ENDRA Life Sciences Inc. - Quarter Report: 2019 June (Form 10-Q)
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2019
OR
☐ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-37969
ENDRA LIFE SCIENCES INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
|
26-0579295
|
|
(State of incorporation)
|
|
(I.R.S. Employer Identification No.)
|
3600 Green Court, Suite 350, Ann Arbor, MI 48105-1570
(Address of principal executive
office) ( Zip
code )
(734) 335-0468
(Registrant’s telephone number, including area
code)
Securities registered pursuant to Section 12(b) of the
Act:
|
Title of each class
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
|
Common Stock, par value $0.0001 per share
|
NDRA
|
The Nasdaq Stock Market LLC
|
|
Warrants, each to purchase one share of Common Stock
|
NDRAW
|
The Nasdaq Stock Market LLC
|
Indicate by check
mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90
days. Yes ☑
No ☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes ☑
No ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, smaller reporting
company or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the
Exchange Act:
|
Large
accelerated filer
|
☐
|
Accelerated
filer
|
☐
|
|
Non-accelerated
filer
|
☑
|
Smaller
reporting company
|
☑
|
|
|
|
Emerging
growth company
|
☑
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☑
As of August 8, 2019, there
were 7,422,642 shares
of our Common Stock, par value $0.0001 per share,
outstanding.
ENDRA LIFE SCIENCES INC.
FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 2019
INDEX
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PART I - FINANCIAL
INFORMATION
Item 1. Financial
Statements
ENDRA Life Sciences Inc.
Condensed Consolidated Balance Sheets
|
|
June
30,
|
December
31,
|
|
Assets
|
2019
|
2018
|
|
Assets
|
(Unaudited)
|
|
|
Cash
|
$2,267,530
|
$6,471,375
|
|
Prepaid
expenses
|
243,782
|
145,424
|
|
Inventory
|
74,280
|
59,444
|
|
Other current
assets
|
366,390
|
273,315
|
|
Total Current
Assets
|
2,951,982
|
6,949,558
|
|
Other
Assets
|
|
|
|
Fixed assets,
net
|
238,727
|
273,233
|
|
Total
Assets
|
$3,190,709
|
$7,222,791
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts payable
and accrued liabilities
|
$1,366,391
|
$974,583
|
|
Total
Liabilities
|
1,366,391
|
974,583
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
Preferred stock,
$0.0001 par value; 10,000,000 shares authorized;
no shares issued or
outstanding
|
-
|
-
|
|
Common stock,
$0.0001 par value; 50,000,000 shares authorized;
7,422,642 and
7,422,642 shares issued and outstanding
|
742
|
742
|
|
Additional paid in
capital
|
34,598,379
|
33,939,162
|
|
Accumulated
deficit
|
(32,774,803)
|
(27,691,696)
|
|
Total
Stockholders’ Equity
|
1,824,318
|
6,248,208
|
|
Total
Liabilities and Stockholders’ Equity
|
$3,190,709
|
$7,222,791
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
3
ENDRA Life Sciences Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
Three Months
Ended
|
Three Months
Ended
|
Six Months
Ended
|
Six Months
Ended
|
|
|
June
30,
|
June
30,
|
June
30,
|
June
30,
|
|
|
2019
|
2018
|
2019
|
2018
|
|
Revenue
|
$-
|
$-
|
$-
|
$6,174
|
|
|
|
|
|
|
|
Cost of Goods
Sold
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Gross
Profit
|
$-
|
$-
|
$-
|
$6,174
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
Research and
development
|
1,304,809
|
839,756
|
3,078,306
|
2,508,579
|
|
Sales and
marketing
|
88,343
|
41,357
|
145,161
|
148,534
|
|
General and
administrative
|
932,021
|
941,955
|
1,848,924
|
2,009,747
|
|
Total operating
expenses
|
2,325,173
|
1,823,068
|
5,072,391
|
4,666,860
|
|
|
|
|
|
|
|
Operating
loss
|
(2,325,173)
|
(1,823,068)
|
(5,072,391)
|
(4,660,686)
|
|
|
|
|
|
|
|
Other
Expenses
|
|
|
|
|
|
Other
expense
|
(9,199)
|
(23,704)
|
(10,716)
|
(11,389)
|
|
Total other
expenses
|
(9,199)
|
(23,704)
|
(10,716)
|
(11,389)
|
|
|
|
|
|
|
|
Loss from
operations before income taxes
|
(2,334,372)
|
(1,846,772)
|
(5,083,107)
|
(4,672,075)
|
|
|
|
|
|
|
|
Provision for
income taxes
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Net
Loss
|
$(2,334,372)
|
$(1,846,772)
|
$(5,083,107)
|
$(4,672,075)
|
|
|
|
|
|
|
|
Net
loss per share – basic and diluted
|
$(0.31)
|
$(0.47)
|
$(0.68)
|
$(1.19)
|
|
|
|
|
|
|
|
Weighted
average common shares – basic and diluted
|
7,422,642
|
3,923,027
|
7,422,642
|
3,923,027
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
ENDRA Life Sciences Inc.
Condensed Consolidated Statements of Stockholders’
Equity
(Unaudited)
|
Six Months Ended June 30, 2018 and 2019
|
Common
stock
|
|
|
Total
|
|
|
|
Shares
|
Amount
|
Additional
Paid in Capital
|
Accumulated
Deficit
|
Stockholders'
Equity
|
|
Balance as of December 31, 2017
|
3,923,027
|
$392
|
$23,170,531
|
$(17,895,435)
|
$5,275,488
|
|
Common
stock issued for services
|
-
|
-
|
47,865
|
-
|
47,865
|
|
Warrants
issued for services
|
-
|
-
|
61,660
|
-
|
61,660
|
|
Fair
value of vested stock options
|
-
|
-
|
640,224
|
-
|
640,224
|
|
Debt
discount
|
-
|
-
|
587,541
|
-
|
587,541
|
|
Net
loss
|
-
|
-
|
-
|
(4,672,075)
|
(4,672,075)
|
|
Balance as of June 30, 2018
|
3,923,027
|
$392
|
$24,507,821
|
$(22,567,510)
|
$1,940,703
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
7,422,642
|
742
|
33,939,162
|
(27,691,696)
|
6,248,208
|
|
Fair
value of vested stock options
|
-
|
-
|
659,217
|
-
|
659,217
|
|
Net
loss
|
-
|
-
|
-
|
(5,083,107)
|
(5,083,107)
|
|
Balance as of June 30, 2019
|
7,422,642
|
$742
|
$34,598,379
|
$(32,774,803)
|
$1,824,318
|
|
Three Months Ended June 30, 2018 and 2019
|
Common
stock
|
|
|
Total
|
|
|
|
Shares
|
Amount
|
Additional
Paid in Capital
|
Accumulated
Deficit
|
Stockholders'
Equity
|
|
Balance
as of March 31, 2018
|
3,923,027
|
$392
|
$23,550,220
|
$(20,720,738)
|
$2,829,874
|
|
Common
stock issued for services
|
-
|
-
|
19,146
|
-
|
19,146
|
|
Warrants
issued for services
|
-
|
-
|
30,049
|
-
|
30,049
|
|
Fair
value of vested stock options
|
-
|
-
|
320,865
|
-
|
320,865
|
|
Debt
discount
|
-
|
-
|
587,541
|
-
|
587,541
|
|
Net
loss
|
-
|
-
|
-
|
(1,846,772)
|
(1,846,772)
|
|
Balance as of June 30, 2018
|
3,923,027
|
$392
|
$24,507,821
|
$(22,567,510)
|
$1,940,703
|
|
|
|
|
|
|
|
|
Balance
as of March 31, 2019
|
7,422,642
|
$742
|
$34,241,430
|
$(30,440,432)
|
$3,801,740
|
|
Fair
value of vested stock options
|
-
|
-
|
356,949
|
-
|
356,949
|
|
Net
loss
|
-
|
-
|
-
|
(2,334,372)
|
(2,334,372)
|
|
Balance as of June 30, 2019
|
7,422,642
|
$742
|
$34,598,379
|
$(32,774,804)
|
$1,824,317
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
5
ENDRA Life Sciences Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
Six
Months Ended
|
Six
Months Ended
|
|
|
June
30,
|
June
30,
|
|
|
2019
|
2018
|
|
Cash
Flows from Operating Activities
|
|
|
|
Net
loss
|
$(5,083,107)
|
$(4,672,075)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation and
amortization
|
39,744
|
30,204
|
|
Common stock,
options and warrants issued for services
|
659,217
|
749,749
|
|
Imputed interest on
promissory notes
|
-
|
5,822
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Increase in
accounts receivable
|
-
|
(4,920)
|
|
Increase in prepaid
expenses
|
(98,358)
|
(251,428)
|
|
Increase in
inventory
|
(14,837)
|
(87,530)
|
|
Increase in other
asset
|
(93,075)
|
(4,304)
|
|
Increase/decrease
in accounts payable and accrued liabilities
|
391,809
|
(96,838)
|
|
Net cash used in
operating activities
|
(4,198,607)
|
(4,331,320)
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
Purchases of fixed
assets
|
(5,238)
|
-
|
|
Net cash used in
investing activities
|
(5,238)
|
-
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
Proceeds from
senior secured convertible promissory notes, net of
fees
|
-
|
935,300
|
|
Net cash provided
by financing activities
|
-
|
935,300
|
|
|
|
|
|
Net
Increase/(Decrease) in cash
|
(4,203,845)
|
(3,396,020)
|
|
|
|
|
|
Cash, beginning of
period
|
6,471,375
|
5,601,878
|
|
|
|
|
|
Cash,
end of period
|
$2,267,531
|
$2,205,858
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
Interest
paid
|
$-
|
$-
|
|
Income
tax paid
|
$-
|
$-
|
|
|
|
|
|
Supplemental
disclosures of non-cash Items:
|
|
|
|
Discount on
convertible notes
|
$-
|
$587,541
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
6
ENDRA Life Sciences Inc.
