertible
|
Series
B Convertible
|
|
|
|
|
|
Total
|
||
|
|
Preferred
Stock
|
Preferred
Stock
|
Common
stock
|
Additional
|
|
Accumulated
|
Stockholders'
|
|||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Paid
in Capital
|
Stock
Payable
|
Deficit
|
Equity
|
|
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
|
|
Series A
Convertible Preferred Stock converted to common stock
|
(6,141.696
)
|
-
|
-
|
-
|
7,178,400
|
717
|
79,997
|
(80,714
)
|
-
|
-
|
|
Series B
Convertible Preferred Stock converted to common stock
|
-
|
-
|
(351.711
)
|
-
|
360,279
|
36
|
1,633
|
(1,669
)
|
-
|
-
|
|
Common
stock issued for cash
|
-
|
-
|
-
|
-
|
9,862,777
|
986
|
6,779,956
|
-
|
-
|
6,780,942
|
|
Common
stock issued for note conversions
|
-
|
-
|
-
|
-
|
331,441
|
33
|
493,814
|
-
|
-
|
493,847
|
|
Common
stock issued for warrant exercise
|
-
|
-
|
-
|
-
|
7,098,108
|
710
|
4,756,301
|
-
|
-
|
4,757,101
|
|
Common stock
issued for services
|
-
|
-
|
-
|
-
|
149,025
|
15
|
125,486
|
-
|
-
|
125,501
|
|
Common stock
issued for vested RSUs
|
-
|
-
|
-
|
-
|
648,273
|
65
|
453,725
|
-
|
-
|
453,790
|
|
Fair value of
vested stock options
|
-
|
-
|
-
|
-
|
-
|
-
|
1,523,061
|
-
|
-
|
1,523,061
|
|
Fair
value adjustment related to warrants repricing
|
-
|
-
|
-
|
-
|
-
|
-
|
395,551
|
-
|
(395,551
)
|
-
|
|
Stock payable
towards preference dividend
|
-
|
-
|
-
|
-
|
-
|
-
|
(49,649
)
|
49,649
|
-
|
-
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(11,725,501
)
|
(11, 725,501
)
|
|
Balance
as of December 31, 2020
|
196.794
|
$
1
|
-
|
$
-
|
34,049,704
|
$
3,404
|
$
64,493,611
|
10,794
|
(57,338,489
)
|
7,169,322
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-4
ENDRA Life Sciences Inc.
Consolidated Statements of
C
ash
Flows
|
|
Year Ended
|
Year Ended
|
|
|
December 31,
|
December 31,
|
|
|
2020
|
2019
|
|
Cash
Flows from Operating Activities
|
|
|
|
Net
loss
|
$
(11, 725,501
)
|
$
(13,305,964
)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation and
amortization
|
99,342
|
80,577
|
|
Common stock,
options and warrants issued for services
|
2,102,352
|
1,399,547
|
|
Amortization of
debt discount
|
232,426
|
2,355,469
|
|
Impairment of other
assets
|
-
|
249,256
|
|
Amortization of
right of use assets
|
65,907
|
34,434
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Increase in prepaid
expenses
|
(274,051
)
|
28,675
|
|
Decrease in lease
liability
|
(60,617
)
|
(30,348
)
|
|
Increase in
inventory
|
(476,178
)
|
(53,998
)
|
|
Decrease in Other
Current Assets
|
124,715
|
(106,642
)
|
|
Decrease in
accounts payable and accrued liabilities
|
(834,990
)
|
760,143
|
|
Net cash used in
operating activities
|
(10,746,595
)
|
(8,588,851
)
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
Purchases of fixed
assets
|
(75,333
)
|
(43,595
)
|
|
Net cash used in
investing activities
|
(75,333
)
|
(43,595
)
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
Proceeds from
senior secured convertible promissory notes, net of
fees
|
-
|
2,490,501
|
|
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
warrant exercise
|
4,757,011
|
-
|
|
Proceeds from
loans
|
337,084
|
-
|
|
Proceeds from
issuance of common stock
|
6,780,942
|
125,000
|
|
Net cash provided
by financing activities
|
11,875,037
|
8,335,278
|
|
|
|
|
|
Net decrease in
cash
|
1,053,109
|
(297,168
)
|
|
|
|
|
|
Cash, beginning of
period
|
6,174,207
|
6,471,375
|
|
|
|
|
|
Cash,
end of period
|
$
7,227,316
|
$
6,174,207
|
|
|
|
|
|
Supplemental
disclosures of cash items
|
|
|
|
Interest
paid
|
$
1,920
|
$
-
|
|
Income tax
paid
|
$
-
|
$
-
|
|
|
|
|
|
Supplemental
disclosures of non-cash items
|
|
|
|
Discount on
convertible notes
|
$
-
|
$
2,490,501
|
|
Conversion of
convertible notes and accrued interest
|
$
493,814
|
$
140,406
|
|
Exchange of balance
in convertible notes and accrued interest for Series A Convertible
Preferred Stock
|
$
-
|
$
1,943,195
|
|
Deemed
dividend
|
$
395,551
|
$
4,219,777
|
|
Conversion of
Series A Convertible Preferred Stock
|
$
(717
)
|
$
-
|
|
Conversion of
Series B Convertible Preferred Stock
|
$
(36
)
|
$
-
|
|
Shares issued for
financing cost
|
27,300
|
-
|
|
Stock dividend
payable
|
$
(49,649
)
|
$
-
|
|
Right of use
asset
|
$
339,012
|
$
404,919
|
|
Lease
liability
|
$
348,388
|
$
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, 2020 and 2019
Note 1 – Nature of the Business
ENDRA Life Sciences Inc. (“ENDRA” or the
“Company”) has developed and is continuing 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.
