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EX-23.1 - CONSENT OF RBSM LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - ENDRA Life Sciences Inc. | end_ex231.htm |
As filed with the Securities and Exchange Commission on May
1, 2017
Registration No. 333-214724
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 10
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933
ENDRA LIFE SCIENCES INC.
(Exact name of registrant as
specified in its charter)
Delaware
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3845
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26-0579295
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(State or other jurisdiction
of
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(Primary Standard
Industrial
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(I.R.S. Employer
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incorporation or organization)
|
|
Classification Code Number)
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|
Identification No.)
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ENDRA
Life Sciences Inc.
3600
Green Court, Suite 350
Ann
Arbor, MI 48105
(734)
335-0468
(Address, including zip code,
and telephone number, including area code, of registrant’s
principal executive offices)
Francois
Michelon
Chief
Executive Officer
ENDRA
Life Sciences Inc.
3600
Green Court, Suite 350
Ann
Arbor, MI 48105
(734)
335-0468
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
Mark R.
Busch
K&L Gates
LLP
214 North Tryon
St., 47th Floor
Charlotte, North
Carolina 28202
Telephone: (704)
331-7440
|
Jonathan
R. Zimmerman
Ben A.
Stacke
Faegre
Baker Daniels LLP
2200
Wells Fargo Center
90
South Seventh Street
Minneapolis,
MN 55402-3901
Telephone:
(612) 766-7000
|
As soon as practicable after the effective date of this
Registration Statement.
(Approximate date of
commencement of proposed sale to the public)
If any of the securities being registered on this
Form are to be offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the following
box. [X]
If
this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. [ ]
If
this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
[ ]
If
this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (check
one):
Large accelerated
filer [ ]
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|
Accelerated
filer
[ ]
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Non-accelerated
filer [ ]
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|
Smaller reporting
company [X]
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(Do not check if a smaller reporting
company)
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CALCULATION
OF REGISTRATION FEE
Title of Each
Class of Securities to be Registered
|
Amount to be
Registered
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Proposed Maximum
Aggregate Offering Price Per Share
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Proposed
Maximum Aggregate
Offering Price(1)
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Amount of
Registration
Fee
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Units, each
consisting of one share of Common Stock, par value $0.0001
per share, and a Warrant to purchase one share of Common
Stock
(2) |
1,610,000
|
$5.50
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$ 8,855,000
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$ 1,026.29
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Common Stock included in the units
|
--
|
$
--
|
$--
|
$--
|
Warrants to
purchase Common Stock included in the
units(3)
|
--
|
$--
|
$ --
|
$ --
|
Common Stock
underlying Warrants included in the units (2)
|
1,610,000
|
$ 6.88
|
$ 11,076,800
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$ 1,283.80
|
Underwriters'
Warrants(3)(4)
|
--
|
$--
|
$ --
|
$ --
|
Shares of Common
Stock underlying Underwriters' Warrants(4)
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128,800
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$ 6.88
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$ 886,144
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$ 120.70
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Total Registration
Fee(5)
|
|
|
$ 20,817,944
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$ 2,412.79
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(1)
Estimated solely
for the purpose of calculating the amount of the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as
amended. Includes the offering price of the shares and warrants
that the underwriters have the option to purchase to cover
over-allotments, if any.
(2)
Pursuant to Rule
416 under the Securities Act of 1933, as amended, there is also
being registered hereby such indeterminate number of additional
shares of common stock of the registrant as may be issued or
issuable because of stock splits, stock dividends, stock
distributions, and similar transactions.
(3)
No separate
registration fee required pursuant to Rule 457(g) under the
Securities Act of 1933, as amended.
(4)
Represents warrants
granted to the underwriters to purchase shares of common stock in
an amount up to 8% of the number of shares sold to the public in
this offering. See “Underwriting” contained within this
Registration Statement for information on underwriting arrangements
relating to this offering.
(5)
Previously paid.
The
registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment, which specifically
states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of
1933, as amended, or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED MAY
1, 2017
ENDRA Life Sciences
Inc.
1,400,000
Units
This is
our initial public offering. We are offering 1,400,000 units,
each consisting of one share of our common stock
and a warrant to purchase one share of common stock,
which numbers reflect our proposed one for 3.50 reverse stock split
described in this prospectus (the “reverse stock
split”).
The
warrants will have an exercise price equal to 125% of the initial
public offering price per unit set forth on the cover
page of this prospectus and will expire on the fifth anniversary of
the original issuance date. The shares of our common stock
and warrants will trade together as units during the first 60
days following the date of this prospectus and, thereafter, the
units will automatically separate and the common stock and warrants
will trade separately, unless National Securities Corporation
determines that an earlier separation date is
acceptable.
Prior
to this offering, there has been no public market for our
securities. We have received approval to list on the Nasdaq Capital
Market our units under the symbol “NDRAU” and
our common stock and warrants under the symbols
“NDRA” and “NDRAW,” respectively. We expect
that the public offering price will be between $5.00 and $5.50 per
unit. After the effectiveness of the registration
statement of which this prospectus is a part, and concurrently with
the pricing of this offering, we will effect the reverse stock
split.
We are an
“emerging growth company” as that term is used in the
Jumpstart Our Business Startups Act of 2012 and, as such, have
elected to comply with certain reduced public company reporting
requirements for this prospectus and future filings. See
“Prospectus Summary – Implications of Being an Emerging
Growth Company.”
Investing
in our securities involves a high degree of risk. See “Risk
Factors” beginning on page 8 for a discussion of information
that should be considered in connection with an investment in our
securities.
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Per
Unit
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Total
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Public offering
price
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$
|
|
Underwriting
discount(1)
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$
|
|
Proceeds, before
expenses, to us(2)
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$
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________
(1) We have also
granted warrants to the underwriters in connection with this
offering and agreed to reimburse the underwriters for certain
expenses incurred by them. See “Underwriting” for a
description of the compensation payable by us to the
underwriters.
(2) We estimate the
total expenses payable by us, excluding the underwriting discount,
will be approximately $700,000.
We have granted the
underwriters a 45-day option to purchase up to 210,000 additional
units to cover over-allotments, if any, provided
that in no event may exercise of this option occur after separation
of the units occurs.
We
have retained National Securities Corporation to act as
representative of the several underwriters for this offering. We
have agreed to pay the underwriters the compensation set forth
herein under the rules of the Financial Industry Regulatory
Authority, or FINRA. National Securities Corporation has a conflict
of interest in offering our units since affiliates of National
Securities Corporation own more than 10% of our outstanding shares.
Due to this conflict of interest, Dougherty & Company LLC is
acting as a “qualified independent underwriter” in
accordance with FINRA Rule 5121. See the section titled
“Conflicts of Interest” for more
information.
Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or
complete. Any representation to the contrary is a
criminal offense.
The underwriters
expect to deliver the units to investors on or about
, 2017, subject to customary
closing conditions.
______________________________________
National Securities Corporation
Dougherty
& Company
______________________________________
The date of this
prospectus is ,
2017.
TABLE
OF CONTENTS
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Page
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PROSPECTUS
SUMMARY
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1
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THE
OFFERING
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6
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SUMMARY
SELECTED FINANCIAL DATA
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7
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RISK
FACTORS
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8
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS
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32
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USE
OF PROCEEDS
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33
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DIVIDEND
POLICY
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34
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CAPITALIZATION
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35
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DILUTION
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36
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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38
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BUSINESS
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45
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EXECUTIVE
OFFICERS, DIRECTORS AND CORPORATE GOVERNANCE
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60
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EXECUTIVE
COMPENSATION
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64
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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67
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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70
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DESCRIPTION
OF THE SECURITIES WE ARE OFFERING
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71
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SHARES
ELIGIBLE FOR FUTURE SALE
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75
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UNDERWRITING
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77
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CONFLICTS OF INTEREST
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80
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NOTICE
TO INVESTORS
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80
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LEGAL
MATTERS
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82
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EXPERTS
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82
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WHERE
YOU CAN FIND MORE INFORMATION
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82
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INDEX
TO FINANCIAL STATEMENTS
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F-1
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Unless otherwise
stated or the context otherwise requires, the terms
“ENDRA,” “we,” “us,”
“our” and the “Company” refer to
ENDRA
Life Sciences Inc., a Delaware
corporation.
You
should rely only on the information contained in this prospectus
and any related free writing prospectus that we may provide to you
in connection with this offering. We have not, and the
underwriters have not, authorized anyone to provide you with
additional or different information. If anyone provides
you with different or inconsistent information, you should not rely
on it. We are not, and the underwriters are not, making an offer to
sell these securities in any jurisdiction where the offer or sale
is not permitted. You should assume that the information appearing
in this prospectus is accurate only as of the date on the front
cover of this prospectus. Our business, financial condition,
results of operations and prospects may have changed since that
date.
For
investors outside the United States: neither we nor the
underwriters have done anything that would permit this offering or
possession or distribution of this prospectus or any free writing
prospectus we may provide to you in connection with this offering
in any jurisdiction where action for that purpose is required,
other than in the United States. You are required to inform
yourselves about and to observe any restrictions relating to this
offering and the distribution of this prospectus and any such free
writing prospectus outside of the United States.
MARKET AND INDUSTRY DATA
Unless otherwise indicated, information contained
in this prospectus concerning our industry and the markets in which
we operate is based on information from independent industry and
research organizations, other third-party sources (including
industry publications, surveys and forecasts), and management
estimates. Management estimates are derived from publicly available
information released by independent industry analysts and
third-party sources, as well as data from our internal research,
and are based on assumptions made by us
upon reviewing such data and our knowledge of such industry and
markets which we believe to be reasonable. Although we believe the
data from these third-party sources is reliable, we have not
independently verified any third-party information. In addition,
projections, assumptions and estimates of the future performance of
the industry in which we operate and our future performance are
necessarily subject to uncertainty and risk due to a variety of
factors, including those described in “Risk Factors”
and “Special Note Regarding Forward-Looking Statements and
Other Information Contained In This Prospectus.” These and
other factors could cause results to differ materially from those
expressed in the estimates made by the independent parties and by
us.
TRADEMARKS
We operate under a number of trademarks,
including, among others, “ENDRA” and
“TAEUS,” all of which are registered under applicable
intellectual property laws. This prospectus contains references to
our trademarks and service marks and to those belonging to other
entities. Solely for convenience, trademarks and trade names
referred to in this prospectus may appear without
the ® or TM symbols,
but such references are not intended to indicate, in any way, that
we will not assert, to the fullest extent possible under applicable
law, our rights or the rights of the applicable licensor to these
trademarks and trade names. We do not intend our use or display of
other companies’ trade names, trademarks or service marks to
imply a relationship with, or endorsement or sponsorship of us by,
any other companies.
Prospectus
Summary
|
This summary highlights selected information
contained elsewhere in this prospectus and does not contain all of
the information that you should consider before investing in our
securities. You should carefully read this prospectus
and the registration statement of which this prospectus is a part
in their entirety before investing in our securities, including the
information discussed under “Risk Factors” and
our financial statements and notes thereto that appear elsewhere in
this prospectus.
Our Company
We have
commercialized an enhanced ultrasound technology for the
pre-clinical research market and are leveraging that expertise 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, or CT, and magnetic resonance imaging, or MRI,
technology is unavailable or impractical.
Since 2010, we
have marketed and sold our Nexus 128 system, which combines
light-based thermoacoustics and ultrasound, to address the imaging
needs of researchers studying disease models in pre-clinical
applications. Sales of the Nexus 128 system were approximately $1.4
million in 2015 and $515,000 in 2016. We have not yet completed
preparation of financial statements for the quarter ending March
31, 2017, but, as described in the section of this prospectus
entitled “Management's Discussion and Analysis of Financial
Control and Results of Operations,” based on preliminary data
available to us, we expect to report no revenue and a total net
loss of approximately $650,000 during that quarter.
Our Nexus 128 system is used in a number of leading global academic
research centers, including Stanford University, The University of
Michigan, Shanghai Jiao Tong University, and Purdue University. We
expect to continue to sell our Nexus 128 system to maintain a base
level of revenue, but believe the market potential for our clinical
systems is much higher.
Building on our
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.
Unlike the
near-infrared light pulses used in our Nexus 128 system, our TAEUS
technology uses radio frequency, or RF, pulses to stimulate
tissues, using a small fraction of the energy 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 overlaid in real time onto conventional
gray-scale ultrasound images.
Image below: Real-time ex-vivo bovine tissue temperature analysis
overlaid on traditional ultrasound image.
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1
We believe that our
TAEUS technology has the potential to add a number of new
capabilities to conventional ultrasound and thereby enhance the
utility of both existing and new ultrasound systems.
Our TAEUS platform
is not intended to replace CT and MRI systems, both of which are
versatile imaging technologies with capabilities and uses beyond
the focus of our business. However, they are also expensive, with a
CT system costing approximately $1 million and an MRI system
costing up to $3 million. In addition, and in contrast to
ultrasound systems, due to their limited number and the fact that
they are usually fixed-in-place at major medical facilities, CT and
MRI systems are frequently inaccessible to patients.
We believe that our
TAEUS platform can extend the use of ultrasound technology to a
number of important applications that either require the use of
expensive CT or MRI imaging systems or where imaging is not
practical using existing technology. To demonstrate the
capabilities of our TAEUS platform, we have conducted various
internal ex-vivo laboratory experiments and have also conducted
limited internal in-vivo large animal studies. However, we have not
yet conducted any human studies and these capabilities are not
supported by clinical data that we have gathered in pursuit of
obtaining regulatory approvals or that was subject to regulatory
oversight and guidance. In our ex-vivo and in-vivo testing, we have
demonstrated that the TAEUS platform has the following capabilities
and potential clinical applications:
●
Tissue Composition:
Our TAEUS technology enables ultrasound to distinguish fat from
lean tissue. This capability would enable the use of TAEUS-enhanced
ultrasound for the early identification, staging and monitoring of
Non-Alcoholic Fatty Liver Disease, or NAFLD, which affects an
estimated 1.4 billion people worldwide and is a precursor to liver
fibrosis, cirrhosis and liver cancer.
●
Temperature
Monitoring: Our TAEUS technology enables traditional ultrasound to
visualize changes in tissue temperature, in real time. This
capability would enable the use of TAEUS-enhanced ultrasound to
guide thermoablative therapy, which uses heat or cold to remove
tissue, such as in the treatment of cardiac atrial fibrillation, or
removal of cancerous liver and kidney lesions, with greater
accuracy.
●
Vascular Imaging:
Our TAEUS technology enables ultrasound to view blood vessels from
any angle, using only a saline solution contrasting agent, unlike
Doppler ultrasound which requires precise viewing angles. This
capability would enable the use of TAEUS-enhanced ultrasound to
easily identify arterial plaque or malformed
vessels.
●
Tissue Perfusion:
Our TAEUS technology enables ultrasound to image blood flow at the
capillary level in a region, organ or tissue. This capability could
be used to assist physicians in characterizing microvasculature
fluid flows symptomatic of damaged tissue, such as internal
bleeding from trauma, or diseased tissue, such as certain
cancers.
|
2
Sales of
ultrasound diagnostic equipment were approximately $4 billion
globally in 2014 and are expected to grow at approximately 4.4%
annually. There are approximately 800,000 installed systems
generating over 400 million annual diagnostic ultrasound procedures
globally. Additionally, an estimated 30,000 to 50,000 new and
replacement systems are sold into the market each year. These
numbers include both portable and cart-based ultrasound systems,
and cover all types of diagnostic ultrasound procedures, including
systems intended for cardiology, prenatal and abdominal use. We do
not intend to address low-cost, portable ultrasound systems and
systems focused on applications, such as prenatal care, where we
believe our TAEUS technology will not substantially impact patient
care. Accordingly, we define our addressable market for one or more
of our TAEUS applications at approximately 300,000 cart-based
ultrasound systems currently in use throughout the
world.
After approval,
our TAEUS technology can be added as an accessory to existing
ultrasound systems, helping to improve clinical decision-making on
the front lines of patient care, without requiring new clinical
workflows or large capital investments. We are also developing
TAEUS for incorporation into new ultrasound systems, primarily
through our collaboration with GE Healthcare, described more fully
below. We are not aware of any other ultrasound devices in
development that include the anticipated functionality of our
planned TAEUS applications.
Based on our
design work and our understanding of the ultrasound accessory
market, we intend to price our initial NAFLD TAEUS application at a
price point approximating one-half of the price of a new cart-based
ultrasound system, which should enable purchasers to recoup their
investment in less than one year by performing a relatively small
number of additional ultrasound procedures. We further believe that
clinicians will be attracted to our technology because it will
enable them to perform more procedures with their existing
ultrasound equipment, thereby retaining more imaging patients in
their clinics rather than referring patients out to a regional
medical center for a CT or MRI scan.
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 NAFLD, which can only be achieved today
with impractical surgical biopsies or MRI scans. Subsequent TAEUS
applications 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
ENDRA.
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. In the future, assuming we are able to raise
additional capital, we intend to seek further regulatory approvals
in the United States and China.
We believe that
our NAFLD TAEUS application will qualify for sale in the European
Union as a Class IIa medical device. As a result, we will be
required to obtain a CE mark for our NAFLD TAEUS application before
we can sell the application in the European Union. Existing
regulations would not require us to conduct a clinical trial to
obtain a CE mark for this application. Nonetheless, for commercial
reasons and to support our CE mark application, we plan to conduct
a limited (less than 10 person) trial to demonstrate our NAFLD
TAEUS application's ability to distinguish fat from lean tissue.
Based on our understanding of applicable regulations and
consultations with medical device regulatory consulting firms and
medical device contract engineering firms, we expect to receive a
CE mark for our NAFLD TAEUS application within 12 to 15 months
after the completion of this offering. However, this estimate is
subject to uncertainty and there can be no assurance that this
process will not take longer or be more costly than we expect.
While we are seeking a CE mark for our NAFLD TAEUS application, we
will also prepare to expand our sales, marketing and customer
support capabilities, so that we can commence initial sales of the
application in the European Union once we have received this
regulatory approval and raised sufficient funds to finance
commercialization. Following receipt of such CE mark and placement
of initial systems with researchers and universities, we plan to
conduct one or more clinical studies to further demonstrate this
product's capabilities. As described below in “Use of
Proceeds,” we believe the proceeds from this offering will be
sufficient for us to be able to complete the process to obtain a CE
mark for our NAFLD TAEUS application, to prepare to commercialize
this application in the EU and to obtain initial clinical data for
this application. However, we will require additional funds to
commercialize this application in the European Union and to
implement the balance of our business plan thereafter.
After the process
of obtaining a CE mark for our NAFLD TAEUS application is complete,
we also intend to prepare for submission to the U.S. Food and Drug
Administration, or the FDA, an application under the Food, Drug and
Cosmetic Act, or the FD&C Act, to sell our NAFLD TAEUS
application in the U.S. We anticipate that the application, as well
as those for our other TAEUS applications, will be submitted for
approval under Section 510(k) of the FD&C Act. In connection
with our initial submission to the FDA, we believe we will be
required to provide imaging verification and validation testing
data, as well as the data from the limited trial we plan to conduct
to support our CE mark application. We expect that our initial FDA
clearance will allow us to sell the NAFLD TAEUS application in the
U.S. with general imaging claims. However, we will need to obtain
additional FDA clearances to be able to make diagnostic claims for
fatty tissue content determination. Accordingly, to support our
commercialization efforts we expect that, following receipt of our
initial FDA clearance, we will submit one or more additional
applications to the FDA, each of which will need to include
additional clinical trial data, so that following receipt of the
necessary clearances we may make those diagnostic claims. Based on
our understanding of applicable regulations and consultations with
medical device regulatory consulting firms and medical device
contract engineering firms and assuming we are able to secure
additional required capital, we expect to submit our initial FDA
application to the FDA approximately fifteen months after the
completion of this offering and that the FDA will make a final
determination on our application approximately six months after it
is submitted. However, these estimates are subject to uncertainty
and there can be no assurance that these processes will not take
longer or be more costly than we expect.
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, or GE Healthcare. Under the
terms of the agreement, GE Healthcare has agreedto 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 April 21, 2017, we and GE Healthcare
entered into an amendment to our agreement, extending its term by
one year to April 22,
2018.
|
3
Risks Related to Our Business
An investment in
our securities involves a high degree of risk. You should carefully
consider the risks summarized below. These risks are discussed more
fully in the “Risk Factors” section of this prospectus
immediately following this prospectus summary. These risks include,
but are not limited to, the following:
●
We have a history
of operating losses, and we may never achieve or maintain
profitability.
●
Our limited
operating history makes it difficult to evaluate our current
business, predict our future results or forecast our financial
performance and growth.
●
Our efforts may
never result in the successful development of commercial
applications based on our TAEUS technology.
●
If we fail to
obtain and maintain necessary regulatory clearances or approvals
for our TAEUS applications, or if clearances or approvals for
future applications and indications are delayed or not issued, our
commercial operations will be harmed.
●
We will depend on
third parties to design, manufacture and seek regulatory approval
of our TAEUS applications. If any third party fails to successfully
design, manufacture and gain regulatory approval of our TAEUS
applications, our business will be materially harmed.
●
Competition in the
medical imaging market is intense and we may be unable to
successfully compete.
●
If we are unable
to secure additional financing on favorable terms, or at all, to
meet our future capital needs, we will be unable to complete fully
our current business plan.
●
We intend to
market our TAEUS applications, if approved, globally, in which case
we will be subject to the risks of doing business outside of the
United States.
●
If we are unable
to protect our intellectual property, then our financial condition,
results of operations and the value of our technology and products
could be adversely affected.
●
There are no
established public trading markets for the securities being offered
in this offering and active trading markets for these securities
may not develop.
Reverse Stock Split
In March 2017, our
board of directors and stockholders holding a majority of the
outstanding shares of our common stock approved resolutions
authorizing our board of directors to effect a reverse split of our
common stock at certain exchange ratios ranging from 1:2.50 to
1:4.00, with our board of directors retaining the discretion as to
whether to implement the reverse stock split and which exchange
ratio to implement. Following the effectiveness of the registration
statement of which this prospectus is a part, and prior to the
closing of this offering, we anticipate that we will effect the
reverse stock split at a ratio of 1 share for each 3.50
shares.
Except as
otherwise indicated and except in our financial statements, all
information regarding share amounts of common stock and prices per
share of common stock contained in this prospectus assume the
consummation of the reverse stock split to be effected following
effectiveness of the registration statement of which this
prospectus is a part, and prior to the closing of this
offering.
Implications of Being an Emerging Growth Company
We are an
“emerging growth company,” as defined in the Jumpstart
Our Business Startups Act of 2012, or the JOBS Act, and, for as
long as we continue to be an “emerging growth company,”
we may choose to take advantage of exemptions from various
reporting requirements applicable to other public companies but not
to “emerging growth companies,” including, but not
limited to, not being required to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act
of 2002, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, and
exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and stockholder approval of any
golden parachute payments not previously approved. We could be an
“emerging growth company” for up to five years, or
until the earliest of (i) the last day of the first fiscal year in
which our annual gross revenues exceed $1 billion, (ii) the date
that we become a “large accelerated filer” as defined
in Rule 12b-2 under the Securities Exchange Act of 1934, as
amended, which would occur if the market value of our common stock
that is held by non-affiliates exceeds $700 million as of the last
business day of our most recently completed second fiscal quarter,
or (iii) the date on which we have issued more than $1 billion in
non-convertible debt during the preceding three-year period. We are
choosing to “opt out” of the extended transition
periods available under the JOBS Act for complying with new or
revised accounting standards, but intend to take advantage of the
other exemptions discussed above.
|
4
We are also
currently considered a “smaller reporting company,”
which generally means that we have a public float of less than $75
million and had annual revenues of less than $50 million during the
most recently completed fiscal year. If we are still considered a
“smaller reporting company” at such time as we cease to
be an “emerging growth company,” we will be subject to
increased disclosure requirements. However, the disclosure
requirements will still be less than they would be if we were not
considered either an “emerging growth company” or a
“smaller reporting company.” Specifically, similar to
emerging growth companies”, “smaller reporting
companies” are able to provide simplified executive
compensation disclosures in their filings; are exempt from the
provisions of Section 404(b) of the Sarbanes-Oxley Act requiring
that independent registered public accounting firms provide an
attestation report on the effectiveness of internal control over
financial reporting; and have certain other decreased disclosure
obligations in their Securities and Exchange Commission filings,
including, among other things, being required to provide only two
years of audited financial statements in annual
reports.
