ENDRA Life Sciences Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. ENDRA is developing TAEUS, a thermo-acoustic enhanced ultrasound technology intended for clinical imaging; its initial target application is quantifying liver fat. The company reported no revenue from TAEUS. It is exploring strategic alternatives, including a potential sale, for its legacy Nexus 128 pre-clinical business.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $0 | $57,772 | $6,174 | $57,772 |
| Operating expenses | $1,823,068 | $1,063,199 | $4,666,860 | $1,423,897 |
| Operating loss | $(1,823,068) | $(1,056,855) | $(4,660,686) | $(1,417,552) |
| Net loss | $(1,846,772) | $(1,431,791) | $(4,672,075) | $(2,173,414) |
| Net loss per share, basic and diluted | $(0.47) | $(0.59) | $(1.19) | $(1.37) |
Q2 2018 had no gross profit because there was no revenue or cost of goods sold. Q2 2017 gross profit was $6,345, an approximately 11% margin; first-half 2018 gross profit was $6,174. R&D expense was $839,756 in Q2 and $2,508,579 for the first half, up 381% and 827%, respectively, year over year, largely reflecting increased TAEUS development and contracted vendors. First-half sales and marketing expense was $148,534 and G&A was $2,009,747.
- Cash and liquidity: Cash was $2,205,858 at June 30, 2018, down from $5,601,878 at December 31, 2017. Current assets were $2,834,315 and current liabilities $1,104,957; reported working capital was $1,729,359.
- Cash flow: First-half operating cash use was $4,331,320 in the cash flow statement; investing cash flow was zero and financing provided $935,300. The MD&A gives operating cash use as $4,331,230, an inconsistency to verify. Cash declined by $3,396,020 over the period.
- Debt: A June private placement raised $1,077,000 in principal of senior secured convertible notes, with $935,300 net proceeds. The notes bear 10% interest and mature December 31, 2018; conversion terms include a $1.40 floor and a $2.016 cap, subject to the specified financing provisions. The balance sheet reports $353,581 net of debt discount. The transaction also included warrants for 320,536 shares.
- Capitalization: 3,923,027 common shares were outstanding at June 30 and August 10. The filing reports 3,267,052 potentially dilutive options and warrants excluded from diluted loss per share; the June financing added convertible notes and warrants.
Material changes and management outlook
- Revenue fell to zero in Q2 and to $6,174 for the first half, as the remaining legacy revenue came from Nexus 128 service activity. ENDRA said it did not expect substantial future revenue from that business and would honor existing contracts.
- Management said June 30 cash was expected to fund current operations into Q4 2018. Without additional capital in the following months, ENDRA said it would need to significantly slow or pause activities. It had no committed additional funding and stated that existing cash would not fund completion of TAEUS commercialization.
- Management expected human-study results during Q3 2018. The company planned to advance the NAFLD application, pursue EU commercialization followed by US and China regulatory pathways, and continue development of other TAEUS applications. These plans depend on development progress, regulatory approvals and financing; no revenue or profitability guidance was provided.
- The filing states there is substantial doubt about ENDRA’s ability to continue as a going concern for one year from issuance. Management said failure to obtain financing could require delaying or reducing development and commercialization, selling assets, or ceasing operations.
- Disclosure controls and procedures were deemed ineffective as of June 30 due to a material weakness: insufficient accounting personnel to segregate financial-processing and reporting duties. Remediation plans, including adding personnel or consultants, depended on available funding.
Risks, contingencies and unusual items
- Key risks include continued operating losses, dependence on external financing, possible shareholder dilution, repayment or conversion of the December 2018 notes, clinical-study uncertainty, development and regulatory delays, market acceptance, and the ability to protect intellectual property and secure partners.
- ENDRA reported no pending litigation it believed would materially affect its financial position or results. It reported no off-balance-sheet arrangements.
- Noncash share-based compensation was $749,749 for the first half. The June notes’ warrant value of $587,541 was recorded as a debt discount; $5,822 was amortized to interest expense through June 30.
Important facts for investors to verify
- Reconcile the $90 discrepancy in first-half operating cash use between the cash flow statement and MD&A.
- Review the June note and security agreements for conversion, collateral, default, maturity and repayment terms, and assess how the notes may affect dilution or liquidity.
- Track subsequent financing, cash runway and whether planned TAEUS development, study and regulatory milestones were achieved.
- Confirm the status and potential financial impact of strategic alternatives for the Nexus 128 business and the remediation of the accounting-control material weakness.