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.
ENDRA Life Sciences Holding B.V. was organized under the laws of
The Netherlands on July 27, 2020 and is wholly owned by the
Company.
ENDRA Life Sciences Ltd. was organized under the laws of the United
Kingdom on August 5, 2020 and is wholly owned by ENDRA Life
Sciences Holding B.V.
ENDRA Life Sciences B.V. was organized under the laws of The
Netherlands on August 11, 2020 and is wholly owned by ENDRA Life
Sciences Holding B.V.
ENDRA Life Sciences GmbH was organized under the laws of Germany on
September 9, 2020 and is wholly owned by ENDRA Life Sciences
Holding B.V.
ENDRA Life Sciences S.A.R.L. was organized under the laws of France
on January 26, 2021 and is wholly owned by ENDRA Life Sciences
Holding B.V.
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.
The COVID-19 outbreak, which the World Health Organization has
classified as a pandemic, has prompted governments and regulatory
bodies throughout the world to issue “stay-at-home” or
similar orders, and enact restrictions on the performance of
“non-essential” services, public gatherings and
travel.
The extent to which COVID-19 impacts the Company’s business
and financial results will depend on numerous evolving factors
including, but not limited to: the magnitude and duration of
COVID-19, the extent to which it will impact worldwide
macroeconomic conditions, the speed of the anticipated recovery,
access to capital markets, and governmental and business reactions
to the pandemic. The Company assessed certain accounting matters
that generally require consideration of forecasted financial
information in context with the information reasonably available to
the Company and the unknown future impacts of COVID-19 as of
December 31, 2020 and through the date of the filing of this Annual
Report on Form 10-K. The accounting matters assessed included, but
were not limited to, estimates related to the accounting for
potential liabilities and accrued expenses, the assumptions
utilized in valuing stock-based compensation issued for services,
the realization of deferred tax assets, and assessments of
impairment related to long-lived assets. The Company’s future
assessment of the magnitude and duration of COVID-19, as well as
other factors, could result in additional material impacts to the
Company’s consolidated financial statements in future
reporting periods.
F-6
Despite the Company’s efforts, the ultimate impact of
COVID-19 on the Company’s business depends on factors beyond
the Company’s knowledge or control, including the duration
and severity of the outbreak, as well as third-party actions taken
to contain its spread and mitigate its public health effects. As a
result, the Company is unable to estimate the extent to which
COVID-19 will negatively impact its financial results or
liquidity.
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
financial statements and related disclosures have been prepared
pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”). These financial statements
have been prepared using the accrual basis of accounting in
accordance with Generally Accepted Accounting Principles
(“GAAP”) of the United States.
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, 2020 and
December 31, 2019, 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.
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.
Leases
In February 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“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. At
December 31, 2020 and December 31, 2019 the Company recorded a
lease liability of $348,388 and $409,005,
respectively.
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.
F-7
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, 2020 and 2019, the Company incurred $5,917,944 and
$6,574,999 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 10,047,010
and
24
,949,725
potentially dilutive
shares, which include outstanding common stock options, warrants,
and convertible notes, as of December 31, 2020
and
December 31, 2019,
respectively.
