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-Q
(Mark One)
☒
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2020
OR
☐
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
COMMISSION FILE NUMBER 001-37969
ENDRA LIFE SCIENCES INC.
(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 of incorporation)
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(I.R.S. Employer Identification No.)
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3600 Green Court, Suite 350, Ann Arbor, MI 48105-1570
(Address of principal executive office)
(
Zip code
)
(734) 335-0468
(Registrant’s telephone number, including area
code)
Securities registered pursuant to Section 12(b) of the
Act:
|
Title of each class
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Trading Symbol(s)
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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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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 every
Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes
☒
No
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, smaller reporting
company or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the
Exchange Act:
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Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☒
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Smaller
reporting company
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☒
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Emerging
growth company
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☒
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☒
As of May 14, 2020, there were 14,504,764
shares
of our common stock, par value
$0.0001 per share, outstanding.
ENDRA LIFE SCIENCES INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2020
INDEX
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PAGE
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26
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26
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26
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26
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26
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26
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26
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SIGNATURES
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28
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EXHIBIT INDEX
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27
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P
ART I - FINANCIAL
INFORMATION
I
tem 1. Financial
Statements
ENDRA Life Sciences
Inc.
Condensed Consolidated Balance Sheets
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March
31,
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December
31,
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Assets
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2020
|
2019
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Assets
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(unaudited)
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Cash
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$
3,102,728
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$
6,174,207
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Prepaid
expenses
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373,254
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116,749
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Inventory
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174,935
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113,442
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Other current
assets
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121,951
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130,701
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Total Current
Assets
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3,772,868
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6,535,099
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Other
Assets
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Fixed assets,
net
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237,015
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236,251
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Right of use
assets
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389,004
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404,919
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Total
Assets
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$
4,398,887
|
$
7,176,269
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Liabilities
and Stockholders’ Equity
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Current
Liabilities
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Accounts payable
and accrued liabilities
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$
1,444,035
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$
1,708,525
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Convertible notes
payable, net of discount
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38,402
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298,069
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Lease liabilities,
current portion
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68,608
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66,193
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Total Current
Liabilities
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1,551,045
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2,072,787
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Long
Term Debt
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Lease
liabilities
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325,804
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342,812
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Total Long Term
Debt
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325,804
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342,812
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Total
Liabilities
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1,876,849
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2,415,599
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Stockholders’
Equity
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Preferred stock
series A, $0.0001 par value; 10,000 shares authorized; 2,441.92
shares issued and outstanding
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1
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1
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Preferred stock
series B, $0.0001 par value; 1,000 shares authorized; 121.58 shares
issued and outstanding
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-
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-
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Common stock,
$0.0001 par value; 50,000,000 shares authorized; 13,553,005 and
8,421,401shares issued and outstanding
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1,355
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842
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Additional paid in
capital
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50,982,080
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49,933,736
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Stock
payable
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78,836
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43,528
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Accumulated
deficit
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(48,540,234
)
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(45,217,437
)
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Total
Stockholders’ Equity
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2,522,038
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4,760,670
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Total
Liabilities and Stockholders’ Equity
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$
4,398,887
|
$
7,176,269
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
3
ENDRA Life Sciences
Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
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Three Months
Ended
|
Three Months
Ended
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March
31,
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March
31,
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2020
|
2019
|
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Operating
Expenses
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Research and
development
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$
1,518,146
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$
1,773,498
|
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Sales and
marketing
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114,955
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56,818
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General and
administrative
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1,467,745
|
916,903
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Total operating
expenses
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3,100,846
|
2,747,219
|
|
|
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Operating
loss
|
(3,100,846
)
|
(2,747,219
)
|
|
|
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|
|
Other
Expenses
|
|
|
|
Amortization of
debt discount
|
(228,568
)
|
-
|
|
Other income
(expense)
|
6,617
|
(1,517
)
|
|
Total other
expenses
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(221,951
)
|
(1,517
)
|
|
|
|
|
|
Loss from
operations before income taxes
|
(3,322,797
)
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(2,748,736
)
|
|
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|
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Provision for
income taxes
|
-
|
-
|
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Net
Loss
|
$
(3,322,797
)
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$
(2,748,736
)
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Net
loss per share – basic and diluted
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$
(0.29
)
|
$
(0.37
)
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Weighted
average common shares – basic and diluted
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11,508,843
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7,422,642
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
ENDRA Life Sciences
Inc.
Condensed Consolidated Statements of Stockholders’
Equity
(Unaudited)
|
Three Months Ended March 31, 2019
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Series A
Convertible
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Series B
Convertible
|
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||
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Preferred
Stock
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Preferred
Stock
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Common
stock
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|||
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Shares
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Amount
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Shares
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Amount
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Shares
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Amount
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Additional
Paid in Capital
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Stock
Payable
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Accumulated
Deficit
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Total
Stockholders'
Equity
|
|
Balance as
of December 31, 2018
|
-
|
$
-
|
-
|
$
-
|
7,422,642
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$
742
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$
33,939,162
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$
-
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$
(27,691,696
)
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$
6,248,208
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Fair value of vested stock
options
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-
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-
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-
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-
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-
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-
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302,268
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-
|
-
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302,268
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Net loss
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-
|
-
|
-
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-
|
-
|
-
|
-
|
-
|
(2,748,736
)
|
(2,748,736
)
|
|
Balance as
of March 31, 2019
|
-
|
$
-
|
-
|
$
-
|
7,422,642
|
$
742
|
$
34,241,430
|
$
-
|
$
(30,440,432
)
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$
3,801,740
|
|
Three Months Ended March 31, 2020
|
Series A
Convertible
|
Series B
Convertible
|
|
|
Additional
|
|
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Total
|
||
|
|
Preferred
Stock
|
Preferred
Stock
|
Common
stock
|
Paid
in
|
Stock
|
Accumulated
|
Stockholders'
|
|||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
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Capital
|
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
|
(3,896.570
)
|
-
|
-
|
-
|
4,520,982
|
452
|
37,471
|
(37,923
)
|
-
|
-
|
|
Series B Convertible Preferred Stock
converted to common stock
|
-
|
-
|
(230.133
)
|
-
|
234,080
|
23
|
811
|
(835
)
|
-
|
-
|
|
Common stock issued for note
conversions
|
-
|
-
|
-
|
-
|
331,441
|
33
|
493,814
|
-
|
-
|
493,847
|
|
Common stock issued for warrant
exercise
|
-
|
-
|
-
|
-
|
45,101
|
5
|
39,233
|
-
|
-
|
39,238
|
|
Fair value of vested stock
options
|
-
|
-
|
-
|
-
|
-
|
-
|
511,080
|
-
|
-
|
511,080
|
|
Stock to be issued, Preferred
Dividend
|
-
|
-
|
-
|
-
|
-
|
-
|
(34,066
)
|
34,066
|
-
|
-
|
|
Stock to be issued,
Consultant
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
40,000
|
-
|
40,000
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,322,797
)
|
(3,322,797
)
|
|
Balance as of
March 31, 2020
|
2,441.920
|
$
1
|
121.578
|
$
-
|
13,553,005
|
$
1,355
|
$
50,982,080
|
$
78,836
|
$
(48,540,234
)
|
$
2,522,038
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
5
ENDRA Life Sciences
Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
Three Months Ended
|
Three Months Ended
|
|
|
March 31,
|
March 31,
|
|
|
2020
|
2019
|
|
Cash
Flows from Operating Activities
|
|
|
|
Net
loss
|
$
(3,322,797
)
|
$
(2,748,736
)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation and
amortization
|
21,586
|
19,632
|
|
Common stock,
options and warrants issued for services
|
511,080
|
302,268
|
|
Amortization of
debt discount
|
228,568
|
-
|
|
Amortization of
right of use assets
|
15,915
|
-
|
|
Stock payable for
investor relations
|
40,000
|
-
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Decrease (increase)
in prepaid expenses
|
(256,505
)
|
40,354
|
|
Decrease in lease
liability
|
(14,593
)
|
-
|
|
Increase in
inventory
|
(61,493
)
|
(14,831
)
|
|
Increase in other
asset
|
8,750
|
-
|
|
Increase in
accounts payable and accrued liabilities
|
(256,878
)
|
(139,349
)
|
|
Net cash used in
operating activities
|
(3,088,367
)
|
(2,540,662
)
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
Purchases of fixed
assets
|
(22,350
)
|
(5,239
)
|
|
Net cash used in
investing activities
|
(22,350
)
|
(5,239
)
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
Proceeds from
warrant exercise
|
39,238
|
-
|
|
Net cash provided
by financing activities
|
39,238
|
-
|
|
|
|
|
|
Net decrease in
cash
|
(3,071,479
)
|
(2,545,901
)
|
|
|
|
|
|
Cash, beginning of
period
|
6,174,207
|
6,471,375
|
|
|
|
|
|
Cash,
end of period
|
$
3,102,728
|
$
3,925,474
|
|
|
|
|
|
Supplemental
disclosures of cash items
|
|
|
|
Interest
paid
|
$
1,920
|
$
-
|
|
Income tax
paid
|
$
-
|
$
-
|
|
|
|
|
|
Supplemental
disclosures of non-cash items
|
|
|
|
Conversion of
convertible notes and accrued interest
|
$
493,814
|
$
-
|
|
Conversion of
Series A Convertible Preferred Stock
|
$
(452
)
|
$
-
|
|
Conversion of
Series B Convertible Preferred Stock
|
$
(23
)
|
$
-
|
|
Stock dividend
payable
|
$
34,066
|
$
-
|
|
Right of use
asset
|
$
389,004
|
$
-
|
|
Lease
liability
|
$
394,412
|
$
-
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
6
ENDRA Life Sciences Inc.
