ENDRA Life Sciences Inc. — Q1 2018 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited. ENDRA is developing Thermo-Acoustic Enhanced Ultrasound (TAEUS) for clinical imaging and sells its Nexus 128 system for preclinical research.
Financial results and liquidity
- Revenue: $6,174, versus zero in Q1 2017, from service on the installed Nexus 128 base. The company reported no cost of goods sold and gross profit of $6,174; the resulting 100% gross margin reflects very small revenue and no reported product costs.
- Operating expenses: $2.844 million, up from $360,697. Research and development was $1.669 million (prior year: $95,814); sales and marketing was $107,177 (prior year: $1,124); and general and administrative expense was $1.068 million (prior year: $263,759).
- Net loss: $2.825 million, versus $741,623 in Q1 2017. Basic and diluted loss per share was $0.72, compared with $1.03; weighted-average shares rose to 3,923,027 from 723,335.
- Cash flow: Operating activities used $2.452 million, versus $236,274 in Q1 2017. There were no investing or financing cash flows in Q1 2018. Cash declined by $2.452 million, from $5.602 million at year-end 2017 to $3.150 million at March 31, 2018.
- Balance sheet: Current assets were $3.464 million and current liabilities $860,196, yielding working capital of $2.604 million. Total assets were $3.690 million; total liabilities were $860,196, consisting of accounts payable and accrued liabilities. No debt was reported on the balance sheet.
Material changes and business developments
- R&D spending increased substantially as ENDRA advanced TAEUS development, including work by contracted development vendors; management attributed the overall operating-expense increase to these efforts, public-company costs, and increased headcount.
- G&A included $137,500 of bonuses and $163,671 of stock compensation expense. The filing also reports $379,689 of stock, option, and warrant compensation issued for services in the cash-flow reconciliation.
- ENDRA reported inventory of $245,962, consisting of raw materials for Nexus 128 systems, and said it had no pending system-sale orders at March 31.
- The company extended its GE Healthcare collaborative research agreement through January 22, 2020. It engaged vendors to productize the NAFLD-focused TAEUS device and anticipated reporting human-study results in Q2 2018.
- Management said the CEO and CTO received salary increases effective April 2018. The company reported 3,923,027 common shares outstanding as of May 14, 2018.
Outlook, risks, and other notable matters
- Management estimated cash on hand and potential Nexus 128 revenue would support current operations into Q3 2018, but said additional capital would be needed within the next several months to avoid significantly slowing or pausing activities. The company had no committed additional financing.
- The filing states substantial doubt exists about ENDRA’s ability to continue as a going concern for one year from issuance of the financial statements. Failure to raise funds could force delays, reductions, or termination of development or commercialization efforts, or cessation of operations. Additional equity could dilute shareholders; debt or licensing arrangements could impose restrictive terms or require rights concessions.
- Planned spending includes TAEUS engineering, regulatory submissions and approvals, commercialization preparations, and further application development. Product development, clinical-study, market-acceptance, regulatory, partner, and financing outcomes remain uncertain; no revenue or profitability guidance was provided.
- Disclosure controls were deemed ineffective due to a material weakness: insufficient accounting personnel to segregate financial-processing and reporting duties. Remediation plans depend partly on obtaining funding.
- ENDRA reported no pending litigation it believed would materially affect its financial position or results. Future minimum office-lease payments were $137,280. It adopted the new revenue-recognition standard in Q1 2018 and said adoption had no financial-statement impact.
Important facts for investors to verify
- Whether financing was obtained after the filing and how actual cash use compared with management’s Q3 2018 runway estimate.
- Human-study results, regulatory progress, product-development milestones, and the commercial terms or status of the GE relationship.
- The effect of the reported material weakness and whether accounting-control remediation was completed.
- Equity dilution and potential exercises or conversions: the filing lists 3,267,052 potentially dilutive shares excluded from diluted loss per share as anti-dilutive.
- Option-count inconsistency: the option activity table reports 987,911 options outstanding at March 31, 2018, while the EPS note lists 978,911 options. The filing text does not reconcile the difference.