ENDRA Life Sciences Inc. — Q2 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2019. ENDRA is developing Thermo-Acoustic Enhanced Ultrasound (TAEUS), initially targeting measurement of liver fat and assessment of nonalcoholic fatty liver disease. The company had no TAEUS revenue and was concentrating resources on development. It ceased Nexus 128 production on January 1, 2019 and ended service support and parts on July 1, 2019.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $6,174 |
| Research and development | $1,304,809 | $839,756 | $3,078,306 | $2,508,579 |
| Sales and marketing | $88,343 | $41,357 | $145,161 | $148,534 |
| General and administrative | $932,021 | $941,955 | $1,848,924 | $2,009,747 |
| Total operating expenses | $2,325,173 | $1,823,068 | $5,072,391 | $4,666,860 |
| Net loss | $2,334,372 | $1,846,772 | $5,083,107 | $4,672,075 |
| Basic and diluted loss per share | $0.31 | $0.47 | $0.68 | $1.19 |
Gross profit was zero in Q2 2019 and Q2 2018; six-month 2019 gross profit was zero versus $6,174 in 2018. Gross margins are not meaningful given no current-period revenue. Q2 R&D rose 55%, primarily due to TAEUS development and contracted vendors; six-month R&D rose 23%. Q2 net loss increased, while reported loss per share declined from the prior year, reflecting a higher weighted-average share count.
Cash, liquidity and financing
- At June 30, 2019, cash was reported as $2,267,530 on the balance sheet ($2,267,531 in the cash-flow statement); working capital was $1,585,591. Total assets were $3,190,709 and total liabilities were $1,366,391, all current. The filing lists no debt liability at quarter-end.
- Cash used in operations was $4,198,607 for the first half of 2019, compared with $4,331,320 in 2018. Investing activities used $5,238; there were no financing cash flows during the first half.
- On July 26, 2019, after quarter-end, the company sold $2,587,893 principal amount of senior secured convertible notes, receiving approximately $2,490,500 net. The notes bear 10% interest, mature April 26, 2020, and convert at $1.49 per share. Investors and the placement agent also received warrants for 1,910,540 shares in total, exercisable at $1.49 through July 26, 2022. The filing estimates pro forma June 30 stockholders’ equity of approximately $3,099,235 after the transaction.
- Management said cash at June 30 plus the July financing was expected to fund current operations into Q4 2019, but additional capital would be needed to execute commercialization plans. The filing states substantial doubt about the company’s ability to continue as a going concern for one year from issuance.
Outlook, risks and other material matters
- Management anticipated submitting the TAEUS liver-device technical file for CE marking in the second half of 2019. Applications require regulatory approvals; the company intended to pursue the EU first, followed by the U.S. and China. No assurance of approval or timing was provided.
- The company expected continued significant spending on product development, regulatory filings and commercialization. It warned that without additional financing it may slow or pause operations, reduce or eliminate development programs, or cease operations. Equity financing could dilute shareholders; debt may carry restrictive terms; collaboration or licensing could require concessions.
- The GE Healthcare collaboration includes rights of first offer relating to manufacturing or licensing for the fatty-liver application and was extended through January 22, 2020. Either party may terminate on at least 60 days’ notice.
- Disclosure controls and procedures were reported ineffective as of June 30, 2019 because accounting resources were insufficient to segregate financial-processing and reporting duties. Remediation depends on obtaining funds to add accounting personnel or consultants and develop written procedures.
- Management reported no pending legal matter believed to have a material adverse effect. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether additional financing was secured after the July note offering, and whether proceeds and the stated cash runway were sufficient for planned operations.
- Current TAEUS development, human-study results, CE-mark submission and approval progress, and any changes to commercialization timing or costs.
- The terms, security, conversion and dilution effects of the July 2019 notes and warrants, including any subsequent conversions or exercises.
- Whether the accounting-control material weakness was remediated and disclosure controls became effective.
- The one-dollar difference between balance-sheet and cash-flow-statement cash at June 30, 2019.