Notes to Condensed Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
(Unaudited)
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.
Note 2 – Summary of Significant Accounting
Policies
Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of
contingent liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
Management makes estimates that affect certain accounts including
deferred income tax assets, accrued expenses, fair value of equity
instruments and reserves for any other commitments or
contingencies. Any adjustments applied to estimates are recognized
in the period in which such adjustments are
determined.
Principles of Consolidation
The Company’s consolidated financial statements include all
accounts of the Company and its consolidated subsidiary and/or
entities as of reporting period ending date(s) and for the
reporting period(s) then ended. All inter-company balances and
transactions have been eliminated.
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements and related notes have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission
(the “SEC”). Accordingly, certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and
regulations. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the
three months ended March 31, 2020 are not necessarily indicative of
the results that may be expected for the year ended December 31,
2020. The balance sheet at December 31, 2019 has been derived from
the audited financial statements at that date. For further
information, refer to the financial statements and footnotes
thereto included in ENDRA Life Sciences Inc. annual financial
statements for the twelve months ended December 31, 2019 included
in the Company’s Annual Report on Form 10-K filed with the
SEC on March 26, 2020.
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 March 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.
7
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.
Revenue Recognition
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2014-09, “Revenue from Contracts with
Customers” (“ASC Topic 606”). This standard
provides a single set of guidelines for revenue recognition to be
used across all industries and requires additional disclosures. The
updated guidance introduces a five-step model to achieve its core
principal of the entity recognizing revenue to depict the transfer
of goods or services to customers at an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. The Company adopted the
updated guidance effective January 1, 2018 using the full
retrospective method. The new standard did not have a material
impact on its financial position and results of operations, as it
did not change the manner or timing of recognizing
revenue.
Under ASC Topic 606, in order to recognize revenue, the Company is
required to identify an approved contract with commitments to
perform respective obligations, identify rights of each party in
the transaction regarding goods to be transferred, identify the
payment terms for the goods transferred, verify that the contract
has commercial substance and verify that collection of
substantially all consideration is probable. The adoption of ASC
Topic 606 did not have an impact on the Company’s operations
or cash flows.
Research and Development Costs
The Company follows FASB Accounting Standards Codification
(“ASC”) Subtopic 730-10, “Research and
Development”. Research and development costs are charged to
the statement of operations as incurred. During the three months
ended March 31, 2020 and 2019, the Company incurred $1,518,146 and
$1,773,498 of expenses related to research and development costs,
respectively.
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 19,992,774
and
24
,949,725
potentially dilutive
shares, which include shares of common stock issuable upon the
exercise or conversion of outstanding preferred stock, stock
options, warrants, and convertible notes, as of March 31, 2020
and
December 31, 2019,
respectively.
The potentially dilutive shares, which are excluded from the
determination of basic and diluted net loss per share as their
effect is anti-dilutive, are as follows:
|
|
March
31,
2020
|
December
31,
2019
|
|
Options to purchase
common stock
|
3,579,737
|
3,449,319
|
|
Warrants to
purchase common stock
|
13,451,823
|
13,496,924
|
|
Shares issuable
upon conversion of notes
|
31,603
|
362,568
|
|
Shares issuable
upon conversion of Series A Preferred Stock
|
2,806,805
|
7,285,651
|
|
Shares issuable
upon conversion of Series B Preferred Stock
|
122,806
|
355,263
|
|
Potentially
dilutive shares excluded
|
19,992,774
|
24,949,725
|
8
Fair Value Measurements
Disclosures about fair value of financial instruments require
disclosure of the fair value information, whether or not recognized
in the balance sheet, where it is practicable to estimate that
value.
In accordance with ASC Topic 820, “Fair Value Measurements
and Disclosures,” the Company measures certain financial
instruments at fair value on a recurring basis. ASC Topic 820
defines fair value, established a framework for measuring fair
value in accordance with accounting principles generally accepted
in the United States, and expands disclosures about fair value
measurements.
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC Topic 820
established a three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements).
These tiers include:
●
Level 1, defined as
observable inputs such as quoted prices for identical instruments
in active markets;
●
Level 2, defined as
inputs other than quoted prices in active markets that are either
directly or indirectly observable such as quoted prices for similar
instruments in active markets or quoted prices for identical or
similar instruments in markets that are not active;
and
●
Level 3, defined as
unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions, such
as valuations derived from valuation techniques in which one or
more significant inputs or significant value drivers are
unobservable.
Financial assets are considered Level 3 when their fair values are
determined using pricing models, discounted cash flow methodologies
or similar techniques and at least one significant model assumption
or input is unobservable.
The carrying amounts of the Company’s financial assets and
liabilities, including cash, accounts receivable, prepaid expenses,
accounts payable, accrued expenses, and other current liabilities,
approximate their fair values because of the short maturity of
these instruments. The fair value of notes payable and convertible
notes approximates their fair values since the current interest
rates and terms on these obligations are the same as prevailing
market rates.
Share-based Compensation
The Company’s 2016 Omnibus Incentive Plan (the “Omnibus
Plan”) permits the grant of stock options and other
share-based awards to its employees, consultants and non-employee
members of the board of directors. Each January 1 the pool of
shares available for issuance under the Omnibus Plan automatically
increases by an amount equal to the lesser of (i) the number of
shares necessary such that the aggregate number of shares available
under the Omnibus Plan equals 25% of the number of fully-diluted
outstanding shares on the increase date (assuming the conversion of
all outstanding shares of preferred stock and other outstanding
convertible securities and exercise of all outstanding options and
warrants to purchase shares) and (ii) if the board of directors
takes action to set a lower amount, the amount determined by the
board. On January 1, 2020, the pool of shares issuable under the
Omnibus Plan automatically increased by 3,202,280 shares from
2,649,378 shares to 5,861,658. As of March 31, 2020, there were
2,281,921 shares of common stock remaining available for issuance
under the Omnibus Plan.
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).
9
Beneficial Conversion Feature
If the
conversion feature of conventional convertible debt provides for a
rate of conversion that is below market value on the date of
issuance, this feature is characterized as a beneficial conversion
feature (“BCF”). A BCF is recorded by the Company as a
debt discount pursuant to ASC Topic 470-20 “Debt with
Conversion and Other Options.” In those circumstances, the
convertible debt is recorded net of the discount related to the BCF
and the Company amortizes the discount to interest expense over the
life of the debt using the effective interest method.