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,
2020
|
December 31,
2019
|
|
Options to purchase
common stock
|
3,569,707
|
3,449,319
|
|
Warrants to
purchase common stock
|
6,251,103
|
13,496,924
|
|
Shares issuable
upon conversion of notes
|
-
|
362,568
|
|
Shares issuable
upon conversion of Series A Convertible Preferred
Stock
|
226,200
|
7,285,651
|
|
Shares issuable
upon conversion of Series B Convertible
Preferred Stock
|
-
|
355,263
|
|
Potential
equivalent shares excluded
|
10,047,010
|
24,949,725
|
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.
F-8
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, 2021, the pool of shares available for
issuance under the Omnibus Plan automatically increased by
1,599,570 shares from 5,861,658 shares to 7,461,228.
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).
F-9
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.
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, 2020
of $57,338,489. The Company had working capital of $7,227,059 as of
December 31, 2020. 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, 2020 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. As described further below under “Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations” the COVID-19 pandemic has impacted
the Company’s business operations to some extent and is
expected to continue to do so and, in light of the effect of such
pandemic on financial markets, these impacts may include reduced
access to capital. 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.
Recent Accounting Pronouncements
The Company considered
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, 2020 and December 31, 2019, inventory consisted
of raw materials and subassemblies to be used in the assembly of a
TAEUS system. As of December 31, 2020, the Company had no orders
pending for the sale of a TAEUS system.
As of December 31, 2020 and December 31, 2019, the Company
had
inventory valued at
$589,620 and $113,442, respectively.
Note 4 – Fixed Assets
As of December 31, 2020 and December 31, 2019, fixed assets
consisted of the following:
|
|
December
31,
2020
|
December
31,
2019
|
|
Property, leasehold
and capitalized software
|
$
718,902
|
$
679,179
|
|
TAEUS development
and testing
|
79,207
|
43,596
|
|
Accumulated
depreciation
|
(585,867
)
|
(486,524
)
|
|
Fixed
assets, net
|
$
212,242
|
$
236,251
|
Depreciation expense for the years ended December 31, 2020 and 2019
was $99,342 and $80,577, respectively.
F-10
Note 5 – Accounts Payable and Accrued
Liabilities
As of December 31, 2020 and December 31, 2019, current liabilities
consisted of the following:
|
|
December
31,
2020
|
December
31,
2019
|
|
Accounts
payable
|
$
402,910
|
$
1,278,431
|
|
Accrued
payroll
|
48,260
|
94,862
|
|
Accrued
bonuses
|
369,393
|
295,794
|
|
Accrued employee
benefits
|
5,750
|
5,750
|
|
Accrued
interest
|
-
|
9,738
|
|
Insurance premium
financing
|
83,870
|
23,950
|
|
Total
|
$
910,183
|
$
1,708,525
|
Note 6 – Bank Loans
U.S. SBA Paycheck Protection Program
In April 2020, the Company issued a U.S. Small Business
Administration (“SBA”) Paycheck Protection Program Note
(the “SBA Note”) to First Republic Bank (the
“Lender”) for a loan in the principal amount of
$308,600 (the “SBA Loan”) under the Paycheck Protection
Program (“PPP”) promulgated under the Coronavirus Aid,
Relief and Economic Security Act of 2020, as modified by the
Paycheck Protection Program Flexibility Act of 2020. The SBA Loan
bears interest at a rate per annum of 1.00%. The term of the SBA
Loan is two years, ending April 22, 2022 (the “Maturity
Date”). No payments will be due on the SBA Loan until the
Company’s application for forgiveness of the SBA Loan has
been processed and completed (the “Deferment Period”),
but interest will accrue during the Deferment Period. Following the
Deferment Period, if the SBA Loan is not entirely forgiven, the
Company must pay monthly principal and interest payments on the
outstanding principal balance of the SBA Loan amortized over the
term of the SBA Loan (the “SBA Loan Payments”), unless
forgiven in whole or in part in accordance with the PPP
regulations. These repayments will begin following the Deferment
Period and until the Maturity Date.
The Company has applied to the Lender for the SBA Loan to be
forgiven in full. The Company believes that it qualifies for
forgiveness of the SBA Loan under the PPP guidelines, but should it
be audited or reviewed as a result of applying for forgiveness or
otherwise, such audit or review could result in the diversion of
management’s time and attention, and legal and reputational
costs. If the Company were to be audited and receive an adverse
finding in such audit, it could be required to repay the full
amount of the SBA Loan, which could reduce its liquidity, and
potentially subject the Company to additional fines and
penalties.
The Company may prepay the principal of the SBA Loan at any time
without incurring any prepayment charges. The Company may prepay
20% or less of the unpaid principal balance at any time without
notice. If the Company prepays more than 20% and the SBA Loan has
been sold on the secondary market, the Company must provide the
Lender with written notice, pay all accrued interest and comply
with the other requirements described in the SBA Note for such
repayment.