Notes to Condensed Consolidated Financial Statements
For the six months ended June 30, 2019 and 2018
(Unaudited)
Note 1 – Nature of the Business
ENDRA Life Sciences Inc. (“ENDRA” or the
“Company”) is developing technology for increasing the
capabilities of clinical diagnostic ultrasound, to broaden patient
access to the safe diagnosis and treatment of a number of
significant medical conditions in circumstances where expensive
X-ray computed tomography (“CT”) and magnetic resonance
imaging (“MRI”) technology is unavailable or
impractical.
ENDRA was incorporated on July 18, 2007 as a Delaware
corporation.
ENDRA Life Sciences Canada Inc. was organized under the laws of
Ontario, Canada on July 6, 2017, and is wholly owned by the
Company.
Note 2 – Summary of Significant Accounting
Policies
Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of
contingent liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
Management makes estimates that affect certain accounts including
deferred income tax assets, accrued expenses, fair value of equity
instruments and reserves for any other commitments or
contingencies. Any adjustments applied to estimates are recognized
in the period in which such adjustments are
determined.
Principles of Consolidation
The Company’s consolidated financial statements include all
accounts of the Company and its consolidated subsidiary and/or
entities as of reporting period ending date(s) and for the
reporting period(s) then ended. All inter-company balances and
transactions have been eliminated.
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements and related notes have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission
(the “SEC”). Accordingly, certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and
regulations. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the
three and six months ended June 30, 2019 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 2019. The balance sheet at December 31, 2018 has been
derived from the audited financial statements at that date. For
further information, refer to the financial statements and
footnotes thereto included in ENDRA Life Sciences Inc. annual
financial statements for the twelve months ended December 31, 2018
included in the Company’s Annual Report on Form 10-K filed
with the SEC on March 11, 2019.
7
Cash and Cash Equivalents
The Company considers all cash on hand and in banks, including
accounts in book overdraft positions, certificates of deposit and
other highly-liquid investments with maturities of one year or
less, when purchased, to be cash. As of June 30, 2019 and December
31, 2018, the Company had no cash equivalents. The Company
maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced
any losses in such accounts and periodically evaluates the credit
worthiness of the financial institutions and has determined the
credit exposure to be negligible.
Inventory
The Company’s inventory is stated at the lower of cost or
estimated net realizable value, with cost primarily determined on a
weighted-average cost basis on the first-in, first-out method. The
Company periodically determines whether a reserve should be taken
for devaluation or obsolescence of inventory.
Capitalization of Fixed Assets
The Company capitalizes expenditures related to property and
equipment, subject to a minimum rule, that have a useful life
greater than one year for: (1) assets purchased; (2) existing
assets that are replaced, improved or the useful lives have been
extended; or (3) all land, regardless of cost. Acquisitions of new
assets, additions, replacements and improvements (other than land)
costing less than the minimum rule in addition to maintenance and
repair costs, including any planned major maintenance activities,
are expensed as incurred.
Revenue Recognition
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2014-09, “Revenue from Contracts with
Customers” (“ASC Topic 606”). This standard
provides a single set of guidelines for revenue recognition to be
used across all industries and requires additional disclosures. The
updated guidance introduces a five-step model to achieve its core
principal of the entity recognizing revenue to depict the transfer
of goods or services to customers at an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. The Company adopted the
updated guidance effective January 1, 2018 using the full
retrospective method. The new standard did not have a material
impact on its financial position and results of operations, as it
did not change the manner or timing of recognizing
revenue.
Under ASC Topic 606, in order to recognize revenue, the Company is
required to identify an approved contract with commitments to
perform respective obligations, identify rights of each party in
the transaction regarding goods to be transferred, identify the
payment terms for the goods transferred, verify that the contract
has commercial substance and verify that collection of
substantially all consideration is probable. The adoption of ASC
Topic 606 did not have an impact on the Company’s operations
or cash flows.
Research and Development Costs
The Company follows ASC Subtopic 730-10, “Research and
Development”. Research and development costs are charged to
the statement of operations as incurred. During the three months
ended June 30, 2019 and 2018, the Company incurred $1,304,809 and
$839,756 of expenses related to research and development costs,
respectively. During the six months ended June 30, 2019 and 2018,
the Company incurred $3,078,306 and $2,508,579 of expenses related
to research and development costs, respectively.
Net Earnings (Loss) Per Common Share
The Company computes earnings per share under ASC Subtopic 260-10,
“Earnings Per Share” (“ASC 260-10”). Basic
earnings (loss) per share is computed by dividing the net income
(loss) attributable to the common stockholders (the numerator) by
the weighted average number of shares of common stock outstanding
(the denominator) during the reporting periods. Diluted loss per
share is computed by increasing the denominator by the weighted
average number of additional shares that could have been
outstanding from securities convertible into common stock (using
the “treasury stock” method), unless their effect on
net loss per share is anti-dilutive. There were 4,167,874
and 3,900,939 potentially dilutive
shares, which include outstanding common stock options, warrants,
and convertible notes, as of June 30, 2019 and December
31, 2018,
respectively.
The potential shares, which are excluded from the determination of
basic and diluted net loss per share as their effect is
anti-dilutive, are as follows:
|
|
June
30,
2019
|
December
31,
2018
|
|
Options to purchase
common stock
|
1,539,846
|
1,272,911
|
|
Warrants to
purchase common stock
|
2,628,028
|
2,628,028
|
|
Potential
equivalent shares excluded
|
4,167,874
|
3,900,939
|
8
Fair Value Measurements
Disclosures about fair value of financial instruments require
disclosure of the fair value information, whether or not recognized
in the balance sheet, where it is practicable to estimate that
value.