Corporate Information
We were
incorporated in Delaware in July 2007. Our corporate headquarters
is located at 3600 Green Court, Suite 350, Ann Arbor, Michigan
48105-1570. Our website can be accessed at
www.endrainc.com. The information contained on, or that
may be obtained from, our website is not, and shall not be deemed
to be, a part of this prospectus.
|
5
THE
OFFERING
Units offered by us
|
1,400,000
units (or 1,610,000 units if the
underwriters exercise their option to purchase additional
units in full), each consisting of one share of
common stock and a warrant to purchase one share of common
stock.
|
Warrants
offered by us
|
Up to 1,400,000
shares of our common stock issuable upon exercise of the
warrants to be issued in this offering (or up to 1,610,000
shares of our common stock if the underwriters exercise their
option to purchase additional units in full). The
warrants will have an exercise price equal to 125% of the initial
public offering price per unit set forth on the cover
of this prospectus and will expire on the fifth anniversary of the
original issuance date. Each warrant will be exercisable
commencing upon separation of the unit of which it was a
part.
|
Separation
of shares of common stock and warrants included in the units
offered hereby
|
The units will
begin trading on, or promptly after, the date of this prospectus.
The units will separate at the earlier of (i) the first trading day
following the 60th day after the date of this prospectus, or (ii)
such earlier date as may be determined by National Securities
Corporation.
|
Common
stock outstanding after this offering
|
3,360,267
shares (or 3,570,267 shares if the underwriters exercise
their option to purchase additional units in full),
and a total of 4,760,267 shares of our common stock outstanding if
the warrants issued in this offering are exercised in full (or
5,180,267 shares if the underwriters exercise their option to
purchase additional units in full and the
warrants included in such units exercised).
(1)(2)
|
Over-allotment
option
|
We have granted the
underwriters a 45-day option to purchase up to 210,000 additional
units to cover over-allotments, if any, provided
that in no event may exercise of this option occur
after separation of the units occurs.
|
Use
of proceeds
|
We intend to use
the net proceeds from this offering to fund the development and
regulatory approval and to prepare for the commercialization of our
Non-Alcoholic Fatty Liver Disease, or NAFLD, TAEUS application in
the European Union for working capital and other general corporate
purposes. However, we will require additional funds to
commercialize this application in the European Union and to
implement the balance of our business plan thereafter. See
“Use of Proceeds” for additional
information.
|
Risk
factors
|
See the section
entitled “Risk Factors” and other information included
in this prospectus for a discussion of factors you should carefully
consider before deciding to invest in our securities.
|
Proposed
Nasdaq Capital Market symbol
|
We have received
approval for listing on the Nasdaq Capital Market our
units under the symbol
“NDRAU” and our common stock
and warrants under the symbols "NDRA" and
“NDRAW,”
respectively.
|
Conflicts of interest
|
Because
certain affiliates of National Securities Corporation, an
underwriter of this offering, beneficially own more than 10% of our
outstanding common stock, National Securities Corporation is deemed
to have a “conflict of interest” within the meaning of
FINRA Rule 5121. Accordingly, this offering is being made in
compliance with the applicable provisions of FINRA Rule 5121. FINRA
Rule 5121 prohibits National Securities Corporation from making
sales to discretionary accounts without the prior written approval
of the account holder and requires that a “qualified
independent underwriter,” as defined in FINRA Rule 5121,
participate in the preparation of the registration statement and
exercise its usual standards of due diligence with respect thereto.
Dougherty & Company LLC is acting as a “qualified
independent underwriter” for this offering. See the section
titled “Conflicts of Interest” for more
information.
|
(1)
The number of
shares of our common stock to be outstanding after this offering is
based on 1,960,267 shares of common stock outstanding as of March
17, 2017, which includes the conversion of the outstanding
principal and accrued interest on our outstanding convertible
promissory notes at March 17, 2017 into an aggregate of 1,236,894
shares of our common stock at a conversion price of $1.40 per share
immediately prior to the completion of this offering, as elected by
the holders of a majority of the outstanding principal amount of
such convertible promissory notes, and excludes the
following:
●
152,812
shares of common stock issuable upon the exercise of outstanding
warrants, at a weighted average exercise price of $18.94 per share;
●
151,881
shares of our common stock issuable upon the exercise of
outstanding stock options issued pursuant to our 2016 Omnibus
Incentive Plan, or our Incentive Plan, at a weighted average
exercise price of $10.01 per share and an estimated 556,559 shares
of our common stock issuable upon the exercise of stock options
expected to be granted to our directors and certain of our officers
upon the completion of this offering at an exercise price equal to
the public offering price per unit set forth on the
cover of this prospectus;
●
an estimated 385,252 shares of our common
stock that will be reserved for future issuance under our Incentive
Plan;
●
up to
1,610,000 shares of our common stock that may be issued under
warrants to be issued to the public in this offering;
and
●
up to
128,800 shares of our common stock issuable upon exercise of the
underwriters' warrants issued to the underwriters in the
offering.
(2) Except as
otherwise indicated herein, all information in this prospectus
assumes or gives effect to:
●
the
reverse stock split;
●
the
conversion of the outstanding principal and accrued interest on our
outstanding convertible promissory notes as of March 17, 2017 into
an aggregate of 1,236,894 shares
of our common stock at a conversion price of $1.40 per share
immediately prior to the completion of this offering, as
elected by the holders of a majority of the outstanding principal
amount of such convertible promissory
notes;
●
the
adoption of our Fourth Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws in connection with
the consummation of this offering; and
●
no
exercise of the underwriters’ over-allotment
option.
|
6
SUMMARY
SELECTED FINANCIAL DATA
The following tables set forth a summary of our historical
financial data at, and for the period ended on, the dates
indicated. We have derived the statements of operations data for
the years ended December 31, 2016 and 2015 from our audited
financial statements included in this prospectus. Our historical
results for any prior period are not necessarily indicative of
results to be expected in any other period or for the year ending
December 31, 2017. You should read this data together with our
financial statements and related notes appearing elsewhere in this
prospectus and the section of this prospectus entitled
“Management's Discussion and Analysis of Financial Condition
and Results of Operations.”
Income Statement Data
|
|
December
31,
2015
|
December
31,
2016
|
Revenue
|
$1,410,065
|
$515,582
|
Gross
Profit
|
$743,831
|
$279,704
|
Operating
Expenses
|
$2,312,402
|
$2,071,462
|
Other
Expenses
|
$(710,634)
|
$(983,610)
|
Net
Loss
|
$(2,279,204)
|
$(2,775,369)
|
Basic
and diluted net loss per common share
|
$(0.98)
|
$(1.10)
|
Weighted
average shares outstanding, basic and diluted
|
2,320,045
|
2,531,626
|
Pro
forma net loss per share, basic and diluted
(unaudited)(1)
|
$(3.44)
|
$(3.84)
|
Pro
forma weighted average shares outstanding
(unaudited)(1)
|
662,870
|
723,322
|
Balance Sheet Data
|
||
|
As
of
|
As
of
|
|
December
31,
|
December
31,
|
|
2015
|
2016
|
Assets
|
|
|
Current
Assets
|
$126,618
|
$195,594
|
Fixed Assets,
net
|
$360,104
|
$295,168
|
Total
Assets
|
$486,722
|
$490,761
|
Liabilities and
Stockholders' Equity
|
|
|
Current
Liabilities
|
$236,421
|
$1,384,528
|
Stockholders'
Equity/(Deficit)
|
$250,300
|
$(893,767)
|
Total Liabilities
and Stockholders' Equity
|
$486,722
|
$490,761
|
|
||
Statements of Cash
Flows Data
|
|
Year Ended
|
Year Ended
|
|
December
31,
2015
|
December
31,
2016
|
Cash Flows from
Operating Activities
|
$(842,727)
|
$(1,315,623)
|
Cash Flows from
Investing Activities
|
$(133,811)
|
$-
|
Cash Flows from
Financing Activities
|
$839,224
|
$1,441,448
|
Cash, end of
period
|
$19,128
|
$144,953
|
|
|
|
(1) The number
of weighted average common shares used in computing pro forma net
loss per share gives effect to the contemplated reverse stock split
at a ratio of 1 share for each 3.5 shares to be effected following
the effectiveness of the registration statement of which this
prospectus is a part, and prior to the closing of this
offering.
|
||
|
7
An investment in our securities involves a high degree of risk. You
should carefully consider the following information about these
risks, together with the other information appearing elsewhere in
this prospectus, before deciding to invest in our
securities.
If any of the events described in the following risk factors
actually occurs, or if additional risks and uncertainties that are
not presently known to us or that we currently deem immaterial
later materialize, then our business, prospects, results of
operations and financial condition could be materially adversely
affected. In that event, the trading price of our
securities could decline, and you may lose all or part of your
investment in our securities. The risks discussed below
include forward-looking statements, and our actual results may
differ substantially from those discussed in these forward-looking
statements. See “Special Note Regarding Forward-Looking
Statements and Other Information Contained in this
Prospectus.”
Risks
Related to Our Business
We have a history of operating losses, and we may never achieve or
maintain profitability.
We have a limited
operating history upon which investors may evaluate our prospects.
We have only generated limited revenues to date and have a history
of losses from operations. As of December 31, 2016, we had an
accumulated deficit of approximately $12,518,473. Even following
the sale of units in this offering, we will require
additional capital to complete the commercialization of our planned
TAEUS applications and to meet our growth and profitability
targets. We expect to expend significant resources on hiring of
personnel, payroll and benefits, continued scientific and potential
product research and development, potential product testing and
pre-clinical and clinical investigations, intellectual property
development and prosecution, marketing and promotion, capital
expenditures, working capital, general and administrative expenses,
and fees and expenses associated with this offering. We also expect
to incur costs and expenses related to consulting, laboratory
development, hiring of scientists and other operational personnel,
and expenses associated with the development of relationships with
strategic partners.
Our Thermo Acoustic
Enhanced Ultrasound, or TAEUS, technology is still in development
and we do not have any applications for our TAEUS technology
approved for sale. Applications for our TAEUS technology may never
be approved, generate significant revenue or become commercially
viable. Our ability to generate significant revenues and,
ultimately, achieve profitability will depend on whether we can
obtain additional capital when we need it, complete the development
of our technology, receive required regulatory approvals for our
TAEUS applications and find customers who will purchase our future
products or strategic partners that will incorporate our technology
into their products. Even if we develop commercially viable
applications for our TAEUS technology, which may include licensing,
we may never recover our research and development expenses and we
may never be able to produce material revenues or operate on a
profitable basis.
Our efforts may never
result in the successful development of commercial
applications based on our TAEUS
technology.
Due to the limited
tissue penetration capability of light-based thermoacoustic
technology, we believe that there is a limited clinical market for
our current Nexus 128 product, which is focused on laboratory
specimen analysis. As a result, we are currently focused on the
development of products based on our TAEUS technology. We have not
yet completed the development of any applications based on such
technology. Our research and development efforts remain subject to
all of the risks associated with the development of new products
based on emerging technologies, including, without limitation,
unanticipated technical or other problems, the inability to develop
a product that may be sold at an acceptable price point and the
possible insufficiency of funds needed in order to complete
development of these products. Technical problems may result in
delays and cause us to incur additional expenses that would
increase our losses. If we cannot complete, or if we experience
significant delays in developing applications based on, our TAEUS
technology, particularly after incurring significant expenditures,
our business may fail.
8
Our success is substantially dependent on the success of
applications for our TAEUS platform.
To date we have
generated only limited sales of our existing Nexus 128 product and
our ability to generate meaningful revenues in the future will
depend on the successful development and commercialization of our
TAEUS platform applications. The commercial success of our TAEUS
platform applications and our ability to generate revenues will
depend on many factors, including the following:
●
our
successful development of applications for our TAEUS technology,
such as those we intend to pursue for the diagnosis of Non-Alcohol
Fatty Liver Disease, or NAFLD, and the monitoring of thermal
ablation surgery, and the acceptance in the marketplace by
physicians and patients of such applications;
●
the
successful design and manufacturing of a device or devices which
enable the use of our TAEUS technology by physicians on their
patients;
●
receipt
of necessary regulatory approvals;
●
sufficient
coverage or reimbursement by third-party payors;
●
our
ability to successfully market our products;
●
our ability to demonstrate that our TAEUS
applications have advantages over
competing products and procedures;
●
the
amount and nature of competition from competing or alternative
imaging products; and
●
our
ability to establish and maintain commercial manufacturing,
distribution and sales force capabilities.
We have limited data regarding the efficacy of our TAEUS platform
applications. If our applications do not perform in accordance with
our expectations, we are unlikely to successfully commercialize our
applications, even if they receive regulatory
approval.
Our success depends
in large part on the medical and third-party payor
community’s acceptance of our TAEUS applications. As a
result, even if we receive regulatory approval for our
applications, we believe that we will need to obtain additional
clinical data from users of our applications to persuade medical
professions to use our applications. We may conduct post-approval
clinical testing to obtain such additional data. Clinical testing
is expensive, can take a significant amount of time to complete and
can have uncertain outcomes. We have not yet conducted any clinical
studies and there can be no assurance that the results of any such
studies will be positive. Our failure to conduct successful
clinical studies could have a material, adverse impact on our
business.
Our limited operating history makes it difficult to evaluate our
business, predict our future results or forecast our financial
performance and growth.
We were
incorporated in 2007 and began commercializing our initial
pre-clinical Nexus 128 products in 2010. Our limited operating
history makes it difficult to evaluate our business, predict our
future results or forecast our financial performance and growth. If
our assumptions regarding the risks and uncertainties we face,
which we use to plan our business, are incorrect or change due to
circumstances in our business or our markets, or if we do not
address these risks successfully, our operating and financial
results could differ materially from our expectations and our
business could suffer.
9
We may not remain commercially viable if there is an inadequate
level of reimbursement by governmental programs and other
third-party payors.
Medical imaging
products are purchased principally by hospitals, physicians and
other healthcare providers around the world that typically bill
various third-party payors, including governmental programs
(e.g., Medicare and
Medicaid in the United States), private insurance plans and managed
care programs, for the services provided to their
patients.
Third-party payors
and governments may approve or deny coverage for certain
technologies and associated procedures based on independently
determined assessment criteria. Reimbursement decisions by payors
for these services are based on a wide range of methodologies that
may reflect the services' assessed resource costs, clinical
outcomes and economic value. These reimbursement methodologies and
decisions confer different, and sometimes conflicting, levels of
financial risk and incentives to healthcare providers and patients,
and these methodologies and decisions are subject to frequent
refinements. Third-party payors are also increasingly adjusting
reimbursement rates, often downwards, indirectly challenging the
prices charged for medical products and services. There can be no
assurance that our products will be covered by third-party payors,
that adequate reimbursement will be available or, even if payment
is available, that third-party payors' coverage policies will not
adversely affect our ability to sell our products
profitably.
We will depend on third parties to design, manufacture and seek
regulatory approval of our TAEUS applications. If any third party
fails to successfully design, manufacture and gain regulatory
approval of our TAEUS applications, our business will be materially
harmed.
We currently intend
to outsource the design and manufacturing of applications utilizing
our TAEUS technology rather than manufacture our TAEUS applications
ourselves. We will have limited control over the efforts and
resources that any third-party original equipment manufacturer, or
OEM, will devote to developing and manufacturing our TAEUS
applications. In addition, we currently expect to depend on OEMs to
acquire CE marks for the device or devices that they develop and
manufacture which are necessary to permit marketing of those
devices in the European Union.
An OEM may not be
able to successfully design and manufacture the products it
develops based on our TAEUS technology, may not devote sufficient
time and resources to support these efforts or may fail in gaining
the required regulatory approvals of our TAEUS applications. The
failure by an OEM in its efforts to design, manufacture or gain
regulatory approval of our TAEUS applications could substantially
harm the value of our TAEUS technology, brand and
business.
If we are unable to manage the anticipated growth of our business,
our future revenues and operating results may be
harmed.
Because of our
small size, growth in accordance with our business plan, if
achieved, will place a significant strain on our financial,
technical, operational and management resources. As we expand our
activities, there will be additional demands on these resources.
The failure to continue to upgrade our technical, administrative,
operating and financial control systems or the occurrence of
unexpected expansion difficulties, including issues relating to our
research and development activities and retention of experienced
scientists, managers and technicians, could have a material adverse
effect on our business, financial condition and results of
operations and our ability to timely execute our business plan. If
we are unable to implement these actions in a timely manner, our
results may be adversely affected.
10
Competition in the medical imaging market is intense and we may be
unable to successfully compete.
In general,
competition in the medical imaging market is very significant and
characterized by extensive research and development and rapid
technological change. Competitors in this market include very large
companies with significantly greater resources than we have. To
successfully compete in this market we will need to develop TAEUS
applications for particular applications that offer significant
advantages over alternative imaging products and procedures for
such applications.
Developments by
other medical imaging companies of new or improved products,
processes or technologies may make our products or proposed
products obsolete or less competitive. Alternative medical imaging
devices may be more accepted or cost-effective than our products.
Competition from these companies for employees with experience in
the medical imaging industry could result in higher turnover of our
employees. If we are unable to respond to these competitive
pressures, we could experience delayed or reduced market acceptance
of our products, higher expenses and lower revenue. If we are
unable to compete effectively with current or new entrants to these
markets, we will be unable to generate sufficient revenue to
maintain our business.
For additional
information regarding our competition, see the section of this
prospectus captioned
“Business-Competition.”
Changes in the healthcare industry could result in a reduction in
the size of the market for our products or may require us to
decrease the selling price for our products, either of which could
have a negative impact on our financial performance.
Trends toward
managed care, healthcare cost containment, and other changes in
government and private sector initiatives in Europe, the United
States and China are placing increased emphasis on lowering the
cost of medical services, which could adversely affect the demand
for or the prices of our products. For example:
●
major
third-party payors of hospital and non-hospital based healthcare
services could revise their payment methodologies and impose
stricter standards for reimbursement of imaging procedures charges
and/or a lower or more bundled reimbursement;
●
there
has been a consolidation among healthcare facilities and purchasers
of medical devices who prefer to limit the number of suppliers from
whom they purchase medical products, and these entities may decide
to stop purchasing our products or demand discounts on our
prices;
●
there
is economic pressure to contain healthcare costs in markets
throughout the world; and
●
there
are proposed and existing laws and regulations in international and
domestic markets regulating pricing and profitability of companies
in the healthcare industry.
These trends could
lead to pressure to reduce prices for our products and could cause
a decrease in the demand for our products in any given market that
could adversely affect our revenue and profitability, which could
harm our business.
We have limited selling, marketing and manufacturing resources,
which may restrict our success in commercializing our TAEUS
technology.
We currently do not
have a sales, marketing, customer support or manufacturing team
dedicated to our TAEUS clinical applications. To grow our business
as planned, we must expand our sales, marketing, customer support
and manufacturing capabilities. We must also establish satisfactory
arrangements for the manufacture and distribution of our TAEUS
applications, which will involve the development of our commercial
infrastructure and/or collaborative commercial arrangements and
partnerships. We may be unable to attract, retain and manage the
specialized workforce and collaborative manufacturing and
distribution arrangements necessary to successfully commercialize
our products. In addition, developing these functions is time
consuming and expensive. We intend to partner with others to assist
us with some or all of these functions. However, we may be unable
to find appropriate third parties with whom to enter into these
arrangements. Furthermore, if we do enter into these arrangements,
these third parties may not perform as expected.
11
If we experience problems in our relationships with our
distributors, our ability to sell our products could be
limited.
Because we are a
small company with limited resources, we expect to depend on
distributors to help promote market acceptance and demand for our
products. Distributors that are in the business of selling other
medical products may not devote a sufficient level of resources and
support required to generate awareness of our products and grow or
maintain product sales. If our distributors are unwilling or unable
to market and sell our products, or if they do not perform to our
expectations, we could experience delayed or reduced market
acceptance and sales of our products. In addition, disagreements
with our distributors or non-performance by these third parties
could lead to costly and time-consuming litigation or arbitration
and disrupt distribution channels for a period of time and require
us to re-establish a distribution channel.
We have and may in the future form or seek additional strategic
alliances, collaborations or enter into licensing arrangements, and
we may not realize the benefits of such alliances, collaborations
or licensing arrangements.
On
April 22, 2016, we entered into a Collaborative Research Agreement
with GE Healthcare under which GE Healthcare has agreed to support
our efforts to commercialize our TAEUS technology for use in an
NAFLD application by, among other things, providing equipment and
technical advice, and facilitating introductions to GE Healthcare
clinical ultrasound customers. This agreement does not commit GE
Healthcare to a long-term relationship and it may disengage with us
at any time. This agreement has a term of one year and is subject
to termination by either party upon not less than 60 days’
notice. On April 21, 2017, we and GE Healthcare
entered into an amendment to our agreement,
extending its term by one year to April 22,
2018.
We
intend in the future to form or seek additional strategic
alliances, create joint ventures or collaborations or enter into
licensing arrangements with third parties that we believe will
complement or augment our development and commercialization efforts
with respect to our technologies and applications.
Any
of these relationships may require us to incur non-recurring and
other charges, increase our near- and long-term expenditures, issue
securities that dilute our existing stockholders or disrupt our
management and business. In addition, we face significant
competition in seeking appropriate strategic partners and the
negotiation process is time-consuming and complex. If we license
technologies or applications, we may not be able to realize the
benefit of such transactions. Further, strategic alliances and
collaborations are subject to numerous risks, which may include the
following:
●
collaborators
have significant discretion in determining the efforts and
resources that they will apply to a collaboration;
●
collaborators
may not pursue development and commercialization of our
technologies and applications or may elect not to continue or renew
development or commercialization programs based on clinical trial
results, changes in their strategic focus due to the acquisition of
competitive products, availability of funding, or other external
factors, such as a business combination that diverts resources or
creates competing priorities;
●
collaborators
may delay clinical trials, provide insufficient funding for a
clinical trial, stop a clinical trial, abandon the development of
an application, repeat or conduct new clinical trials, or require a
new formulation of an application for clinical
testing;
●
collaborators
could independently develop, or develop with third parties,
products that compete directly or indirectly with our applications
and technologies;
●
a
collaborator with marketing and distribution rights to one or more
applications may not commit sufficient resources to their marketing
and distribution;
●
collaborators
may not properly maintain or defend our intellectual property
rights or may use our intellectual property or proprietary
information in a way that gives rise to actual or threatened
litigation that could jeopardize or invalidate our intellectual
property or proprietary information or expose us to potential
liability;
●
disputes
may arise between us and a collaborator that cause the delay or
termination of the research, development or commercialization of
our technologies and applications, or that result in costly
litigation or arbitration that diverts management attention and
resources;
●
collaborations
may be terminated and, if terminated, may result in a need for
additional capital to pursue further development or
commercialization of the applicable applications or technologies;
and
●
collaborators
may own or co-own intellectual property covering our products that
results from our collaborating with them, and in such cases, we
would not have the exclusive right to commercialize such
intellectual property.
As
a result, if we enter into collaboration agreements and strategic
partnerships or license our applications or technologies, we may
not be able to realize the benefit of such transactions if we are
unable to successfully integrate them with our existing operations
and company culture, which could delay our timelines or otherwise
adversely affect our business. We also cannot be certain that,
following a strategic transaction or license, we will achieve the
revenue or specific net income that justifies such transaction. Any
delays in entering into new strategic partnership agreements
related to our applications could delay the development and
commercialization of our technologies and applications in certain
geographies or for certain applications, which would harm our
business prospects, financial condition and results of
operations.
We intend to market our TAEUS applications, if approved, globally,
in which case we will be subject to the risks of doing business
outside of the United States.