If the Company determines the instrument meets the guidance under
ASC Topic 480, the instrument is accounted for as a liability with
a respective debt discount. The Company has previously recorded
debt discounts in connection with raising funds through the
issuance of promissory notes. These costs are amortized to noncash
interest expense over the life of the debt. If a conversion of the
underlying debt occurs, a proportionate share of the unamortized
amounts is immediately expensed. See Note 6, Convertible Notes, for
further discussion on the Company’s accounting treatment for
the convertible notes.
Going Concern
The
Company’s financial statements are prepared using accounting
principles generally accepted in the United States (“U.S.
GAAP”) applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal
course of business. The Company has limited commercial experience
and had a cumulative net loss from inception to March 31, 2020 of
$48,540,234. The Company had working capital of $2,221,823 as of
March 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 March 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 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” 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 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
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from
Contracts with Customers.” ASU 2014-09 is a comprehensive
revenue recognition standard that superseded nearly all previous
revenue recognition guidance under U.S. GAAP and replaced it with a
principle-based approach for determining revenue recognition. Under
ASU 2014-09, revenue is recognized when a customer obtains control
of promised goods or services and is recognized in an amount that
reflects the consideration which the entity expects to receive in
exchange for those goods or services. In addition, the standard
requires disclosure of the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers.
The FASB has since issued ASU 2016-08, ASU 2016-10, ASU 2016-11,
ASU 2016-12, and ASU 2016-20, all of which clarify certain
implementation guidance within ASU 2014-09. ASU 2014-09 is
effective for interim and annual periods beginning after December
15, 2017. The standard can be adopted either retrospectively to
each prior reporting period presented (full retrospective method),
or retrospectively with the cumulative effect of initially applying
the guidance recognized at the date of initial application (the
cumulative catch-up transition method). The Company has reviewed
ASU 2014-09 and using the full retrospective method has determined
that its adoption has had no impact on its financial position,
results of operations or cash flows. The Company adopted the
provisions of this standard in the first quarter of fiscal
2018.
In February 2016, the FASB issued ASU No. 2016-02,
“Leases.” ASU 2016-02 requires a lessee to record a
right of use asset and a corresponding lease liability on the
balance sheet for all leases with terms longer than 12 months. ASU
2016-02 is effective for all interim and annual reporting periods
beginning after December 15, 2018. Early adoption is permitted. A
modified retrospective transition approach is required for lessees
for capital and operating leases existing at, or entered into
after, the beginning of the earliest period presented in the
financial statements. The Company evaluated the impact that the
application of the new standard has on its consolidated financial
statements and related disclosures, and determined that it should
record a total lease liability of $431,363, with a corresponding
right of use asset valued at $430,681. The Company adopted the
provisions of this standard in the first quarter of fiscal
2019.
Other recent accounting pronouncements issued by the FASB,
including its Emerging Issues Task Force, the American Institute of
Certified Public Accountants, and the SEC, did not or in
management’s opinion will not have a material impact on the
Company’s present or future consolidated financial
statements.
10
Note 3 – Inventory
As of March 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 March 31, 2020, the Company had no orders
pending for the sale of a TAEUS system.
As of March 31, 2020 and December 31,
2019, the Company had
inventory valued at
$174,935 and $113,442, respectively.
Note 4 – Fixed Assets
As of
March 31, 2020 and December 31, 2019, fixed assets consisted of the
following:
|
|
March
31,
2020
|
December
31,
2019
|
|
Property, leasehold
and capitalized software
|
$
684,418
|
$
679,179
|
|
TAEUS development
and testing
|
60,708
|
43,596
|
|
Accumulated
depreciation
|
(508,111
)
|
(486,524
)
|
|
Fixed assets,
net
|
$
237,015
|
$
236,251
|
Depreciation
expense for the three months ended March 31, 2020 and 2019 was
$21,586 and $19,632, respectively.
Note 5 – Accounts Payable and Accrued
Liabilities
As of
March 31, 2020 and December 31, 2019, current liabilities consisted
of the following:
|
|
March
31,
2020
|
December
31,
2019
|
|
Accounts
payable
|
$
1,240,687
|
$
1,278,431
|
|
Accrued
payroll
|
95,656
|
94,862
|
|
Accrued
bonuses
|
97,114
|
295,794
|
|
Accrued employee
benefits
|
5,750
|
5,750
|
|
Accrued
interest
|
4,828
|
9,738
|
|
Insurance premium
financing
|
-
|
23,950
|
|
Total
|
$
1,444,035
|
$
1,708,525
|
Note 6 – Convertible Notes
July 2019 Notes
On July 26, 2019 the Company conducted a private placement offering
in which the Company sold senior secured convertible promissory
notes (the “July 2019 Notes”) and warrants exercisable
for shares of the Company’s common stock (the “July
2019 Warrants”) to accredited investors for a purchase price
approximately $2.8 million. The purchase price covered the purchase
of $2,587,895 aggregate principal amount of July 2019 Notes and
July 2019 Warrants exercisable for an aggregate of 1,736,843 shares
of common stock. The net proceeds to the Company were approximately
$2.5 million, after deducting placement agent fees and other
offering expenses.
The Company sold the July 2019 Notes and July 2019 Warrants
pursuant to a Securities Purchase Agreement, dated July 26, 2019,
between the Company and each purchaser. The July 2019 Notes bore
interest at a rate of 10% per annum until maturity on April 26,
2020. Interest was paid in arrears on the outstanding principal
amount on the three month anniversary of the issuance of the July
2019 Notes, and each three month period thereafter, and finally on
the maturity date. Holders of July 2019 Notes were entitled to
convert principal and accrued, unpaid interest on the July 2019
Notes into shares of common stock. The July 2019 Notes were
convertible into common stock at a conversion price per share equal
to $1.49 and were initially convertible into 1,736,843 shares of
common stock.
Each July 2019 Warrant entitles the holder to purchase one share of
common stock for an exercise price per share equal to $1.49. The
July 2019 Warrants are exercisable for an aggregate of 1,736,843
shares of common stock commencing immediately upon issuance and
expire July 26, 2022. The July 2019 Warrants provide for cashless
exercise and customary anti-dilution protection. The terms of the
Placement Agent Warrant (as defined below) are the same as those of
the July 2019 Warrants.
National Securities Corporation (the “Placement Agent”)
acted as placement agent in the offering pursuant to a Placement
Agent Agreement, dated July 9, 2019 (the “Placement Agent
Agreement”). Pursuant to the Placement Agent Agreement, the
Company paid to the Placement Agent a commission of 10% of the
gross proceeds from the offering, reimbursed $30,000 of the
Placement Agent’s expenses and issued to the Placement Agent
a warrant exercisable for 173,685 shares of common stock (the
“Placement Agent
Warrant”).
11
The July 2019 Notes and July 2019 Warrants include embedded
derivatives that require bifurcation from the host contract under
the provisions of ASC 815-40, “Derivatives and
Hedging.” The estimated fair value of the derivative warrant
instruments was calculated using a Black-Scholes valuation model.
At inception, the aggregate relative fair value of the 1,910,538
warrants issued to the investors and the Placement Agent in July
2019 was determined to be $1,993,714 using the Black-Scholes-Merton
Option Pricing model with the following average assumptions: (i)
volatility rate of 111%, (ii) discount rate of 0%, (iii) zero
expected dividend yield, and (iv) expected life of three years. Out
of such amount, $1,126,138 was recorded as debt discount upon
issuance using allocation of proceeds.
At the issuance of the
July 2019 Notes, the effective conversion price was analyzed at
$0.84 per share of common stock and the market price of the shares
on the date of conversion was $1.54 per share. As a result, the
Company recognized aggregate beneficial conversion features of
$1,440,638.
$1,147,257 was
recorded as debt discount upon issuance of the July 2019 Notes
using allocation of proceeds.