In
accordance with ASC Topic 820, “Fair Value Measurements and
Disclosures,” the Company measures certain financial
instruments at fair value on a recurring basis. ASC Topic 820
defines fair value, established a framework for measuring fair
value in accordance with accounting principles generally accepted
in the United States, and expands disclosures about fair value
measurements.
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC Topic 820
established a three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements).
These tiers include:
● Level 1, defined as
observable inputs such as quoted prices for identical instruments
in active markets;
● Level 2, defined as
inputs other than quoted prices in active markets that are either
directly or indirectly observable such as quoted prices for similar
instruments in active markets or quoted prices for identical or
similar instruments in markets that are not active;
and
● Level 3, defined as
unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions, such
as valuations derived from valuation techniques in which one or
more significant inputs or significant value drivers are
unobservable.
Financial assets are considered Level 3 when their fair values are
determined using pricing models, discounted cash flow methodologies
or similar techniques and at least one significant model assumption
or input is unobservable.
The carrying amounts of the Company’s financial assets and
liabilities, including cash, accounts receivable, prepaid expenses,
accounts payable, accrued expenses, and other current liabilities,
approximate their fair values because of the short maturity of
these instruments. The fair value of notes payable and convertible
notes approximates their fair values since the current interest
rates and terms on these obligations are the same as prevailing
market rates.
Share-based Compensation
The Company’s 2016 Omnibus Incentive Plan (the “Omnibus
Plan”) permits the grant of stock options and other
share-based awards to its employees, consultants and non-employee
members of the board of directors. Each January 1 the pool of
shares available for issuance under the Omnibus Plan automatically
increases by an amount equal to the lesser of (i) the number of
shares necessary such that the aggregate number of shares available
under the Omnibus Plan equals 25% of the number of fully-diluted
outstanding shares on the increase date (assuming the conversion of
all outstanding shares of preferred stock and other outstanding
convertible securities and exercise of all outstanding
options and warrants to purchase shares) and (ii) if the board
of directors takes action to set a lower amount, the amount
determined by the board. On January 1, 2019, the pool of shares
available for issuance under the Omnibus Plan automatically
increased from 1,345,074 shares to 2,649,378 shares.
The Company records share-based compensation in accordance with the
provisions of the Share-based Compensation Topic of the FASB
Codification. The guidance requires the use of option-pricing
models that require the input of highly subjective assumptions,
including the option’s expected life and the price volatility
of the underlying stock. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option
valuation model, and the resulting charge is expensed using the
straight-line attribution method over the vesting period. The
Company has elected to use the calculated value method to account
for the options it issued in 2017 (prior to commencement on June
28, 2017 of public trading in the Company’s common stock).
Under the Share-based Compensation Topic of the FASB Codification,
a nonpublic entity that is unable to estimate the expected
volatility of the price of its underlying shares may measure awards
based on a “calculated value,” which substitutes the
volatility of appropriate public companies (representative of the
company’s size and industry) as a benchmark for the
volatility of the entity’s own share price. The Company has
used the historical closing values of these companies to estimate
volatility, which was calculated to be 90%, for periods prior to
June 28, 2017, when there was no active market for the
Company’s common stock.
Stock compensation expense recognized during the period is based on
the value of share-based awards that were expected to vest during
the period adjusted for estimated forfeitures. The estimated fair
value of grants of stock options and warrants to non-employees of
the Company is charged to expense, if applicable, in the financial
statements. These options vest in the same manner as the employee
options granted under the stock incentive plan as described
above.
9
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from
Contracts with Customers. ASU 2014-09 is a comprehensive revenue
recognition standard that supersedes nearly all existing revenue
recognition guidance under current U.S. GAAP and replaces it with a
principle based approach for determining revenue recognition. Under
ASU 2014-09, revenue is recognized when a customer obtains control
of promised goods or services and is recognized in an amount that
reflects the consideration which the entity expects to receive in
exchange for those goods or services. In addition, the standard
requires disclosure of the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers.
The FASB has recently issued ASU 2016-08, ASU 2016-10, ASU 2016-11,
ASU 2016-12, and ASU 2016-20, all of which clarify certain
implementation guidance within ASU 2014-09. ASU 2014-09 is
effective for interim and annual periods beginning after December
15, 2017. The standard can be adopted either retrospectively to
each prior reporting period presented (full retrospective method),
or retrospectively with the cumulative effect of initially applying
the guidance recognized at the date of initial application (the
cumulative catch-up transition method). The Company has reviewed
ASU 2014-09 and using the full retrospective method has determined
that its adoption has had no impact on its financial position,
results of operations or cash flows. The Company adopted the
provisions of this standard in the first quarter of fiscal
2018.
In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU
2016-02 requires a lessee to record a right of use asset and a
corresponding lease liability on the balance sheet for all leases
with terms longer than 12 months. ASU 2016-02 is effective for all
interim and annual reporting periods beginning after December 15,
2018. Early adoption is permitted. A modified retrospective
transition approach is required for lessees for capital and
operating leases existing at, or entered into after, the beginning
of the earliest period presented in the financial statements. The
Company evaluated the impact that the application of the new
standard has on its consolidated financial statements and related
disclosures, and determined there has been no impact. The Company
adopted the provisions of this standard in the first quarter of
fiscal 2019.
In May 2017, the FASB issued ASU No. 2017-09, Compensation –
Stock Compensation (Topic 718) Scope of Modification Accounting.
The amendments in ASU 2017-09 provide guidance about which changes
to the terms or conditions of a share-based payment award require
an entity to apply modification accounting in Topic 718. The
adoption of ASU 2017-09, which is effective for annual periods
beginning after December 15, 2017 and for interim periods within
those annual periods, did not have any impact on the
Company’s consolidated financial statement presentation or
disclosures.
Other recent accounting pronouncements issued by the FASB,
including its Emerging Issues Task Force, the American Institute of
Certified Public Accountants, and the SEC did not or in
management’s opinion will not have a material impact on the
Company’s present or future consolidated financial
statements.
Note 3 – Going Concern
The Company’s financial statements are prepared using
accounting principles generally accepted in the United States
(“U.S. GAAP”) applicable to a going concern, which
contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has
limited commercial experience and had a cumulative net loss from
inception to June 30, 2019 of $32,774,803. The Company had working
capital of $1,585,591 as of June 30, 2019. The Company has not
established an ongoing source of revenue sufficient to cover its
operating costs and to allow it to continue as a going concern. The
accompanying financial statements for the period ended June 30,
2019 have been prepared assuming the Company will continue as a
going concern. However, the Company’s cash resources will
likely be insufficient to meet its anticipated needs during the
next twelve months. The Company will require additional financing
to fund its future planned operations, including research and
development and commercialization of its products.
The ability of the Company to continue as a going concern is
dependent on the Company obtaining adequate capital to fund
operating losses until it establishes a revenue stream and becomes
profitable. Management’s plans to continue as a going concern
include raising additional capital through sales of equity
securities and borrowing. However, management cannot provide any
assurances that the Company will be successful in accomplishing any
of its plans. If the Company is not able to obtain the necessary
additional financing on a timely basis, the Company will be
required to delay, reduce the scope of or eliminate one or more of
the Company’s research and development activities or
commercialization efforts or perhaps even cease the operation of
its business. The ability of the Company to continue as a going
concern is dependent upon its ability to successfully secure other
sources of financing and attain profitable operations. There is
substantial doubt about the ability of the Company to continue as a
going concern for one year from the issuance of the accompanying
condensed consolidated financial statements. The accompanying
condensed consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to
continue as a going concern.