The Company did not provide any collateral or personal guarantees
for the SBA Loan, nor did the Company pay any facility charge to
the government or to the Lender.
The SBA Note also provides for customary events of default,
including, among others, events of default relating to failure to
make payment or comply with the covenants contained in the SBA Note
and related loan documents, defaults on any other loan with the
Lender, defaults on any loan or agreement with another creditor (if
the Lender believes the default may materially affect the
Company’s ability pay the SBA Note), failure to pay any taxes
when due, bankruptcy, breaches of representations, judgment,
reorganization, merger, consolidation or other changes in ownership
or business structure without the Lender’s prior written
consent, and material adverse changes in financial condition or
business operation. Upon an event of default the Lender may require
immediate payment of all amounts owing under the SBA Note, collect
all amounts owing from the Company, or file suit and obtain
judgment.
Toronto-Dominion Bank Loan
On April 27, 2020, the Company entered into a commitment loan with
TD Bank under the Canadian Emergency Business Account, in the
principal aggregate amount of CAD 40,000, which is due and payable
upon the expiration of the initial term on December 31, 2022. This
note bears interest on the unpaid balance at the rate of zero
percent (0%) per annum during the initial term. Under this note no
interest payments are due until January 1, 2023. Under the
conditions of the loan, twenty-five percent (25%) of the loan will
be forgiven if seventy-five percent (75%) is repaid prior to the
initial term date.
F-11
Note 7 – Capital Stock
On June 17, 2020, the Company filed a Certificate of Amendment to
its Fourth Amended and Restated Certificate of Incorporation with
the Secretary of State of the State of Delaware effecting an
amendment to increase the number of authorized shares of the
Company’s common stock from 50,000,000 shares to 80,000,000
shares. The Certificate of Amendment was approved by the
Company’s stockholders at the Company’s annual meeting
of stockholders on June 16, 2020.
At December 31, 2020, the authorized capital of the Company
consisted of 90,000,000 shares of capital stock, comprised of
80,000,000 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 designated 10,000 shares of its
preferred stock as Series A Convertible Preferred Stock
(“Series A Preferred Stock”) and 1,000 shares of its
preferred stock as Series B Convertible Preferred Stock
(“Series B Preferred Stock”), and the remainder of
9,989,000 shares remain authorized but undesignated.
As of December 31, 2020, there were 34,049,704 shares of common
stock, 196.794 shares of Series A Preferred Stock, and no shares of
Series B Preferred Stock issued and outstanding, and a stock
payable balance of $10,794.
During the year ended December 31, 2020, the Company issued a total
of 25,628,303 shares of its common stock, as follows:
●
7,178,400 shares
upon the conversion of 6,141.696 shares of its Series A
Preferred Stock;
●
360,279 shares upon
the conversion of 351.711 shares of its Series B Preferred
Stock;
●
7,857,286
shares on December 18, 2020 in an underwritten offering for net
proceeds of $5,000,192;
●
7,098,108 shares
upon warrant exercises for an aggregate exercise price of
$4,757,011;
●
2,005,491
shares in return for aggregate net proceeds of $1,780,750 from
sales through its at-the-market equity offering
programs;
●
331,441 shares upon
the conversion of $493,847 principal and accrued interest on
convertible promissory notes issued in July 2019;
●
149,025 shares to
certain consultants pursuant to services agreements;
and
●
648,273 shares to
its employees pursuant to RSU agreements with these
employees.
December 2020 Offering of Common Stock
On December 15, 2020, the Company entered into an underwriting
agreement (the “Underwriting Agreement”) with
ThinkEquity, a division of Fordham Financial Management, Inc. (the
“Underwriter”), relating to an underwritten public
offering for the issuance and sale of 7,143,000 shares of the
Company’s common stock, par value $0.0001 per share (the
“Common Stock”). In addition, under the terms of the
Underwriting Agreement, the Company granted the Underwriter a
45-day option to purchase up to an additional 714,286 shares of its
Common Stock to cover over-allotments, if any. The Underwriter
exercised in full its option to purchase the additional 714,286
shares on December 16, 2020.
The offering closed on December18, 2020. The net proceeds to the Company from the offering were approximately $4.9 million, after deducting underwriting discounts
and commissions and other offering expenses.