As a result, the
Company recorded a note discount of $2,587,895 to account for the
funding cost of $314,500 and the relative fair values of the
warrants’ and the notes’ beneficial conversion
features, which will be amortized as interest over the terms of the
warrants and the notes or in full upon exercise of the warrants and
conversion of the notes.
During the three months ended March 31, 2020, the
Company amortized $228,568 of such discount to interest expense,
and the unamortized discount as of March 31, 2020 was
$3,858.
On December 11, 2019, the Company completed an offering of its
Series A Convertible Preferred Stock (“Series A Preferred
Stock”), described below under Note 7. In connection with the
offering, the Company retired $1,919,008 aggregate principal amount
of the July 2019 Notes and $24,184 in accrued interest, which
amounts were used by the noteholders to purchase an aggregate of
1,690.58 shares of Series A Preferred Stock.
As of March 31, 2020, the Company had a total of $42,260 in
principal amount of July 2019 Notes outstanding, and unamortized
debt discount of $3,858, for a net balance of $38,402 amount of the
July 2019 Notes remaining outstanding.
Note 7 – Capital Stock
At
March 31, 2020, the authorized capital of the Company consisted of
60,000,000 shares of capital stock, consisting of 50,000,000 shares
of common stock with a par value of $0.0001 per share and
10,000,000 shares of preferred stock with a par value of $0.0001
per share. The Company has designated 10,000 shares of its
preferred stock as Series A Preferred Stock and 1,000 shares of its
preferred stock as Series B Preferred Stock, and the remainder of
9,989,000 shares remain authorized but undesignated.
As of
March 31, 2020, there were 13,553,005 shares of common stock,
2,441.92 shares of Series A Preferred Stock, and 121.578 shares of
Series B Preferred Stock issued and outstanding, and a stock
payable balance of $78,836.
During the three months ended March 31, 2020, the Company issued
4,520,982 shares of its common stock upon the conversion of
3,896.570 shares of its
Series A Preferred Stock, and
234,080 shares of its common stock
upon the conversion of 230.133 shares of its
Series B
Preferred Stock
.
During the three months ended March 31, 2020, the Company issued
331,441 shares of its common stock upon the conversion of $493,847
principal amount of, and in respect of accrued interest on, July
2019 Notes.
During the three months ended March 31, 2020, the Company issued
45,101 shares of its common stock upon warrant exercises
valued
at $39,238.
December 2019 Offering of Series A
Preferred Stoc
k
, Common
Stock and Warrants
On
December 11, 2019, the Company completed a private placement
offering in which the Company sold 6,338.49 shares of its Series A
Preferred Stock and 904,526 shares of its common stock, along with
warrants (the “December 11, 2019 Warrants”) exercisable
for an aggregate of 8,190,225 shares of common stock, for
approximately $7.9 million of gross proceeds. The offering was made
pursuant to a Securities Purchase Agreement (the “Purchase
Agreement”), dated as of December 5, 2019, between the
Company and the investors. Pursuant to the Purchase Agreement, each
investor elected whether to receive shares of Series A Preferred
Stock or shares of common stock in the offering. The Company used
approximately $1.9 million of the net proceeds from the offering to
repay debt represented by July 2019 Notes and plans to use the
remaining net proceeds for working capital and general corporate
purposes.
12
In
connection with the closing of the offering, the Company filed a
Certificate of Designations of Series A Convertible Preferred Stock
(the “Series A Certificate of Designations”) with the
Secretary of State of the State of Delaware setting forth the
rights and preferences of the Series A Preferred Stock. Each share
of Series A Preferred Stock has a $1,000 issue price (the
“Issue Price”). Dividends accrue on the Issue Price at
a rate of 6.0% per annum and are payable to holders of Series A
Preferred Stock as, when and if declared by the Company’s
Board of Directors. Shares of Series A Preferred Stock, including
accrued but unpaid dividends, are convertible into common stock at
a conversion price of $0.87 per share. The conversion price is
subject to proportional adjustment for certain transactions
relating to the Company’s capital stock, including stock
splits, stock dividends and similar transactions. Holders of shares
of Series A Preferred Stock vote with the holders of common stock
and are entitled to a number of votes equal to the number of shares
of common stock into which such holder’s shares of Series A
Preferred Stock are then convertible. Holders of Series A Preferred
Stock are entitled to a liquidation preference in the event of any
liquidation, dissolution or winding up of the Company based on
their shares’ aggregate Issue Price and accrued and unpaid
dividends thereon. Holders may convert their shares of Series A
Preferred Stock into common stock at any time and the Company has
the right to cause each holder to convert their shares of Series A
Preferred Stock if at any time (i) the simple average of the daily
volume-weighted average price of Common Stock for 10 consecutive
trading days is greater than $1.74 (as adjusted for stock splits,
stock dividends and similar transactions) and (ii) there is then an
effective registration statement registering under the Securities
Act of 1933, as amended (the “Securities Act”), the
resale of the shares of common stock issuable upon such conversion
of Series A Preferred Stock (the “Series A Forced Conversion
Conditions”).
The
simple average of the Daily VWAP (as defined in the Series A
Certificate of Designations) for the 10 consecutive trading days
from January 8, 2020 to January 22, 2020, inclusive, was $1.82,
satisfying the first Forced Conversion Condition. On January 27,
2020, the SEC declared effective the Company’s Registration
Statement on Form S-3 (File No. 333-235883) registering under the
Securities Act the resale of the shares of common stock issuable
upon the conversion of Series A Preferred Stock, shares of common
stock issued in the offering, and shares of common stock issuable
upon the exercise of December 11, 2019 Warrants and December 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.
The
Securities Purchase Agreement, dated December 5, 2019, includes
customary representations, warranties and covenants. In connection
with the offering, the Company paid to the placement agent a
commission of 8.0% of the gross proceeds from the offering, will
reimburse up to $35,000 of the placement agent’s documented
expenses and issued to the placement agent and its designees
warrants exercisable for an aggregate of 327,606 shares of Common
Stock (the “Series A Placement Agent Warrant”). The
terms of the Series A Placement Agent Warrant are the same as those
of the December 11, 2019 Warrants.
Series A Preferred Stock Deemed Dividend, Beneficial Conversion
Calculation
After
factoring in the relative fair value of the warrants issued in
conjunction with the Series A Preferred Stock, the effective
conversion price is $0.45 per share, compared to the market price
of $0.90 per share on the date of issuance. As a result, a
$4,208,612 beneficial conversion feature was recorded as
a deemed dividend in the consolidated statement of
operations because the Series A Preferred Stock is immediately
convertible, with a credit to additional paid-in capital. The
relative fair value of the warrants issued with the Series A
Preferred Stock of $2,766,941 was recorded as a reduction to the
carrying amount of the preferred stock in the consolidated balance
sheet. The value of the warrants was determined utilizing the
binomial option pricing model using a term of 5 years, a volatility
of 114%, a risk-free interest rate of 1.64%, a 6% rate of
dividends, and a call multiple of 2.
December 2019 Offering of Series B Preferred Stock and
Warrants
On
December 19, 2019, the Company completed a private placement
offering in which the Company sold 351.711 shares of its Series B
Preferred Stock and warrants (the “December 19, 2019
Warrants”) exercisable for an aggregate of 426,316 shares of
the Company’s common stock to the investors for approximately
$405,000 of gross proceeds. The Company plans to use the net
proceeds from the offering for working capital and general
corporate purposes.
13
In
connection with the closing of the offering, the Company filed a
Certificate of Designations of Series B Convertible Preferred Stock
(the “Series B Certificate of Designations”) with the
Secretary of State of the State of Delaware setting forth the
rights and preferences of the Series B Preferred Stock. The Series
B Preferred Stock has substantially the same rights and preferences
as the Series A Preferred Stock, except for a different conversion
price and trading price of common stock at which the Series B
Preferred Stock becomes subject to automatic conversion. Each share
of Series B Preferred Stock has a $1,000 issue price (the
“Issue Price”). Dividends accrue on the Issue Price at
a rate of 6.0% per annum and are payable to holders of Preferred
Stock as, when and if declared by the Company’s Board of
Directors. Shares of Series B Preferred Stock, including accrued
but unpaid dividends, are convertible into Common Stock at a
conversion price of $0.99 per share of common stock. The conversion
price is subject to proportional adjustment for certain
transactions relating to the Company’s capital stock,
including stock splits, stock dividends and similar transactions.