Note 4 – Inventory
As of June 30, 2019 and December 31, 2018, inventory consisted of raw materials to be used
in the assembly of a TAEUS system. As of June 30, 2019, the Company
had no orders pending for the sale of a TAEUS
system.
10
Note 5 – Fixed Assets
As of
June 30, 2019 and December 31, 2018, fixed assets consisted of the
following:
|
|
June
30,
2019
|
December
31,
2018
|
|
Computer equipment
and fixtures
|
$684,418
|
$679,179
|
|
Accumulated
depreciation
|
(445,691)
|
(405,946)
|
|
Fixed assets,
net
|
$238,727
|
$273,233
|
Depreciation expense for the six months ended June 30, 2019 and
June 30, 2018 was $39,744 and $30,204, respectively.
Note 6 – Accounts Payable and Accrued
Liabilities
As of
June 30, 2019 and December 31, 2018, current liabilities consisted
of the following:
|
|
June
30,
2019
|
December
31,
2018
|
|
Accounts
payable
|
$1,011,324
|
$631,472
|
|
Accrued
payroll
|
88,488
|
29,302
|
|
Accrued
bonuses
|
260,829
|
263,497
|
|
Accrued employee
benefits
|
5,750
|
27,804
|
|
Insurance premium
financing
|
-
|
22,508
|
|
Total
|
$1,366,391
|
$974,583
|
Note 7 – Capital Stock
At June 30, 2019, the authorized capital of the Company consisted
of 60,000,000 shares of capital stock, consisting of 50,000,000
shares of common stock with a par value of $0.0001 per share, and
10,000,000 shares of preferred stock with a par value of $0.0001
per share. As of June 30, 2019 and December 31, 2018, there were
7,422,642 shares of common stock issued and outstanding and no
preferred stock outstanding.
11
Note 8 – Stock Options and Warrants
Stock options are awarded to the Company’s employees,
consultants and non-employee members of the board of directors
under the 2016 Omnibus Incentive Plan and are generally granted
with an exercise price equal to the market price of the
Company’s common stock at the date of grant. The aggregate
fair value of these stock options granted by the Company during the
six months ended June 30, 2019 was determined to be $769,451 using
the Black-Scholes-Merton option-pricing model based on the
following assumptions: (i) volatility rate of 103% to 124%, (ii)
discount rate of 0%, (iii) zero expected dividend yield, and (iv)
expected life of 7 to 10 years. A summary of option activity under
the Company’s stock options as of June 30, 2019, and changes
during the six months then ended is presented below:
|
|
Number of
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual Term
(Years)
|
|
Balance outstanding
at December 31, 2018
|
1,272,911
|
$4.56
|
6.31
|
|
Granted
|
348,000
|
2.05
|
7.01
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
|
Cancelled or
expired
|
(81,065)
|
-
|
-
|
|
Balance outstanding
at June 30, 2019
|
1,539,846
|
$3.99
|
6.10
|
|
Exercisable at June
30, 2019
|
660,300
|
$5.41
|
5.33
|
The following table summarizes all stock warrant activity of the
Company for the six months ended June 30, 2019:
|
|
Number of
Warrants
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Term (Years)
|
|
|
Balance outstanding
at December 31, 2018
|
2,628,028
|
$6.32
|
3.17
|
|
|
Granted
|
-
|
-
|
-
|
|
|
Exercised
|
-
|
-
|
-
|
|
|
Forfeited
|
- -
|
|
-
|
|
|
Expired
|
-
|
-
|
-
|
|
|
Balance outstanding
at June 30, 2019
|
2,628,028
|
$6.32
|
2.92
|
|
|
Exercisable at June
30, 2019
|
2,628,028
|
$6.32
|
2.92
|
|
12
Note 9 – Commitments & Contingencies
Office Lease
Effective January 1, 2015, the Company entered into an office lease
agreement with Green Court, LLC, a Michigan limited liability
company, for approximately 3,657 rentable square feet of space, for
the initial monthly rent of $5,986, which commenced on January 1,
2015 for an initial term of 60 months. On October 10, 2017 this
lease was amended, increasing the rentable square feet of space to
3,950 and the monthly rent to $7,798. Under the terms of the lease
the Company has an option on the same space for an additional
60-month term. Future minimum payments under this lease are as
follows:
|
2019
|
46,788
|
|
Total
|
$46,788
|
For the three and six months ended June 30, 2019 and 2018, the
Company incurred rent expenses of $23,188 and $52,507 and $26,104
and $52,248, respectively.
Employment and Consulting Agreements
Francois Michelon –
Effective May 12, 2017, the Company entered into an amended and
restated employment agreement with Francois Michelon, the
Company’s Chief Executive Officer and Chairman of the board
of directors. The term of the employment agreement runs through
December 31, 2019. The employment agreement provides for an annual
base salary that is subject to adjustment at the board of
directors’ discretion. The annual base salary in effect
during the period covered by this Form 10-Q was $355,350. Under the
employment agreement, Mr. Michelon is eligible for an annual cash
bonus based upon achievement of performance-based objectives
established by the board of directors. Pursuant to Mr.
Michelon’s employment agreement, in connection with the
closing of the Company’s initial public offering he was
granted options to purchase an aggregate 339,270 shares of common
stock. The options have a weighted average exercise price of $4.96
per share of common stock and vest in three equal annual
installments beginning on May 12, 2018. Upon termination without
cause, any portion of Mr. Michelon’s options scheduled to
vest within 12 months will automatically vest, and upon termination
without cause within 12 months following a change of control, the
entire unvested portion of the options will automatically vest.
Upon termination for any other reason, the entire unvested portion
of the options will terminate.
If Mr. Michelon’s employment is terminated by the Company
without cause, Mr. Michelon will be entitled to receive 12
months’ continuation of his current base salary and a lump
sum payment equal to 12 months of continued healthcare coverage (or
24 months’ continuation of his current base salary and a lump
sum payment equal to 24 months of continued healthcare coverage if
such termination occurs within one year following a change in
control).
Under his employment agreement, Mr. Michelon is eligible to receive
benefits that are substantially similar to those of the
Company’s other senior executive officers.
Michael Thornton –
Effective May 12, 2017, the Company entered into an amended and
restated employment agreement with Michael Thornton, the
Company’s Chief Technology Officer. The term of the
employment agreement runs through December 31, 2019. The employment
agreement provides for an annual base salary that is subject to
adjustment at the board of directors’ discretion. The annual
base salary in effect during the period covered by this Form 10-Q
was $267,800. Under the employment agreement, Mr. Thornton is
eligible for an annual cash bonus based upon achievement of
performance-based objectives established by the board of directors.
Pursuant to Mr. Thornton’s employment agreement, in
connection with the closing of the Company’s initial public
offering he was granted options to purchase an aggregate 345,298
shares of common stock. The options have a weighted average
exercise price of $4.96 per share of common stock and vest in three
equal annual installments beginning on May 12, 2018. Upon
termination without cause, any portion of Mr. Thornton’s
option scheduled to vest within 12 months will automatically vest,
and upon termination without cause within 12 months following a
change of control, the entire unvested portion of the options will
automatically vest. Upon termination for any other reason, the
entire unvested portion of the options will
terminate.
If Mr. Thornton’s employment is terminated by the Company
without cause, Mr. Thornton will be entitled to receive 12
months’ continuation of his current base salary and a lump
sum payment equal to 12 months of continued healthcare coverage (or
24 months’ continuation of his current base salary and a lump
sum payment equal to 24 months of continued healthcare coverage if
such termination occurs within one year following a change in
control).
Under his employment agreement, Mr. Thornton is eligible to receive
benefits that are substantially similar to those of the
Company’s other senior executive officers.