Because we intend
to market our TAEUS applications, if approved, globally, our
business may be subject to risks associated with doing business
globally. Accordingly, our business and financial results in the
future could be adversely affected due to a variety of factors,
including:
●
changes
in a specific country’s or region’s political and
cultural climate or economic condition;
●
unexpected
changes in laws and regulatory requirements in local
jurisdictions;
●
difficulty
of effective enforcement of contractual provisions in local
jurisdictions;
●
inadequate
intellectual property protection in certain countries;
●
trade-protection
measures, import or export licensing requirements such as Export
Administration Regulations promulgated by the United States
Department of Commerce and fines, penalties or suspension or
revocation of export privileges;
●
effects
of applicable local tax structures and potentially adverse tax
consequences; and
●
significant
adverse changes in currency exchange rates.
We depend on our senior management team and the loss of one or more
key employees or an inability to attract and retain highly skilled
employees could harm our business.
Our success largely
depends upon the continued services of our executive management
team and key employees and the loss of one or more of our executive
officers or key employees could harm us and directly impact our
financial results. Our employees may terminate their employment
with us at any time. Our executive management team has significant
experience and knowledge of medical devices and ultrasound systems,
and the loss of any team member could impair our ability to design,
identify, and develop new intellectual property and new scientific
or product ideas. Additionally, if we lose the services of any of
these persons, we would likely be forced to expend significant time
and money in the pursuit of replacements, which may result in a
delay in the implementation of our business plan and plan of
operations. We can give no assurance that we could find
satisfactory replacements for these individuals on terms that would
not be unduly expensive or burdensome to us.
To execute our
growth plan, we must attract and retain highly qualified personnel.
Competition for skilled personnel is intense, especially for
engineers with high levels of experience in designing and
developing medical devices and for sales executives, especially
with industry expertise. We may experience difficulty in hiring and
retaining employees with appropriate qualifications. Many of the
companies with which we compete for experienced personnel have
greater resources than we have. In addition, we invest significant
time and expense in training our employees, which increases their
value to competitors who may seek to recruit them. If we fail to
attract new personnel or fail to retain and motivate our current
personnel, our business and future growth prospects would be
harmed.
12
Our employees, independent contractors, consultants, commercial
partners and vendors may engage in misconduct or other improper
activities, including noncompliance with regulatory standards and
requirements.
We are exposed to
the risk of fraud, misconduct or other illegal activity by our
employees, independent contractors, consultants, commercial
partners and vendors. Misconduct by these parties could include
intentional, reckless and negligent conduct that fails to: comply
with the U.S. Food, Drug and Cosmetics Act, or the FD&C Act,
and similar laws of other countries, and rules and regulations of
the U.S. Food and Drug Administration, or the FDA, and other
similar foreign regulatory bodies; provide true, complete and
accurate information to the FDA and other similar foreign
regulatory bodies; comply with manufacturing standards we
establish; comply with healthcare fraud and abuse laws in the
United States and similar foreign fraudulent misconduct laws; or
report financial information or data accurately or to disclose
unauthorized activities to us. If we obtain European, Chinese or
FDA approval of any of our products and begin commercializing those
products in Europe, China or the United States, respectively, our
potential exposure under such laws will increase significantly, and
our costs associated with compliance with such laws are also likely
to increase. In particular, the promotion, sales and marketing of
healthcare items and services, as well as certain business
arrangements in the healthcare industry, are subject to extensive
laws designed to prevent fraud, kickbacks, self-dealing and other
abusive practices. These laws and regulations may restrict or
prohibit a wide range of pricing, discounting, marketing and
promotion, structuring and commissions, certain customer incentive
programs and other business arrangements generally. It is not
always possible to identify and deter misconduct by employees and
other parties, and the precautions we take to detect and prevent
this activity may not be effective in controlling unknown or
unmanaged risks or losses or in protecting us from governmental
investigations or other actions or lawsuits stemming from a failure
to comply with these laws or regulations. If any such actions are
instituted against us, and we are not successful in defending
ourselves or asserting our rights, those actions could have a
significant impact on our business, including the imposition of
significant fines or other sanctions.
Misdiagnosis, warranty and other claims initiated against us and
product field actions could increase our costs, delay or reduce our
sales and damage our reputation, adversely affecting our financial
condition.
Our business
exposes us to the risk of malpractice, warranty or product
liability claims inherent in the sale and support of medical device
products, including those based on claims that the use or failure
of one of our products resulted in a misdiagnosis or harm to a
patient. Such claims may cause financial loss, damage our
reputation by raising questions about our products’ safety
and efficacy, adversely affect regulatory approvals and interfere
with our efforts to market our products. Although to date we have
not been involved in any medical malpractice or product liability
litigation, we may incur significant liability if such litigation
were to occur. We may also face adverse publicity resulting from
product field actions or regulatory proceedings brought against us.
Claims could also be asserted under state consumer protection acts.
If we cannot successfully defend ourselves against product
liability or related claims, we may incur substantial liabilities
or be required to limit distribution of our products. Even a
successful defense would require significant financial and
management resources. Regardless of the merits or eventual outcome,
liability claims may result in:
●
decreased
demand for our products;
●
injury
to our reputation and negative media attention;
●
initiation
of investigations by regulators;
13
●
costs
to defend the related litigation;
●
a
diversion of management’s time and our
resources;
●
substantial
monetary awards to trial participants or
patients;
●
product
recalls, withdrawals or labeling, marketing or promotional
restrictions;
●
loss
of revenue;
●
exhaustion
of any available insurance and our capital
resources;
●
the
inability to commercialize a product at all or for particular
applications; and
●
a
decline in the price of our securities.
Although we
currently maintain liability insurance in amounts we believe are
commercially reasonable, any liability we incur may exceed our
insurance coverage. Our insurance policies may also have various
exclusions, and we may be subject to a claim for which we have no
coverage. Liability insurance is expensive and may cease to be
available on acceptable terms, if at all. A malpractice, warranty,
product liability or other claim or product field action not
covered by our insurance or exceeding our coverage could
significantly impair our financial condition. In addition, a
product field action or a liability claim against us could
significantly harm our reputation and make it more difficult to
obtain the funding and commercial relationships necessary to
maintain our business.
Our internal computer systems, or those used by third-party
manufacturers or other contractors or consultants, may fail or
suffer security breaches.
Despite the
implementation of security measures, our internal computer systems
and those of our future manufacturers and other contractors and
consultants are vulnerable to damage from computer viruses and
unauthorized access. Although to our knowledge we have not
experienced any such material system failure or security breach to
date, if such an event were to occur and cause interruptions in our
operations, it could result in a material disruption of our
development programs and our business operations. To the extent
that any disruption or security breach were to result in a loss of,
or damage to, our data or applications, or inappropriate disclosure
of confidential or proprietary information, we could incur
liability and the further development and commercialization of our
products could be delayed.
Unfavorable economic conditions may have an adverse impact on our
business.
Unfavorable changes
in economic conditions, including inflation, recession, or other
changes in economic conditions, may result in lower consumer
healthcare spending as well as physician and hospital spending and
availability of credit. If demand for medical devices or budgets
for capital improvements decline, our revenue could be adversely
affected. Additionally, if our suppliers face challenges in
obtaining credit, in selling their products or otherwise in
operating their businesses, they may become unable to continue to
offer the materials we use to manufacture our products, which could
result in sales disruption.
We may face
significant challenges if global economic conditions remain
unstable or worsen, including reduced demand for our products and
services, increased order cancellations, longer sales cycles and
slower adoption of new technologies; increased difficulty in
collecting accounts receivable and increased risk of excess and
obsolete inventories; increased price competition in our served
markets; increased prices in components as a result of higher
commodities prices; supply chain interruptions, which could disrupt
our ability to produce our products; and increased risk of
impairment of investments, goodwill and intangible and long-lived
assets.
14
The United Kingdom’s vote to leave the European Union will
have uncertain effects and could adversely affect us.
The United Kingdom
held a referendum on June 23, 2016 in which a majority of voters
voted to exit the European Union, commonly referred to as
“Brexit”. Negotiations are expected to commence to
determine the future terms of the United Kingdom’s
relationship with the European Union, including, among other
things, the terms of trade between the United Kingdom and the
European Union. The effects of Brexit will depend on any agreements
the United Kingdom makes to retain access to E.U. markets either
during a transitional period or more permanently. Brexit could
adversely affect European and worldwide economic and market
conditions and could contribute to instability in global financial
and foreign exchange markets, including volatility in the value of
the Sterling and Euro. In addition, Brexit could lead to legal
uncertainty and potentially divergent national laws and regulations
as the United Kingdom determines which E.U. laws to replace or
replicate. Any of these effects of Brexit, and others we cannot
anticipate, could adversely affect our business, results of
operations, financial condition and cash flows.
Risks
Related to Intellectual Property and Other Legal
Matters
If we are unable to protect our intellectual property, then our
financial condition, results of operations and the value of our
technology and products could be adversely affected.
Much of our value
arises out of our proprietary technology and intellectual property
for the design, manufacture and use of medical imaging systems,
including development of our TAEUS applications. We rely on patent,
copyright, trade secret and trademark laws to protect our
proprietary technology and limit the ability of others to compete
with us using the same or similar technology. Third parties may
infringe or misappropriate our intellectual property, which could
harm our business.
We currently
maintain a patent portfolio consisting of one current granted
patent and twelve pending patent applications in the United States
and foreign jurisdictions relating to our technology. In addition,
we currently license eight granted patents and three pending patent
applications in the United States and foreign jurisdictions. We or
our licensor may fail to maintain these patents, may determine not
to pursue litigation against entities that are infringing upon
these patents, or may pursue such enforcement less aggressively
than we ordinarily would.
Policing
unauthorized use of our intellectual property is difficult, costly
and time-intensive. We may fail to stop or prevent misappropriation
of our technology, particularly in countries where the laws may not
protect our proprietary rights to the same extent as do the laws of
the United States. Proceedings to enforce our patent and other
intellectual property rights in non-U.S. jurisdictions could result
in substantial costs and divert our efforts and attention from
other aspects of our business. If we cannot prevent other companies
from using our proprietary technology or if our patents are found
invalid or otherwise unenforceable, we may be unable to compete
effectively against other manufacturers of ultrasound systems,
which could decrease our market share. In addition, the breach of a
patent licensing agreement by us may result in termination of a
patent license.
If we are unable to protect the confidentiality of our proprietary
information and know-how, the value of our technology and products
could be adversely affected.
In addition to our
patent activities, we rely upon, among other things, unpatented
proprietary technology, processes, trade secrets and know-how. Any
involuntary disclosure to or misappropriation by third parties of
our confidential or proprietary information could enable
competitors to duplicate or surpass our technological achievements,
potentially eroding our competitive position in our market. We seek
to protect confidential or proprietary information in part by
confidentiality agreements with our employees, consultants and
third parties. While we require all of our employees, consultants,
advisors and any third parties who have access to our proprietary
know-how, information and technology to enter into confidentiality
agreements, we cannot be certain that this know-how, information
and technology will not be disclosed or that competitors will not
otherwise gain access to our trade secrets or independently develop
substantially equivalent information and techniques. These
agreements may be terminated or breached, and we may not have
adequate remedies for any such termination or breach. Furthermore,
these agreements may not provide meaningful protection for our
trade secrets and know-how in the event of unauthorized use or
disclosure. To the extent that any of our staff was previously
employed by other pharmaceutical, medical technology or
biotechnology companies, those employers may allege violations of
trade secrets and other similar claims in relation to their former
employee’s therapeutic development activities for
us.
15
We may in the future be a party to intellectual property litigation
or administrative proceedings that could be costly and could
interfere with our ability to sell our TAEUS
applications.
The medical device
industry has been characterized by extensive litigation regarding
patents, trademarks, trade secrets, and other intellectual property
rights, and companies in the industry have used intellectual
property litigation to gain a competitive advantage. It is possible
that U.S. and foreign patents and pending patent applications or
trademarks controlled by third parties may be alleged to cover our
products, or that we may be accused of misappropriating third
parties’ trade secrets. Other medical imaging market
participants, many of which have substantially greater resources
and have made substantial investments in patent portfolios, trade
secrets, trademarks, and competing technologies, may have applied
for or obtained or may in the future apply for or obtain, patents
or trademarks that will prevent, limit or otherwise interfere with
our ability to make, use, sell and/or export our products or to use
product names. We may become a party to patent or trademark
infringement or trade secret claims and litigation as a result of
these and other third party intellectual property rights being
asserted against us. The defense and prosecution of these matters
are both costly and time consuming. Vendors from whom we purchase
hardware or software may not indemnify us in the event that such
hardware or software is accused of infringing a third party's
patent or trademark or of misappropriating a third party’s
trade secret.
Further, if such
patents, trademarks, or trade secrets are successfully asserted
against us, this may harm our business and result in injunctions
preventing us from selling our products, license fees, damages and
the payment of attorney fees and court costs. In addition, if we
are found to willfully infringe third-party patents or trademarks
or to have misappropriated trade secrets, we could be required to
pay treble damages in addition to other penalties. Although patent,
trademark, trade secret, and other intellectual property disputes
in the medical device area have often been settled through
licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing
royalties. We may be unable to obtain necessary licenses on
satisfactory terms, if at all. If we do not obtain necessary
licenses, we may not be able to redesign our TAEUS applications to
avoid infringement.
Similarly,
interference or derivation proceedings provoked by third parties or
brought by the U.S. Patent and Trademark Office, or USPTO, may be
necessary to determine the priority of inventions or other matters
of inventorship with respect to our patents or patent applications.
We may also become involved in other proceedings, such as
re-examination, inter partes review, or opposition proceedings,
before the USPTO or other jurisdictional body relating to our
intellectual property rights or the intellectual property rights of
others. Adverse determinations in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent us
from manufacturing and selling our TAEUS applications or using
product names, which would have a significant adverse impact on our
business.
Additionally, we
may need to commence proceedings against others to enforce our
patents or trademarks, to protect our trade secrets or know-how, or
to determine the enforceability, scope and validity of the
proprietary rights of others. These proceedings would result in
substantial expense to us and significant diversion of effort by
our technical and management personnel. We may not prevail in any
lawsuits that we initiate and the damages or other remedies
awarded, if any, may not be commercially meaningful. We may not be
able to stop a competitor from marketing and selling products that
are the same or similar to our products or from using product names
that are the same or similar to our product names, and our business
may be harmed as a result.
16
Intellectual property rights may not provide adequate protection,
which may permit third parties to compete against us more
effectively.
In order to remain
competitive, we must develop and maintain protection of the
proprietary aspects of our technologies. We rely on a combination
of patents, copyrights, trademarks, trade secret laws and
confidentiality and invention assignment agreements to protect our
intellectual property rights. Any patents issued to us may be
challenged by third parties as being invalid, or third parties may
independently develop similar or competing technology that avoids
our patents. Should such challenges be successful, competitors
might be able to market products and use manufacturing processes
that are substantially similar to ours. We may not be able to
prevent the unauthorized disclosure or use of our technical
knowledge or other trade secrets by consultants, vendors or former
or current employees, despite the existence generally of
confidentiality agreements and other contractual restrictions.
Monitoring unauthorized use and disclosure of our intellectual
property is difficult, and we do not know whether the steps we have
taken to protect our intellectual property will be adequate. In
addition, the laws of many foreign countries will not protect our
intellectual property rights to the same extent as the laws of the
United States. Consequently, we may be unable to prevent our
proprietary technology from being exploited abroad, which could
affect our ability to expand to international markets or require
costly efforts to protect our technology. To the extent our
intellectual property protection is incomplete, we are exposed to a
greater risk of direct competition. In addition, competitors could
purchase our products and attempt to replicate some or all of the
competitive advantages we derive from our development efforts or
design around our protected technology. Our failure to secure,
protect and enforce our intellectual property rights could
substantially harm the value of our TAEUS platform, brand and
business.
Risks
Related to Government Regulation
Failure to comply with laws and regulations could harm our
business.
Our business is or
in the future may be subject to regulation by various federal,
state, local and foreign governmental agencies, including agencies
responsible for monitoring and enforcing employment and labor laws,
workplace safety, environmental laws, consumer protection laws,
anti-bribery laws, import/export controls, securities laws and tax
laws and regulations. In certain jurisdictions, these regulatory
requirements may be more stringent than those in the United States.
Noncompliance with applicable regulations or requirements could
subject us to investigations, sanctions, mandatory recalls,
enforcement actions, adverse publicity, disgorgement of profits,
fines, damages, civil and criminal penalties or injunctions and
administrative actions. If any governmental sanctions, fines or
penalties are imposed, or if we do not prevail in any possible
civil or criminal litigation, our business, operating results and
financial condition could be harmed. In addition, responding to any
action will likely result in a significant diversion of
management's attention and our resources and substantial costs.
Enforcement actions and sanctions could further harm our business,
operating results and financial condition.
17
If we fail to obtain and maintain necessary regulatory clearances
or approvals for our TAEUS applications, or if clearances or
approvals for future applications and indications are delayed or
not issued, our commercial operations will be harmed.
The medical devices
that we manufacture and market are subject to regulation by
numerous worldwide regulatory bodies, including the FDA and
comparable international regulatory agencies. These agencies
require manufacturers of medical devices to comply with applicable
laws and regulations governing development, testing, manufacturing,
labeling, marketing and distribution of medical devices. Devices
are generally subject to varying levels of regulatory control,
based on the risk level of the device. Governmental regulations
specific to medical devices are wide-ranging and govern, among
other things:
●
product
design, development and manufacture;
●
laboratory,
pre-clinical and clinical testing, labeling, packaging storage and
distribution;
●
premarketing
clearance or approval;
●
record
keeping;
●
product
marketing, promotion and advertising, sales and distribution;
and
●
post-marketing
surveillance, including reporting of deaths or serious injuries and
recalls and correction and removals.
In the European
Union, we will be required to comply with applicable medical device
directives (including the Medical Devices Directive and the Active
Implantable Medical Devices Directive) and obtain CE mark
certification in order to market medical devices. The CE mark is
applied following approval from an independent notified body or
declaration of conformity. It is an international symbol of
adherence to quality assurance standards and compliance with
applicable European Medical Devices Directives. We believe that our
TAEUS applications will qualify for sale in the European Union as
Class IIa medical devices. Existing regulations do not require
clinical trials to obtain CE marks for Class IIa medical devices.
However, in 2012 the European Commission proposed a new regulatory
scheme that, if implemented, will impose significant additional
obligations on medical device companies. Expected changes include
stricter requirements for clinical evidence and pre-market
assessment of safety and performance, new classifications to
indicate risk levels, requirements for third party testing by
government accredited groups for some types of medical devices, and
tightened and streamlined quality management system assessment
procedures. It is anticipated that this new regulatory scheme may
be implemented prior to receipt of the CE mark for our NAFLD TAEUS
application but we believe that applicable transition rules should
allow us to avoid their application in that case. However, such new
rules could impose additional requirements, such as a requirement
to conduct clinical trials, on future CE mark applications we
make.
We are also
required to comply with the regulations of each other country where
we commercialize products, such as the requirement that we obtain
approval from the FDA and the China Food and Drug Administration
before we can launch new products in the United States and China,
respectively.
International sales
of medical devices manufactured in the United States that are not
approved by the FDA for use in the United States, or that are
banned or deviate from lawful performance standards, are subject to
FDA export requirements. Exported devices are subject to the
regulatory requirements of each country to which the device is
exported. Frequently, regulatory approval may first be obtained in
a foreign country prior to application in the United States due to
differing regulatory requirements; however, other countries, such
as China for example, require approval in the country of origin
first.
Before a new
medical device or a new intended use for an existing product can be
marketed in the United States, a company must first submit and
receive either 510(k) clearance or premarketing approval, or PMA,
from the FDA, unless an exemption applies. The typical duration to
receive a 510(k) approval is approximately nine to twelve months
from the date of the initial 510(k) submission and the typical
duration to receive a PMA approval is approximately two years from
the date of submission of the initial PMA application, although
there is no guarantee that the timing will not be
longer.
We expect all of
our products to be classified as Class II medical devices that may
be approved by means of a 510(k) clearance. In the past, the 510(k)
pathway for product marketing has required only proof of
substantial equivalence in technology for a given indication with a
previously cleared device. Recently, there has been a trend of the
FDA requiring additional clinical work to prove efficacy in
addition to technological equivalence and basic safety. Whether
clinical data is provided or not, the FDA may decide to reject the
substantial equivalence argument we present. If that happens, the
device is automatically designated as a Class III device. The
device sponsor must then fulfill more rigorous PMA requirements, or
can request a risk-based classification determination for the
device in accordance with the “de novo” process, which
may determine that the new device is of low to moderate risk and
that it can be appropriately be regulated as a Class I or II
device. Thus, although at this time we do not anticipate that we
will be required to do so, it is possible that one or more of our
other products may require approval through the 510(K) de novo
process or by means of a PMA.
We may not be able
to obtain the necessary clearances or approvals or may be unduly
delayed in doing so, which could harm our business. Furthermore,
even if we are granted regulatory clearances or approvals, they may
include significant limitations on the indicated uses for the
product, which may limit the market for the product. Therefore,
even if we believe we have successfully developed our TAEUS
technology, we may not be permitted to market TAEUS applications in
the United States if we do not obtain FDA regulatory clearance to
market such applications. Delays in obtaining clearance or approval
could increase our costs and harm our revenues and
growth.
18
In addition, we are
required to timely file various reports with the FDA, including
reports required by the medical device reporting regulations that
require us to report to certain regulatory authorities if our
devices may have caused or contributed to a death or serious injury
or malfunctioned in a way that would likely cause or contribute to
a death or serious injury if the malfunction were to recur. If
these reports are not filed timely, regulators may impose sanctions
and sales of our products may suffer, and we may be subject to
product liability or regulatory enforcement actions, all of which
could harm our business.
If we initiate a
correction or removal for one of our devices to reduce a risk to
health posed by the device, we would be required to submit a
publically available Correction and Removal report to the FDA and,
in many cases, similar reports to other regulatory agencies. This
report could be classified by the FDA as a device recall which
could lead to increased scrutiny by the FDA, other international
regulatory agencies and our customers regarding the quality and
safety of our devices. Furthermore, the submission of these reports
has been and could be used by competitors against us in competitive
situations and cause customers to delay purchase decisions or
cancel orders and would harm our reputation.
The FDA and the
Federal Trade Commission, or FTC, also regulate the advertising and
promotion of our products to ensure that the claims we make are
consistent with our regulatory clearances, that there are adequate
and reasonable data to substantiate the claims and that our
promotional labeling and advertising is neither false nor
misleading in any respect. If the FDA or FTC determines that any of
our advertising or promotional claims are misleading, not
substantiated or not permissible, we may be subject to enforcement
actions, including warning letters, and we may be required to
revise our promotional claims and make other corrections or
restitutions.
The FDA and state
authorities have broad enforcement powers. Our failure to comply
with applicable regulatory requirements could result in enforcement
action by the FDA or state agencies, which may include any of the
following sanctions:
●
adverse
publicity, warning letters, fines, injunctions, consent decrees and
civil penalties;
●
repair,
replacement, refunds, recall or seizure of our
products;
●
operating
restrictions, partial suspension or total shutdown of
production;
●
refusing
our requests for 510(k) clearance or premarket approval of new
products, new intended uses or modifications to existing
products;
●
withdrawing
510(k) clearance or premarket approvals that have already been
granted; and
●
criminal
prosecution.
If any of these
events were to occur, our business and financial condition would be
harmed.
Our TAEUS applications may require recertification or new
regulatory clearances or premarket approvals and we may be required
to recall or cease marketing our TAEUS applications until such
recertification or clearances are obtained.
Most countries
outside of the United States require that product approvals be
recertified on a regular basis, generally every five years. The
recertification process requires that we evaluate any device
changes and any new regulations or standards relevant to the device
and, where needed, conduct appropriate testing to document
continued compliance. Where recertification applications are
required, they must be approved in order to continue selling our
products in those countries.
19
In the United
States, material modifications to the intended use or technological
characteristics of our TAEUS applications will require new 510(k)
clearances or premarket approvals or require us to recall or cease
marketing the modified devices until these clearances or approvals
are obtained. Based on FDA published guidelines, the FDA requires
device manufacturers to initially make and document a determination
of whether or not a modification requires a new approval,
supplement or clearance; however, the FDA can review a
manufacturer’s decision. Any modification to an FDA-cleared
device that would significantly affect its safety or efficacy or
that would constitute a major change in its intended use would
require a new 510(k) clearance or possibly a premarket
approval.