Holders of shares of Series B Preferred Stock vote with the holders
of common stock and are entitled to a number of votes equal to the
number of shares of common stock into which such holder’s
shares of Series A Preferred Stock are then convertible. Holders of
Series B Preferred Stock are entitled to a liquidation preference
in the event of any liquidation, dissolution or winding up of the
Company based on their shares’ aggregate Issue Price and
accrued and unpaid dividends. Such liquidation preference of Series
B Preferred Stock holders is on a pari passu basis with holders of
Series A Preferred Stock. Holders may convert their shares of
Series B Preferred Stock into common stock at any time and the
Company has the right to cause each holder to convert their shares
of Series B Preferred Stock in the event that (i) the average of
the daily volume-weighted average price of Common Stock over any 10
consecutive trading days is greater than $1.98 (as adjusted for
stock splits, stock dividends and similar transactions) and (ii)
there is then an effective registration statement registering under
the Securities Act the resale of the shares of Common Stock
issuable upon such conversion of Preferred Stock (together, the
“Series B Forced Conversion Conditions”).
The
average daily VWAP requirement of the Series B Forced Conversion
Conditions relating to daily volume-weighted average price of our
Common Stock has not yet been satisfied. On January 27, 2020, the
SEC declared effective the Company’s Registration Statement
on Form S-3 (File No. 333-235883) registering under the Securities
Act the resale of the shares of common stock issuable upon the
conversion of Series B Preferred Stock and upon the exercise of
December 19, 2019 Warrants.
Each
December 19, 2019 Warrant entitles the holder to purchase a share
of common stock for an exercise price equal to $0.99. The December
19, 2019 Warrants are exercisable commencing immediately upon
issuance and expire on the date five years after the date of
issuance, unless earlier terminated pursuant to the terms of the
December 19, 2019 Warrant. If, during the term of the December 19,
2019 Warrants, the Series B Forced Conversion Conditions are met,
the Company may deliver notice thereof to the holders of the
December 19, 2019 Warrants and, after a 30-day period following
such notice, any unexercised December 19, 2019 Warrants will be
forfeited. The December 19, 2019 Warrants provide for cashless
exercise in the event there is no effective registration statement
registering under the Securities Act the resale of the shares of
common stock issuable upon exercise of such December 19, 2019
Warrants.
The
Securities Purchase Agreement, dated December 19, 2019, includes
customary representations, warranties and covenants. In connection
with the closing of the offering, the Company paid to the placement
agent in the offering a commission of approximately 8.0% of the
gross proceeds from the offering and issued to the placement agent
and its designees warrants exercisable for an aggregate of 14,211
shares of common stock (the “Series B Placement Agent
Warrant”). The terms of the Series B Placement Agent Warrant
are the same as those of the Warrants.
Series B Preferred Stock Deemed Dividend, Beneficial Conversion
Calculation
After
factoring in the relative fair value of the warrants issued in
conjunction with the Series B Preferred Stock, the effective
conversion price is $0.03 per share, compared to the market price
of $1.36 per share on the date of issuance. As a result, a $11,165
beneficial conversion feature was recorded as a deemed dividend in
the consolidated statement of operations because the Series 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.
14
Note 8 – Common Stock Options
Stock
options are awarded to the Company’s employees, consultants
and non-employee members of the board of directors under the 2016
Omnibus Incentive Plan (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 three months ended March
31, 2020 was determined to be $185,602 using the
Black-Scholes-Merton option-pricing model based on the following
assumptions: (i) volatility rate of 116% 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 March 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
|
130,418
|
0.24
|
2.01
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
|
Cancelled or
expired
|
-
|
-
|
-
|
|
Balance outstanding
at March 31, 2020
|
3,579,737
|
$
2.24
|
7.79
|
|
Exercisable at
March 31, 2020
|
856,172
|
$
4.77
|
5.20
|
Note 9 – Common Stock Warrants
During the three months ended March 31, 2020, the Company issued an
aggregate of 45,101 shares of its common stock upon warrant
exercises valued at $39,238.
The following table summarizes all stock warrant activity of the
Company for the three months ended March 31, 2020:
|
|
Number of
Warrants
|
Weighted Average
Exercise Price
|
Weighted
Average
Remaining
Contractual Term
(Years)
|
|
|
Balance outstanding
at December 31, 2019
|
13,496,924
|
$
2.02
|
4.07
|
|
|
Granted
|
-
|
-
|
-
|
|
|
Exercised
|
(45,101
)
|
0.87
|
4.70
|
|
|
Forfeited
|
-
|
|
-
|
|
|
Expired
|
-
|
-
|
-
|
|
|
Balance outstanding
at March 31, 2020
|
13,451,823
|
$
2.03
|
3.82
|
|
|
Exercisable at
March 31, 2020
|
13,451,823
|
$
2.03
|
3.82
|
|
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,
such that the lease now expires on December 31, 2024.
The
Company records the lease asset and lease liability at the present
value of lease payments over the lease term. The lease typically
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 March 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
March 31, 2020, the maturities of operating lease liabilities are
as follows:
|
|
Operating
Lease
|
|
2020
|
$
74,092
|
|
2021
|
101,752
|
|
2022
|
104,793
|
|
2023
|
107,954
|
|
2024 and
beyond
|
111,192
|
|
Total
|
$
499,784
|
|
Less: amount
representing interest
|
(105,371
)
|
|
Present value of
future minimum lease payments
|
394,412
|
|
Less: current
obligations under leases
|
68,608
|
|
Long-term lease
obligations
|
$
325,804
|
For the three months ended March 31, 2020 and 2019, the Company
incurred rent expenses of $30,288 and $23,188,
respectively.
Employment and Consulting Agreements
Francois Michelon
–
Effective May 12, 2017, the Company entered into an amended and
restated employment agreement with Francois Michelon, the
Company’s Chief Executive Officer and Chairman of the board
of directors. The 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-Q 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, Mr. Michelon will be entitled to receive 12
months’ continuation of his current base salary and a lump
sum payment equal to 12 months of continued healthcare coverage (or
24 months’ continuation of his current base salary and a lump
sum payment equal to 24 months of continued healthcare coverage if
such termination occurs within one year following a change in
control).
Under his employment agreement, Mr. Michelon is eligible to receive
benefits that are substantially similar to those of the
Company’s other senior executive officers.
On December 27, 2019, the Company entered into an amendment to Mr.
Michelon’s employment agreement to provide that (i) Mr.
Michelon’s employment with the Company will continue until
terminated under the terms the employment agreements, and (ii) Mr.
Michelon will each receive certain payments if he is terminated by
the Company without Cause (as defined in the employment agreement
amendment) or he resigns for Good Reason (as defined in the
employment agreement amendment).
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. 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-Q 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, Mr. Thornton will be entitled to receive 12
months’ continuation of his current base salary and a lump
sum payment equal to 12 months of continued healthcare coverage (or
24 months’ continuation of his current base salary and a lump
sum payment equal to 24 months of continued healthcare coverage if
such termination occurs within one year following a change in
control).
Under his employment agreement, Mr. Thornton is eligible to receive
benefits that are substantially similar to those of the
Company’s other senior executive officers.
On December 27, 2019, the Company entered into an amendment to Mr.
Thornton’s employment agreement to provide that (i) Mr.
Thornton’s employment with the Company will continue until
terminated under the terms the employment agreements, and (ii) Mr.
Thornton will each receive certain payments if he is terminated by
the Company without Cause (as defined in the employment agreement
amendment) or he resigns for Good Reason (as defined in the
employment agreement amendment).
