ENDRA Life Sciences Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 26, 2020. This is an annual report, not a quarterly filing. ENDRA is a development-stage medical-imaging company focused on its Thermo-Acoustic Enhanced Ultrasound (TAEUS) platform.
Business context and developments
ENDRA is developing TAEUS to extend conventional ultrasound capabilities, initially to quantify liver fat associated with nonalcoholic fatty liver disease (NAFLD). The company discontinued production of its legacy Nexus 128 system on January 1, 2019, and ended related service and parts support on July 1, 2019, shifting resources to TAEUS. It reported receiving CE mark approval for its NAFLD TAEUS FLIP System in March 2020, after the fiscal year-end; it had not yet generated TAEUS revenue. The company planned to pursue U.S. FDA clearance.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $0 | $6,174 |
| Research and development | $6.575 million | $4.722 million |
| Sales and marketing | $412,434 | $262,641 |
| General and administrative | $3.856 million | $3.753 million |
| Operating loss | $10.844 million | $9.019 million |
| Net loss | $13.306 million | $9.796 million |
| Net loss attributable to common stockholders | $17.526 million | $9.796 million |
| Cash used in operating activities | $8.589 million | $7.702 million |
Gross margin is not meaningful for 2019 because the company had no revenue or cost of goods sold. The larger loss included higher TAEUS development spending and $2.355 million of non-cash debt-discount amortization. A $4.220 million deemed dividend on preferred stock increased the loss attributable to common stockholders but was not an operating expense.
At December 31, 2019, cash was $6.174 million, current assets were $6.535 million, current liabilities were $2.073 million, and working capital was $4.462 million. Total liabilities were $2.416 million, including $298,069 of convertible notes net of discount and $409,005 of lease liabilities. The July 2019 notes bore 10% interest and matured April 26, 2020; approximately $530,495 principal remained outstanding at year-end. Management estimated year-end cash would fund current operations into the third quarter of 2020, but said further capital was needed to execute commercialization plans. The auditor and management cited substantial doubt about the company’s ability to continue as a going concern.
Financing activities provided $8.335 million in 2019. The company raised capital through convertible notes and December placements of preferred stock, common stock and warrants, using approximately $1.9 million of offering proceeds to repay debt. Cash decreased by $297,168 during the year. The company reported a $249,256 impairment expense for a Canadian tax-receivable asset and no 2019 inventory impairment, versus a $287,541 inventory write-down in 2018.
Material changes, outlook and risks
- R&D expense rose 39% year over year as spending on TAEUS development and contracted vendors increased. Sales and marketing expense rose 57%, partly reflecting additional headcount and pre-commercial activity.
- ENDRA had no recurring revenue source and expected continued significant spending on development, regulatory work, inventory, hiring and commercialization. It had no committed external funding and warned that failure to raise capital could force it to slow or pause activities, reduce development, or cease operations.
- The December 2019 financing added Series A and Series B convertible preferred stock and substantial warrants. The filing reported 24.95 million potentially dilutive shares excluded from diluted loss per share at year-end, including 13.50 million warrants and shares issuable on preferred-stock conversion.
- After year-end, preferred-stock conversions and note conversions resulted in additional common shares; the filing reported approximately 4.69 million shares issued upon conversion of preferred stock through the report date. These transactions and outstanding warrants create material dilution risk.
- Commercialization depends on regulatory clearances, clinical evidence, market acceptance, reimbursement, manufacturing and distribution partners. CE approval was obtained in March 2020, but U.S. FDA clearance and diagnostic claims still required further regulatory steps and potentially additional clinical data.
- GE Healthcare’s collaboration provides support and certain rights of first offer; an amendment in January 2020 extended the agreement to January 14, 2021 and modified those rights. The agreement may be terminated on at least 60 days’ notice.
- The company identified COVID-19 as a potential source of clinical-study, supply-chain, regulatory-review and commercialization delays. It also disclosed a material weakness in financial reporting controls due to insufficient accounting personnel to segregate duties; management’s remediation plans depended partly on obtaining funding.
Important facts for investors to verify
- Current cash runway, subsequent financing, and the company’s ability to meet obligations and sustain operations beyond its stated estimate.
- Commercial launch progress following CE mark approval, including registrations, initial sales, pricing, demand and any TAEUS revenue.
- Timing and scope of FDA clearance, any required clinical studies, and permitted diagnostic claims.
- Remaining convertible-note balances, preferred-stock conversion terms, warrant exercises and resulting dilution.
- Progress remediating the disclosed material weakness and any subsequent changes in internal controls.
- Any effects of COVID-19 or partner, manufacturing, reimbursement or regulatory developments on the commercialization schedule.