We may not be able
to obtain recertification or additional 510(k) clearances or
premarket approvals for our applications or for modifications to,
or additional indications for, our TAEUS technology in a timely
fashion, or at all. Delays in obtaining required future
governmental approvals would harm our ability to introduce new or
enhanced products in a timely manner, which in turn would harm our
future growth. If foreign regulatory authorities or the FDA require
additional approvals, we may be required to recall and to stop
selling or marketing our TAEUS applications, which could harm our
operating results and require us to redesign our applications. In
these circumstances, we may be subject to significant enforcement
actions.
If we or our suppliers fail to comply with the FDA’s Quality
System Regulations or other regulatory bodies’ equivalent
regulations, our manufacturing operations could be delayed or shut
down and TAEUS platform sales could suffer.
Our manufacturing
processes and those of our third party suppliers will be required
to comply with the FDA’s Quality System Regulations and other
regulatory bodies’ equivalent regulations, which cover the
procedures and documentation of the design, testing, production,
control, quality assurance, labeling, packaging, storage and
shipping of our TAEUS applications. We will also be subject to
similar state requirements and licenses. In addition, we must
engage in extensive recordkeeping and reporting and must make
available our manufacturing facilities and records for periodic
unannounced inspections by governmental agencies, including the
FDA, state authorities and comparable agencies in other countries.
If we fail such an inspection, our operations could be disrupted
and our manufacturing interrupted. Failure to take adequate
corrective action in response to an adverse inspection could result
in, among other things, a shut-down of our manufacturing
operations, significant fines, suspension of marketing clearances
and approvals, seizures or recalls of our products, operating
restrictions and criminal prosecutions, any of which would cause
our business to suffer. Furthermore, our key component suppliers
may not currently be or may not continue to be in compliance with
applicable regulatory requirements, which may result in
manufacturing delays for our product and cause our results of
operations to suffer.
Our TAEUS applications may in the future be subject to product
recalls that could harm our reputation.
Governmental
authorities in Europe, the United States and China have the
authority to require the recall of commercialized products in the
event of material regulatory deficiencies or defects in design or
manufacture. A government-mandated or voluntary recall by us could
occur as a result of component failures, manufacturing errors or
design or labeling defects. Recalls of our TAEUS applications would
divert managerial attention, be expensive, harm our reputation with
customers and harm our financial condition and results of
operations. A recall announcement would negatively affect the price
of our securities.
Healthcare reform measures could hinder or prevent our planned
products' commercial success.
There have been,
and we expect there will continue to be, a number of legislative
and regulatory changes to the healthcare system in ways that could
harm our future revenues and profitability and the future revenues
and profitability of our potential customers. In the European
Union, although there have not been any recent amendments to the
relevant regulatory legislation, there are ongoing discussions
regarding amending the current regulatory framework for medical
devices. Moreover, because the Medical Devices Directive requires
only minimum harmonization in the European Union, member countries
may alter their enforcement of the directives or amend their
national regulatory rules. We cannot predict what healthcare
initiatives, if any, will be implemented by the European Union or
E.U. member countries, or the effect any future legislation or
regulation will have on us.
20
In the United
States, federal and state lawmakers regularly propose and, at
times, enact legislation that would result in significant changes
to the healthcare system, some of which are intended to contain or
reduce the costs of medical products and services. For example, one
of the most significant healthcare reform measures in decades, the
Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Affordability Reconciliation Act, or
Affordable Care Act, was enacted in 2010. The Affordable Care Act
contains a number of provisions, including those governing
enrollment in federal healthcare programs, reimbursement changes
and fraud and abuse measures, all of which will impact existing
government healthcare programs and will result in the development
of new programs. The Affordable Care Act, among other things,
imposes an excise tax of 2.3% on the sale of most medical devices,
including ours, and any failure to pay this amount could result in
the imposition of an injunction on the sale of our products, fines
and penalties.
It remains unclear
whether changes will be made to the Affordable Care Act, or whether
it will be repealed or materially modified. We cannot assure you
that the Affordable Care Act, as currently enacted or as amended or
discontinued in the future, will not harm our business and
financial results and we cannot predict how future federal or state
legislative or administrative changes relating to healthcare reform
will affect our business.
There likely will
continue to be legislative and regulatory proposals at the federal
and state levels directed at containing or lowering the cost of
healthcare. We cannot predict the initiatives that may be adopted
in the future or their full impact. The continuing efforts of the
government, insurance companies, managed care organizations and
other payors of healthcare services to contain or reduce costs of
healthcare may harm:
●
our
ability to set a price that we believe is fair for our
products;
●
our
ability to generate revenues and achieve or maintain profitability;
and
●
the
availability of capital.
If we fail to comply with healthcare regulations, we could face
substantial penalties and our business, operations and financial
condition could be adversely affected.
Even though we do
not and will not control referrals of healthcare services or bill
directly to Medicare, Medicaid or other third party payors, certain
federal and state healthcare laws and regulations pertaining to
fraud and abuse and patients’ rights are and will be
applicable to our business. We could be subject to healthcare fraud
and abuse and patient privacy regulation by both the federal
government and the states in which we conduct our business. Other
jurisdictions such as the European Union have similar laws. The
regulations that will affect how we operate include:
●
the
federal healthcare program Anti-Kickback Statute, which prohibits,
among other things, any person from knowingly and willfully
offering, soliciting, receiving or providing remuneration, directly
or indirectly, in exchange for or to induce either the referral of
an individual for, or the purchase, order or recommendation of, any
good or service for which payment may be made under federal
healthcare programs, such as the Medicare and Medicaid
programs;
21
●
the
federal False Claims Act, which prohibits, among other things,
individuals or entities from knowingly presenting, or causing to be
presented, false claims, or knowingly using false statements, to
obtain payment from the federal government;
●
federal
criminal laws that prohibit executing a scheme to defraud any
healthcare benefit program or making false statements relating to
healthcare matters;
●
the
federal Physician Payment Sunshine Act, created under the
Affordable Care Act, and its implementing regulations, which
require manufacturers of drugs, medical devices, biologicals and
medical supplies for which payment is available under Medicare,
Medicaid, or the Children's Health Insurance Program to report
annually to the U.S. Department of Health and Human Services, or
HHS, information related to payments or other transfers of value
made to physicians and teaching hospitals, as well as ownership and
investment interests held by physicians and their immediate family
members;
●
HIPAA,
as amended by the Health Information Technology for Economic and
Clinical Health Act, which governs the conduct of certain
electronic healthcare transactions and protects the security and
privacy of protected health information; and
●
state
law equivalents of each of the above federal laws, such as
anti-kickback and false claims laws which may apply to items or
services reimbursed by any third-party payor, including commercial
insurers.
The Affordable Care
Act, among other things, amends the intent requirement of the
Federal Anti-Kickback Statute and criminal healthcare fraud
statutes. A person or entity no longer needs to have actual
knowledge of this statute or specific intent to violate it. In
addition, the Affordable Care Act provides that the government may
assert that a claim including items or services resulting from a
violation of the Federal Anti-Kickback Statute constitutes a false
or fraudulent claim for purposes of the False Claims
Act.
Efforts to ensure
that our business arrangements will comply with applicable
healthcare laws may involve substantial costs. It is possible that
governmental and enforcement authorities will conclude that our
business practices do not comply with current or future statutes,
regulations or case law interpreting applicable fraud and abuse or
other healthcare laws and regulations. If any such actions are
instituted against us, and we are not successful in defending
ourselves or asserting our rights, those actions could have a
significant impact on our business, including the imposition of
civil, criminal and administrative penalties, damages,
disgorgement, monetary fines, possible exclusion from participation
in Medicare, Medicaid and other federal and similar foreign
healthcare programs, contractual damages, reputational harm,
diminished profits and future earnings, and curtailment of our
operations, any of which could harm our ability to operate our
business and our results of operations.
Compliance with environmental laws and regulations could be
expensive. Failure to comply with environmental laws and
regulations could subject us to significant liability.
Our research and
development and manufacturing operations may involve the use of
hazardous substances and are subject to a variety of federal,
state, local and foreign environmental laws and regulations
relating to the storage, use, discharge, disposal, remediation of,
and human exposure to, hazardous substances and the sale, labeling,
collection, recycling, treatment and disposal of products
containing hazardous substances. In addition, our research and
development and manufacturing operations produce biological waste
materials, such as human and animal tissue, and waste solvents,
such as isopropyl alcohol. These operations are permitted by
regulatory authorities, and the resultant waste materials are
disposed of in material compliance with environmental laws and
regulations. Liability under environmental laws and regulations can
be joint and several and without regard to fault or negligence.
Compliance with environmental laws and regulations may be expensive
and non-compliance could result in substantial liabilities, fines
and penalties, personal injury and third part property damage
claims and substantial investigation and remediation costs.
Environmental laws and regulations could become more stringent over
time, imposing greater compliance costs and increasing risks and
penalties associated with violations. We cannot assure you that
violations of these laws and regulations will not occur in the
future or have not occurred in the past as a result of human error,
accidents, equipment failure or other causes. The expense
associated with environmental regulation and remediation could harm
our financial condition and operating results.
22
Risks
Related to this Offering and Owning Our Securities, Our Financial
Results and Our Need for Financing
The preliminary financial data contained herein are based on
information existing as of the date hereof and there can be no
assurance that actual financial results will not differ,
potentially materially so.
The estimated
financial results included herein are based on information existing
as of the date hereof. During the preparation of our financial
statements for the quarter ending March 31, 2017, we may identify
items that would require us to make adjustments, which may be
material to the estimates described above. This preliminary
financial data has been prepared by and is the responsibility of
our management. RBSM LLP has not audited, reviewed, compiled or
performed any procedures with respect to this preliminary financial
data, and accordingly, RBSM LLP does not express an opinion or any
other form of assurance with respect thereto. Accordingly, there
can be no assurance that the projected results will be realized or
that actual results will not be significantly lower than
projected.
Our quarterly and annual results may fluctuate significantly, may
not fully reflect the underlying performance of our business and
may result in decreases in the price of our
securities.
Our operating
results will be affected by numerous factors such as:
●
variations
in the level of expenses related to our proposed
products;
●
status
of our product development efforts;
●
execution
of collaborative, licensing or other arrangements, and the timing
of payments received or made under those arrangements;
●
intellectual
property prosecution and any infringement lawsuits to which we may
become a party;
●
regulatory
developments affecting our products or those of our
competitors;
●
our
ability to obtain and maintain FDA clearance and approval from
foreign regulatory authorities for our products, which have not yet
been approved for marketing;
●
market acceptance of our TAEUS
applications;
●
the availability of reimbursement for our
TAEUS applications;
●
our
ability to attract new customers and grow our business with
existing customers;
●
the
timing and success of new product and feature introductions by us
or our competitors or any other change in the competitive dynamics
of our industry, including consolidation among competitors,
customers or strategic partners;
●
the
amount and timing of costs and expenses related to the maintenance
and expansion of our business and operations;
●
changes
in our pricing policies or those of our competitors;
●
general
economic, industry and market conditions;
●
the
hiring, training and retention of key employees, including our
ability to expand our sales team;
●
litigation
or other claims against us;
●
our
ability to obtain additional financing; and
●
advances
and trends in new technologies and industry standards.
Any or all of these
factors could adversely affect our cash position requiring us to
raise additional capital which may be on unfavorable terms and
result in substantial dilution.
23
The forecasts of market growth included in this prospectus may
prove to be inaccurate, and even if the markets in which we compete
achieve the forecasted growth, our business may not grow at similar
rates, if at all.
Growth forecasts
are subject to significant uncertainty and are based on assumptions
and estimates that may not prove to be accurate. The forecasts in
this prospectus relating to, among other things, the expected
growth and need for diagnosis of NAFLD and the growth and need for
temperature monitoring of thermal ablation procedures may prove to
be inaccurate.
Even if these
markets experience the forecasted growth described in this
prospectus, we may not grow our business at similar rates, or at
all. Our growth is subject to many factors, including whether the
markets for NAFLD diagnosis and thermal ablation continue to grow,
the rate of market acceptance of our TAEUS applications versus the
products of our competitors and our success in implementing our
business strategies, each of which is subject to many risks and
uncertainties. Accordingly, the forecasts of market growth included
in this prospectus should not be taken as indicative of our future
growth.
If we are unable to implement and maintain effective internal
control over financial reporting in the future, investors may lose
confidence in the accuracy and completeness of our financial
reports and the market price of our securities may
decrease.
As a public
company, we will be required to maintain internal control over
financial reporting and to report any material weaknesses in such
internal controls. Section 404 of the Sarbanes-Oxley Act of
2002, or the Sarbanes-Oxley Act, requires that we evaluate and
determine the effectiveness of our internal control over financial
reporting and, beginning with our annual report for the year ending
December 31, 2018, provide a management report on our internal
control over financial reporting, which must be attested to by our
independent registered public accounting firm to the extent we are
no longer an “emerging growth company,” as defined by
the Jumpstart Our Businesses Act of 2012, or the JOBS Act, or a
smaller reporting company under the Securities Act.
Currently and in
the future, if we have material weaknesses in our internal control
over financial reporting, we may not detect errors on a timely
basis and our financial statements may be materially misstated. We
are in the process of designing and implementing our internal
control over financial reporting, which process will be time
consuming, costly and complicated. However, we are a small
organization with limited management resources. In addition to
serving as our Chief Financial Officer, David Wells provides
financial consulting services to several other companies. These
other consulting services could prevent Mr. Wells from dedicating
sufficient time and attention to us, which could limit our ability
to maintain effective internal controls over financial
reporting.
Until such time as
we are no longer an "emerging growth company" or a smaller
reporting company, our auditors will not be required to attest as
to our internal control over financial reporting. If we continue to
identify material weaknesses in our internal control over financial
reporting, if we are unable to comply with the requirements of
Section 404 in a timely manner, if we are unable to assert
that our internal control over financial reporting is effective or,
once required, if our independent registered public accounting firm
is unable to attest that our internal control over financial
reporting is effective, investors may lose confidence in the
accuracy and completeness of our financial reports and the market
price of our common stock could decrease. We could also become
subject to stockholder or other third-party litigation as well as
investigations by the stock exchange on which our securities are
listed, the Securities and Exchange Commission, or the SEC, or
other regulatory authorities, which could require additional
financial and management resources and could result in fines,
trading suspensions or other remedies.
We may not be able to secure additional financing on favorable
terms, or at all, to meet our future capital needs and our failure
to obtain additional financing when needed could force us to delay,
reduce or eliminate our product development programs and
commercialization efforts.
We believe that the
net proceeds from this offering, together with our current cash and
expected revenues from operations, will be sufficient for us to
fund the development and regulatory approval and to initiate the
commercialization of our NAFLD TAEUS application in the European
Union. However, the expected net proceeds from this offering are
not expected to be sufficient for us to complete the full
commercialization of this application in the European Union or to
complete the development of any other TAEUS application. As a
result, we expect that 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.
24
To date, we have
financed our operations primarily through sales of our Nexus 128
system and net proceeds from the issuance of equity and debt
securities. We do not know when or if our operations will generate
sufficient cash to fund our ongoing operations. In the future, we
may require additional capital in order to (i) continue to
conduct research and development activities; (ii) conduct
clinical studies; (iii) fund the costs of seeking regulatory
approval of TAEUS applications; (iv) expand our sales and
marketing infrastructure; (v) acquire complementary business
technology or products; or (vi) respond to business
opportunities, challenges, increased regulatory obligations or
unforeseen circumstances. 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 elsewhere in
this “Risk Factors” section. 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. Our future funding requirements will depend on many
factors, including, but not limited to:
●
the costs, timing and outcomes of regulatory
reviews associated with our future products, including TAEUS
applications;
●
the
costs and expenses of expanding our sales and marketing
infrastructure;
●
the costs and timing of developing variations of
our TAEUS applications and, if
necessary, obtaining regulatory clearance of such
variations;
●
the degree of success we experience in
commercializing our products, particularly our TAEUS
applications;
●
the extent to which our TAEUS applications
are adopted by hospitals for use by
primary care physicians, hepatologists, radiologists and
oncologists for diagnosis of fatty liver disease and the thermal
ablation of lesions;
●
the
number and types of future products we develop and
commercialize;
●
the
costs of preparing, filing and prosecuting patent applications and
maintaining, enforcing and defending intellectual property-related
claims;
●
the
extent and scope of our general and administrative
expenses;
●
the
progress, timing, scope and costs of our clinical trials, including
the ability to timely enroll patients in our planned and potential
future clinical trials;
●
the
outcome, timing and cost of regulatory approvals, including the
potential that the FDA or comparable regulatory authorities may
require that we perform more studies than those that we currently
expect;
●
the
amount of sales and other revenues from technologies and products
that we may commercialize, if any, including the selling prices for
such potential products and the availability of adequate
third-party reimbursement;
●
selling
and marketing costs associated with our potential products,
including the cost and timing of expanding our marketing and sales
capabilities;
25
●
the
terms and timing of any potential future collaborations, licensing
or other arrangements that we may establish;
●
cash
requirements of any future acquisitions and/or the development of
other products;
●
the
costs of operating as a public company;
●
the
cost and timing of completion of commercial-scale, outsourced
manufacturing activities; and
●
the
time and cost necessary to respond to technological and market
developments.
We may raise funds
in equity or debt financings following our initial public offering
or enter into credit facilities in order to access funds for our
capital needs. Any debt financing obtained by us in the future
would cause us to incur debt service expenses and could include
restrictive covenants relating to our capital raising activities
and other financial and operational matters, which may make it more
difficult for us to obtain additional capital and pursue business
opportunities. If we raise additional funds through further
issuances of equity or convertible debt securities, our existing
stockholders could suffer significant dilution in their percentage
ownership of our Company, and any new equity securities we issue
could have rights, preferences and privileges senior to those of
holders of our common stock. General market conditions or the
market price of our common stock may not support capital raising
transactions such as an additional public or private offering of
our common stock or other securities. If we are unable to obtain
adequate financing or financing on terms satisfactory to us when we
require it, we may terminate or delay the development of one or
more of our products, or delay establishment of sales and marketing
capabilities or other activities necessary to commercialize our
products. In addition, if we raise additional funds through
collaborations, strategic alliances or marketing, distribution or
licensing arrangements with third parties, we may have to
relinquish valuable rights to our technologies, future revenue
streams or products or to grant licenses on terms that may not be
favorable to us.
If we are unable to
raise additional capital when needed, we may be required to curtail
the development of our technology or materially curtail or reduce
our operations. We could be forced to sell or dispose of our rights
or assets. Any inability to raise adequate funds on commercially
reasonable terms could have a material adverse effect on our
business, results of operation and financial condition, including
the possibility that a lack of funds could cause our business to
fail and liquidate with little or no return to
investors.
We may be subject to securities litigation, which is expensive and
could divert management attention.
The price of our
securities may be volatile, and in the past companies that have
experienced volatility in the market price of their securities have
been subject to an increased incidence of securities class action
litigation. We may be the target of this type of litigation in the
future. Securities litigation against us could result in
substantial costs and divert our management’s attention from
other business concerns, which could seriously harm our
business.
As an investor, you may lose all of your investment.
Investing in our
securities involves a high degree of risk. As an investor, you may
never recoup all, or even part, of your investment and you may
never realize any return on your investment. You must be prepared
to lose all of your investment.
26
Prior to the completion of our initial public offering, there will
have been no public trading market for our units,
common stock or warrants. An active public trading market for our
securities may not develop and our securities may trade below the
public offering price.
The offering under
this prospectus is an initial public offering of our
securities. Prior to the closing of the offering, there
will have been no public market for our units, common
stock or warrants. An active public trading market for our
units, common stock and warrants may not develop after
the completion of the offering. If an active trading market
for our units, common stock or warrants does not
develop after this offering, the market price and liquidity of our
units, common stock and warrants may be materially and
adversely affected. The public offering price for our
units has been determined by negotiation among us and
the underwriters based upon several factors, and the price at which
our units trade after this offering may decline below
the public offering price. Investors in our units may
experience a significant decrease in the value of their
units regardless of our operating performance or
prospects.
If a public market for our units, common stock or
warrants develops, it may be volatile. This may affect
the ability of our investors to sell their securities as well as
the price at which they sell their securities.
If a market for our
units, common stock or warrants develops, the market
price for the units, shares and warrants may be
significantly affected by factors such as variations in quarterly
and yearly operating results, general trends in the medical imaging
industry, and changes in state or federal regulations affecting us
and our industry. Furthermore, in recent years the stock
market has experienced extreme price and volume fluctuations that
are unrelated or disproportionate to the operating performance of
the affected companies. Such broad market fluctuations
may adversely affect the market price of our units,
common stock and warrants, if markets for them
develop.
In addition to
market and industry factors, the price and trading volume for our
units, common stock and warrants may be highly
volatile for specific business reasons, including:
●
announcements
of regulatory approval or a complete response letter, or specific
label indications or patient populations for its use, or changes or
delays in the regulatory review process;
●
announcements
of innovations or new products by us or other participants in the
medical imaging market;
●
adverse
actions taken by regulatory agencies with respect to our clinical
trials, manufacturing supply chain or sales and marketing
activities;
●
any
adverse changes to our relationship with manufacturers or
suppliers;
●
results
of our testing and clinical trials;
●
results
of our efforts to acquire or license additional
products;
●
variations
in the level of expenses related to our existing products or
pre-clinical and clinical development programs;
●
any
intellectual property infringement actions in which we may become
involved;
●
announcements
concerning our competitors or the medical imaging industry in
general;
●
achievement
of expected product sales and profitability;
●
manufacture,
supply or distribution shortages;
●
variations
in our results of operations;
●
announcements
about our earnings that are not in line with analyst
expectations;
27
●
publication
of operating or industry metrics by third parties, including
government statistical agencies, that differ from expectations of
industry or financial analysts;
●
changes
in financial estimates by securities research
analysts;
●
press
reports, whether or not true, about our
business;
●
additions
to or departures of our management;
●
release
or expiry of lock-up or other transfer restrictions on our
outstanding securities;
●
sales
or perceived potential sales of additional
securities;
●
sales
of our securities by us, our executive officers and directors or
our stockholders in the future;
●
general
economic and market conditions and overall fluctuations in the U.S.
equity markets; and
●
changes
in accounting principles.
Any of these
factors may result in large and sudden changes in the volume and
trading price of our securities. In addition, the stock market, in
general, and smaller companies like ours, in particular, have
experienced extreme price and volume fluctuations that have often
been unrelated or disproportionate to the operating performance of
these companies. Broad market and industry factors may negatively
affect the market price of our units, common stock and
warrants, regardless of our actual operating
performance.
The warrants may not have any value.
The warrants will
be exercisable beginning after separation from the units and
until the five year anniversary of the date of initial
issuance of the units at an initial exercise price
equal to 125% of the initial offering price per unit
set forth on the cover page of this prospectus. In the event that
our common stock price does not exceed the exercise price of the
warrants during the period when the warrants are exercisable, the
warrants may not have any value.
A warrant does not entitle the holder to any rights as common
stockholders until the holder exercises the warrant for a share of
our common stock.
Until you acquire
shares upon exercise of your warrants, the warrants will not
provide you any rights as a common stockholder. Upon exercise of
your warrants, you will be entitled to exercise the rights of a
common stockholder only as to matters for which the record date
occurs after the exercise date.
We are an “emerging growth company” under the JOBS Act
and we cannot be certain if the reduced disclosure requirements
applicable to emerging growth companies will make our securities
less attractive to investors.
We are an
“emerging growth company,” as defined in the Jumpstart
Our Business Startups Act of 2012, or the JOBS Act, and we may take
advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not
“emerging growth companies” including, but not limited
to, not being required to comply with the auditor attestation
requirements of section 404 of the Sarbanes-Oxley Act, reduced
disclosure obligations regarding executive compensation in our
periodic reports and proxy statements, and exemptions from the
requirements of holding a nonbinding advisory vote on executive
compensation and stockholder approval of any golden parachute
payments not previously approved. We cannot predict if
investors will find our securities less attractive because we may
rely on these exemptions. If some investors find our
securities less attractive as a result, there may be a less active
trading market for our securities and the price of our securities
may be more volatile.