David Wells
– On May 12,
2017, the Company entered into a consulting agreement with
StoryCorp Consulting (“StoryCorp”), pursuant to which
David Wells provided services to the Company as its Chief Financial
Officer. Pursuant to the consulting agreement, the Company paid to
StoryCorp a monthly fee of $9,000, and in May 2018 this monthly fee
was increased to $9,540. Additionally, pursuant to the consulting
agreement, the Company granted to Mr. Wells a stock option to
purchase 15,000 shares of common stock in connection with the
closing of the Company’s initial public offering, having an
exercise price per share equal to $5.00 and vesting in twelve equal
quarterly installments, and, for so long as the consulting
agreement was in place, granted to Mr. Wells a stock option to
purchase the same number of shares of common stock with the same
terms on each annual anniversary of the date of the consulting
agreement. In May 2018, the annual stock option amount was
increased and on December 13, 2018, Mr. Wells was granted options
to purchase an additional 35,000 shares of common
stock.
On May
13, 2019, the Company entered into an employment agreement with
David Wells that supersedes the consulting agreement between the
Company and StoryCorp. The employment agreement provides for an
annual base salary of $230,000 and eligibility for an annual cash
bonus to be paid based on attainment of Company and individual
performance objectives to be established by the Company’s
board of directors (in 2019, the amount of such cash bonus if all
goals were achieved would be 30% of the base salary plus base fees
paid to StoryCorp under the consulting agreement). The employment
agreement also provides for eligibility to receive benefits
substantially similar to those of the Company’s other senior
executive officers.
Pursuant
to the employment agreement, on May 13, 2019 Mr. Wells was granted
stock options to purchase 56,000 shares of the Company’s
common stock. The stock options have an exercise price of $1.38 per
share, and vest in three equal annual installments beginning on the
first anniversary of the grant date.
Litigation
From time to time the Company may become a party to litigation in
the normal course of business. There are currently no legal matters
that management believes would have a material effect on the
Company’s financial position or results of
operations.
17
Note 12 – Subsequent Events
COVID-19
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.
Beginning
in March 2020, we undertook temporary precautionary measures
intended to help minimize the risk of the virus to our employees,
including temporarily 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. 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 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.
Paycheck Protection Program
Subsequent
to the period ended Mach 31, 2020, the Company issued a U.S. Small
Business Administration (“SBA”) Paycheck Protection
Program Note (the “Note”) to First Republic Bank (the
“Lender”) for a loan in the amount of $308,600.00 (the
“Loan”) under the Paycheck Protection Program
(“PPP”) promulgated under the Coronavirus Aid, Relief
and Economic Security Act of 2020. The Loan bears interest at a
rate per annum of 1.00%. The term of the Loan is two years, ending
April 22, 2022 (the “Maturity Date”). No payments are
due on the Loan until seven months from April 22, 2020, the date of
first disbursement of the Loan (the “Deferment
Period”), but interest will accrue during the Deferment
Period. Following the Deferment Period, the Company must pay
monthly principal and interest payments on the outstanding
principal balance of the Loan amortized over the term of the Loan
(the “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 may apply to the Lender for the Loan to be forgiven
partially or fully if the funding received is used during the
8-week period following disbursement for payroll costs, covered
rent, and covered utilities, provided that at least 75% of the
forgiven amount has been used for payroll costs. Forgiveness is
based on the Company’s maintaining, or quickly rehiring,
employees and maintaining applicable salary levels. Forgiveness
will be reduced if full-time headcount declines, or if salaries and
wages decrease.
No assurance is
provided that the Company will obtain forgiveness of the Loan in
full or in part.
The
Company may prepay the principal of the 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 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 Note for such repayment.
The
Company did not provide any collateral or personal guarantees for
the Loan, nor did the Company pay any facility charge to the
government or to the Lender.
The
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 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 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 Note, collect all amounts owing from the Company,
or file suit and obtain judgment.
Common Stock Issued
Subsequent
to the period ended March 31, 2020, the Company issued a total
of 929,650 shares of common stock upon the conversion
of an aggregate of 808.796 shares of Series A Convertible
Preferred Stock at the request
of its holder.
Subsequent
to the period ended March 31, 2020 the Company issued a total of
22,099 shares of common stock to a vendor for services which were
valued at $40,000.
18
I
tem 2. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
Forward-Looking Statements
As used
in this Quarterly Report on Form 10-Q (this “Form
10-Q”), unless the context otherwise requires, the terms
“we,” “us,” “our,”
“ENDRA” and the “Company” refer to ENDRA
Life Sciences Inc., a Delaware corporation, and its wholly-owned
subsidiary. The following discussion and analysis of our financial
condition and results of operations should be read in conjunction
with our historical financial statements and related notes thereto
in this Form 10-Q. This Form 10-Q 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,” “could,”
“seek,” “intend,” “plan,”
“estimate,” “anticipate” or other
comparable terms. All statements other than statements of
historical facts included in this Form 10-Q 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 collaborations and strategic
alliances and licensing arrangements; the amount and nature of
competition in our industry; our ability to protect our
intellectual property; potential changes in the healthcare industry
or third-party reimbursement practices; delays and changes in
regulatory requirements, policy and guidelines including potential
delays in submitting required regulatory applications for CE mark
certification or Food and Drug Administration (“FDA”)
approval; our ability to obtain 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; and the
other risks and uncertainties described in the Risk Factors section
of our Annual Report on Form 10-K for the period ended December 31,
2019, as filed with the SEC on March 26, 2020, and in the
Management’s Discussion and Analysis of Financial Condition
and Results of Operations section of this Form 10-Q. 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.
From time to time, we
use press releases, Twitter (@endralifesci) and LinkedIn
(www.linkedin.com/company/endra-inc) to distribute material
information. Our press releases and financial and other material
information are routinely posted to and accessible on the Investors
section of our website, www.endrainc.com. Accordingly, investors
should monitor these channels, in addition to our SEC filings and
public conference calls and webcasts. In addition, investors may
automatically receive e-mail alerts and other information about the
Company by enrolling their e-mail addresses by visiting the
“Email Alerts” section of our website
a
t
investors.endrainc.com
. Information that is contained
in and can be accessed through our website, Twitter posts and
LinkedIn are not incorporated into, and do not form a part of, this
Quarterly Report or any other report or document we file with the
SEC.
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 of our
Nexus 128 system as of January 1, 2019 and stopped providing
service support and parts for all existing Nexus 128 systems as of
July 1, 2019 in order to focus our resources on the development of
our TAEUS technology.
Unlike the near-infrared light pulses used in our legacy Nexus 128
system, our TAEUS technology uses radio frequency
(“RF”) pulses to stimulate tissues, using a small
fraction (less than 1%) of the energy that would be transmitted
into the body during an MRI scan. The use of RF energy allows our
TAEUS technology to penetrate deep into tissue, enabling the
imaging of human anatomy at depths equivalent to those of
conventional ultrasound. The RF pulses are absorbed by tissue and
converted into ultrasound signals, which are detected by an
external ultrasound receiver and a digital acquisition system that
is part of the TAEUS system. The detected ultrasound is processed
into images and other forms of data using our proprietary
algorithms and displayed to complement conventional gray-scale
ultrasound images.
19
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
January 13, 2020, we and GE Healthcare entered into an amendment to
our agreement, extending its term by 12 months to January 14, 2021
and modifying GE Healthcare’s rights of first
offer.
In November 2017, we engaged two firms that specialize in medical
device software development to commence productization of our TAEUS
device targeting NAFLD. The agreements call for these vendors to
provide us with the specialized engineering resources necessary to
translate our current prototype TAEUS device into a clinical
product that meets CE regulatory requirements required for
commercial launch in the European Union followed by FDA submission
for the U.S. market.
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 Conformité Européene
(“CE”) mark approval for our TAEUS FLIP (Fatty Liver
Imaging Probe) System. The CE marking indicates that TAEUS FLIP
System complies with all applicable European Directives and
Regulations in the European Union and other CE mark geographies,
including the 27 EU member states. We next intend to submit to the
FDA an application for approval of the TAEUS FLIP.
