ENDRA Life Sciences Inc. — Q3 2017 Form 10-Q
Business context and period: The filing covers the three and nine months ended September 30, 2017. ENDRA develops thermoacoustic imaging technology. Revenue to date came from its Nexus 128 pre-clinical imaging system and related services; its clinical TAEUS applications remained under development.
Financial highlights
- Revenue: Q3 revenue was $287,000, versus none in Q3 2016, from one Nexus 128 system sale. Nine-month revenue was $344,772, versus none in 2016, from one system sale and service fees.
- Gross profit and margin: Q3 gross profit was $168,730, with a 59% margin. Nine-month gross profit was $175,075, with a 51% margin.
- Expenses and losses: Q3 operating expenses were $1.08 million and operating loss was $910,934; net loss was $908,908, compared with a $977,898 net loss in Q3 2016. Nine-month operating expenses were $2.50 million and operating loss was $2.33 million; net loss was $3.08 million, up from $2.09 million in 2016. R&D rose 119% in Q3 and 70% for nine months year over year; G&A rose 62% and 69%, respectively.
- Cash flow: Nine-month cash used in operations was $1.93 million, compared with $769,459 in 2016. Investing used $7,862. Financing provided $8.77 million, primarily from the IPO.
- Liquidity and debt: Cash at September 30 was $6.98 million; working capital was $6.91 million. Total liabilities were $312,042, with no notes or convertible notes outstanding. Convertible principal and interest of $1.73 million converted into common stock in May 2017.
- Capitalization: The May IPO of 1.932 million units generated approximately $8.6 million in net proceeds. Each unit included one common share and a warrant; 3.91 million common shares were outstanding at September 30. Options and warrants may add dilution.
Changes, outlook, and risks
- Revenue began to appear in 2017, but remained limited and depended on Nexus sales and services. The company reported no pending orders for a Nexus 128 system at September 30.
- Management estimated cash and potential Nexus revenue would fund current operations into Q4 2018, but said existing cash would not fund full commercialization of the NAFLD TAEUS application or development of other applications. Additional financing may be needed; availability and terms are uncertain.
- The filing states there is substantial doubt about the company’s ability to continue as a going concern within one year after issuance. Failure to obtain financing could require delays, reduced development, or cessation of operations.
- Management described a post-quarter partnership with StarFish Medical and CriTech Research to productize the NAFLD device, targeting EU launch in 2018 followed by U.S. FDA submission. This is a target, not assurance of approval or launch. A GE Healthcare collaboration includes certain rights of first offer and was extended through April 22, 2018.
- Disclosure controls were deemed ineffective due to a material weakness: insufficient accounting personnel to segregate financial processing and reporting duties. Remediation depends partly on obtaining funding.
- Other risks include development and regulatory uncertainty, market acceptance, competition, intellectual property protection, and the need for future capital. Management reported no material pending litigation and no subsequent events.
Investor facts to verify
- Whether post-quarter engineering and regulatory milestones for TAEUS were achieved, and whether the stated EU and U.S. timelines changed.
- Actual cash burn and financing needs relative to management’s Q4 2018 runway estimate; the filing also identifies substantial going-concern doubt.
- Whether Nexus sales recur, given limited revenue and no system orders pending at quarter-end.
- Potential dilution from outstanding warrants and options, including the IPO warrants and executive awards.
- Progress in remediating the accounting-control material weakness.