We will remain an
“emerging growth company” for up to five years,
although we will lose that status sooner if our annual revenues
exceed $1 billion, if we issue more than $1 billion in
non-convertible debt in a three year period, or if the market value
of our common stock that is held by non-affiliates exceeds $700
million as of any June 30.
If securities or industry analysts do not publish research reports
about our business, or if they issue an adverse opinion about our
business, the price of our securities and trading volume could
decline.
The trading market
for our securities will be influenced by the research and reports
that industry or securities analysts publish about us or our
business. We do not currently have and may never obtain research
coverage by securities and industry analysts. If no or few analysts
commence research coverage of us, or one or more of the analysts
who cover us issues an adverse opinion about our company, the price
of our securities would likely decline. If one or more of these
analysts ceases research coverage of us or fails to regularly
publish reports on us, we could lose visibility in the financial
markets, which in turn could cause the price of our securities or
trading volume to decline.
28
We have not paid dividends in the past and have no immediate plans
to pay dividends.
We plan to reinvest
all of our earnings, to the extent we have earnings, in order to
further develop our technology and potential products and to cover
operating costs. We do not plan to pay any cash
dividends with respect to our securities in the foreseeable
future. We cannot assure you that we would, at any time,
generate sufficient surplus cash that would be available for
distribution to the holders of our common stock as a
dividend. Therefore, you should not expect to receive
cash dividends on the common stock we are
offering.
Concentration of ownership among our existing executive officers,
directors and significant stockholders may prevent new investors
from influencing significant corporate decisions.
All decisions with
respect to the management of the Company will be made by our board
of directors and our officers, who, before this offering,
beneficially own approximately 26.1% of our common stock, as
calculated in accordance with Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended, or the Exchange
Act. After the issuance of our common stock in this
offering, management will beneficially own approximately 6.7% of
our common stock, as calculated in accordance with Rule 13d-3. In
addition, before this offering, Blue Earth Fund, LP, Jeffrey and
Margaret Padnos, Benjamin Padnos, Erick Richardson and Robert
Clifford and their affiliates beneficially own approximately 23.4%,
16.8%, 16.3%, 13.0% and 10.1% of our common stock, respectively,
and after this offering will beneficially own approximately 5.9%,
4.0%, 3.9%, 3.0% and 2.2% of our common stock, respectively, as
calculated in accordance with Rule 13d-3 promulgated under the
Exchange Act. As a result, these stockholders will be
able to exercise a substantial level of control over all matters
requiring stockholder approval, including the election of
directors, amendment of our Fourth Amended and Restated Certificate
of Incorporation, or the Certificate of Incorporation, and approval
of significant corporate transactions. This control could have the
effect of delaying or preventing a change of control of the Company
or changes in management and will make the approval of certain
transactions difficult or impossible without the support of these
stockholders.
Certain of our stockholders who have relationships with National
Securities Corporation, an underwriter in this offering, may have
conflicts of interest with respect to matters involving our
Company.
As noted in the
section titled “Conflicts of Interest,” National
Securities Corporation has a conflict of interest in offering our
units since affiliates of National Securities Corporation
beneficially own more than 10% of our outstanding common stock. As
a result, National Securities Corporation is deemed to have a
“conflict of interest” within the meaning of FINRA Rule
5121. Robert C. Clifford and Daniel Landry, stockholders of ours
who beneficially own 10.1% and 8.8% of our common stock,
respectively, are both principals of Liquid Venture Partners, LLC,
an affiliate of National Securities Corporation. Due to this
conflict of interest, Dougherty & Company LLC is acting as a
qualified independent underwriter. However, in the future, our
stockholders who are affiliated with National Securities
Corporation may face real or apparent conflicts of interest with
matters affecting both us and National Securities
Corporation.
We will incur significant increased costs as a result of becoming a
public company that reports to the SEC and our management will be
required to devote substantial time to meet compliance
obligations.
As a public company
listed in the United States, we will incur significant legal,
accounting and other expenses that we did not incur as a private
company. We will be subject to reporting requirements of
the Exchange Act and the Sarbanes-Oxley Act, as well as rules
subsequently implemented by the SEC and Nasdaq that impose
significant requirements on public companies, including requiring
the establishment and maintenance of effective disclosure and
financial controls and changes in corporate governance
practices. In addition, in 2010, the Dodd-Frank Wall
Street Reform and Protection Act, or the Dodd-Frank Act, was
enacted. There are significant corporate governance and
executive compensation-related provisions in the Dodd-Frank Act
that will increase our legal and financial compliance costs, make
some activities more difficult, time-consuming or costly and may
also place undue strain on our personnel, systems and
resources. Our management and other personnel will need
to devote a substantial amount of time to these compliance
initiatives. In addition, these rules and regulations
may make it more difficult and more expensive for us to obtain
director and officer liability insurance, and we may be required to
accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. As
a result, it may be more difficult for us to attract and retain
qualified people to serve on our board of directors, our board
committees or as executive officers.
29
A significant portion of our total outstanding shares of common
stock is restricted from immediate resale but may be sold into the
market in the near future. This could cause the market price of our
securities to drop significantly, even if our business is doing
well.
Sales of a
substantial number of shares of our common stock in the public
market could occur in the future. These sales, or the perception in
the market that the holders of a large number of securities intend
to sell shares, could reduce the market price of our common stock.
After this offering, we will have outstanding 3,360,267 shares of
common stock (or 3,570,267 shares if the underwriters exercise
their option to purchase additional units in
full). Of these outstanding shares, all of the 1,400,000
shares of common stock (or 1,610,000 shares if the underwriters
exercise their option to purchase additional units in
full) and warrants exercisable for 1,400,000 shares of common
stock (1,610,000 shares if the underwriters exercise their option
to purchase additional units in full) issued in this
offering will be freely tradable upon separation of the
units. In addition, we expect that the shares issued upon
exercise of the warrants issued in this offering will be freely
tradeable. The remaining outstanding shares of our common stock
will be restricted under securities laws or as a result of lock-up
agreements but will be able to be resold after the offering as
described in the “Shares Eligible for Future Sale”
section of this prospectus. We also intend to register all shares
of common stock that we may issue under our equity compensation
plans. Once we register these shares, they can be freely sold in
the public market upon issuance and once vested, subject to the
180- and 365-day lock-up periods under the lock-up agreements
described in the “Underwriting” section of this
prospectus.
Future sales and issuances of our common stock or rights to
purchase common stock, including pursuant to our equity incentive
plan, could result in additional dilution of the percentage
ownership of our stockholders and could cause the price of our
securities to fall.
We expect that
significant additional capital will be needed in the future to
continue our planned operations. To the extent we raise additional
capital by issuing equity securities, our stockholders may
experience substantial dilution. We may sell common stock,
convertible securities or other equity securities. If we sell
common stock, convertible securities or other equity securities,
your investment in our common stock will be diluted. These sales
may also result in material dilution to our existing stockholders,
and new investors could gain rights superior to our existing
stockholders.
We may allocate the net proceeds from this offering in ways that
differ from the estimates discussed in the section titled
“Use of Proceeds” and with which you may not
agree.
The allocation of
net proceeds of this offering set forth in the “Use of
Proceeds” section below represents our estimates based upon
our current plans and assumptions regarding industry and general
economic conditions, and our future revenues and
expenditures. The amounts and timing of our actual
expenditures will depend on numerous factors, including market
conditions, cash generated by our operations, business developments
and related rate of growth. We may find it necessary or
advisable to use portions of the proceeds from this offering for
other purposes. Circumstances that may give rise to a
change in the use of proceeds and the alternate purposes for which
the proceeds may be used are discussed in the section entitled
“Use of Proceeds” below. You may not have an
opportunity to evaluate the economic, financial or other
information on which we base our decisions on how to use our
proceeds. As a result, you and other stockholders may
not agree with our decisions. See “Use of
Proceeds” for additional information.
You will experience immediate dilution in the book value per share
of the common stock you purchase.
The initial public
offering price per unit (and our common stock
forming part of such unit will be substantially higher
than the net tangible book value (deficit) per share of our common
stock immediately prior to the offering. After giving effect to the
assumed sale of units in this offering, at the assumed
initial public offering price of $5.25 per unit, the
mid-point of the range set forth on the cover page of this
prospectus, and after deducting the underwriting discount and
estimated offering expenses payable by us and attributing no value
to the warrants included in the units, purchasers of
our units in this offering will incur immediate
dilution of $3.19 per share in the net tangible book value
(deficit) of the common stock they acquire. In the event that you
exercise your warrants, you will experience additional dilution to
the extent that the exercise price of the warrants is higher than
the tangible book value (deficit) per share of our common stock.
For a further description of the dilution that investors in this
offering will experience, see “Dilution.”
Our charter documents and Delaware law may inhibit a takeover that
stockholders consider favorable.
Upon the closing of
this offering, provisions of our Certificate of Incorporation and
bylaws and applicable provisions of Delaware law may delay or
discourage transactions involving an actual or potential change in
control or change in our management, including transactions in
which stockholders might otherwise receive a premium for their
shares, or transactions that our stockholders might otherwise deem
to be in their best interests. The provisions in our
Certificate of Incorporation and bylaws:
30
●
authorize
our board of directors to issue preferred stock without stockholder
approval and to designate the rights, preferences and privileges of
each class; if issued, such preferred stock would increase the
number of outstanding shares of our common stock and could include
terms that may deter an acquisition of us;
●
limit
who may call stockholder meetings;
●
do
not provide for cumulative voting rights; and
●
provide
that all vacancies may be filled by the affirmative vote of a
majority of directors then in office, even if less than a
quorum.
In addition, once
we become a publicly traded corporation, section 203 of the
Delaware General Corporation Law may limit our ability to engage in
any business combination with a person who beneficially owns 15% or
more of our outstanding voting stock unless certain conditions are
satisfied. This restriction lasts for a period of three
years following the share acquisition. These provisions
may have the effect of entrenching our management team and may
deprive you of the opportunity to sell your shares to potential
acquirers at a premium over prevailing prices. This
potential inability to obtain a control premium could reduce the
price of our common stock. See “Anti-Takeover Effects of
Certain Provisions of Delaware Law and Our Charter Documents”
for additional information.
Our disclosure controls and procedures may not prevent or detect
all errors or acts of fraud.
Upon completion of
this offering, we will become subject to the periodic reporting
requirements of the Exchange Act. Our disclosure controls and
procedures are designed to reasonably assure that information
required to be disclosed by us in reports we file or submit under
the Exchange Act is accumulated and communicated to management, and
recorded, processed, summarized and reported within the time
periods specified by the rules and forms of the SEC. We believe
that any disclosure controls and procedures or internal controls
and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met.
These inherent
limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people
or by an unauthorized override of the controls. Accordingly,
because of the inherent limitations in our control system,
misstatements due to error or fraud may occur and not be
detected.
31
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS
This prospectus
contains forward-looking statements. All statements other than
statements of historical facts contained in this prospectus,
including statements regarding the timing of our clinical trials,
our strategy, future operations, future financial position, future
revenue, projected costs, prospects, plans, objectives of
management and expected market growth are forward-looking
statements. In addition, our preliminary financial data for
the quarter ending March 31, 2017 contained in this prospectus are
forward-looking statements. Forward-looking statements
give our current expectations or forecasts of future events. You
can find many (but not all) of these statements by looking for
words such as “approximates,” “believes,”
“hopes,” “expects,”
“anticipates,” “estimates,”
“projects,” “intends,” “plans,”
“would,” “should,” “could,”
“may” or other similar expressions in this
prospectus. These statements may be found principally
under the sections entitled “Prospectus Summary,”
“Risk Factors,” “Use of Proceeds,”
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and
“Business.” These forward-looking statements are
subject to certain risks and uncertainties that could cause actual
results to differ materially from our historical experience and our
present expectations or projections. Actual results may differ materially from those
discussed as a result of various factors, including, but not
limited to:
●
our
need to secure required regulatory approvals from governmental
authorities in the European Union, United States and other
jurisdictions;
●
our dependence on
third parties to design, manufacture, obtain required regulatory
approvals of, market and distribute our TAEUS applications;
●
our ability to commercialize any applications of
our TAEUS technology and the
pricing of any such applications;
●
our
limited operating history and our ability to achieve
profitability;
●
our
need for and ability to obtain adequate financing in the
future;
●
the
impact of competitive or alternative products, technologies and
pricing;
●
the
adequacy of protections afforded to us by the patents that we own
and the success we may have in, and the cost to us of, maintaining,
enforcing and defending those patents;
●
our
ability to obtain, expand and maintain patent protection in the
future, and to protect our non-patented intellectual
property;
●
general
economic conditions and events and the impact they may have on us
and our potential customers;
●
our
ability to continue as a going concern;
●
our success at managing the risks involved in the
foregoing items; and
●
other factors
discussed in the “Risk Factors” section of this
prospectus.
These statements
reflect our views with respect to future events as of the date of
this prospectus and are based on assumptions and subject to risks
and uncertainties. Given these uncertainties, you should not place
undue reliance on these forward-looking statements. These
forward-looking statements represent our estimates and assumptions
only as of the date of this prospectus and, except as required by
law, we undertake no obligation to update or review publicly any
forward-looking statements, whether as a result of new information,
future events or otherwise after the date of this prospectus. We
anticipate that subsequent events and developments will cause our
views to change. You should read this prospectus and the documents
referenced in this prospectus and filed as exhibits to the
registration statement, of which this prospectus is a part,
completely and with the understanding that our actual future
results may be materially different from what we expect. Our
forward-looking statements do not reflect the potential impact of
any future acquisitions, merger, dispositions, joint ventures or
investments we may undertake. We qualify all of our forward-looking
statements by these cautionary statements.
32
We estimate that we
will receive net proceeds of approximately $6,062,000 from this
offering, or approximately $7,076,300 if the underwriters exercise
their over-allotment option in full, based on an assumed initial
public offering price of $5.25 per unit, the mid-point
of the range set forth on the cover page of this prospectus, and
after deducting the underwriting discount and estimated offering
expenses payable by us and excluding the proceeds, if any, from the
exercise of the warrants.
A $0.25 increase
(decrease) in the initial public offering price of $5.25 per
unit would increase (decrease) the net proceeds to us
from this offering by approximately $322,000, assuming the number
of units offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
underwriting discount and estimated offering expenses payable by
us. Similarly, each increase (decrease) of one hundred thousand in
the number of units offered by us, as set forth on the
cover page of this prospectus, would increase (decrease) the net
proceeds to us from this offering by approximately $483,000,
assuming the initial public offering price of $5.25 per
unit, the mid-point of the price range set forth on
the cover page of this prospectus, remains the same and after
deducting the underwriting discount and estimated offering expenses
payable by us.
We intend to use
the net proceeds from this offering to fund the development and
regulatory approval and to prepare for the initial
commercialization of our NAFLD TAEUS application in the European
Union and for working capital and other general corporate purposes.
However, we will require additional funds to commercialize this
application in the European Union and to implement the balance of
our business plan thereafter. We believe that our NAFLD TAEUS
application will qualify for sale in the European Union as a Class
IIa medical device. As a result, we will be required to obtain a CE
mark for our NAFLD TAEUS application before we can sell the
application in the European Union.
Existing
regulations would not require us to conduct a clinical trial to
obtain a CE mark for this application. Nonetheless, for commercial
reasons and to support our CE mark application, we plan to conduct
a limited (less than 10 person) trial to demonstrate our NAFLD
TAEUS application's ability to distinguish fat from lean tissue. We
intend to engage a medical device contract engineering firm to
perform commercial product engineering, and to obtain a CE mark,
for this application. Based on our understanding of applicable
regulations and consultations with medical device regulatory
consulting firms and medical device contract engineering firms, we
expect that the development of our NAFLD TAEUS application,
including the receipt of the necessary CE mark, will be complete
within 12 to 15 months after the completion of this offering and
that we will use approximately $700,000 of the net proceeds from this offering on such
activities.
While we are seeking a CE mark for our NAFLD TAEUS
application, we also plan to expand our sales, marketing and
customer support capabilities, so that we can commence initial
commercial sales of the application in the European Union promptly
following receipt of this regulatory approval. We estimate that we
will use approximately $600,000 of the net proceeds from
this offering on such activities. Additionally, to enhance our
commercialization efforts in the European Union, following receipt
of such CE mark and placement of initial systems with researchers
and universities, we plan to conduct one or more clinical studies
to demonstrate this product's capabilities, and that we will use
approximately $250,000 of the net proceeds from this offering on
such activities. However, these estimates are subject to
uncertainty and there can be no assurance that these processes will
not take longer or be more costly than we expect.
We
expect to use the balance of the net proceeds from this offering on
research and development, additional regulatory activities, sales
and marketing activities for general and administrative expense and
other general corporate purposes.
The amounts and
timing of our actual expenditures will depend on numerous factors,
including market conditions, results from our research and
development efforts, business developments and related sales and
marketing activities. Therefore, as of the date of this prospectus,
we cannot specify with certainty the specific allocation of the net
proceeds to be received upon the completion of this offering. Our
management will have broad discretion in the application of the net
proceeds, and investors will be relying on the judgment of our
management regarding the application of the proceeds from this
offering.
We believe that the
net proceeds of this offering, together with our existing cash,
will be sufficient for us to fund the development of our NAFLD
TAEUS application through the expected receipt of regulatory
approval in the European Union and to prepare for the initial
commercialization of our NAFLD TAEUS application in this market. It
is possible that we will not achieve the progress that we expect
because of unforeseen costs or factors impacting timely completion
of the regulatory approvals for a new medical device, which are
difficult to predict and are subject to risks and delays. We have
no other committed external sources of funds. The expected net
proceeds from this offering are not expected to be sufficient for
the commercialization of our NAFLD TAEUS application in the
European Union, to initiate the process for obtaining required
regulatory approvals in the U.S. or China or to commercialize this
application in these markets, or to complete the development of any
other TAEUS application. As a result, we expect that 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.
Pending our use of
the net proceeds from this offering, we intend to invest the net
proceeds in a variety of capital preservation investments,
including short-term, investment-grade, interest-bearing
instruments and U.S. government securities.
33
We have never
declared or paid any dividends on our capital stock, and do not
plan to do so for the foreseeable future. We expect that we will
retain all of our available funds and future earnings, if any, for
use in the operation and expansion of our business. The terms of
any loan agreement we enter into or any debt securities we may
issue are likely to contain restrictions on our ability to pay
dividends on our capital stock. Subject to the foregoing, the
payment of dividends in the future, if any, will be at the
discretion of our board of directors and will depend upon such
factors as earnings levels, capital requirements, restrictions
imposed by applicable law, our overall financial condition and any
other factors deemed relevant by our board of
directors.
34
The following table
sets forth our actual cash and capitalization, each as of December
31, 2016:
●
on an actual
basis;
●
on a pro forma
basis to give effect to the reverse stock split, to reflect the
filing of our Fourth Amended and Restated Certificate of
Incorporation in connection with this offering and to give effect to the conversion of the
outstanding principal and accrued interest on our outstanding
convertible promissory notes as of March 17, 2017 into
an aggregate of 1,236,894 shares
of our common stock at a conversion price of $1.40 per share
immediately prior to the completion of this offering, as elected by
holders of a majority of the outstanding principal amount of such
convertible promissory notes; and
●
on a pro forma as
adjusted basis, to further reflect the sale by us of
units at an initial public offering price of $5.25 per
unit, the mid-point of the price range set forth on
the cover page of this prospectus, and after deducting the
underwriting discount and estimated offering expenses payable by us
and the receipt by us of the expected net proceeds of such
sale.
The pro forma and
pro forma as adjusted information below is illustrative only, and
our capitalization following the closing of this offering may
differ from that shown below based on the actual initial public
offering price and other terms of this offering determined at
pricing. You should read this information together with the
sections entitled “Summary Financial Data” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our financial
statements and the related notes, which appear elsewhere in this
prospectus.
|
As
of December 31, 2016
|
||
|
Actual
|
Pro
Forma
|
Pro
Forma As Adjusted (1)(2)
|
|
|
|
|
Cash
|
$ 144,953
|
$ 144,953
|
$6,206,953
|
|
|
|
|
Capitalization
|
|
|
|
Debt:
|
|
--
|
--
|
Senior
convertible notes
|
1,731,650
|
--
|
--
|
Total
debt
|
$ 1,731,650
|
$ --
|
$ --
|
|
|
|
|
Stockholders
Equity:
|
|
|
|
Preferred
stock, $0.0001 par value; 34,861,927 shares authorized; no shares
issued or outstanding, actual; 10,000,000 shares authorized pro
forma; no shares issued or outstanding pro forma and pro forma as
adjusted
|
--
|
--
|
--
|
Common stock, $0.0001 par value; 45,000,000 shares
authorized; 2,531,808 shares issued and
outstanding actual;
50,000,000 shares authorized and 1,960,627 shares issued and
outstanding, pro forma, and 50,000,000 shares authorized and
3,360,267 shares issued and
outstanding, pro forma as adjusted
|
253
|
196
|
336
|
Stock
payable(3)
|
81,000
|
81,000
|
81,000
|
Additional
paid-in capital
|
11,543,453
|
13,275,160
|
19,337,020
|
Accumulated
deficit
|
(12,518,473)
|
(12,518,473)
|
(12,518,473)
|
Total
stockholders equity
|
(893,767)
|
837,883
|
6,899,883
|
|
|
|
|
Total
capitalization
|
$837,883
|
$837,883
|
$6,899,883
|
__________
(1)
A $0.25 increase
(decrease) in the assumed initial public offering price of
$5.25 per unit,
the mid-point of the price range set forth on the cover page of
this prospectus, would increase or decrease the amount of cash,
cash equivalents and short-term investments, additional paid-in
capital and total capitalization by approximately $322,000,
assuming the number of units offered by us, as set
forth on the cover page of this prospectus, remains the same and
after deducting the underwriting discount and estimated offering
expenses payable by us. Similarly, a one hundred thousand increase
(decrease) in the number of units offered by us, as
set forth on the cover page of this prospectus, would increase
(decrease) cash and cash equivalents, working capital, total assets
and total stockholders' equity by approximately $483,000, assuming
the assumed initial public offering price of $5.25 per unit, the mid-point
of the price range set forth on the cover page of this prospectus,
remains the same, and after deducting the underwriting discount and
estimated offering expenses payable by us.
(2)
The number of shares of our common stock to be
outstanding after this offering is based on 1,960,267
shares of common stock outstanding as
of December 31, 2016, which includes the conversion of the
principal and accrued interest on our outstanding convertible
promissory notes as of March 17, 2017 into an aggregate of
1,236,894 shares of our common stock at a conversion price
of $1.40 per share immediately prior to the completion of this
offering, as elected by holders of a majority of the outstanding
principal amount of such convertible promissory notes, and excludes
the following:
●
152,812 shares of
common stock issuable upon the exercise of outstanding warrants, at
a weighted average exercise price of $18.94 per share;
●
151,881 shares of
our common stock issuable upon the exercise of outstanding stock
options issued pursuant to our 2016 Omnibus Incentive
Plan, or our
Incentive Plan, at a weighted average exercise price of $10.01 per
share and an estimated 556,559 shares of
our common stock issuable upon the exercise of stock options
expected to be granted to our directors and certain of our officers
upon the completion of this offering at an exercise price equal to
the public offering price set forth on the cover of this
prospectus;
●
an estimated 385,252 shares of our common
stock that will be reserved for future issuance under our Incentive
Plan;
●
up to 1,610,000
shares of our common stock that may be issued under warrants to be
sold in this offering; and
●
up to 128,000
shares of our common stock issuable upon exercise of the
underwriters' warrants issued to the underwriters in this
offering.
(3)
Stock Payable is to be issued at the closing of this offering to
StoryCorp Consulting (d/b/a Wells Compliance Group) in an amount of
15,429 shares of common stock.