13
David Wells – On May
12, 2017, the Company entered into a consulting agreement with
StoryCorp Consulting (“StoryCorp”), pursuant to which
David Wells provides services to the Company as its Chief Financial
Officer. Pursuant to the consulting agreement, the Company pays to
StoryCorp a monthly fee of $9,000, and in May 2018 this monthly fee
was increased to $9,540. Additionally, pursuant to the consulting
agreement, the Company granted to Mr. Wells a stock option to
purchase 15,000 shares of common stock in connection with the
closing of the Company’s initial public offering, having an
exercise price per share equal to $5.00 and vesting in twelve equal
quarterly installments, and, for so long as the consulting
agreement is in place, will grant to Mr. Wells a stock option to
purchase the same number of shares of common stock with the same
terms on each annual anniversary of the date of the consulting
agreement. In May 2018, the annual stock option amount was
increased and on December 13, 2018, Mr. Wells was granted options
to purchase an additional 35,000 shares of common
stock.
On May
13, 2019, the Company entered into an employment agreement with
David Wells that supersedes the consulting agreement between the
Company and StoryCorp. The employment agreement provides for an
annual base salary of $230,000 and eligibility for an annual cash
bonus to be paid based on attainment of Company and individual
performance objectives to be established by the Company’s
board of directors (in 2019, the amount of such cash bonus if all
goals are achieved will be 30% of the base salary plus base fees
paid to StoryCorp Consulting under the Consulting Agreement). The
Employment Agreement also provides for eligibility to receive
benefits substantially similar to those of the Company’s
other senior executive officers.
Pursuant
to the Employment Agreement, on May 13, 2019 Mr. Wells was granted
stock options to purchase 56,000 shares of the Company’s
common stock. The stock options have an exercise price of $1.38 per
share, and vest in three equal annual installments beginning on the
first anniversary of the grant date.
Litigation
From time to time the Company may become a party to litigation in
the normal course of business. There are currently no legal matters
that management believes would have a material effect on the
Company’s financial position or results of
operations.
Note 10 – Subsequent Event
On July
26, 2019, the Company conducted a private placement in which the
Company sold $2,587,893 aggregate principal amount of senior
secured convertible promissory notes (the “Notes”) to
accredited investors.
The
Notes are convertible into common stock at a conversion price per
share equal to $1.49 and bear interest at a rate of 10% per annum
until maturity on April 26, 2020 (the “Maturity Date”).
Interest will be paid in arrears on the outstanding principal
amount on the three month anniversary of the issuance of the Notes
and each three month period thereafter and on the Maturity Date.
The Notes provide for customary events of default. In the case of
an event of default with respect to the Notes, each noteholder may
declare its Note to be due and payable immediately without further
action or notice. If such an event of default occurs and be
continuing, interest on the Notes will automatically be increased
to 18% until the default is cured.
In
addition, the Company issued warrants exercisable for 1,736,855
shares of the Company’s common stock to accredited investors
and issued to National Securities Corporation, which served as
placement agent in the offering, and its designees warrants
exercisable for 173,685 shares of common stock. Each warrant
entitles the holder to purchase shares of Common Stock for an
exercise price per share equal to $1.49. The warrants are
exercisable immediately and expire July 26, 2022.
Completion
of the offering described above increased the Company’s
stockholders’ equity by approximately $1,274,916.
Accordingly, on a pro forma basis after giving effect to the
offering, the Company’s total stockholders’ equity as
of June 30, 2019 would have been approximately
$3,099,235.
14
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
Forward-Looking Statements
As used
in this Quarterly Report on Form 10-Q (this “Form
10-Q”), unless the context otherwise requires, the terms
“we,” “us,” “our,”
“ENDRA” and the “Company” refer to ENDRA
Life Sciences Inc., a Delaware corporation, and its wholly-owned
subsidiary. The following discussion and analysis of our financial
condition and results of operations should be read in conjunction
with our historical financial statements and related notes thereto
in this Form 10-Q. This Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended, that are intended to be covered by the
“safe harbor” created by those sections.
Forward-looking statements, which are based on certain assumptions
and describe our future plans, strategies and expectations, can
generally be identified by the use of forward-looking terms such as
“believe,” “expect,” “may,”
“will,” “should,” “could,”
“seek,” “intend,” “plan,”
“estimate,” “anticipate” or other
comparable terms. All statements other than statements of
historical facts included in this Form 10-Q regarding our
strategies, prospects, financial condition, operations, costs,
plans and objectives are forward-looking statements. Examples of
forward-looking statements include, among others, statements we
make regarding expectations for revenues, cash flows and financial
performance, the anticipated results of our development efforts and
the timing for receipt of required regulatory approvals and product
launches. Forward-looking statements are neither historical facts
nor assurances of future performance. Instead, they are based only
on our current beliefs, expectations and assumptions regarding the
future of our business, future plans and strategies, projections,
anticipated events and trends, the economy and other future
conditions. Because forward-looking statements relate to the
future, they are subject to inherent uncertainties, risks and
changes in circumstances that are difficult to predict and many of
which are outside of our control. Our actual results and financial
condition may differ materially from those indicated in the
forward-looking statements. Therefore, you should not rely on any
of these forward-looking statements. Important factors that could
cause our actual results and financial condition to differ
materially from those indicated in the forward-looking statements
include, among others, the following: our limited commercial
experience, limited cash and history of losses; our ability to
obtain adequate financing to fund our business operations in the
future; our ability to achieve profitability; our ability to
develop a commercially feasible application based on our
Thermo-Acoustic Enhanced Ultrasound (“TAEUS”)
technology; market acceptance of our technology; results of our
human studies, which may be negative or inconclusive; our ability
to find and maintain development partners; our reliance on
collaborations and strategic alliances and licensing arrangements;
the amount and nature of competition in our industry; our ability
to protect our intellectual property; potential changes in the
healthcare industry or third-party reimbursement practices; delays
and changes in regulatory requirements, policy and guidelines
including potential delays in submitting required regulatory
applications for CE mark certification or Food and Drug
Administration (“FDA”) approval; our ability to obtain
CE mark certification and secure required FDA and other
governmental approvals for our TAEUS applications; our ability to
comply with regulation by various federal, state, local and foreign
governmental agencies and to maintain necessary regulatory
clearances or approvals; and the other risks and uncertainties
described in the Risk Factors section of our Annual Report on Form
10-K for the period ended December 31, 2018, as filed with the SEC
on March 11, 2019, and in the Management’s Discussion and
Analysis of Financial Condition and Results of Operations section
of this Form 10-Q. We undertake no obligation to publicly update
any forward-looking statement, whether written or oral, that may be
made from time to time, whether as a result of new information,
future developments or otherwise.
Overview
We are leveraging experience with pre-clinical enhanced ultrasound
devices to develop technology for increasing the capabilities of
clinical diagnostic ultrasound, to broaden patient access to the
safe diagnosis and treatment of a number of significant medical
conditions in circumstances where expensive X-ray computed
tomography (“CT”) and magnetic resonance imaging
(“MRI”) technology is unavailable or
impractical.
In 2010, we began marketing and selling our Nexus 128 system, which
combined light-based thermoacoustics and ultrasound to address the
imaging needs of researchers studying disease models in
pre-clinical applications. Building on this expertise in
thermoacoustics, we have developed a next-generation technology
platform — Thermo Acoustic Enhanced Ultrasound, or TAEUS
— which is intended to enhance the capability of clinical
ultrasound technology and support the diagnosis and treatment of a
number of significant medical conditions that currently require the
use of expensive CT or MRI imaging or where imaging is not
practical using existing technology. We ceased production of our
Nexus 128 system as of January 1, 2019 and stopped providing
service support and parts for all existing Nexus 128 systems as of
July 1, 2019 in order to focus our resources on the development of
our TAEUS technology.