At-the-Market Equity Offering Programs
In March 2020, the Company entered into an at-the-market equity
offering sales agreement (the “HCW ATM Agreement”) with
H.C. Wainwright & Co., LLC (“Wainwright”) to sell
shares of common stock for aggregate gross proceeds of up to $7.2
million, from time to time, through an “at-the-market”
equity offering program under which Wainwright acted as sales
agent. On September 18, 2020, the Company terminated the HCW ATM
Agreement after having issued an aggregate of 1,421,858 shares of
common stock in return for gross proceeds of
$1,372,437.
F-12
On September 25, 2020, the Company entered into an at-the-market
equity offering sales agreement (the “2020 Ascendiant ATM
Agreement”) with Ascendiant Capital Markets, LLC
(“Ascendiant”) to sell shares of common stock for
aggregate gross proceeds of up to $6.8 million, from time to time,
through an “at-the-market” equity offering program
under which Ascendiant acted as sales agent. The 2020 Ascendiant
ATM Agreement was terminated by the Company on December 15, 2020
after having issued an aggregate of 583,633 shares of common stock
in return for gross proceeds of approximately
$473,000.
Subsequent to the year ended December 31, 2020 and on February 18,
2021, the Company entered into an at-the-market equity offering
sales agreement (the “2021 Ascendiant ATM Agreement”)
with Ascendiant to sell shares of common stock for aggregate gross
proceeds of up to $12.6 million, from time to time, through an
“at-the-market” equity offering program under which
Ascendiant acted as sales agent. As of March 24, 2021 under the
2021 Ascendiant ATM Agreement the Company has issued an aggregate
of 3,914,217 shares of common stock in return for gross proceeds of
$10,099,525.
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 it sold 6,338.490 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. As of December 31,
2020, 196.794 shares of Series A Convertible Preferred Stock and
December 11, 2019 Warrants exercisable for an aggregate 3,450,549
shares of common stock remained outstanding.
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 the
Company’s 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 Series A 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 11, 2019
Warrants.
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.
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. As of December 31, 2020, no shares of
Series A Convertible Preferred Stock and December 19, 2019 Warrants
exercisable for an aggregate 24,737 shares of common stock remained
outstanding.
F-13
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 Warrants. The terms of the December 19, 2019
Warrants provide that the Company may deliver notice to the holders
and, after a 30-day period following such notice, any unexercised
December 19, 2019 Warrants will be forfeited, in the event that
during the term of the December 19, 2019 Warrants (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 the exercise of the December 19, 2019 Warrants
(together, the “Series B Forced Conversion
Conditions”). 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.
The simple average of the Daily VWAP (as defined in the December
19, 2019 Warrants) for the 10 consecutive trading days from January
14, 2021 to January 28, 2021, inclusive, was $1.99, satisfying the
first Series B 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 exercise of December 19, 2019 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 B
Preferred Stock is immediately convertible, with a credit to
additional paid-in capital. The relative fair value of the warrants
issued with the Series B 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.
Note 8 – Common Stock Options and Restricted Stock Units
(RSU’s)
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 (the “Omnibus
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, 2020 was
determined to be $378,422 using the Black-Scholes-Merton
option-pricing model based on the following assumptions: (i)
volatility rate of 94% to 119%, (ii) discount rate of 0%, (iii)
zero expected dividend yield, and (iv) expected life of 10 years. A
summary of option activity under the Company’s Omnibus Plan
as of December 31, 2020, 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, 2019
|
3,449,319
|
$
2.32
|
8.26
|
|
Granted
|
327,918
|
1.26
|
9.26
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
|
Cancelled or
expired
|
(207,530
)
|
-
|
-
|
|
Balance outstanding
at December 31, 2020
|
3,569,707
|
$
2.13
|
7.50
|
|
Exercisable at
December 31, 2020
|
1,458,069
|
$
2.83
|
6.60
|
Restricted Stock Units
A restricted stock unit grants a participant the right to receive
one share of common stock, following the completion of the
requisite service period. Restricted stock units are classified as
equity. Compensation cost is based on the Company’s stock
price on the grant date and is recognized on a straight-line basis
over the vesting period for the entire award.
As a cash-conserving measure taken in light of the adverse economic
conditions caused by the COVID-19 pandemic, in April 2020 the
Company reduced the cash salaries of members of management by 33%
for the remainder of 2020, including the salaries of its named
executive officers. In lieu of cash, the Company paid this portion
of management salaries in the form of restricted stock units (the
“RSU’s”) that vested over the remainder of the
year. Additionally, the Company amended its Non-Employee Director
Compensation Policy to provide that its non-employee
directors’ annual retainers for the second, third and fourth
fiscal quarters of 2020 would also be paid in in the form of
RSU’s rather than cash.
