ENDRA Life Sciences Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. ENDRA is developing TAEUS, a radio-frequency-enhanced ultrasound platform intended to support medical imaging, initially for quantifying liver fat and assessing nonalcoholic fatty liver disease. The company ceased production of its legacy Nexus 128 system in January 2019 and planned to end its related service and parts support on July 1, 2019.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $0 | $6,174 |
| Operating expenses | $2,747,219 | $2,843,792 |
| Operating loss | $2,747,219 | $2,837,618 |
| Net loss | $2,748,736 | $2,825,303 |
| Net loss per share, basic and diluted | $0.37 | $0.72 |
| Cash used in operating activities | $2,540,662 | $2,451,890 |
| Cash at period end | $3,925,474 | $3,149,988 |
- Research and development expense rose 6% to $1,773,498; sales and marketing expense fell 47% to $56,818; general and administrative expense fell 14% to $916,903.
- Cash declined from $6,471,375 at December 31, 2018. Working capital was $3,542,901 at March 31, 2019.
- Total liabilities were $835,232, all reported as current accounts payable and accrued liabilities. The filing reports no cash interest paid and says the June 2018 convertible notes had converted to common stock in connection with the October and November 2018 offerings.
- No gross margin is meaningful for Q1 2019 because revenue and cost of goods sold were both zero. There was no income tax provision.
Material changes and operating developments
- Revenue ended as the company discontinued Nexus 128 production and shifted resources toward TAEUS. No TAEUS revenue had been generated.
- Management attributed higher R&D costs to increased TAEUS application development and contracted vendors. Lower sales and marketing and G&A costs partly offset the increase.
- The company reported initial results from its first TAEUS human feasibility study in March 2019. It anticipated submitting the TAEUS liver device technical file for CE Mark in mid-2019; this was an expectation, not a reported approval.
- Under its agreement with GE Healthcare, ENDRA had granted certain first-offer rights relating to manufacturing and licensing for the target application. The agreement was extended to January 22, 2020.
Outlook, risks and other notable items
- Management estimated that March 31 cash would fund current operations into the third quarter of 2019. It said additional capital would be needed within months and that existing cash would not fund full commercialization of the NAFLD application or development of other applications.
- The filing states there is substantial doubt about ENDRA’s ability to continue as a going concern for one year from issuance of the financial statements. Without timely financing, the company may slow, pause, reduce or eliminate development or commercialization work, or cease operations.
- Potential funding sources include equity, debt, collaborations and licensing. Availability and terms are uncertain; equity could dilute shareholders, debt may impose restrictive covenants, and partnerships could require giving up rights.
- Key business risks include development and regulatory delays, uncertain human-study results, market acceptance, financing needs, competition, intellectual property protection, reimbursement practices, and obtaining CE Mark, FDA and other approvals.
- Disclosure controls and procedures were assessed as ineffective due to a material weakness: insufficient accounting personnel to segregate transaction-processing and reporting duties. Remediation hiring was contingent on funding.
- After quarter-end, on May 13, 2019, ENDRA hired CFO David Wells under an employment agreement providing a $230,000 annual base salary, bonus eligibility and options for 56,000 shares. No subsequent events were reported in the financial-statement notes.
- No material litigation or off-balance-sheet arrangements were reported. The filing provides no formal revenue or earnings guidance.
Important facts for investors to verify
- Cash runway and actual financing progress, given management’s stated expectation of funding only into Q3 2019 and the going-concern warning.
- Progress and results of TAEUS human studies, CE Mark submission and any later regulatory milestones or approvals.
- Whether the company can commercialize TAEUS, secure partners and generate revenue after ending Nexus support.
- Remediation of the accounting personnel material weakness and whether disclosure controls become effective.
- Potential dilution from future capital raises and outstanding options and warrants; the filing lists 4,067,145 potentially dilutive shares excluded from diluted loss per share as anti-dilutive.