35
If you purchase
units in this offering, you will experience dilution
to the extent of the difference between the combined public
offering price per unit in this offering and our pro
forma as adjusted net tangible book value per share immediately
after this offering, assuming no value is attributed to the
warrants and such warrants are accounted for and classified as
equity.
Net tangible book
value per share represents total tangible assets less total
liabilities, divided by the number of shares of common stock
outstanding. Our historical net tangible book value as of December
31, 2016 (assuming the reverse stock split) was $(893,767), or
$(1.24) per share of common stock. On a pro forma basis assuming
the conversion of the principal and accrued interest on our
outstanding convertible promissory notes as of March 17, 2017 into
an aggregate of 1,236,893 shares of our common stock at a
conversion price of $1.40 per share immediately prior to the
completion of this offering, our pro forma net tangible book value
as of December 31, 2016 would have been $837,883, or $0.43 per
share. After giving effect to the assumed sale of 1,400,000
units in this offering at the assumed initial public
offering price of $5.25 per unit, the mid-point of the
price range set forth on the cover page of this prospectus, after
deducting the underwriting discount and estimated offering expenses
payable by us, our pro forma as adjusted net tangible book value as
of December 31, 2016 would have been $6,899,883, or $2.05 per
share. This represents an immediate increase in pro forma as
adjusted net tangible book value of $1.63 per share to existing
stockholders and an immediate dilution in pro forma as adjusted net
tangible book value of $3.20 per
share to investors in this offering. The following table
illustrates this dilution on a per share basis:
Assumed initial
public offering price per unit
|
|
$5.25
|
Historical net
tangible book value per share as of December 31, 2016
|
$ (1.24)
|
|
Pro forma increase
in net tangible book value per share attributable to conversion of
convertible promissory notes
|
$ 1.66
|
|
Pro forma net
tangible book value per share as of December 31, 2016
|
$ 0.43
|
|
Pro forma increase
in net tangible book value per share attributable to new
investors
|
$ 1.63
|
|
Pro forma as
adjusted tangible book value per share, after giving effect to this
offering
|
|
2.05
|
Dilution of pro
forma as adjusted net tangible book value per share to new
investors
|
|
$ 3.20
|
If the underwriters
exercise in full their option to purchase 210,000 additional
units at the initial public offering price of $5.25
per share and related warrant, the pro forma as adjusted net
tangible book value per share after giving effect to this offering
would be $2.25 per share, which amount represents an immediate
increase in pro forma as adjusted net tangible book value of $1.81
per share of our common stock to existing stockholders and an
immediate dilution in pro forma as adjusted net tangible book value
of $3.00 per share of our common stock to new investors purchasing
units in this offering.
The following table
summarizes, on a pro forma as adjusted basis as described above as
of December 31, 2016 and with respect to shares acquired since 2013
(and excluding shares acquired prior to 2013, for which it was
impracticable to determine cost basis information), the number of
shares of common stock purchased from us, the total consideration
paid to us and the average price per share paid to us by our
existing stockholders (including holders of our convertible
promissory notes as of March 17, 2017 upon the conversion thereof)
and by new investors purchasing units in this offering
at the assumed initial public offering price of $5.25 per
unit, the mid-point of the price range set forth on
the cover page of this prospectus, attributing no value to the
warrants and assuming no exercise of the warrants, and before the
deduction of the underwriting discount and estimated offering
expenses payable by us. Investors purchasing units in
this offering will pay an average price per share substantially
higher than our existing stockholders paid.
|
Shares
Acquired
|
Total Consideration
|
Average Price
|
||
|
Number
|
Percent
|
Amount
|
Percent
|
Per Share
|
Existing
stockholders
|
1,969,294
|
58.4
|
$ 5,609,331
|
43.3
|
$ 2.85
|
New
investors
|
1,400,000
|
41.6
|
$ 7,350,000
|
56.7
|
$5.25
|
Total
|
|
100%
|
100%
|
|
|
36
In the event that
you exercise your warrants, you will experience additional dilution
to the extent that the exercise price of the warrants is higher
than the average price per share paid to us by our existing
stockholders. If any shares are issued upon exercise of outstanding
options or warrants, you may experience further
dilution.
The above
discussion and tables are based on 1,960,267 shares of common stock
outstanding as of March 17, 2017, which includes the conversion of
the principal and accrued interest on our outstanding convertible
promissory notes outstanding as of March 17, 2017 into an aggregate
of 1,236,894 shares of our common stock at a conversion price of
$1.40 per share immediately prior to the completion of this
offering, as elected by the holders of a majority of the
outstanding principal amount of such convertible promissory notes,
and excludes the following:
●
152,812
shares of common stock issuable upon the exercise of outstanding
warrants, at a weighted average exercise price of $18.94 per
share;
●
151,881 shares of our common stock issuable upon
the exercise of outstanding stock options issued pursuant to our
2016 Omnibus Incentive Plan, or our Incentive Plan, at a weighted
average exercise price of $10.01 per share and an estimated
556,559 shares of our common stock
issuable upon the exercise of stock options expected to be granted
to our directors and certain of our officers upon the completion of
this offering at an exercise price equal to the public offering
price set forth on the cover of this
prospectus;
●
an
estimated 385,252 shares of our common stock that will be reserved
for future issuance under our Incentive Plan;
●
up to 1,610,000
shares of our common stock that may be issued under warrants to be
issued to the public in this offering; and
●
up
to 128,800 shares of our common stock issuable upon exercise of the
underwriters' warrants issued to the underwriters in this
offering.
A $0.25 increase
(decrease) in the assumed initial public offering price of $5.25
per unit, the mid-point of the price range set forth
on the cover page of this prospectus, would increase (decrease) the
pro forma as adjusted net tangible book value per share after this
offering by approximately $0.10 and $(0.10), respectively, and the
dilution of pro forma as adjusted net tangible book value per share
to new investors by approximately $0.10 and $(0.10), respectively,
assuming that the number of units offered by us, as
set forth on the cover page of this prospectus, remains the same
and after deducting the underwriting discount and estimated
offering expenses payable by us. An increase (decrease) of one
hundred thousand in the number of units offered by us,
as set forth on the cover of this prospectus, would increase
(decrease) the pro forma as adjusted net tangible book value per
share after this offering by approximately $0.08 and $(0.05),
respectively, and decrease (increase) the dilution of pro forma as
adjusted net tangible book value per share to new investors by
approximately $0.08 and $(0.05), respectively, assuming the assumed
initial public offering price of $5.25 per unit, the
mid-point of the price range set forth on the cover page of this
prospectus, remains the same, and after deducting the underwriting
discount and estimated offering expenses payable by
us.
We may choose to raise additional capital through the sale of
equity or convertible debt securities due to market conditions or
strategic considerations even if we believe we have sufficient
funds for our current or future operating plans. To the extent that
any of these options or warrants are exercised, new options are
issued under our Incentive Plan or we issue additional shares of
common stock or other equity securities in the future, there may be
further dilution to new investors participating in this
offering.
37
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis of our
financial condition and results of operations together with the
section entitled “Summary Financial Data” and our
financial statements and related notes included elsewhere in this
prospectus. Some of the information contained in this discussion
and analysis or set forth elsewhere in this prospectus, including
information with respect to our plans and strategy for our business
and related financing, includes forward-looking statements that
involve risks and uncertainties. See “Cautionary Note
Regarding Forward-Looking Statements.” Our actual results may
differ materially from those described below. You should read the
“Risk Factors” section of this prospectus for a
discussion of important factors that could cause actual results to
differ materially from the results described in or implied by the
forward-looking statements contained in the following discussion
and analysis.
Overview
We have
commercialized an enhanced ultrasound technology for the
pre-clinical research market and are leveraging that expertise 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, or CT, and magnetic resonance imaging, or MRI,
technology is unavailable or impractical.
Since 2010, we have
marketed and sold our Nexus 128 system, which combines light-based
thermoacoustics and ultrasound, to address the imaging needs of
researchers studying disease models in pre-clinical applications.
Sales of the Nexus 128 system were approximately $1.4 million in
2015 and $515,000 in 2016. We have not yet completed preparation of
financial statements for the quarter ending March 31, 2017, but, as
described below under “Recent Financial Results,” based
on preliminary data available to us, we expect to report no revenue
and a total net loss of approximately $650,000 during
that quarter. Our Nexus 128 system is used in a number of leading
global academic research centers, including Stanford University,
The University of Michigan, Shanghai Jiao Tong University, and
Purdue University. We expect to continue to sell our Nexus 128
system to maintain a base level of revenue, but believe the market
potential for our clinical systems is much higher.
We believe that our
TAEUS technology has the potential to add a number of new
capabilities to conventional ultrasound and thereby enhance the
utility of both existing and new ultrasound systems. Our TAEUS
platform is not intended to replace CT and MRI systems, both of
which are versatile imaging technologies with capabilities and uses
beyond the focus of our business. However, they are also expensive,
with a CT system costing approximately $1 million and an MRI system
costing up to $3 million. In addition, and in contrast to
ultrasound systems, due to their limited number and the fact that
they are usually fixed-in-place at major medical facilities, CT and
MRI systems are frequently inaccessible to patients.
We believe that our
TAEUS platform can extend the use of ultrasound technology to a
number of important applications that either require the use of
expensive CT or MRI imaging systems or where imaging is not
practical using existing technology. To demonstrate the
capabilities of our TAEUS platform, we have conducted various
internal ex-vivo laboratory experiments and have also conducted
limited internal in-vivo large animal studies. However, we have not
yet conducted any human studies and these capabilities are not
supported by clinical data that we have gathered in pursuit of
obtaining regulatory approvals or that was subject to regulatory
oversight and guidance. In our ex-vivo and in-vivo testing, we have
demonstrated that the TAEUS platform has the following capabilities
and potential clinical applications:
●
Tissue Composition:
Our TAEUS technology enables ultrasound to distinguish fat from
lean tissue. This capability would enable the use of TAEUS-enhanced
ultrasound for the identification, staging and monitoring of NAFLD,
a precursor to liver fibrosis, cirrhosis and liver
cancer.
●
Temperature
Monitoring: Our TAEUS technology enables traditional ultrasound to
visualize changes in tissue temperature, in real time. This
capability would enable the use of TAEUS-enhanced ultrasound to
guide thermoablative therapy, such as in the treatment of cardiac
atrial fibrillation, or removal of cancerous liver and kidney
lesions, with greater accuracy.
●
Vascular Imaging:
Our TAEUS technology enables ultrasound to view blood vessels from
any angle, using only a saline solution contrasting agent, unlike
Doppler ultrasound which requires precise viewing angles. This
capability would enable the use of TAEUS-enhanced ultrasound to
easily identify arterial plaque or malformed vessels.
●
Tissue Perfusion:
Our TAEUS technology enables ultrasound to image blood flow at the
capillary level in a region, organ or tissue. This capability could
be used to assist doctors in characterizing microvasculature fluid
flows symptomatic of damaged tissue, such as internal bleeding from
trauma, or diseased tissue, such as certain cancers.
38
After approval, our
TAEUS technology can be added as an accessory to existing
ultrasound systems, helping to improve clinical decision-making on
the front lines of patient care, without requiring new clinical
workflows or large capital investments. We are also developing
TAEUS for incorporation into new ultrasound systems, primarily
through our collaboration with GE Healthcare. We are not aware of any other ultrasound devices
in development that include the anticipated functionality of our
planned TAEUS applications.
Based on our design work and our understanding of
the ultrasound accessory market, we intend to price our
initial NAFLD TAEUS application
at a price point approximating one-half of the price
of a new cart-based ultrasound system, which should enable
purchasers to recoup their investment in less than one year by
performing a relatively small number of additional ultrasound
procedures. We further believe that clinicians will be attracted to
our technology because it will enable them to perform more
procedures with their existing ultrasound equipment, thereby
retaining more imaging patients in their clinics rather than
referring patients out to a regional medical center for a CT or MRI
scan.
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 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.
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.
We
believe that our NAFLD TAEUS application will qualify for sale in
the European Union as a Class IIa medical device. As a result, we
will be required to obtain a CE mark for our NAFLD TAEUS
application before we can sell the application in the European
Union. Existing regulations would not require us to conduct a
clinical trial to obtain a CE mark for this application.
Nonetheless, for commercial reasons and to support our CE mark
application we plan to conduct a limited (less than 10 person)
trial to demonstrate our NAFLD TAEUS application’s ability to
distinguish fat from lean tissue. Based on our understanding of
applicable regulations and consultations with medical device
regulatory consulting firms and medical device contract engineering
firms, we expect to receive a CE mark for our NAFLD TAEUS
application within 12 to 15 months after the completion of this
offering. However, this estimate is subject to uncertainty and
there can be no assurance that this process will not take longer or
be more costly than we expect. While we are seeking a CE mark
for our NAFLD TAEUS application, we will also prepare to expand our
sales, marketing and customer support capabilities, so that we can
commence initial sales of the application in the European Union
once we have received this regulatory approval and raised
sufficient funds to finance commercialization. Following receipt of
such CE mark and placement of initial systems with researchers and
universities, we plan to conduct one or more clinical studies to
further demonstrate this application’s capabilities. As
described above in “Use of Proceeds,” we believe the
proceeds from this offering will be sufficient for us to be able to
complete the process to obtain a CE mark for our NAFLD TAEUS
application, to prepare for the commercialization of this
application in the EU and to obtain initial clinical data for this
application. However, we will require additional funds to
commercialize this application in the European Union and to
implement the balance of our business plan thereafter.
After the process
of obtaining a CE mark for our NAFLD TAEUS application is complete
and if we are able to raise additional capital, we intend to
prepare for submission to the U.S. Food and Drug Administration, or
the FDA, an application under the Food, Drug and Cosmetic Act, or
the FD&C Act, to sell our NAFLD TAEUS application in the U.S.
We anticipate that the application, as well as those for our other
TAEUS applications, will be submitted for approval under Section
510(k) of the FD&C Act. In connection with our initial
submission to the FDA, we believe we will be required to provide
imaging verification and validation testing data, as well as the
data from the limited trial we plan to conduct to support our CE
mark application. We expect that our initial FDA clearance will
allow us to sell the NAFLD TAEUS application in the U.S. with
general imaging claims. However, we will need to obtain additional
FDA clearances to be able to make diagnostic claims for fatty
tissue content determination. Accordingly, to support our
commercialization efforts we expect that, following receipt of our
initial FDA clearance, we will submit one or more additional
applications to the FDA, each of which will need to include
additional clinical trial data, so that following receipt of the
necessary clearances we may make those diagnostic claims. Based on
our understanding of applicable regulations and consultations with
medical device regulatory consulting firms and medical device
contract engineering firms, we expect to submit our initial FDA
application to the FDA approximately fifteen months after the
completion of this offering and that the FDA will make a final
determination on our application approximately six months after it
is submitted. However, these estimates are subject to uncertainty
and there can be no assurance that these processes will not take
longer or be more costly than we expect. In addition, the proceeds
from this offering will not be sufficient for us to complete the
FDA application process and, as a result, we will need to raise
additional capital in order to obtain FDA approval.
39
Financial Operations
Overview
Revenue
To date our revenue
has been generated by the placement and sale of our Nexus 128
system for use in pre-clinical applications.
Cost of Goods Sold
Our cost of goods
sold is related to our direct costs associated with the development
and shipment of our thermoacoustic imaging systems placed in
pre-clinical settings.
Research and Development Expenses
Our research and
development expenses primarily include wages, fees and equipment
for the development of our TAEUS technology platform and our
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 advertising, marketing and consulting
expenses and headcount. Currently, our marketing efforts for our
pre-clinical business are through distributors in China, the
European Union, Australia, Korea and the United Kingdom, our
website, and attendance of key industry meetings. 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 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.
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, or our Incentive Plan, which has been approved by
our board of directors, permits the grant of share options and
shares to our employees, consultants and non-employee members of
our board of directors for up to an estimated 385,252 shares of
common stock (to be an amount equal to 18% of our total issued and
outstanding shares of common stock following the completion of this
offering on a fully diluted basis, including shares issuable under
our Incentive Plan, shares issuable upon the conversion into shares
of common stock of all outstanding securities that are convertible
by their terms into shares of common stock and the exercise of all
options and warrants exercisable for shares of common stock, and
shares issuable upon exercise in full of the underwriters’
warrants to purchase shares of common stock and the
underwriters’ over-allotment option). 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, and the resulting charge is
expensed using the straight-line attribution method over the
vesting period. We have elected to use the calculated value method
to account for the options we issued in 2014. 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 bench mark for the volatility of the
entity’s own share price. There is no existing active market
for our common stock. We have used the historical closing values of
these companies to estimate volatility, which was calculated to be
90%.
40
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 Footnote 2 of
the financial statements for a discussion of recently issued
accounting standards.
Recent
Financial Results
We have not yet
completed preparation of financial statements for the quarter
ending March 31, 2017, but based on preliminary data available to
us, we expect to report no revenue for the quarter ending March 31,
2017 and a total net loss of approximately $650,000
for the quarter ending March 31, 2017.
This preliminary
financial information is based on current expectations and is
subject to quarter-end closing adjustments. Actual results may
differ. This preliminary financial data has been prepared by and is
the responsibility of our management. RBSM LLP has not audited,
reviewed, compiled or performed any procedures with respect to this
preliminary financial data, and accordingly, RBSM LLP does not
express an opinion or any other form of assurance with respect
thereto. For a discussion of certain risks that may cause our
results of operations to differ from our expectations, see
“Risk Factors” elsewhere in this
prospectus.
Results
of Operations
Years ended December 31, 2016 and 2015
Revenues
We had revenue of
$515,582 for the year ended December 31, 2016, as compared to
$1,410,065 for the year ended December 31, 2015, due to our limited
resources and our decision to focus those resources on developing
our TAEUS applications.
Cost of Goods Sold
Cost of goods sold
was $235,878 and $666,233 for the years ended December 31, 2016 and
2015, respectively. Gross margin was approximately 54% and 53% for
the years ended December 31, 2016 and 2015, respectively. Cost of
goods sold decreased as a result of a decrease in units sold during
the year. The increase in gross margin resulted from a decrease in
the cost of certain parts used to assemble the systems sold. We
expect increased margins in 2017 due to increased retail
prices.
Research and Development
Research and
development expenses were $495,377 for the year ended December 31,
2016, as compared to $1,038,878 for the year ended December 31,
2015, a decrease of $543,501, or 52%. The costs include primary
wages, fees and equipment for the development of our TAEUS product
line. Research and development expenses declined due to a reduction
in spending to conserve cash. Following completion of the offering
we expect that our research and development expenses will increase
significantly due to our efforts to develop our TAEUS
applications.
Sales and Marketing
Sales and marketing
expenses were $34,130 for the year ended December 31, 2016, as
compared to $50,635 for the year ended December 31, 2015, a
decrease of $16,505, or 33%. The decrease was primarily due to
reduced commissions paid on the sale of our Nexus 128 system.
Currently our marketing efforts for our pre-clinical business are
through distributors in China, the European Union, Australia and
the United Kingdom, 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.
41
General and Administrative
Our general and
administrative expenses for the year ended December 31, 2016 were
$1,541,956, an increase of $319,068, or 26%, compared to $1,222,888
for the year ended December 31, 2015. Our wage and related expenses for the
year ended December 31, 2016 were $705,556, compared to $738,819
for the year ended December 31, 2015. Wage and related expenses in
2016 included $194,326 of stock compensation expense related to the
issuance and vesting of options, compared to $273,837 of stock
compensation expense for 2015. Our professional fees for the year
ended December 31, 2016 were $601,671, an increase of $367,714, or
157%, compared to $233,957 for the year ended December 31, 2015. We
expect that our general and administrative expenses will increase
significantly as a result of our becoming a public
company.
Net loss
As a result of the
foregoing, for the year ended December 31, 2016, we recorded a net
loss of $2,775,369 compared to a net loss of $2,279,204 for the
year ended December 31, 2015.
Liquidity
and Capital Resources
To date, we have
generated only limited revenues from sales of our Nexus 128 system.
We have funded our operations to date through the private sale of
our equity securities. As of December 31, 2016, we had $144,953 in
cash.
The financial
statements included in this prospectus have been prepared assuming
the Company 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 year ended December
31, 2015, the Company incurred a net loss of $2,279,204, used cash
in operations of $842,727, and at December 31, 2015, the Company
had a stockholders’ equity of $250,300.
Also, as reflected
in the accompanying financial statements, during the year ended
December 31, 2016, the Company incurred a net loss of $2,775,369,
and used cash in operations of $1,315,623. At December 31, 2016,
the Company had a stockholders' deficit of $893,767. These and
other factors raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not
include any adjustments that might be necessary should the Company
be unable to continue as a going concern.
Operating Activities
During the year
ended December 31, 2015, the Company used $842,727 of cash in
operating activities primarily as a result of its net loss of
$2,279,204, offset in part by additional warrants issued during the
warrant exchange program of $686,343, net changes in operating
assets and liabilities of $343,072, $72,225 in depreciation and
amortization expense, $309,837 in non-cash stock compensation
expense, and loss on warrant exercise of $25,000.
During the year
ended December 31, 2016, the Company used $1,315,623 of cash in
operating activities primarily as a result of its net loss of
$2,775,369, offset by amortization of discount of convertible debt
of $899,976, share-based compensation of $230,326, $64,936 in
depreciation and amortization expenses, additional warrants issued
during the warrant exchange program of $5,823, and net changes in
operating assets and liabilities of $254,981.
42
Investing Activities
During the year
ended December 31, 2015, we acquired equipment in the aggregate
amount of $133,811.
There were no
investing activities for the year ended December 31,
2016.
Financing Activities
Financing
activities provided $839,224 to us during the year ended December
31, 2015 from the issuance of common stock.
During the year
ended December 31, 2016, financing activities provided $1,441,448
including $5,000 from common stock issued for cash, $50,000 in
proceeds from notes payable, $132,000 in proceeds from issuance of
convertible notes to related parties, and $1,254,448 in proceeds
from the issuance of 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
applications 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.
43
We believe that the
net proceeds of this offering, together with our existing cash,
will be sufficient for us to fund the development, regulatory
approval and initial commercialization of our NAFLD TAEUS
application in the European Union. 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. The expected net proceeds of this offering are not
expected to 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 entitled “Risk Factors” and elsewhere in
this prospectus. 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. 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
We do not have any
off balance sheet transactions.
44
Overview
We have commercialized
an enhanced ultrasound technology for the pre-clinical research
market and are leveraging that expertise 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, or CT, and magnetic resonance
imaging, or MRI, technology is unavailable or
impractical.
Since 2010, we have
marketed and sold our Nexus 128 system, which combines light-based
thermoacoustics and ultrasound, to address the imaging needs of
researchers studying disease models in pre-clinical applications.
Building on our 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 require the use of expensive CT or MRI imaging or
where imaging is not practical using existing technology. We
believe that our TAEUS technology, which can be used with existing
ultrasound equipment and incorporated into next-generation
ultrasound systems, has the potential to make advanced imaging
available in certain applications to a wider range of patients on a
more cost-effective basis than is possible using existing CT and
MRI technology. We expect to continue to sell our Nexus 128 system
to maintain a base level of revenue, but believe the market
potential for our clinical systems is much higher.
Diagnostic
Imaging Technologies
Diagnostic imaging
technologies such as CT, MRI and ultrasound allow physicians to
look inside a person’s body to guide treatment or gather
information about medical conditions such as broken bones, cancers,
signs of heart disease or internal bleeding. The type of imaging
technology a physician uses depends on a patient’s symptoms
and the part of the body being examined. CT technology is well
suited for viewing bone injuries, diagnosing lung and chest
problems, and detecting cancers. MRI technology excels at examining
soft tissue in ligament and tendon injuries, spinal cord injuries,
and brain tumors. CT scans can take as little as 5 minutes, while
an MRI scan can take up to 30 minutes.
Unfortunately,
while CT and MRI systems are versatile and create high quality
images, they are also expensive and not always accessible to
patients. A CT system costs approximately $1 million and an MRI
system can cost up to $3 million. CT and MRI systems are large and
can weigh several tons, typically requiring significant
modifications to existing healthcare facilities to safely handle
the load. Because of their size and weight, CT and MRI systems are
usually fixed-in-place at major medical facilities. As a result,
they are less accessible to primary care and rural clinics,
economically developing markets, and patient bedsides. There are
only approximately 64,000 CT systems and 32,000 MRI systems in the
world, approximately 50% of which are located in the U.S. and
Japan.
