ENDRA Life Sciences Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Financial statements are unaudited. ENDRA develops thermoacoustic imaging technology: it sells Nexus 128 systems for preclinical research and is developing TAEUS clinical applications, initially targeting assessment of fatty liver disease.
Financial performance and liquidity
| Metric | Q2 2017 | Six months 2017 | Comparable 2016 |
|---|---|---|---|
| Revenue | $57,772 | $57,772 | $0 |
| Gross profit (margin) | $6,345 (about 11%) | $6,345 (about 11%) | $0 |
| Operating expenses | $1,064,200 | $1,424,898 | $494,312 Q2; $867,768 six months |
| Operating loss | $1,057,855 | $1,418,553 | $494,312 Q2; $867,768 six months |
| Interest expense | $373,936 | $754,860 | $234,802 Q2; $235,000 six months |
| Net loss | $1,431,791 | $2,173,413 | $729,114 Q2; $1,108,591 six months |
| Basic and diluted loss per share | $0.59 | $1.37 | $1.01 Q2; $1.53 six months |
Q2 revenue came from service fees for the installed Nexus 128 base, not reported system sales. Cost of goods sold was $51,427 in both 2017 periods. Six-month research and development expense was $270,540, up 36%; general and administrative expense was $1,146,330, up 74%. Management attributed higher G&A primarily to additional headcount and IPO-related one-time costs; six-month wage and related expense included $239,225 of stock compensation.
At June 30, cash was $7,524,071, versus $144,953 at December 31, 2016. Current assets were $7,672,500 and current liabilities $162,302, yielding reported working capital of $7,510,198. Total liabilities were $162,302; notes and convertible notes were no longer outstanding after repayment or conversion. Six-month operating cash use was $1,378,720; investing cash use was $7,862; financing provided $8,765,700. The company reported no interest or income taxes paid.
Material changes and financing
- May 2017 IPO of 1,932,000 units at $5 each generated approximately $8.6 million net proceeds. Each unit included one common share and a warrant exercisable at $6.25; units separated and the shares and warrants began trading separately on June 28.
- Convertible-note principal and interest of $1,726,079 converted into 1,232,859 common shares in May. The company reported 3,907,027 shares outstanding at June 30, compared with 723,335 at year-end 2016. The 2017 reverse split was one-for-3.5; share figures reflect the split.
- Outstanding options totaled 928,121 and warrants 2,248,141 at quarter-end. Potential dilution is material; securities were excluded from diluted loss per share as anti-dilutive.
Outlook, risks and other notable items
- Management expects spending to rise as it advances NAFLD TAEUS development, pursues regulatory approvals—initially planned for the EU, followed by the U.S. and China—and prepares for commercialization. Management said cash was expected to fund development, regulatory work, and preparation for EU commercialization, but not full commercialization or other TAEUS applications; additional capital will be needed.
- The filing states there is substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the financial statements. Management says cash could be insufficient for anticipated needs and that further financing may not be available on acceptable terms or at all. Failure to raise funds could force delays, reductions, or cessation of development activities.
- The GE Healthcare collaboration was extended through April 22, 2018. Before commercial release of the NAFLD application, ENDRA must offer GE a period to negotiate an exclusive ultrasound-manufacturer relationship; either party may terminate on at least 60 days’ notice.
- Disclosure controls and procedures were deemed ineffective at June 30 because of a material weakness: insufficient accounting personnel to segregate financial-processing and reporting duties. Remediation plans depend on securing resources.
- Future minimum office lease payments totaled $194,274 through 2019. Management reported no pending legal matter expected to have a material adverse effect and no off-balance-sheet transactions.
Investor verification priorities
- Assess cash burn, funding needs, and the basis for management’s cash-runway estimate alongside the stated going-concern doubt.
- Verify TAEUS development milestones, regulatory pathway and timing, and the scope and practical effect of GE Healthcare’s negotiation rights.
- Review revenue quality and sustainability: reported 2017 revenue was limited to Nexus 128 service fees, with an approximately 11% gross margin.
- Evaluate dilution from IPO warrants, outstanding options and warrants, and any future financing.
- Track remediation of the accounting-control material weakness and the related staffing or consulting costs.