Unlike the near-infrared light pulses used in our legacy Nexus 128
system, our TAEUS technology uses radio frequency
(“RF”) pulses to stimulate tissues, using a small
fraction of the energy that would be transmitted into the body
during an MRI scan. The use of RF energy allows our TAEUS
technology to penetrate deep into tissue, enabling the imaging of
human anatomy at depths equivalent to those of conventional
ultrasound. The RF pulses are absorbed by tissue and converted into
ultrasound signals, which are detected by an external ultrasound
receiver and a digital acquisition system that is part of the TAEUS
system. The detected ultrasound is processed into images using our
proprietary algorithms and displayed to complement conventional
gray-scale ultrasound images.
We expect that the first-generation TAEUS application will be a
standalone ultrasound accessory designed to cost-effectively
quantify fat in the liver and stage progression of nonalcoholic
fatty liver disease (“NAFLD”), which can only be
achieved today with impractical surgical biopsies or MRI scans.
Subsequent TAEUS offerings are expected to be implemented via a
second generation hardware platform that can run multiple clinical
software applications that we will offer TAEUS users for a one-time
licensing fee – adding ongoing customer value to the TAEUS
platform and a growing software revenue stream for our
Company.
15
In April 2016, we entered into a Collaborative Research Agreement
with General Electric Company, acting through its GE Healthcare
business unit and the GE Global Research Center (collectively,
“GE Healthcare”). Under the terms of the agreement, GE
Healthcare has agreed to assist us in our efforts to commercialize
our TAEUS technology for use in a fatty liver application by, among
other things, providing equipment and technical advice, and
facilitating introductions to GE Healthcare clinical ultrasound
customers. In return for this assistance, we have agreed to afford
GE Healthcare certain rights of first offer with respect to
manufacturing and licensing rights for the target application. More
specifically, we have agreed that, prior to commercially releasing
our NAFLD TAEUS application, we will offer to negotiate an
exclusive ultrasound manufacturer relationship with GE Healthcare
for a period of at least one year of commercial sales. The
commercial sales would involve, within our sole discretion, either
our Company commercially selling GE Healthcare ultrasound systems
as the exclusive ultrasound system with our TAEUS fatty liver
application embedded, or GE Healthcare being the exclusive
ultrasound manufacturer to sell ultrasound systems with our TAEUS
fatty liver application embedded. The agreement is subject to
termination by either party upon not less than 60 days’
notice. On January 30, 2018, we and GE Healthcare entered into an
amendment to our agreement, extending its term by 21 months to
January 22, 2020.
In November 2017, we contracted with the Centre for Imaging
Technology Commercialization (“CIMTEC”) to initiate
human studies, through Canada-based Robarts Research Institute,
with our TAEUS device targeting NAFLD. In October 2018, we received
an Investigational Testing Authorization from Health Canada to
commence the first human studies with our TAEUS clinical system
targeting NAFLD, guiding our algorithm development, and comparing
our technology to MRI. The feasibility study, the first of several
planned human studies, is being conducted in collaboration with
Robarts Research Institute in London, Canada. We reported our
initial study results in March 2019. The data collected from the
study, including additional usability inputs, will be included in
our TAEUS liver device technical file submission for device CE
Mark, which we anticipate in the second half of
2019.
Each of our TAEUS platform applications will require regulatory
approvals before we are able to sell or license the application.
Based on certain factors, such as the installed base of ultrasound
systems, availability of other imaging technologies, such as CT and
MRI, economic strength and applicable regulatory requirements, we
intend to seek initial approval of our applications for sale in the
European Union, followed by the United States and
China.
Financial Operations Overview
Revenue
To date our revenue has been generated by the placement and sale of
our discontinued Nexus 128 thermoacoustic imaging systems for use
in pre-clinical applications, and related service revenue. No
revenue has been generated by our TAEUS technology, which is
currently in the product development stage.
Cost of Goods Sold
Our cost of goods sold is related to our direct costs associated
with the development and shipment of our discontinued Nexus 128
systems placed in pre-clinical settings, and costs associated with
service provided for these systems.
Research and Development Expenses
Our research and development expenses primarily include wages, fees
and equipment for the development of our TAEUS technology platform
and the proposed applications. Additionally, we incur certain costs
associated with the protection of our products and inventions
through a combination of patents, licenses, applications and
disclosures.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of headcount and
consulting costs, and marketing and tradeshow expenses. Currently,
our marketing efforts are through our website and attendance of key
industry meetings and conferences. In connection with the
commercialization of our TAEUS applications, we expect to
build a small sales and marketing team to train and support global
ultrasound distributors, as well as execute traditional marketing
activities such as promotional materials, electronic media and
participation in industry events and conferences.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries
and related expenses for our management and personnel, and
professional fees, such as accounting, consulting and
legal.
16
Critical Accounting Policies and Estimates
Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of
contingent liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
Management makes estimates that affect certain accounts including
deferred income tax assets, accrued expenses, fair value of equity
instruments and reserves for any other commitments or
contingencies. Any adjustments applied to estimates are recognized
in the period in which such adjustments are
determined.
Share-based Compensation
Our 2016 Omnibus Incentive Plan (the “Omnibus Plan”)
permits the grant of share options and shares to our employees,
consultants and non-employee members of our board of directors.
Each January 1 the pool of shares available for issuance under the
Omnibus Plan automatically increases by an amount equal to the
lesser of (i) the number of shares necessary such that the
aggregate number of shares available under the Omnibus Plan equals
25% of the number of fully-diluted outstanding shares on the
increase date (assuming the conversion of all outstanding shares of
preferred stock and other outstanding convertible securities and
exercise of all outstanding options and warrants to purchase
shares) and (ii) if the board of directors takes action to set a
lower amount, the amount determined by the board. On January 1,
2019, the pool of shares available for issuance under the Omnibus
Plan automatically increased from 1,345,074 shares to 2,649,378
shares.
We record share-based compensation in accordance with the
provisions of the Share-based Compensation Topic of the FASB
Codification. The guidance requires the use of option-pricing
models that require the input of highly subjective assumptions,
including the option’s expected life and the price volatility
of the underlying stock. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option
valuation model which uses certain assumptions related to risk-free
interest rates, expected volatility, expected life of the common
stock options, and future dividends, and the resulting charge is
expensed using the straight-line attribution method over the
vesting period.
Stock compensation expense recognized during the period is based on
the value of share-based awards that were expected to vest during
the period adjusted for estimated forfeitures. The estimated fair
value of grants of stock options and warrants to non-employees is
charged to expense, if applicable, in the financial
statements.
Recent Accounting Pronouncements
See Note 2 of the accompanying financial statements for a
discussion of recently issued accounting standards.
Results of Operations
Three Months Ended June 30, 2019 and 2018
Revenue
We had
no revenue during the three months ended June 30, 2019 and
2018.
Cost of Goods Sold
There
was no cost of goods sold for each of the three months ended June
30, 2019 and 2018.
17
Research and Development
Research
and development expenses were $1,304,809 for the three months ended
June 30, 2019, as compared to $839,756 for the three months ended
June 30, 2018, an increase of $465,053, or 55%. The costs include
primarily wages, fees and equipment for the development of our
TAEUS product line. Research and development expenses increased
from the same period for the prior year due primarily to increased
spending to develop TAEUS applications, which included expenses for
our contracted development vendors.