While CT and MRI
systems create high quality images, their use is not always
practical. For example, the diagnosis and treatment of the
estimated 1.4 billion patients suffering from Non-Alcoholic Fatty
Liver Disease, or NAFLD, requires ongoing surveillance of the
patients’ livers to assess the progression of the disease and
the efficacy of treatment. However, the use of CT and MRI systems
to perform that surveillance is impractical for a number of
reasons, including the high cost of the scan, the limited
availability of CT and MRI systems and the required use of contrast
agents, including those containing radioactive substances, that can
cause allergic reactions and reduced kidney functions. Patient
exposure to the ionizing radiation generated by a CT system must be
limited for safety reasons. Similarly, because of the strong
magnetic field created by an MRI machine, patients with metal joint
replacements or cardiac pacemakers cannot be imaged with an MRI
system.
Because of CT and
MRI’s limited availability and practical limitations, a
patient who would otherwise be a candidate for CT or MRI scanning
must often rely on less effective or less practical methods. For
example, MRI scans are not typically used to measure tissue
temperature during thermoablative (temperature based) surgery.
Instead, physicians use printed manufacturer guidelines to time the
thermal surgery or insert surgical temperature probes in an attempt
to guide treatment. As a result, the treatment is often imprecise
or comes with additional risks, such as infection.
45
These limitations
have led to a decrease in the number of CT scans. According to the
American College of Radiology, the overall number of CT scans
performed in the United States under Medicare Part B fell
approximately 8% from 2009 to 2014. The decline in CT scans has
been accompanied by increased use of alternative scanning
technologies. The American College of Radiology reported that the
overall number of ultrasound scans performed in the United States
under Medicare Part B increased approximately 6% from 2009 to 2014.
During the same period MRI usage increased by 5%, but remains
significantly below the use of ultrasound technology, even in the
United States.
Ultrasound
Technology
An ultrasound
machine transmits sound waves, which bounce off tissues, organs and
blood in the body. The ultrasound machine captures these echoes and
uses them to create an image. Ultrasound technology excels at
imaging the structure of internal organs, muscles and bone
surfaces.
Ultrasound systems
are more broadly available to patients than either CT or MRI
systems. There are approximately 800,000 ultrasound systems
globally in use today. Ultrasound systems are relatively
inexpensive compared to CT and MRI systems, with smaller portable
ultrasound systems costing as little as $10,000 and new cart-based ultrasound systems costing
between $75,000 and $125,000.
Ultrasound systems are also more mobile than CT and MRI systems and
many are designed to be moved by an operator from room to room, or
closer to patients. Ultrasound technology does not present the same
safety concerns as CT and MRI technology, since ultrasound does not
emit ionizing radiation and ultrasound contrast agents are
considered to be generally safe.
Due to its utility,
cost-effectiveness and safety profile, ultrasound imaging is
frequently used in a physician’s examination room or at a
patient’s bedside as a first-line diagnostic tool, which has
resulted in an overall increase in the number of ultrasound scans
performed. According to the American College of Radiology, the
overall number of ultrasound scans performed in the United States
under Medicare Part B increased 6% from 2009 to 2014 (while CT
exams declined 8% during the same period).
However,
ultrasound’s imaging capabilities are more limited compared
to CT and MRI technology. For example, ultrasound systems cannot
measure tissue temperature during thermal ablation surgery, or
quantify fat to diagnose early stage liver disease -- instances
where CT and MRI systems are commonly used.
Unmet
Need
We believe that the
limited availability of high-utility and cost-effective imaging
technology represents a significant unmet medical need. We believe
that expanding the capability of ultrasound technology to perform
more of the imaging tasks presently available only on expensive CT
and MRI systems will satisfy this unmet need.
Our
Solution – Thermo-Acoustic Enhanced Ultrasound, or
TAEUS
Our commercially
available Nexus 128 system and our Thermo-Acoustic Enhanced
Ultrasound, or TAEUS technology, each use a pulsed energy source
– near-infrared light and radio-frequency, or RF,
respectively – to generate ultrasonic waves in tissue. These
waves are then detected with ultrasound equipment and used to
create high-contrast images using our proprietary algorithms.
Unlike conventional ultrasound, which creates images based on the
scattering properties of tissue, thermoacoustic imaging provides
tissue absorption maps of the pulsed energy, similar to those
generated by CT scans. Ultrasound is only utilized to transmit the
absorption signal to the imaging system outside of the
body.
46
Since 2010 we have
marketed our Nexus 128 system to address the imaging needs of
researchers studying disease models in
pre-clinical applications. The Nexus 128 uses near-infrared
light combined with ultrasound to generate 3D images of tumors in
laboratory mice. We believe the Nexus 128 is the only commercially
available fully 3D thermoacoustic imaging system.
Sales of the Nexus
128 system were approximately $1.4 million in 2015 and $515,000 in
2016. Our Nexus 128 system is used in a number of leading global
academic research centers, including Stanford University, The
University of Michigan, Shanghai Jiao Tong University, and Purdue
University.
While our Nexus 128
system is suited for small animal research, the near-infrared light
energy used in our Nexus 128 system only penetrates tissues up to
3cm, limiting its utility beyond shallow-depth human dermatological
or breast applications. Additionally, blood-filled organs, such as
the liver, absorb most of the near-infrared light, making it
difficult to generate an accurate image.
Our
TAEUS Technology Platform
To increase the
utility of our thermoacoustic technology, in 2013 we began to
develop our TAEUS technology platform. Unlike the near-infrared
light pulses used in our Nexus 128 system, our TAEUS technology
uses RF pulses to stimulate tissues, using a small fraction of the
energy transmitted into the body during an MRI scan. Using RF
energy enables 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 overlaid in real
time onto conventional gray-scale ultrasound images. An example of
a TAEUS image overlay is shown below:
Image below: Real-time ex-vivo bovine tissue temperature analysis
overlaid on traditional ultrasound image.
Our RF-based
thermoacoustics are not adversely affected by blood-filled organs,
enabling our TAEUS technology to be used in clinical liver
applications, among others.
After approval, our
TAEUS technology can be added as an accessory to existing
ultrasound systems, helping to improve clinical decision-making on
the front lines of patient care, without requiring new clinical
workflows or large capital investments. We are also developing
TAEUS for incorporation into new ultrasound systems, primarily
through our collaboration with GE Healthcare, described more fully
below.
We believe that our
TAEUS technology has the potential to add a number of new
capabilities to conventional ultrasound and thereby enhance the
utility of both existing and new ultrasound systems and extend the
use of ultrasound technology to circumstances that either require
the use of expensive CT or MRI imaging systems or where imaging is
not practical using existing technology. To demonstrate the
capabilities of our TAEUS platform, we have conducted various
internal ex-vivo laboratory experiments and have also conducted
limited internal in-vivo large animal studies. However, we have not
yet conducted any human studies and these capabilities are not
supported by clinical data that we have gathered in pursuit of
obtaining regulatory approvals or that was subject to regulatory
oversight and guidance. In our ex-vivo and in-vivo testing, we have
demonstrated that the TAEUS platform has the following capabilities
and potential clinical applications:
47
●
Tissue Composition:
Our TAEUS technology enables ultrasound to distinguish fat from
lean tissue. This capability would enable the use of TAEUS-enhanced
ultrasound for the early identification, staging and monitoring of
NAFLD, a precursor to liver fibrosis, cirrhosis and liver
cancer.
●
Temperature
Monitoring: Our TAEUS technology enables traditional ultrasound to
visualize changes in tissue temperature, in real time. This
capability would enable the use of TAEUS-enhanced ultrasound to
guide thermoablative therapy, which uses heat or cold to remove
tissue, such as in the treatment of cardiac atrial fibrillation, or
removal of cancerous liver and kidney lesions, with greater
accuracy.
●
Vascular Imaging:
Our TAEUS technology enables ultrasound to view blood vessels from
any angle, using only a saline solution contrasting agent, unlike
Doppler ultrasound, which requires precise viewing angles. This
capability would enable the use of TAEUS-enhanced ultrasound to
easily identify arterial plaque or malformed vessels.
●
Tissue Perfusion:
Our TAEUS technology enables ultrasound to image blood flow at the
capillary level in a region, organ or tissue. This capability could
be used to assist physicians in characterizing microvasculature
fluid flows symptomatic of damaged tissue, such as internal
bleeding from trauma, or diseased tissue, such as certain
cancers.
Because of the
large number of traditional ultrasound systems currently in global
use, we are first developing our TAEUS technology for sale as an
aftermarket accessory that works with existing ultrasound systems.
Because our TAEUS technology is designed to enhance the utility of,
not replace, conventional ultrasound, we believe healthcare
providers will be able to increase the utilization of, and generate
new revenue from, their existing ultrasound systems once we obtain
required regulatory approval for specific applications.
Based on our design work and our
understanding of the ultrasound accessory market, we intend
to price our initial NAFLD
TAEUS application at a price point approximating one-half of the price of a
new cart-based ultrasound system, or approximately $40,000 to
$50,000, which should enable purchasers to recoup their investment
in less than one year by performing a relatively small number of
additional ultrasound procedures. We further believe that
clinicians will be attracted to our technology because it will
enable them to perform more procedures with their existing
ultrasound equipment, thereby retaining more imaging patients in
their clinics rather than referring patients out to a regional
medical center for a CT or MRI scan.
Endra’s
first clinical product will interface with a conventional
ultrasound scanner, utilizing the scanner’s B-mode imaging to
guide the selected region for assessment of liver fat content. The
following sub-systems will comprise Endra’s first generation
product.
Radio frequency (RF) source and computer:
The
RF source consists of a low power waveform generator and an
amplifier. Together, these components provide the characteristic
pulses required to excite thermoacoustic signals in tissue. The
computer provides processing capability to both utilize the
conventional ultrasound data for navigation to the measurement site
of interest, and the calculations required to convert digitized
thermoacoustic signals to measurements of fat in liver tissue. The
entire sub-system is expected to be approximately the size of a
desk-side computer. The entire sub-system will reside in a single
enclosure, on wheels, and sit adjacent to the ultrasound imaging
system.
Specialized Transducer:
A
single channel ‘receive only’ ultrasound transducer is
specifically designed and optimized for thermoacoustic imaging. The
transducer sub-system will detect thermoacoustic signals excited by
the RF source within the liver. The transducer assembly includes
electronics for signal amplification, digitization, and signal
processing. The specialized transducer will attach to the
conventional ultrasound probe used for liver imaging.
RF Applicator:
The
RF applicator transmits pulses of energy, provided by the RF
source, into tissue. The applicator contacts the patient’s
skin in proximity of the target region for
measurement.
A
second generation product is expected to provide two dimensional
imaging with a transducer composed of multiple receive elements.
The RF source and applicator will be similar to those in the first
generation product but the multi-element transducer will allow for
multiple applications including: reading tissue composition,
temperature, vascular flow, tissue perfusion, and other potential
applications. Ultimately, we expect our technology will be
incorporated into conventional ultrasound systems and our business
model will transition from producing stand-alone systems to
licensing our technology, IP and specialized components to
ultrasound OEMs. Existing ultrasound equipment already includes
power supplies, computation, high speed electronics, and ultrasound
transducers, which may be leveraged by our thermoacoustic imaging
applications. The RF source and applicator are the principal
hardware components that will be added to OEM ultrasound systems
for the OEM fully integrated form of our product.
We
are following a model that mirrors the approach used by companies
in the past to introduce new ultrasound imaging capabilities to
existing conventional ultrasound scanners. Color Doppler,
elastography, 3-D imaging, and high channel count systems were all
introduced by new companies (not already involved in conventional
ultrasound imaging). Historically, ultrasound imaging has grown
through the introduction of unique technology and capabilities that
expanded the applications and use of clinical ultrasound in a form
that often added separate hardware to existing ultrasound systems.
Ultimately, as these new technologies gained acceptance in the
marketplace they were incorporated into OEM designed and built
systems that were sold by the leading ultrasound imaging
vendors.
48
Image: Illustration
of a typical cart-based ultrasound system (left) with
our TAEUS technology depicted to the
right.
Ultrasound
Market
Sales of ultrasound
diagnostic equipment were approximately $4 billion globally in 2014
and are expected to grow at approximately 4.4% annually. There are
approximately 800,000 installed systems generating over 400 million
annual diagnostic ultrasound procedures globally. Additionally, an
estimated 30,000 to 50,000 new and replacement systems are sold
into the market each year. These numbers include both portable and
cart-based ultrasound systems, and cover all types of diagnostic
ultrasound procedures, including systems intended for cardiology,
prenatal and abdominal use. We do not intend to address low-cost,
portable ultrasound systems and systems focused on applications,
such as prenatal care, where we believe our TAEUS technology will
not substantially impact patient care. Accordingly, we define our
addressable market for one or more of our TAEUS applications at
approximately 300,000 cart-based ultrasound systems currently in
use throughout the world.
We believe that
demand for ultrasound systems is driven primarily by the following
factors:
●
Population growth
and age demographics that increase the demand for diagnostic
screening for cancer, cardiology, and prenatal
applications.
●
Economic
development broadening investment in healthcare in previously
underserved markets such as China and Latin America, where
ultrasound technology has significant appeal due to its price point
and flexibility at point-of-care.
●
Expanding
ultrasound applications and improving image quality that drive
demand for new ultrasound technologies, such as software
enhancements, bi-axial probes, and dedicated single application
systems.
●
Positive insurance
reimbursement rate trends for ultrasound diagnostics due to the
technology’s safety and cost-effectiveness.
49
Potential
Clinical Applications for our TAEUS Technology
Early Diagnosis and Monitoring of Non-Alcoholic Fatty Liver
Disease, or NAFLD
Our first TAEUS
platform application will focus on quantifying fat in the liver and
stage progression of NAFLD which, untreated, can progress to
Non-Alcoholic Steato-Hepatitis, or NASH, cirrhosis and liver
cancer. In 2011, over 1.4 billion people were affected by
NAFLD/NASH. The World Gastroenterology Organisation considers
NAFLD/NASH a global pandemic affecting rich and poor countries
alike. Obesity, hepatitis, and diabetes are leading contributors to
the development of NAFLD.
Untreated, an
estimated 20% of NAFLD cases progress to NASH, a condition in which
liver fat causes inflammation and decreased liver function,
resulting in fatigue, weight loss, muscle pain and abdominal
pain.
Approximately 25%
of NASH cases progress to liver cirrhosis, in which liver
inflammation causes scar tissue which eventually prevents the liver
from functioning properly. The scar tissue blocks the flow of blood
through the liver and slows the processing of nutrients, hormones,
drugs, and naturally produced toxins. It also slows the production
of proteins and other substances made by the liver. Once a patient
develops cirrhosis of the liver, the only life-saving therapy is a
liver transplant. Additionally, cirrhosis patients may develop
liver cancer. In 2015, the World Health Organization ranked liver
cancer as the second highest cause of cancer death, after lung
cancer, killing 745,000 people annually. Because of the increased
incidence of obesity, hepatitis and diabetes throughout the world,
NAFLD has become the most common chronic liver disease and an
important cause of cirrhosis and liver cancer
worldwide.
Despite the
increased incidence of NAFLD and its role in the development of
NASH, cirrhosis and liver cancer, we believe that no low-cost,
accurate and safe method exists for measuring fat in the liver.
Current liver enzyme blood tests are indicative, but cannot
reliably confirm early stage NAFLD or NASH, and liver enzyme levels
are normal in a large percentage of patients with NAFLD. Existing
ultrasound technology can only measure fat qualitatively in the
liver at moderate to severe levels, typically greater than 30%
liver fat, and ultrasound has low accuracy when used on obese
patients. While early stage NAFLD and NASH can be confirmed by an
MRI scan, an MRI scan is expensive, and MRI systems are not widely
available or practical for many patients. A surgical biopsy can be
used to confirm NAFLD and NASH, but is also expensive, involves a
painful procedure and exposes patients to the risk of infection.
Furthermore, MRIs and surgical biopsies are impractical for
repeated screening and monitoring of liver disease. We believe
these limitations negatively impact the diagnosis and treatment of
patients with NAFLD.
Patients
diagnosed with NAFLD and related liver diseases are typically
treated with therapies such as statins, insulin sensitizers and
other compounds and are encouraged to adopt lifestyle changes to
improve their overall health.
A significant
number of pharmaceutical compounds are in development by companies
such as Bristol-Myers Squibb Company, Intercept Pharmaceuticals,
Inc., Gilead Sciences, Inc., Genfit SA, Galectin Therapeutics Inc.,
Conatus Pharmaceuticals Inc., NuSirt Sciences Inc., Tobira
Therapeutics, Inc. and Immuron Limited.
Billions of dollars
are spent annually on the diagnosis and treatment of NAFLD and
related liver diseases. Identification and staging of NAFLD is
central to determining the course of treatment. In addition,
patients receiving treatment for NAFLD-spectrum liver diseases must
continue to be monitored to assess disease progression and the
efficacy of treatment. Because of the high cost and limited global
availability, CT and MRI technology is not typically used for this
function.
50
We believe our
TAEUS technology will enable primary care physicians, radiologists
and hepatologists to diagnose NAFLD earlier and monitor patients
with NAFLD-spectrum liver diseases more accurately and
cost-effectively than is possible with existing
technology.
Image below: Ex-vivo TAEUS tissue composition analysis overlaid on
traditional ultrasound image.
Temperature Monitoring of Thermoablative Surgery
We also intend to
develop a TAEUS platform application to guide thermal ablation
surgery, such as in the treatment of cardiac atrial fibrillation,
chronic pain and lesions of the liver, thyroid, kidneys and other
soft tissues. We plan to target clinical users of thermoablative
technology, including interventional radiologists, cardiologists,
gynecologists and surgical oncologists.
Thermoablation
involves the use of heat or cold to remove malfunctioning or
diseased tissue in surgical oncology, cardiology, neurology,
gynecology, and urology applications. Thermoablative technologies
include RF, microwave, laser and cryogenic ablation. The worldwide
market for RF surgical ablation procedures alone was estimated in
2015 to be $3.7 billion per annum, generating over 5 million annual
RF ablation procedures and growing at approximately 18% annually.
We believe that the growth of this market is driven primarily by
the aging global population requiring more cardiac and cancer
procedures, as well as the relative ease-of-use and low cost of
thermoablative technologies when compared to open
surgery.
However, RF and
other thermoablative surgery technologies pose risks, including
under-treatment of diseased tissue and unintended thermal damage to
areas outside the treatment area. For example, it has been reported
that patients receiving RF ablation of liver tumors have
experienced thermal injury to the diaphragm, gallbladder, bile
ducts and gastrointestinal tract, some of which have resulted in
patient deaths.
Clinicians must
rely on printed manufacturer guidelines to plan procedures using thermal ablation
technologies or, when available, monitor tissue temperature changes
in real-time with MRI imaging or surgical temperature probes. We
believe these existing methods either lack real-time precision or
are impractical due to cost, poor availability and other
factors.
We believe that the
ability to visualize changes in tissue temperature in real time
could potentially enhance the effectiveness and safety of
thermoablation therapies and that our TAEUS technology platform
combined with traditional ultrasound has the potential to guide
thermoablation surgery more cost-effectively and more accurately
than existing methods.
51
Image below: Real-time ex-vivo TAEUS tissue temperature analysis
overlaid on traditional ultrasound image.
Vascular Imaging
We believe that our
TAEUS technology can be used to image blood vessels and distinguish
them from the surrounding tissue. In addition to our NAFLD and
thermoablation applications, we intend to develop a cardiovascular
application based on our TAEUS technology that, with the use of a
standard saline contrast agent, can enable existing ultrasound
systems to perform a number of cardiovascular diagnostic functions,
such as identifying arterial plaque or blocked or malformed
vessels, as well as safely guiding biopsies away from vital
vasculature.
Conventional
ultrasound imaging systems use Doppler imaging in a variety of
vascular applications. Doppler ultrasound, which images the
velocity of blood, is effective in larger vessels and regions where
blood velocity is high. However, Doppler ultrasound is not
sufficiently sensitive for use in very small vessels or in vascular
imaging applications where blood velocities are very low. For these
applications, contrast enhanced CT and MRI angiography is used
which requires the patient to be injected with a contrast agent,
iodinated compounds and gadolinium, respectively. Contrast-enhanced
CT and MRI scans both require referral for examination after
initial screening with ultrasound and carry risks associated with
their respective contrast agents. We believe that our TAEUS
platform application has the potential to offer the advantages of
CT and MR contrast enhanced imaging at the point of care using only
a safe electrolyte solution as the contrast agent.
Tissue Perfusion or “Leakiness”
We believe that our
TAEUS technology can be used to image tissue perfusion, or the
absorption of fluids into an organ or tissue. We intend to develop
an application for our TAEUS platform that would enable ultrasound
detection of microvasculature fluid flows symptomatic of tissue
compromised by trauma or disease.
When a
person’s body is affected by disease or trauma, blood and
other fluids may leak from damaged tissues in subtle ways.
Traditional ultrasound cannot effectively image these disruptions
in microvascular permeability, but we believe ultrasound combined
with our TAEUS technology can.
We believe that
using our TAEUS technology physicians will be able to quickly and
clearly see tissue compromised by disease, such as cancer, or
trauma, especially with the use of a standard saline contrast
agent, when CT or MRI is not readily available.
Collaboration
with GE Healthcare
On April 22, 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, or 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 TAEUS technology for a fatty
liver 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 their TAEUS fatty liver
application embedded, or GE Healthcare being the exclusive
ultrasound manufacturer to sell ultrasound systems with the TAEUS
fatty liver application technology embedded.
52
The agreement with
GE Healthcare does not prevent us from selling our TAEUS fatty
liver application technology to distributors or directly to
non-manufacturer purchasers.
Additionally, the
agreement provides that prior to offering to license any of our
TAEUS fatty liver application intellectual property to a third
party, we will first offer to negotiate to license our TAEUS fatty
liver application intellectual property to GE
Healthcare.
Finally, we agreed
that prior to selling any equity interests in our company to a
healthcare device manufacturer, we will first offer to negotiate in
good faith to sell such equity interests to GE
Healthcare.
The agreement is
subject to termination by either party upon not less than 60
days’ notice. On April 21 2017, we and GE Healthcare
entered into an amendment to our agreement, extending its term by
one year to April 22, 2018.
Intellectual
Property
We rely on a
combination of patent, copyright, trademark and trade secret laws
and other agreements with employees and third parties to establish
and protect our proprietary intellectual property rights. We
require our officers, employees and consultants to enter into
standard agreements containing provisions requiring confidentiality
of proprietary information and assignment to us of all inventions
made during the course of their employment or consulting
relationship. We also enter into nondisclosure agreements with our
commercial counterparties and limit access to, and distribution of,
our proprietary information.
We are committed to
developing and protecting our intellectual property and, where
appropriate, filing patent applications to protect our technology.
Our issued and pending patents claims are directed at the following
areas related to our technology:
●
Methods to induce
and enhance thermoacoustic signal generation;
●
System
configurations, devices and novel hardware for transmission of RF
pulses into tissue and detection of acoustic signals;
●
Methods for
integrating our devices with existing conventional ultrasound
systems; and
●
Methods and
algorithms for signal processing, image formation and
analysis.
We currently
maintain a patent portfolio consisting of two patents issued in
foreign jurisdictions, eight patent applications pending in the
United States and five patent applications pending in foreign
jurisdictions. These patents and patent applications cover certain
innovations relating to contrast-enhanced imaging as well as
several aspects of fat imaging and fat quantitation in the liver
and other tissues.
In addition, we
have in-licensed five U.S. patents, three foreign patents, one
patent application pending in the United States and two patent
applications pending in foreign jurisdictions. These patents
protect a number of key design attributes that are specific to our
Nexus 128 product.
Each of our patents
generally has a term of 20 years from its respective priority
filing date. Among our issued patents, the first patents are set to
expire in 2018 and the last patents expire in 2031.
