ENDRA Life Sciences Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 14, 2020. ENDRA is developing TAEUS ultrasound technology intended to support medical imaging, initially for fatty liver disease. The company has not commercially launched TAEUS and reported no revenue.
Financial performance and position
- Revenue and gross margin: No revenue or cost of goods sold in Q1 2020 or Q1 2019; margins are therefore not meaningful.
- Operating expenses: $3.10 million, up from $2.75 million. R&D declined 14% to $1.52 million; sales and marketing rose 102% to $115,000; general and administrative expenses rose 60% to $1.47 million.
- Loss: Operating loss was $3.10 million; net loss was $3.32 million versus $2.75 million a year earlier. The current-quarter loss included $229,000 of noncash debt-discount amortization. Basic and diluted loss per share was $0.29, compared with $0.37.
- Cash flow: Cash used in operations was $3.09 million, compared with $2.54 million in Q1 2019. Investing used $22,000; financing provided $39,000 from warrant exercises. Cash declined $3.07 million during the quarter.
- Liquidity: Cash was $3.10 million at March 31, down from $6.17 million at December 31, 2019. Working capital was $2.22 million. Management estimated cash would fund operations into Q3 2020 and stated additional capital would be required.
- Debt and liabilities: Total liabilities were $1.88 million, including $38,000 of net convertible notes and $394,000 of lease liabilities. The July 2019 notes carried 10% interest and matured April 26, 2020; $42,000 principal remained outstanding at quarter-end. The filing does not provide a clear value for the notes’ status after maturity.
- Equity and potential dilution: Common shares outstanding increased to 13.55 million from 8.42 million at year-end, principally through preferred-stock and note conversions. At March 31, 19.99 million potentially dilutive shares were excluded from diluted loss per share as anti-dilutive. The filing reported 14,504,764 common shares outstanding as of May 14.
Material changes and developments
- R&D spending decreased as the company said it completed TAEUS product development and shifted focus toward commercialization. G&A increased, including higher wages, stock compensation and professional fees.
- In March 2020, ENDRA received CE mark approval for its TAEUS FLIP system and said it intended to submit an application to the FDA. The filing does not provide a date or assured outcome for FDA authorization.
- The company entered into an at-the-market equity sales agreement in March, permitting up to $7.2 million in gross sales; no shares had been sold under it by March 31.
- After quarter-end, ENDRA obtained a $308,600 PPP loan at 1% interest, with a two-year term and potential forgiveness subject to program requirements. Forgiveness was not assured.
- After quarter-end, the company issued 929,650 common shares upon conversion of Series A preferred stock and 22,099 shares to a vendor for services.
Outlook, risks and unusual items
- Going concern: The company disclosed substantial doubt about its ability to continue as a going concern for one year from issuance of the financial statements. It has no established revenue stream sufficient to cover operating costs and needs additional financing. Failure to secure funding could force it to delay or reduce development or commercialization, or cease operations.
- Funding plans: Management said it was exploring equity sales through the ATM and possible cash exercise of December 2019 warrants, but had no commitments for additional funds. Further equity could dilute shareholders; debt could impose restrictive covenants.
- COVID-19: The company shifted most employees to remote work and restricted travel and events. In April, it reduced management cash salaries by 33% for the rest of 2020, substituting restricted stock units, and shifted non-employee director retainers for Q2–Q4 to stock units. It warned of possible delays to development, studies, regulatory reviews and supply, and reduced access to capital; it had not identified a significant operational impact to date.
- Nasdaq listing: ENDRA received notice that its share price had been below $1 for 30 consecutive trading days. It had until December 28, 2020, under the stated compliance period, to regain compliance, with possible additional time subject to conditions; delisting remained a risk.
- Controls: Management concluded disclosure controls were not effective and identified a material weakness due to insufficient accounting personnel to segregate financial-processing and reporting duties. Remediation depended on obtaining funding.
- Other items: No material litigation was reported. Preferred-stock and warrant terms, including conversion and forced-conversion provisions, may affect future share count and dilution.
Most important facts for investors to verify
- Current cash, cash burn and financing secured since the filing, including whether the ATM was used and the status of the PPP loan.
- Whether the July 2019 notes were repaid, converted, extended or otherwise resolved after their April 26, 2020 maturity.
- FDA submission and authorization status for TAEUS FLIP, and progress toward actual commercial sales and revenue.
- Current Nasdaq bid-price compliance status and any actions taken to maintain listing.
- Progress on remediating the accounting-control material weakness and the resulting effect on reporting reliability.
- Updated common shares and potential dilution from preferred stock, warrants, options and any subsequent financing.