Sales and Marketing
Sales
and marketing expenses were $88,343 for the three months ended June
30, 2019, as compared to $41,357 for the three months ended June
30, 2018, an increase of $46,986, or 114%. The increase was
primarily due additional headcount and pre-selling activities for
our TAEUS product line. Currently, our marketing efforts are
through our website and attendance of key industry meetings. Our
future clinical business will involve hiring and training
additional staff to support our sales efforts. As we seek to
complete the development and commercialization of our TAEUS
applications, subject to available funds, we intend to build a
small sales and marketing team to train and support global
ultrasound distributors, as well as execute traditional marketing
activities such as promotional materials, electronic media and
participation in industry conferences.
General and Administrative
Our
general and administrative expenses for the three months ended June
30, 2019 were $932,021, compared to $941,955 for the three months
ended June 30, 2018, a decrease of $9,934, or 1%. Our wage and
related expenses for the three months ended June 30, 2019 were
$501,850, compared to $440,449 for the three months ended June 30,
2018. Wage and related expenses in the three months ended June 30,
2019, included $58,731 for bonuses and $178,905 of stock
compensation expense related to the issuance and vesting of
options, compared to $40,800 for bonuses and $163,371 of stock
compensation expense for the same period in 2018. Our professional
fees for the three months ended June 30, 2019 were $334,468,
compared to $438,402 for the three months ended June 30,
2018.
Net Loss
As a
result of the foregoing, for the three months ended June 30, 2019,
we recorded a net loss of $2,334,372 compared to a net loss of
$1,846,772 for the three months ended June 30, 2018.
Six months Ended June 30, 2019 and 2018
Revenue
We had
no revenue during the six months ended June 30, 2019, as compared
to $6,174 for the six months ended June 30, 2018. The revenue was a
result of service activity on our installed base of Nexus 128
pre-clinical systems. During the six months ended June 30, 2019, we
ceased production of our Nexus 128 system and announced our plan to
stop providing service support and parts for all existing systems
as of July 1, 2019, in order to focus our resources on the
development of our TAEUS technology.
Cost of Goods Sold
There
was no cost of goods sold for each of the six months ended June 30,
2019 and 2018.
18
Research and Development
Research
and development expenses were $3,078,306 for the six months ended
June 30, 2019, as compared to $2,508,579 for the six months ended
June 30, 2018, an increase of $569,727, or 23%. The costs include
primarily wages, fees and equipment for the development of our
TAEUS product line. Research and development expenses increased
from the same period for the prior year due primarily to increased
spending to develop TAEUS applications, which included expenses for
our contracted development vendors.
Sales and Marketing
Sales
and marketing expenses were $145,161 for the six months ended June
30, 2019, as compared to $148,534 for the six months ended June 30,
2018, a decrease of $3,373, or 2%. The decrease was primarily due
to reduced costs associated with commercialization of the TAEUS
product line. Currently, our marketing efforts are through our
website and attendance of key industry meetings. Our future
clinical business will involve hiring and training additional staff
to support our sales efforts. As we seek to complete the
development and commercialization of our TAEUS applications, we
intend to build a small sales and marketing team to train and
support global ultrasound distributors, as well as execute
traditional marketing activities such as promotional materials,
electronic media and participation in industry
conferences.
General and Administrative
Our
general and administrative expenses for the six months ended June
30, 2019 were $1,848,924, compared to $2,009,747 for the six months
ended June 30, 2018, a decrease of $160,823, or 8%. Our wage and
related expenses for the six months ended June 30, 2019 were
$910,194, compared to $916,703 for the six months ended June 30,
2018. Wage and related expenses in the six months ended June 30,
2019, included $93,102 for bonuses and $350,742 of stock
compensation expense related to the issuance and vesting of
options, compared to $177,950 for bonuses and $327,042 of stock
compensation expense for the same period in 2018. Our professional
fees for the six months ended June 30, 2019 were $692,305, compared
to $853,139 for the six months ended June 30, 2018.
Net Loss
As a
result of the foregoing, for the six months ended June 30, 2019, we
recorded a net loss of $5,083,107 compared to a net loss of
$4,672,075 for the six months ended June 30, 2018.
Liquidity and Capital Resources
To date
we have funded our operations through private and public sales of
our securities. As of June 30, 2019, we had $2,267,530 in cash. In
May 2017, we completed our initial public offering, raising net
proceeds of approximately $8.6 million after deducting offering
expenses of approximately $0.8 million in underwriting discounts,
commissions and expenses and approximately $0.3 million in offering
expenses payable by us. In June 2018, we completed the placement of
senior secured convertible promissory notes and warrants, raising
net proceeds of approximately $935,000 after deducting offering
expenses of approximately $142,000 payable by us. On October 15,
2018, we completed an underwritten public offering of 1,477,750
shares of our common stock. The net proceeds from this offering
were approximately $2.7 million, after deducting underwriting
discounts and commissions and other offering expenses. On November
13, 2018, we completed an underwritten public offering of 1,385,750
shares of our common stock. The net proceeds from this offering
were approximately $4.9 million, after deducting underwriting
discounts and commissions and other offering expenses. In
connection with these underwritten public offerings, the promissory
notes issued in June 2018 converted into common stock pursuant to
their terms. In July 2019, we
completed a private placement of senior secured convertible
promissory notes and warrants, raising net proceeds of
approximately $2,490,500 after deducting offering expenses of
approximately $314,500 payable by us. The promissory notes bear
interest at a rate of 10% per annum until maturity on April 26,
2020.
We
believe that cash on hand at June 30, 2019, together with the
proceeds from our July 2019 convertible note financing, will be
sufficient to fund our current operations into the fourth quarter
of 2019. However, we still need additional capital to execute our
commercialization plan and if we do not raise additional capital in
the next several months we will need to significantly slow or pause
our business activities until such time as we are able to raise
additional capital. We continue to evaluate and manage our capital
needs to support our clinical, regulatory and operational
activities and prepare for the results of our human studies data
and EU commercialization. We are currently exploring potential
financing options that may be available to us, including additional
sales of our common stock. However, we have no commitments to
obtain any additional funds, and there can be no assurance such
funds will be available on acceptable terms or at all. If we are
unable to obtain additional financing in a timely fashion and on
terms acceptable to us, our financial condition and results of
operations may be materially adversely affected and we may not be
able to continue operations or execute our stated commercialization
plan.
The
financial statements included in this Form 10-Q have been prepared
assuming we will continue as a going concern, which contemplates
the realization of assets and the settlement of liabilities and
commitments in the normal course of business. As reflected in the
accompanying financial statements, during the six months ended June
30, 2019, we incurred net losses of $5,083,107 and used cash in
operations of $4,198,607. These and other factors raise substantial
doubt about our ability to continue as a going concern for one year
from the issuance of the accompanying financial statements. The
financial statements do not include any adjustments that might be
necessary should we be unable to continue as a going
concern.
19
Operating Activities
During
the six months ended June 30, 2019, we used $4,198,607 of cash in
operating activities primarily as a result of our net loss of
$5,083,107, which included non-cash charges for share-based
compensation of $659,217, depreciation expenses of $39,744, and net
changes in operating assets and liabilities of
$(185,539).
During
the six months ended June 30, 2018, we used $4,331,320 of cash in
operating activities primarily as a result of our net loss of
$4,672,075, which included non-cash charges for share-based
compensation of $749,749, $30,204 in depreciation expenses, $5,822
in imputed interest on promissory notes, and net changes in
operating assets and liabilities of $(445,020).
Investing Activities
During
the six months ended June 30, 2019, the Company used $5,238 in
investing activities related to purchase of equipment.
During
the six months ended June 30, 2018, the Company had no cash flows
from investing activities.
Financing Activities
During
the six months ended June 30, 2019, there were no cash flows from
financing activities.
During
the six months ended June 30, 2018, the Company received $935,300
in financing activities in proceeds from convertible
notes.