Financial Operations Overview
Revenue
No revenue has been generated by our TAEUS technology, which we
have not yet commercially sold.
Cost of Goods Sold
No cost of goods sold has been generated by our TAEUS technology,
which we have not yet commercially sold.
Research and Development Expenses
Our research and development expenses primarily include wages, fees
and equipment for the development of our TAEUS technology platform
and the proposed applications. Additionally, we incur certain costs
associated with the protection of our products and inventions
through a combination of patents, licenses, applications and
disclosures.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of headcount and
consulting costs, and marketing and tradeshow expenses. Currently,
our marketing efforts are through our website and attendance of key
industry meetings and conferences. In connection with the
commercialization of our TAEUS applications, we expect to
build a small sales and marketing team to train and support global
ultrasound distributors, as well as execute traditional marketing
activities such as promotional materials, electronic media and
participation in industry events and conferences.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries
and related expenses for our management and personnel, and
professional fees, such as accounting, consulting and
legal.
20
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,
2020, the pool of shares issuable under the Omnibus Plan
automatically increased by 3,202,280 shares from 2,649,378 shares
to 5,861,658. As of March 31, 2020, there were 2,281,921 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.
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
Three months ended March 31, 2020 and 2019
Revenue
We had
no revenue during the three months ended March 31, 2020 and
2019.
Cost of Goods Sold
There
was no cost of goods sold for each of the three months ended March
31, 2020 and 2019.
21
Research and Development
Research
and development expenses were $1,518,146 for the three months ended
March 31, 2020, as compared to $1,773,498 for the three months
ended March 31, 2019, a decrease of $255,352, or 14%. 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 the TAEUS product and began focusing our spending on
commercialization of the product that has been
developed.
Sales and Marketing
Sales
and marketing expenses were $114,955 for the three months ended
March 31, 2020, as compared to $56,818 for the three months ended
March 31, 2019, an increase of $58,137, or 102%. The increase was
primarily due to additional headcount and pre-selling activities
for our TAEUS product line. Currently, our marketing efforts are
through our website and attendance of key industry meetings. We
expect that our future clinical business will involve hiring and
training additional staff to support our sales efforts. As we seek
to complete the development and commercialization of our TAEUS
applications, we intend to build a small sales and marketing team
to train and support global ultrasound distributors, as well as
execute traditional marketing activities such as promotional
materials, electronic media and participation in industry
conferences.
General and Administrative
Our
general and administrative expenses for the three months ended
March 31, 2020 were $1,467,745, compared to $916,903 for the three
months ended March 31, 2019, an increase of $550,842, or 60%. Our
wage and related expenses for the three months ended March 31, 2020
were $647,442, compared to $408,345 for the three months ended
March 31, 2019. Wage and related expenses in the three months ended
March 31, 2020 included $66,193 for bonuses and $249,585 of stock
compensation expense related to the issuance and vesting of
options, compared to $34,372 for bonuses, $171,837 of stock
compensation expense related to the issuance and vesting of options
for the three months ended March 31, 2019. Our professional fees,
which include legal, audit, and investor relations, for the three
months ended March 31, 2020 were $669,275, compared to $357,837 for
the three months ended March 31, 2019.
Amortization of Debt Discount
During
the three months ended March 31, 2020, we incurred non-cash
expenses of $228,568 related to the amortization of debt discount
incurred as result of our issuance of our convertible notes and
warrants issued in July 2019. There were no such expenses during
the three months ended March 31, 2019.
Net Loss
As a
result of the foregoing, for the three months ended March 31, 2020,
we recorded a net loss of $3,322,797, compared to a net loss of
$2,748,736 for the three months ended March 31, 2019.
Liquidity and Capital Resources
To date
we have funded our operations through private and public sales of
our securities. As of March 31, 2020, we had $3,102,728 in cash. We
have completed the following financing events from January 2019
through March 31, 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
“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. Pursuant to the ATM
Agreement, Wainwright 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, we may sell shares to Wainwright as principal at a
purchase price agreed upon by Wainwright and the Company.
Wainwright may also sell shares in negotiated transactions with our
prior approval. The offer and sale of the shares pursuant to the
ATM Agreement will terminate upon the earlier of (a) the issuance
and sale of all of the shares subject to the ATM Agreement or (b)
the termination of the ATM Agreement by Wainwright or us pursuant
to its terms. As of March 31, 2020, we had not sold any shares of
common stock under the ATM Agreement.
22
We
believe that cash on hand at March 31, 2020 will only be sufficient
to fund our current operations into the third quarter of 2020. We
will need additional capital to execute our commercialization plan
and if we do not raise additional capital in the next several
months we will need to significantly slow or pause our business
activities until such time as we are able to raise additional
capital. We continue to evaluate and manage our capital needs to
support our clinical, regulatory and operational activities and
prepare for the results of our human studies data and EU
commercialization. We are currently exploring potential financing
options that may be available to us, including additional sales of
our common stock through the ATM Agreement and by causing the
mandatory exercise of our warrants issued on December 11, 2019 for
cash. However, we have no commitments to obtain any additional
funds, and there can be no assurance 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.
The
financial statements included in this Form 10-Q have been prepared
assuming we will continue as a going concern, which contemplates
the realization of assets and the settlement of liabilities and
commitments in the normal course of business. As reflected in the
accompanying financial statements, during the three months ended
March 31, 2020, we incurred net losses of $3,322,797 and used cash
in operations of $3,088, 295. 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 three months ended March 31, 2020, we used $3,088,367 of cash
in operating activities primarily as a result of our net loss of
$3,322,797, offset by share-based compensation of $511,080,
amortization of debt discount of $228,568, depreciation expense of
$21,586, amortization of Right of Use assets of $15,915, stock
payable for investor relations of $40,000, and net changes in
operating assets and liabilities of $(582,719).
During
the three months ended March 31, 2019, we used $2,540,662 of cash
in operating activities primarily as a result of our net loss of
$2,748,736, which included non-cash charges for share-based
compensation of $302,268, depreciation expenses of $19,632, and net
changes in operating assets and liabilities of
$113,826.
Investing Activities
During
the three months ended March 31, 2020, the Company used $22,350 in
investing activities related to purchases of
equipment.
During
the three months ended March 31, 2019, the Company used $5,239 in
investing activities related to purchases of
equipment.
Financing Activities
During
the three months ended March 31, 2020, financing activities
provided $39,238, in proceeds from warrant exercises.
During
the three months ended March 31, 2019, there were no cash flows
from financing activities.
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;
●
prepare regulatory
filings required for marketing approval of our NAFLD TAEUS
application in the United States;
●
seek to hire a
small internal marketing team to engage and support channel
partners and clinical customers for our NAFLD TAEUS
application;
●
commence marketing
of our NAFLD TAEUS application;
●
advance development
of our other TAEUS applications; and
●
add operational,
financial and management information systems and personnel,
including personnel to support our product development, planned
commercialization efforts and our operation as a public
company.
23
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 Quarterly
Report on Form 10-Q entitled “Risk Factors” and such
section of our most recently filed Annual Report on Form 10-K. 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 above, 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 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.
Beginning
in March 2020, we undertook temporary precautionary measures
intended to help minimize the risk of the virus to our employees,
including temporarily 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 is paying this
portion of management salaries in the form of restricted stock
units that vest 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 shall 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.