F-14
On April 9, 2020, the Company granted 674,019 RSU’s to
non-employee directors and certain members of management. The
461,146 RSU’s granted to management vested daily over the
term through December 31, 2020. The 212,873 RSU’s granted to
non-employee directors vested in three equal quarterly installments
on the last date of the second, third and fourth fiscal quarters of
2020. The total fair value of the RSU’s granted on April 9,
2020 was $471,813, based on the grant date closing price of $0.70
per share.
As of December 31, 2020 the Company had issued and vested the
following RSU’s:
|
|
Restricted Stock
Units Outstanding
|
Weighted Average
Grant Date Fair Value
|
|
Balance
Outstanding at December 31, 2019
|
-
|
$
-
|
|
Granted
|
674,019
|
0.70
|
|
Vested
/ Released
|
(674,019
)
|
-
|
|
Forfeited
|
-
|
-
|
|
Cancelled
or expired
|
-
|
-
|
|
Balance
outstanding at December 31, 2020
|
-
|
$
-
|
Note 9 – Common Stock Warrants
Warrant Conversions and Consent Solicitation
Certain holders of our warrants issued in private placements in (i)
June 2018, exercisable for an aggregate of 283,337 shares of common
stock, (ii) July 2019, exercisable for an aggregate of 1,910,540
shares of common stock, and (iii) December 2019, exercisable for an
aggregate of 8,958,358 shares of common stock (collectively, the
“Private Warrants”) indicated to the Company that they
were willing to exercise their Private Warrants at reduced exercise
prices. Our board of directors approved the Company’s
partially waiving the exercise prices of Private Warrants to
provide for reduced exercised prices which resulted in a deemed
dividend. Prices were subsequently agreed upon between the Company
and each exercising warrant holder, and the Company obtaining
stockholder approval for the issuance of an aggregate number of
shares of the Company’s common stock upon the exercise of
Private Warrants greater than 19.99% of the number of shares
outstanding prior to any such issuance, in compliance with Nasdaq
Listing Rule 5635(d).
During the year ended December 31, 2020, the Company issued an
aggregate of 7,098,108 shares of its common stock upon Private
Warrant exercises for net proceeds of $4,757,011.
The following table summarizes all stock warrant activity of the
Company for the year ended December 31, 2020:
|
|
Number
of Warrants
|
Weighted
Average Exercise Price
|
Weighted
Average Contractual Term (Years)
|
|
Balance outstanding
at December 31, 2019
|
13,496,924
|
$
2.02
|
4.07
|
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
(7,098,108
)
|
0.70
|
3.39
|
|
Forfeited
|
-
|
-
|
-
|
|
Expired
|
(147,713
)
|
-
|
-
|
|
Balance outstanding
at December 31, 2020
|
6,251,103
|
$
2.79
|
2.79
|
|
Exercisable at
December 31, 2020
|
6,251,103
|
$
2.79
|
2.79
|
F-15
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.
Subsequent to the period ended December 31, 2020 and on March 15,
2021, the Company entered into an amendment to the lease, adding
approximately 3,248 rentable square feet, increasing the initial
monthly rent to $15,452 effective May, 2021, and extending the term
of the lease to December 31, 2025.
The Company records the lease asset and lease liability at the
present value of lease payments over the lease term. The lease
typically does 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,
2020 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 4.67 years.
As of December 31, 2020, the maturities of operating lease
liabilities are as follows:
|
|
Operating
Lease
|
|
2021
|
101,752
|
|
2022
|
104,793
|
|
2023
|
107,954
|
|
2024 and
beyond
|
111,192
|
|
Total
|
$
425,691
|
|
Less: amount
representing interest
|
(77,303
)
|
|
Present value of
future minimum lease payments
|
348,388
|
|
Less: current
obligations under leases
|
76,480
|
|
Long-term lease
obligations
|
$
271,908
|
For the years ended December 31, 2020 and 2019, the Company
incurred rent expenses of $120,275 and $105,514,
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 and, on December 27, 2019, entered into an amendment
to the employment agreement. 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 option award 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 option award will
automatically vest. Upon termination for any other reason, the
entire unvested portion of the option award will
terminate.
If Mr. Michelon’s employment is terminated by the Company
without cause or Mr. Michelon terminates his employment for good
reason, 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 April 9, 2020, the Company granted Mr. Michelon 123,064
restricted stock units in lieu of $86,145 of his cash salary. The
restricted stock units vested on a daily basis through December 31,
2020.
F-16
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 and, on December 27, 2019,
entered into an amendment to the employment agreement. The 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 award 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 option
award will automatically vest. Upon termination for any other
reason, the entire unvested portion of the option award will
terminate.
If Mr. Thornton’s employment is terminated by the Company
without cause or Mr. Thornton terminates his employment for good
reason, 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 April 9, 2020, the Company granted Mr. Thornton 96,213
restricted stock units in lieu of $67,349 of his cash salary. The
restricted stock units vested on a daily basis through December 31,
2020.
David Wells
– On May
13, 2019, the Company entered into an employment agreement with
David Wells that superseded a consulting agreement between the
Company and StoryCorp Consulting, pursuant to which Mr. Wells
provided services to the Company as its Chief Financial Officer.
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.
On April 9, 2020, the Company granted Mr. Wells 79,653 restricted
stock units in lieu of $55,757 of his cash salary. The restricted
stock units vested on a daily basis through December 31,
2020.
Litigation
From time to time the Company may become a party to litigation in
the normal course of business. As of December 31, 2020, there were
no legal matters that management believes would have a material
effect on the Company’s financial position or results of
operations.
F-17
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, 2020 and 2019 are summarized
below.
|
|
2020
|
2019
|
|
Net operating loss
carryforward
|
$
(11,827,295
)
|
$
(8,106,070
)
|
|
Stock based
compensation
|
150,595
|
--
|
|
Fair value of
options
|
395,996
|
289,528
|
|
Total deferred tax
assets
|
(11,280,704
)
|
(7,816,542
)
|
|
Valuation
allowance
|
$
11,280,704
|
$
7,816,542
|
|
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,
2020 and 2019, 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, 2020 and 2019 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,
2020 and 2019.
|
|
2020
|
2019
|
|
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, 2020, the Company has available net operating loss
carryforwards for federal and state income tax purposes of
approximately $43.4 million, which $27.4 million has an indefinite
life and $16 million will begin to expire in 2027 through
2037.
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 2020. 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, 2020 and 2019 and
therefore the entity had no significant impact on the year-end 2020
and 2019 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.
F-18
Note 12 – Subsequent Events
Common Stock Issued
Subsequent to the period ended December 31, 2020, the Company
issued a total of 3,914,217 shares of common stock in return
for net proceeds of $10,099,525 from sales under the 2021
Ascendiant ATM Agreement (defined below).
Subsequent to the year ended December 31, 2020, the Company issued
an aggregate of 3,567,899 shares of its common stock upon Private
Warrant exercises for gross proceeds of $2,918,472.
Nasdaq Qualification Notice
On February 2, 2021, the Company received written notice from the
Listing Qualifications Staff of The Nasdaq Stock Market LLC
(“Nasdaq”) notifying the Company that for at least ten
consecutive business days, from January 15, 2021 to February 1,
2021, the closing bid price for the Company’s common stock
was $1.00 per share or greater. Accordingly, the written notice
stated that the Company had regained compliance with the minimum
bid price listing requirement set forth under Nasdaq Listing Rule
5550(a)(2).
ATM Agreement
On February 19, 2021, the Company entered into an at-the-market
equity offering sales agreement (the “2021 Ascendiant ATM
Agreement”) with Ascendiant Capital Markets, LLC
(“Ascendiant”) to sell shares of common stock for
aggregate gross proceeds of up to $12.6 million, from time to time,
through an “at-the-market” equity offering program
under which Ascendiant acts as sales agent. Pursuant to the 2021
Ascendiant ATM Agreement, Ascendiant may sell the shares in sales
deemed to be “at-the-market” equity offerings as
defined in Rule 415 under the Securities Act, including sales made
directly on or through the Nasdaq Capital Market. If agreed to in a
separate terms agreement, the Company may sell shares to Ascendiant
as principal at a purchase price agreed upon by Ascendiant and the
Company. Ascendiant may also sell shares in negotiated transactions
with our prior approval.
Office Lease
On March 15, 2021, the Company entered into an amendment to its
Gross Lease with Green Court LLC (the “Lease
Amendment”), adding approximately 3,248 rentable square feet,
increasing the initial monthly rent to $15,452 effective May 1,
2021, and extending the term of the lease to December 31, 2025.
This summary of the Lease Amendment is qualified in its entirety by
the copy of the Lease Amendment attached hereto as Exhibit
10.18.
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, 2020, 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, 2020: 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, 2020.
Continuing Remediation Efforts
During
the year ended December 31, 2020 the Company:
●
continued
drafting certain documents which outline operating procedures which
it intends to adopt during the current year;
●
engaged
on a project basis an outside firm with expertise in the area of
proper controls and procedures;
●
installed
software systems that support improved controls over accounts
payable and payments; and
●
hired
on a part-time basis additional staffing to support the financial
reporting process.
To
remediate its internal control weakness, management intends to
implement the following measures during 2021:
●
Add
additional accounting personnel or outside consultants to properly
segregate duties and to effect timely, accurate preparation of the
financial statements; and
●
Complete
the development of and maintain adequate written accounting
policies and procedures.
This
Annual Report on Form 10-K does not include an attestation report
of our independent registered public accounting firm on our
internal control over financial reporting due to an exemption
established by the JOBS Act for
“emerging growth companies.”
Changes in Internal Control of Financial Reporting
During
the quarter ended December 31, 2020, except as described above
under “Continuing Remediation Efforts,” there were no
changes that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
I
tem 9B. Other
Information.
Not
applicable.
48
PART III
The
information required by this Item is incorporated by reference to
our Proxy Statement on Schedule 14A relating to our 2021 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, 2020.
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 2021 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, 2020.
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 2021 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, 2020.
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 2021 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, 2020.
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 2021 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, 2020.
49
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
|
10.2
|
08/14/2020
|
|
|
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
|
|
50
|
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
|
|
|
10.15
|
Amendment
4 to Collaborative Research Agreement, dated December 16, 2020, by
and between the Company and General Electric Company
|
|
8-K
|
10.1
|
12/21/20
|
|
10.16
|
Gross
Lease, dated January 1, 2015, between the Company and Green Court
LLC
|
|
S-1
|
10.18
|
11/21/16
|
|
10.17
|
Amendment
to Gross Lease, dated October 10, 2017, by and between the Company
and Green Court LLC
|
|
10-Q
|
10.2
|
05/15/18
|
|
Second
Amendment to Lease, dated March 15, 2021, by and between the
Company and Green Court LLC
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
10.19
|
Sublicense
Agreement, dated August 2, 2007, by and between the Company and
Optosonics, Inc.
|
|
S-1
|
10.19
|
11/21/16
|
|
10.20
|
Amendment
to Sublicense Agreement, dated January 18, 2011, by and between the
Company and Optosonics, Inc.
|
|
S-1
|
10.20
|
11/21/16
|
|
10.21
|
Master
Services Agreement, dated October 24, 2017, by and between the
Company and CriTech Research, Inc.
|
|
10-K
|
10.15
|
03/20/18
|
|
10.22
|
Consulting
Agreement, dated October 31, 2017, by and between the Company and
StarFish Product Engineering, Inc.
|
|
10-K
|
10.16
|
03/20/18
|
|
10.23
|
Employment
Agreement, dated May 13, 2019, by and between the Company and David
Wells*
|
|
10-Q
|
10.2
|
05/14/19
|
|
10.24
|
Employment
Agreement, dated April 20, 2019, by and between the Company and
Renaud Maloberti*
|
|
10-Q
|
10.2
|
08/08/19
|
|
10.25
|
U.S.
Small Business Administration Paycheck Protection Program Note,
issued by the Company to First Republic Bank
|
|
10-Q
|
10.2
|
05/14/2020
|
|
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
|
|
|
|
|
|
24.1
|
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 16. Form 10-K
Summary
None.
51
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 25, 2021
|
By:
|
/s/ Francois
Michelon
|
|
|
|
|
Francois
Michelon
|
|
|
|
|
Chief
Executive Officer and Director
(Principal
Executive Officer)
|
|
POWER 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.
|
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Francois Michelon
|
|
Chief
Executive Officer and Director (Principal Executive
Officer)
|
|
March
25, 2021
|
|
Francois
Michelon
|
|
|
|
|
|
|
|
|
|
|
|
/s/
David Wells
|
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
|
March
25, 2021
|
|
David
Wells
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Louis J. Basenese
|
|
Director
|
|
March
25, 2021
|
|
Louis
J. Basenese
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Anthony DiGiandomenico
|
|
Director
|
|
March
25, 2021
|
|
Anthony
DiGiandomenico
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Michael Harsh
|
|
Director
|
|
March
25, 2021
|
|
Michael
Harsh
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Alexander Tokman
|
|
Director
|
|
March
25, 2021
|
|
Alexander
Tokman
|
|
|
|
|
|
|
|
|
|
|
52
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 Bank LoansNote 7 Capital StockNote 8 Common Stock Options and Restricted Stock Units (rsu S)Note 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 16. Form 10-k Summary