Funding Requirements
We have
not completed development of our TAEUS technology platform
applications. We expect to continue to incur significant expenses
for the foreseeable future. We anticipate that our expenses will
increase substantially as we:
●
advance the engineering design and development of our NAFLD TAEUS
application;
●
prepare regulatory filings required for marketing approval of our
NAFLD TAEUS application in the European Union and the United
States;
●
seek to hire a small internal marketing team to engage and support
channel partners and clinical customers for our NAFLD TAEUS
application;
●
commence marketing of our NAFLD TAEUS application;
●
advance development of our other TAEUS applications;
and
●
add operational, financial and management information systems and
personnel, including personnel to support our product development,
planned commercialization efforts and our operation as a public
company.
20
It is
possible that we will not achieve the progress that we expect
because the actual costs and timing of completing the development
and regulatory approvals for a new medical device are difficult to
predict and are subject to substantial risks and delays. We have no
committed external sources of funds. We do not expect that our
existing cash will be sufficient for us to complete the
commercialization of our NAFLD TAEUS application or to complete the
development of any other TAEUS application and we will need to
raise substantial additional capital for those purposes. As a
result, we will need to finance our future cash needs through
public or private equity offerings, debt financings, corporate
collaboration and licensing arrangements or other financing
alternatives. Our forecast of the period of time through which our
financial resources will be adequate to support our operations is a
forward-looking statement and involves risks and uncertainties, and
actual results could vary as a result of a number of factors,
including the factors discussed in the section of our Annual Report
on Form 10-K for the year ended December 31, 2018, entitled
“Risk Factors” . We have based this estimate on
assumptions that may prove to be wrong, and we could utilize our
available capital resources sooner than we currently
expect.
Until
we can generate a sufficient amount of revenue from our TAEUS
platform applications, if ever, we expect to finance future cash
needs through public or private equity offerings, debt financings
or corporate collaborations and licensing arrangements. Additional
funds may not be available when we need them on terms that are
acceptable to us, or at all. If adequate funds are not available,
we may be required to delay, reduce the scope of or eliminate one
or more of our research or development programs or our
commercialization efforts or perhaps even cease the operation of
our business. To the extent that we raise additional funds by
issuing equity securities, our stockholders may experience
additional dilution, and debt financing, if available, may involve
restrictive covenants. To the extent that we raise additional funds
through collaborations and licensing arrangements, it may be
necessary to relinquish some rights to our technologies or
applications or grant licenses on terms that may not be favorable
to us. We may seek to access the public or private capital markets
whenever conditions are favorable, even if we do not have an
immediate need for additional capital at that time.
Off-Balance Sheet Transactions
At June
30, 2019, the Company did not have any transactions, obligations or
relationships that could be considered off-balance sheet
arrangements.
Item 3. Quantitative and Qualitative
Disclosure About Market Risk
As a
smaller reporting company, we are not required to provide the
information required by this Item 3.
Item 4. Controls and
Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-Q, management
performed, with the participation of our principal executive
officer and principal financial officer, an evaluation of the
effectiveness of our disclosure controls and procedures as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act
of 1934, as amended (the “Exchange Act”). Our
disclosure controls and procedures are designed to ensure that
information required to be disclosed in the reports we file or
submit under the Exchange Act is recorded, processed, summarized,
and reported within the time periods specified in the SEC’s
forms, and that such information is accumulated and communicated to
our management, including our principal executive officer and
principal financial officer, to allow timely decisions regarding
required disclosures. Based on the evaluation, our principal
executive officer and principal financial officer concluded that,
as of June 30, 2019, our disclosure controls and procedures were
not effective.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented
or detected on a timely basis. We identified the following material
weakness as of June 30, 2019: insufficient personnel resources
within the accounting function to segregate the duties over
financial transaction processing and reporting.
To remediate our internal control weaknesses, management intends to
implement the following measures, as finances allow:
●
Adding sufficient accounting personnel or outside consultants to
properly segregate duties and to effect a timely, accurate
preparation of the financial statements.
● Developing
and maintaining adequate written accounting policies and
procedures, once we hire additional accounting personnel or outside
consultants.
The
additional hiring is contingent upon our efforts to obtain
additional funding and the results of our operations. Management
expects to secure funds in the coming fiscal year but provides no
assurances that it will be able to do so.
Changes in Internal Control over Financial Reporting
There
was no change to our internal controls or in other factors that
could affect these controls during the three months
ended June 30,
2019 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting. However, our management is currently seeking to improve
our controls and procedures in an effort to remediate the
deficiency described above.
21
PART II – OTHER
INFORMATION
Item 1. Legal
Proceedings
We are
not currently a party to any pending legal proceedings that we
believe will have a material adverse effect on our business or
financial condition. We may, however, be subject to various claims
and legal actions arising in the ordinary course of business from
time to time.
Item 1A. Risk
Factors
In
addition to the other information set forth in this report, you
should carefully consider the factors discussed under “Risk
Factors” in our Annual Report on Form 10-K for the period
ended December 31, 2018, as filed with the Securities and Exchange
Commission on March 11, 2019. These factors could materially
adversely affect our business, financial condition, liquidity,
results of operations and capital position, and could cause our
actual results to differ materially from our historical results or
the results contemplated by any forward-looking statements
contained in this report.
Item 2. Recent Sales of Unregistered
Securities; Use of Proceeds from Registered Securities
Not
applicable.
Item 3. Defaults Upon Senior
Securities
Not
applicable.
Item 4. Mine Safety
Disclosures
Not
applicable.
Item 5. Other
Information
On August 8, 2019, we issued an
earnings release reporting our results of operations for the three
months ended June 30, 2019. A copy of that earnings release is
furnished herewith as Exhibit 99.1 pursuant to Item 2.02 of Form
8-K. This information shall not be deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934, nor shall it be
deemed incorporated by reference in any filing under the Securities
Act
22
Item 6. Exhibits
|
Exhibit Number
|
|
Description
|
|
|
Fourth
Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 to the Company’s
Current Report on Form 8-K filed on May 12, 2017)
|
|
|
|
Amended
and Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.4 to the Company’s Registration Statement on Form
S-1 (File No. 333-214724), as amended, originally filed on November
21, 2016)
|
|
|
|
Specimen
Certificate representing shares of common stock of the Company
(incorporated by reference to Exhibit 4.1 to the Company’s
Registration Statement on Form S-1 (File No. 333-214724), as
amended, originally filed on November 21, 2016)
|
|
|
|
Employment
Agreement, dated May 13, 2019, by and between the Company and David
Wells* (incorporated by reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q filed on May 14,
2019)
|
|
|
|
Employment
Agreement, dated April 20, 2019, by and between the Company and
Renaud Maloberti* (filed herewith)
|
|
|
|
Certification
of Periodic Report by Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14a and pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
|
|
|
|
Certification
of Periodic Report by Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14a and pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
|
|
|
|
Certification
of Periodic Report by Chief Executive Officer and Chief Financial
Officer pursuant to U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
|
|
|
Earnings release issued August 8, 2019 (furnished
herewith)
|
|
|
101.INS
|
|
XBRL
Instance Document (filed herewith)
|
|
101.SCH
|
|
XBRL
Taxonomy Schema (filed herewith)
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase (filed
herewith)
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase (filed
herewith)
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase (filed herewith)
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase (filed
herewith)
|
*
Indicates management compensatory plan, contract or
arrangement.
23
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
ENDRA LIFE SCIENCES INC.
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
Date:
August 8, 2019
|
By:
|
/s/
Francois Michelon
|
|
|
|
Name:
Francois Michelon
|
|
|
|
Title:
Chief Executive Officer and Chairman
(Principal
Executive Officer)
|
|
Date:
August 8, 2019
|
By:
|
/s/
David Wells
|
|
|
|
Name:
David Wells
|
|
|
|
Title:
Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
24