Nasdaq Capital Market Listing
Our
common stock is 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. 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
notification has no immediate effect on the listing of our common
stock. In accordance with Nasdaq Marketplace Rule 5810(c)(3)(A) and
the rule change filed by Nasdaq with the Securities and Exchange
Commission on April 16, 2020, we have a period of 180 calendar days
from July 1, 2020, or until December 28, 2020, to regain compliance
with the minimum bid price requirement. The notification
letter also stated that, in the event we do not regain compliance
with the minimum bid price requirement by December 28,
2020, we may be eligible for additional time. To qualify for
additional time, we would be required to meet the continued listing
requirement for market value of publicly held shares and all other
initial listing standards for The Nasdaq Capital Market, with the
exception of the bid price requirement, and would need to
provide written notice of our intention to cure the deficiency
during the second compliance period, by effecting a reverse stock
split, if necessary. If we meet these requirements, Nasdaq will
inform us that we have been granted an additional 180 calendar days
to regain compliance. However, if it appears to the staff of Nasdaq
(the “Staff”) that we will not be able to cure the
deficiency, or if we are otherwise not eligible, the Staff would
notify us that our securities will be subject to delisting. In the
event of such notification, we may appeal the Staff’s
determination to delist its securities, but there can be no
assurance the Staff would grant our request for continued
listing.
We
intend to continue actively monitoring the bid price for our common
stock between now and December 28, 2020 and will consider available
options to resolve the deficiency and regain compliance with
the minimum bid price requirement.
Off-Balance Sheet Transactions
At
March 31, 2020, the Company did not have any transactions,
obligations or relationships that could be considered off-balance
sheet arrangements.
24
I
tem 3. Quantitative and Qualitative
Disclosure About Market Risk
As a
smaller reporting company, we are not required to provide the
information required by this Item 3.
I
tem 4. Controls and
Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-Q, management
performed, with the participation of our principal executive
officer and principal financial officer, an evaluation of the
effectiveness of our disclosure controls and procedures as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act
of 1934, as amended (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 officer and principal financial officer concluded that,
as of March 31, 2020, our disclosure controls and procedures were
not effective.
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. We identified the following material
weakness as of March 31, 2020: insufficient personnel resources
within the accounting function to segregate the duties over
financial transaction processing and reporting.
To remediate our internal control weaknesses, management intends to
implement the following measures, as finances allow:
●
Adding
sufficient accounting personnel or outside consultants to properly
segregate duties and to effect a timely, accurate preparation of
the financial statements.
●
Upon
the hiring of additional accounting personnel or outside
consultants, develop and maintain adequate written accounting
policies and procedures.
The
additional hiring is contingent upon our efforts to obtain
additional funding and the results of our operations. Management
expects to secure funds in the coming fiscal year but provides no
assurances that it will be able to do so.
Changes in Internal Control over Financial Reporting
There
were no changes to our internal control over financial reporting or
in other factors that could affect these controls during the three
months ended March 31, 2020
that
has materially affected, or
is reasonably likely to materially affect, our internal control
over financial reporting. However, our management is currently
seeking to improve our controls and procedures in an effort to
remediate the deficiency described above.
25
P
ART II – OTHER
INFORMATION
I
tem 1. 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 condition. We may, however, be subject to various claims
and legal actions arising in the ordinary course of business from
time to time.
I
tem 1A. Risk Factors
In
addition to the risk factors and uncertainties described below and
the other information set forth in this report, you should
carefully consider the factors discussed under “Risk
Factors” in our Annual Report on Form 10-K for the period
ended December 31, 2019, as filed with the Securities and Exchange
Commission on March 26, 2020. These factors could materially
adversely affect our business, financial condition, liquidity,
results of operations and capital position, and could cause our
actual results to differ materially from our historical results or
the results contemplated by any forward-looking statements
contained in this report.
The outbreak of the novel strain of coronavirus, SARS-CoV-2, which
causes COVID-19, could adversely impact our business, including our
pre-sales activities, clinical trials and ability to obtain
regulatory approvals.
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. Beginning in
March 2020, we undertook temporary precautionary measures to help
minimize the risk of the virus to our employees, including by
temporarily 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 is paying this portion of
management salaries in the form of restricted stock units that vest
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 shall be paid in in the
form of restricted stock units rather than cash. We may take
additional measures, any of which could 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.
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; (ISSUER
DIRECT….PLEASE FORMAT BULLETS CORRECTLY, REMOVE THIS
NOTE)
●
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.
I
tem 2. Recent Sales of Unregistered
Securities; Use of Proceeds from Registered Securities
Not
applicable.
I
tem 3. Defaults Upon Senior
Securities
Not
applicable.
I
tem 4. Mine Safety
Disclosures
Not
applicable.
I
tem 5. Other
Information
Not
applicable.
26
I
tem 6. Exhibits
|
Exhibit Number
|
|
Description
|
|
|
Fourth
Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 to the Company’s
Current Report on Form 8-K filed on May 12, 2017)
|
|
|
|
Amended
and Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.4 to the Company’s Registration Statement on Form
S-1 (File No. 333-214724), as amended, originally filed on November
21, 2016)
|
|
|
|
Specimen
Certificate representing shares of common stock of the Company
(incorporated by reference to Exhibit 4.1 to the Company’s
Registration Statement on Form S-1 (File No. 333-214724), as
amended, originally filed on November 21, 2016)
|
|
|
|
Form of
Convertible Promissory Note (incorporated by reference to Exhibit
4.1 to the Company’s Current Report on Form 8-K filed on July
29, 2019)
|
|
|
|
Form of
Warrant (incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed on July 29,
2019)
|
|
|
|
Certificate
of Designations of Series A Convertible Preferred Stock
(incorporated by reference to Exhibit 4.1 to the Company’s
Current Report on Form 8-K filed on December 11, 2019)
|
|
|
|
Form of
Warrant issued in December 2019 Series A Convertible Preferred
Stock Offering (incorporated by reference to Exhibit 4.2 to the
Company’s Current Report on Form 8-K filed on December 11,
2019)
|
|
|
|
Certificate
of Designations of Series B Convertible Preferred Stock
(incorporated by reference to Exhibit 4.1 to the Company’s
Current Report on Form 8-K filed on December 26, 2019)
|
|
|
|
Form of
Warrant issued in December 2019 Series B Convertible Preferred
Stock Offering (incorporated by reference to Exhibit 4.2 to the
Company’s Current Report on Form 8-K filed on December 26,
2019)
|
|
|
|
Amendment
3 to Collaborative Research Agreement, dated January 13, 2020, by
and between the Company and General Electric Company (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on January 15, 2020)
|
|
|
|
U.S.
Small Business Administration Paycheck Protection Program Note,
issued by the Company to First Republic Bank (filed
herewith)
|
|
|
|
Certification
of Periodic Report by Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14a and pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
|
|
|
|
Certification
of Periodic Report by Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14a and pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
|
|
|
|
Certification
of Periodic Report by Chief Executive Officer and Chief Financial
Officer pursuant to U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith)
|
|
|
101.INS
|
|
XBRL
Instance Document (filed herewith)
|
|
101.SCH
|
|
XBRL
Taxonomy Schema (filed herewith)
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase (filed
herewith)
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase (filed
herewith)
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101.LAB
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XBRL
Taxonomy Extension Label Linkbase (filed herewith)
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101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase (filed
herewith)
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*
Indicates management compensatory plan, contract or
arrangement.
27
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.
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ENDRA LIFE SCIENCES INC.
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Date:
May 14, 2020
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By:
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/s/
Francois
Michelon
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Francois
Michelon
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Chief
Executive Officer and Chairman
(Principal
Executive Officer)
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ENDRA LIFE SCIENCES INC.
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Date:
May 14, 2020
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By:
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/s/
David
Wells
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David
Wells
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Chief
Financial Officer
(Principal
Financial and Accounting Officer)
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28
TABLE OF CONTENTS
Part I - Financial InformationItem 1. Financial StatementsNote 1 Nature Of The BusinessNote 2 Summary Of Significant Accounting PoliciesNote 3 InventoryNote 4 Fixed AssetsNote 5 Accounts Payable and Accrued LiabilitiesNote 6 Convertible NotesNote 7 Capital StockNote 8 Common Stock OptionsNote 9 Common Stock WarrantsNote 10 Commitments & ContingenciesNote 12 Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosure About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Recent Sales Of Unregistered Securities; Use Of Proceeds From Registered SecuritiesItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits