ENDRA Life Sciences Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 13, 2019. Unaudited results. ENDRA is developing TAEUS, an ultrasound-enhancement platform, initially targeting assessment of fatty liver disease. The company discontinued Nexus 128 production in January 2019 and ended support and parts service in July 2019 to focus on TAEUS.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $6,174 |
| Research and development | $1.468 million | $1.163 million | $4.547 million | $3.671 million |
| Sales and marketing | $100,203 | $72,179 | $245,364 | $220,713 |
| General and administrative | $1.072 million | $833,000 | $2.921 million | $2.843 million |
| Operating loss | $(2.641) million | $(2.356) million | $(7.713) million | $(7.016) million |
| Net loss | $(3.414) million | $(2.759) million | $(8.497) million | $(7.431) million |
| Basic and diluted loss per share | $(0.46) | $(0.70) | $(1.14) | $(1.89) |
Gross margin is not meaningful: there was no revenue in Q3 2019 or the first nine months of 2019, and no cost of goods sold in those periods. Revenue in 2018 came from service activity for Nexus 128 systems. No TAEUS revenue had been generated.
At September 30, 2019, cash was $2.275 million, down from $6.471 million at December 31, 2018. Working capital was $1.122 million; total assets were $3.615 million, total liabilities $2.213 million, and stockholders’ equity $1.403 million. Cash used in operating activities for the first nine months was $6.681 million, compared with $5.800 million in 2018. Investing activities used $5,238; financing activities provided $2.491 million, principally net proceeds from the July note offering.
The July 2019 financing generated approximately $2.491 million net proceeds from senior secured convertible notes and warrants. Notes had aggregate principal of $2.588 million, bear 10% annual interest, and mature April 26, 2020; they are convertible at $1.49 per share. The reported current carrying amount, net of discount, was $590,026. Debt-discount amortization of $728,417 was recorded as noncash expense in the nine-month period. Lease liabilities totaled $424,210, including $65,295 current and $358,915 long-term.
Material changes and notable items
- Q3 R&D expense increased 26% year over year, primarily from TAEUS development and contracted vendors; nine-month R&D increased 24%.
- Q3 net loss widened by about $655,000 year over year. The 2019 quarter included $728,417 of noncash debt-discount amortization related to the July financing; Q3 2018 included a $287,541 inventory impairment that did not recur.
- Common shares outstanding were 7,516,875 at September 30, 2019, versus 7,422,642 at year-end 2018. The filing reports 7,752,101 potentially dilutive shares, excluded from diluted loss per share as anti-dilutive.
- The company extended its office lease through December 31, 2024. The balance sheet reflects adoption of the lease accounting standard, including a right-of-use asset.
Outlook, risks, and contingencies
Management said September-end cash was expected to fund current operations into the first quarter of 2020, but additional capital was needed within the next several months to carry out commercialization plans. Management warned that absent financing, it may significantly slow or pause activities. The filing states that cash resources were likely insufficient for anticipated needs over the next 12 months and identifies substantial doubt about the company’s ability to continue as a going concern. Management was exploring financing options but had no committed funding; failure to raise capital could force reductions or delays in development and commercialization, or cessation of operations.
ENDRA completed its first TAEUS human feasibility study in September 2019. It expected to include study data and usability input in a technical file for CE Mark submission in the first half of 2020. Product sales remain subject to regulatory approvals, and the filing cautions that development, approvals, and commercialization timing and costs are uncertain. The GE Healthcare collaboration, as amended, was due to run through January 22, 2020 and includes rights of first offer relating to manufacturing or licensing for the fatty-liver application.
Nasdaq had notified the company that it did not meet the $2.5 million minimum stockholders’ equity listing requirement. ENDRA said it expected to regain compliance by February 10, 2020, but gave no assurance; delisting could reduce liquidity and make financing more difficult. Disclosure controls were assessed as ineffective due to a material weakness: insufficient accounting personnel to segregate financial-processing and reporting duties. Remediation depended on obtaining funds. The company reported no pending legal proceedings believed likely to have a material adverse effect and no off-balance-sheet arrangements.
Investor verification priorities
- Whether ENDRA secured sufficient financing after September 30, 2019, and how that funding affected runway, dilution, and the ability to repay or convert the notes due April 2020.
- Whether the company regained and maintained Nasdaq’s minimum-equity and other listing requirements.
- Progress and results from the TAEUS human study, regulatory-file preparation, CE Mark timing, and any required U.S. approvals.
- Whether projected cash runway and development plans changed, given the reported operating cash burn and going-concern uncertainty.
- Progress in remediating the accounting-control material weakness and the potential dilution from outstanding warrants, options, and convertible notes.