53
Sales
and Marketing
We currently market
our Nexus 128 pre-clinical system through a small internal
marketing team and a global network of distributors in the United
Kingdom, the European Union, Australia, China and Korea. We use our
corporate website, sales materials and key industry meetings to
drive customer awareness, interest and trial of our
products.
We currently do not
have a sales and marketing team dedicated to our TAEUS clinical
applications. In parallel to securing all necessary government
marketing approvals, we intend to hire a small internal marketing
team to engage and support channel partners and clinical customers.
As we have done with our Nexus 128 system, we intend to partner
with several geographically-focused independent clinical ultrasound
equipment distributors to market and sell our TAEUS applications.
We believe that these distributors have existing customer
relationships, a strong knowledge of diagnostic imaging technology
and the capabilities to support the installation, customer training
and post-sale service of capital equipment and
software.
We also intend to
work with original equipment manufacturers, or OEMs, of ultrasound
and thermal ablation equipment to sell our TAEUS applications
alongside their own new systems and into their existing installed
base systems. We believe that these OEMs will find our applications
attractive as they will enable them to generate additional revenue
from their installed systems – as they currently do with
aftermarket accessory portfolios. We believe our relationship with
GE Healthcare will facilitate this strategy.
Based on our design
work and our understanding of the ultrasound accessory market, we
intend to price our initial NAFLD TAEUS application at a price
point approximating one-half of the price of a new cart-based
ultrasound system, which should enable purchasers to recoup their
investment in less than one year by performing a relatively small
number of additional ultrasound procedures.
Some of our TAEUS
offerings are expected to be implemented via a hardware platform
that can run multiple individual software applications that we will
offer TAEUS users for a one-time licensing fee, enabling users to
perform more procedures with their existing ultrasound equipment
and retaining more patients in their clinics rather than referring
them out to a regional imaging medical center for a CT or MRI
scan.
We also intend to
license our TAEUS technology to OEMs, such as GE Healthcare, for
incorporation in their new ultrasound systems.
Manufacturing
We assemble our
Nexus 128 products from components provided to us by third-party
component suppliers and manufacturers. While many of the components
are off-the-shelf components available from multiple suppliers, our
proprietary receiver array is specially manufactured to our
specifications by one manufacturer. To date, we have not
experienced any component shortages. We do not have any long-term
supply or manufacturing agreements related to our Nexus 128
products and components are obtained on a purchase order basis when
required.
We intend to
contract with a medical device contract engineering firm to perform
the commercial product engineering for our NAFLD TAEUS application,
as well as any other application we decide to commercialize. We
expect that the selected contractor will have quality systems and
processes in place, commensurate with productizing devices with CE
mark certification that will meet FDA requirements for approval. We
believe that our contractor will have the ability to provide
product design, development and documentation necessary to support
a CE mark that will enable us to sell the application in the
European Union as a Class IIa medical device once a final design
has been developed and tested. We also expect that this contractor,
with support from a medical device regulatory consulting firm, will
lead the preparation of documentation for regulatory approval
submission both in the European Union and in the United States. In
order to foster collaboration with and supervision of our
contractor, we intend to locate one or more of our employees at the
medical device contract engineering firm during the TAEUS
application manufacturing process. We have identified several
medical device contract engineering firms that have the capability
to provide these services. However, as of the date hereof, we have
not entered into a contract with any of them. We expect that our
contract manufacturers will either supply necessary components
internally or obtain them from third-party sources. At this time,
we do not know whether any components will be single
sourced.
54
Regulatory
Approval Pathway
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.
The first TAEUS
application we intend to commercialize is our NAFLD TAEUS
application. Our initial target market for this application is the
European Union. We believe that our NAFLD TAEUS application will
qualify for sale in the European Union as a Class IIa medical
device. As a result, we will be required to obtain a CE mark for
our NAFLD TAEUS application before we can sell the application in
the European Union. We have not yet initiated the process for
obtaining this CE mark. The first step we plan to take in this
regard is to contract with a medical device contract engineering
firm to perform the commercial product engineering for our NAFLD
TAEUS application, as well as any other application we decide to
commercialize. We expect that the selected contractor will have
quality systems and processes in place, commensurate with
productizing devices with CE mark and FDA certification and
approvals. We believe that our contractor will have the ability to
provide product design, development and documentation necessary to
support a CE mark that will enable us to sell the application in
the European Union as a Class IIa medical device once a final
design has been developed and tested. We also expect that this
contractor, with support from a medical device regulatory
consulting firm, will lead the preparation of documentation for
regulatory approval submission both in the European Union and,
later, in the United States. We have identified several medical
device contract engineering firms that have the capability to
provide these services. However, as of the date hereof, we have not
entered into a contract with any of them. Existing regulations
would not require us to conduct a clinical trial to obtain a CE
mark for this application. Nonetheless, for commercial reasons and
to support our CE mark application we plan to conduct a limited
(less than 10 person) trial to demonstrate our NAFLD TAEUS
application’s ability to distinguish fat from lean tissue.
Based on our understanding of applicable regulations and
consultations with medical device regulatory consulting firms and
medical device contract engineering firms, we expect that the
development of our NAFLD TAEUS application, including the receipt
of the necessary CE mark, will be complete approximately 12 to 15
months after the completion of this offering, and that we will use
approximately $600,000 of the net proceeds from this offering on
such activities. Additionally, to enhance our commercialization
efforts in the European Union, following receipt of such CE mark
and placement of initial systems with researchers and universities,
we plan to conduct one or more clinical studies to demonstrate this
product’s capabilities, and that we will use approximately
$250,000 of the net proceeds from this offering on such activities.
However, these estimates are subject to uncertainty and there can
be no assurance that these processes will not take longer or be
more costly than we expect. In 2012 the European Commission
proposed a new regulatory scheme that, if implemented, will impose
significant additional obligations on medical device companies.
Expected changes include stricter requirements for clinical
evidence and pre-market assessment of safety and performance, new
classifications to indicate risk levels, requirements for third
party testing by government accredited groups for some types of
medical devices, and tightened and streamlined quality management
system assessment procedures. It is anticipated that this new
regulatory scheme may be implemented prior to receipt of the CE
mark for our NAFLD TAEUS application but we believe that applicable
transition rules should allow us to avoid their application in that
case. However, such new rules could impose additional requirements,
such as a requirement to conduct clinical trials, on future CE mark
applications we make.
After the process
of obtaining a CE mark for our NAFLD TAEUS application is complete
and if we are able to raise additional capital, we intend to
prepare for submission to the U.S. Food and Drug Administration, or
the FDA, an application under the Food, Drug and Cosmetic Act, or
the FD&C Act, to sell our NAFLD TAEUS application in the U.S.
We anticipate that the application, as well as those for our other
TAEUS applications, will be submitted for approval under Section
510(k) of the FD&C Act. Based on our understanding of
applicable regulations and consultations with medical device
regulatory consulting firms and medical device contract engineering
firms, we expect to submit this application to the FDA
approximately fifteen months after the completion of this offering
and for the FDA to make a final determination on our application
approximately six months after that application is submitted. We
expect that our initial FDA clearance will allow us to sell the
NAFLD TAEUS application in the U.S. with general imaging claims.
However, we will need to obtain additional FDA clearances to be
able to make diagnostic claims for fatty tissue content
determination. Accordingly, to support our commercialization
efforts we expect that, following receipt of our initial FDA
clearance, we will submit one or more additional applications to
the FDA, each of which will need to include additional clinical
trial data, so that following receipt of the necessary clearances
we may make those diagnostic claims.
Regulation
European Union
The primary
regulatory environment in Europe is the European Union, which
consists of 28 member states encompassing most of the major
countries in Europe. We believe that in the European Union
applications incorporating our TAEUS technology will be regulated
as Class IIa medical devices by the European Medicines Agency, or
EMA, and the European Union Commission. As described above, we
expect our applications will receive a CE mark from an appropriate
Competent Authority as a result of successful review of one or more
submissions prepared by our contract engineering and
manufacturer(s), so that such applications can be marketed and
distributed within the European Economic Area. Each of our
applications will be required to be recertified each year for CE
marking, which recertification may require an annual audit. The
audit procedure, which will include on-site visits at our facility,
and the contract manufacturer’s(s’) facility(ies), will
require us to provide the contract manufacturer(s) with information
and documentation concerning our quality management system and all
applicable documents, policies, procedures, manuals, and other
information.
55
In the European
Union, the manufacturer of medical devices is subject to current
Good Manufacturing Practice, or cGMP, as set forth in the relevant
laws and guidelines of the European Union and its member states.
Compliance with cGMP is generally assessed by a Notified Body
accredited by a Competent Authority. For a Class IIa device,
typically, quality system evaluation is performed by the Notified
Body, which also recommends to the relevant Competent Authority for
the European community whether a device will receive a CE mark. The
Notified Body may conduct inspections of relevant facilities, and
review manufacturing procedures, operating systems and personnel
qualifications. In addition to obtaining approval for each
application, in many cases each device manufacturing facility must
be audited on a periodic basis by the Notified Body. Further
inspections may occur over the life of the
application.
FDA Regulation
Each of our
products must be approved or cleared by the FDA before it is
marketed in the United States Before and after approval or
clearance in the United States, our applications are subject to
extensive regulation by the FDA under the FD&C Act and/or the Public Health Service
Act, as well as by other regulatory bodies. The FDA regulations
govern, among other things, the development, testing,
manufacturing, labeling, safety, storage, record-keeping, market
clearance or approval, advertising and promotion, import and
export, marketing and sales, and distribution of medical devices
and pharmaceutical products.
FDA Approval or Clearance of Medical Devices
In the United
States, medical devices are subject to varying degrees of
regulatory control and are classified in one of three classes
depending on the extent of controls the FDA determines are
necessary to reasonably ensure their safety and
efficacy:
●
Class I: general
controls, such as labeling and adherence to quality system
regulations;
●
Class II: special
controls, premarket notification (510(k)), specific controls such
as performance standards, patient registries and post-market
surveillance and additional controls such as labeling and adherence
to quality system regulations; and
●
Class III: special
controls and approval of a premarket approval, or PMA,
application.
We expect all of
our products to be classified as Class II medical devices and
require FDA authorization prior to marketing by means of a 510(k)
clearance.
To request
marketing authorization by means of a 510(k) clearance, we must
submit a premarket notification demonstrating that the proposed
device is substantially equivalent to another legally marketed
medical device, has the same intended use, and is as safe and
effective as a legally marketed device and does not raise different
questions of safety and effectiveness than a legally marketed
device. 510(k) submissions generally include, among other things, a
description of the device and its manufacturing, device labeling,
medical devices to which the device is substantially equivalent,
safety and biocompatibility information and the results of
performance testing. In some cases, a 510(k) submission must
include data from human clinical studies. Marketing may commence
only when the FDA issues a clearance letter finding substantial
equivalence. The typical duration to receive a 510(k) approval is
approximately nine to twelve months from the date of the initial
510(k) submission, although there is no guarantee that the timing
will not be longer.
In the past, the
510(k) pathway for product marketing has required only proof of
substantial equivalence in technology for a given indication with a
previously cleared device. Recently, there has been a trend of the
FDA requiring additional clinical work to prove efficacy in
addition to technological equivalence and basic safety. Whether
clinical data is provided or not, the FDA may decide to reject the
substantial equivalence argument we present. If that happens, the
device is automatically designated as a Class III device. The
device sponsor must then fulfill more rigorous PMA requirements, or
can request a risk-based classification determination for the
device in accordance with the “de novo” process, which
may determine that the new device is of low to moderate risk and
that it can be appropriately be regulated as a Class I or II
device. If a de novo request is granted, the device may be legally
marketed and a new classification is established. If the device is
classified as Class II, the device may serve as a predicate for
future 510(k) submissions. If the device is not approved through de
novo review, then it must go through the standard PMA process for
Class III devices.
56
After a device
receives 510(k) clearance, any product modification that could
significantly affect the safety or effectiveness of the product, or
that would constitute a significant change in intended use,
requires a new 510(k) clearance or, if the device would no longer
be substantially equivalent, a PMA. If the FDA determines that the
product does not qualify for 510(k) clearance, then a company must
submit, and the FDA must approve, a PMA before marketing can
begin.
A PMA application
must provide a demonstration of safety and effectiveness, which
generally requires extensive pre-clinical and clinical trial data.
Information about the device and its components, device design,
manufacturing and labeling, among other information, must also be
included in the PMA. As part of the PMA review, the FDA will
inspect the manufacturer’s facilities for compliance with
quality system regulation requirements, which govern testing,
control, documentation and other aspects of quality assurance with
respect to manufacturing. If the FDA determines the application or
manufacturing facilities are not acceptable, the FDA may outline
the deficiencies in the submission and often will request
additional testing or information. Notwithstanding the submission
of any requested additional information, the FDA ultimately may
decide that the application does not satisfy the regulatory
criteria for approval. During the review period, a FDA advisory
committee, typically a panel of clinicians and statisticians, is
likely to be convened to review the application and recommend to
the FDA whether, or upon what conditions, the device should be
approved. The FDA is not bound by the advisory panel decision.
While the FDA often follows the panel’s recommendation, there
have been instances in which the FDA has not. The FDA must find the
information to be satisfactory in order to approve the PMA. The PMA
approval can include post-approval conditions, including, among
other things, restrictions on labeling, promotion, sale and
distribution, or requirements to do additional clinical studies
after approval. Even after approval of a PMA, a new PMA or PMA
supplement is required to authorize certain modifications to the
device, its labeling or its manufacturing process. Supplements to a
PMA often require the submission of the same type of information
required for an original PMA, except that the supplement is
generally limited to that information needed to support the
proposed change from the product covered by the original PMA. The
typical duration to receive PMA approval is approximately two years
from the date of submission of the initial PMA application,
although there is no guarantee that the timing will not be
longer.
Clinical Trials of Medical Devices
One or more
clinical trials are generally required to support a PMA application
and more recently are becoming necessary to support a 510(k)
submission. Clinical studies of unapproved or uncleared medical
devices or devices being studied for uses for which they are not
approved or cleared (investigational devices) must be conducted in
compliance with FDA requirements. If an investigational device
could pose a significant risk to patients, the sponsor company must
submit an investigational device exemption application to the FDA
prior to initiation of the clinical study. An investigational
device exemption application must be supported by appropriate data,
such as animal and laboratory test results, showing that it is safe
to test the device on humans and that the testing protocol is
scientifically sound. The investigational device exemption will
automatically become effective 30 days after receipt by the FDA
unless the FDA notifies the company that the investigation may not
begin. Clinical studies of investigational devices may not begin
until an institutional review board has approved the
study.
57
During the study,
the sponsor must comply with the FDA’s investigational device
exemption requirements. These requirements include investigator
selection, trial monitoring, adverse event reporting, and record
keeping. The investigators must obtain patient informed consent,
rigorously follow the investigational plan and study protocol,
control the disposition of investigational devices, and comply with
reporting and record keeping requirements. The sponsor, the FDA, or
the institutional review board at each institution at which a
clinical trial is being conducted may suspend a clinical trial at
any time for various reasons, including a belief that the subjects
are being exposed to an unacceptable risk. During the approval or
clearance process, the FDA typically inspects the records relating
to the conduct of one or more investigational sites participating
in the study supporting the application.
Post-Approval Regulation of Medical Devices
After a device is
cleared or approved for marketing, numerous and pervasive
regulatory requirements continue to apply. These
include:
●
the FDA quality
systems regulation, which governs, among other things, how
manufacturers design, test, manufacture, exercise quality control
over, and document manufacturing of their products;
●
labeling and claims
regulations, which prohibit the promotion of products for
unapproved or “off-label” uses and impose other
restrictions on labeling; and
●
the Medical Device
Reporting regulation, which requires reporting to the FDA of
certain adverse experiences associated with use of the
product.
Good Manufacturing Practices Requirements
Manufacturers of
medical devices are required to comply with the good manufacturing
practices set forth in the quality system regulation promulgated
under Section 520 of the FD&C
Act. Current good manufacturing practices regulations require,
among other things, quality control and quality assurance as well
as the corresponding maintenance of records and documentation. The
manufacturing facility for an approved product must be registered
with the FDA and meet current good manufacturing practices
requirements to the satisfaction of the FDA pursuant to a pre-PMA
approval inspection before the facility can be used. Manufacturers,
including third party contract manufacturers, are also subject to
periodic inspections by the FDA and other authorities to assess
compliance with applicable regulations. Failure to comply with
statutory and regulatory requirements subjects a manufacturer to
possible legal or regulatory action, including the seizure or
recall of products, injunctions, consent decrees placing
significant restrictions on or suspending manufacturing operations,
and civil and criminal penalties. Adverse experiences with the
product must be reported to the FDA and could result in the
imposition of marketing restrictions through labeling changes or in
product withdrawal. Product approvals may be withdrawn if
compliance with regulatory requirements is not maintained or if
problems concerning safety or efficacy of the product occur
following the approval.
China
Regulation
China’s
regulatory approval framework includes nationwide approval based on
a showing that the device for which approval is sought has been
previously approved in the country of origin. Alternatively, we
understand it is also possible to receive approval at the
provincial level or to work exclusively with hospitals that do not
require such nationwide or provincial approval. We intend to
explore these potential paths to regulatory compliance in
China.
Other Regulations
We will become
subject to regulations and product registration requirements in
many foreign countries in which we may sell our products, including
in the areas of product standards, packaging requirements, labeling
requirements, import and export restrictions and tariff
regulations, duties and tax requirements. The time required to
obtain clearance required by foreign countries may be longer or
shorter than that required for EMA or FDA clearance, and
requirements for licensing a product in a foreign country may
differ significantly from EMA and FDA requirements.
58
Competition
While we believe
that we are the only company developing RF-based thermoacoustic
ultrasound products, we will face direct and indirect competition
from a number of competitors, many of whom have greater financial,
sales and marketing and other resources than we do.
Manufacturers of CT
and MRI systems include multi-national corporations such as Royal
Philips, Siemens AG and Hitachi, Ltd., many of whom also
manufacture and sell ultrasound equipment. In the NAFLD diagnosis
market we will compete with makers of surgical biopsy tools, such
as Cook Medical and Sterylab S.r.l. In the thermal ablation market,
we will compete with manufacturers of surgical temperature probes,
such as Medtronic plc and St. Jude Medical, Inc.
Research
and Development
Our research and
development expenses were $495,377 and $1,038,878 for the years
ended December 31, 2016 and 2015, respectively.
Employees
As of December 31, 2016, we had eight employees, five
of whom are employed on a full-time basis. Three full-time
employees and two part-time employees were engaged in research and
development activities, one full-time employee was engaged in
administrative activities, one full-time employee was engaged in
product assembly and one part-time employee was engaged in
marketing activities. After the closing of the offering, we intend
to employ certain of our part-time employees on a full-time basis.
None of our employees is covered by a collective bargaining
agreement, and we believe our relationship with our employees is
good.
We also employ
technical advisors, on an as-needed basis, to supplement existing
staff. We believe that these technical advisors provide us with
necessary expertise in clinical ultrasound applications, ultrasound
technology, and intellectual property.
Properties
Our principal
office is located at 3600 Green Court, Suite 350, Ann Arbor,
Michigan 48105-1570. We currently lease approximately 3,657 square
feet of office and light industrial/research space under a lease
that is due to expire in 2020. The rent is approximately $6,135 per
month, subject to moderate annual increases. We believe that
equivalent suitable space is available at similar
rents.
Legal
Proceedings
We are not a party
to any pending legal proceedings.
59
The following table
sets forth the names and ages of all of our executive officers and
directors. Our officers are appointed by, and serve at the
pleasure of, the board of directors.
Name
|
Age
|
Position
|
Francois
Michelon
|
51
|
Chief Executive
Officer and Chairman
|
Michael
Thornton
|
48
|
Chief Technology
Officer
|
David
Wells
|
54
|
Chief Financial
Officer
|
Anthony
DiGiandomenico
|
50
|
Director
|
Dr. Sanjiv Sam
Gambhir
|
54
|
Director
|
Michael
Harsh
|
62
|
Director
|
Alexander
Tokman
|
55
|
Director
|
Biographical
information with respect to our executive officers and directors is
provided below. There are no family relationships
between any of our executive officers or directors.
Francois
Michelon − Chief Executive Officer and Chairman
Francois Michelon
joined ENDRA as Chief Executive Officer and Chairman of the Board
of Directors in 2015. He has 18 years of healthcare technology
experience in general management, operations, strategy and
marketing across the diagnostic imaging, surgical instrument and
dental sectors.
From 2012 to 2014,
Mr. Michelon served as Vice President of Global Marketing for the
3i division of Biomet, Inc. (now Zimmer Biomet Holdings, Inc.), a
provider of oral reconstruction technologies, where he was
responsible for the upstream and downstream development of the
division’s global portfolio. From 2004 to 2011, Mr. Michelon
served as Group Director of Global Services and Visualization for
Smith & Nephew plc’s Advanced Surgical Devices division,
where he led P&L’s in the B2B service and capital
equipment sectors. From 1997 to 2004, Mr. Michelon worked at GE
Healthcare in a variety of global upstream and downstream marketing
roles.
Mr. Michelon
received an MBA from Carnegie-Mellon University and a BA in
Economics from the University of Chicago. He has also earned his
Six Sigma Black Belt certification. Mr. Michelon’s extensive
industry and executive experience position him well to serve as our
Chief Executive Officer and a member of our board of
directors.
Michael
Thornton − Chief Technology Officer
Prior to joining
ENDRA as Chief Technology Officer in 2007, Michael Thornton was a
founder and President of Enhanced Vision Systems Corp., or EVS, a
developer and supplier of medical imaging equipment to the
pharmaceutical, biotech, and academic sectors.
In 2002, EVS was
acquired by General Electric Company and was integrated into the
Functional and Molecular Imaging business unit of GE Medical
Systems (now GE Healthcare, a subsidiary of General Electric
Company). Following the acquisition of EVS by GE Medical Systems,
Mr. Thornton held a number of positions at GE Healthcare, including
Sales Manager, Global Product Manager, and Site Leader. He was a
member of the leadership team that expanded the pre-clinical
imaging business to include: computed tomography, optical, and
positron emission tomography imaging technologies, with global
market reach. He is also a founder of Volumetrics Medical Corp., a
developer and manufacturer of quality assurance devices for
diagnostic imaging.
Prior to founding
EVS, Mr. Thornton developed medical imaging related technologies at
the Robarts Research Institute (London, Ontario, Canada) for which
he obtained an MSc in Electrical Engineering from the University of
Western Ontario. Mr. Thornton also holds a BASc in Electrical
Engineering from the University of Toronto and is a member of the
American Association of Physicists in Medicine.
60
David
Wells − Chief Financial Officer
David Wells became
our Chief Financial Officer on an interim basis in 2014
and on a continuing basis in 2017.
He possesses 30 years of experience in finance, operations and
administrative positions. While mainly focused on technology
companies, Mr. Wells has also worked in the water treatment,
supply-chain management, manufacturing and professional services
industries.
Mr. Wells is the
founder of Wells Compliance Group, a technology-based services firm
supporting the financial reporting needs of publicly traded
companies and privately held firms whose investor or shareholder
base requires timely GAAP-compliant financial reporting. Through
StoryCorp Consulting (d/b/a/ Wells Compliance Group), Mr. Wells has
consulted with several emerging growth companies since March 2013
and served as the principal financial officer of Mount Tam
Biotechnologies, Inc., a biopharmaceutical company (August 2015 to
April 2016), Content Checked Holdings, Inc., a technology company
(April 2015 to November 2016), and Loton, Corp., a media company
(February 2016 to present). From 2009 to 2013, he was the
President, CFO and a Director of Sionix Corporation, a publicly
traded water treatment company.
Mr. Wells holds an
MBA from Pepperdine University and a BS in Finance and
Entrepreneurship from Seattle Pacific University.
Anthony
DiGiandomenico − Director
Anthony
DiGiandomenico joined ENDRA’s board of directors in 2013. A
co-founder of MDB Capital Group LLC, Mr. DiGiandomenico focuses on
corporate finance and capital formation for growth-oriented
companies. He has participated in all areas of corporate finance
including private capital, public offerings, PIPEs, business
consulting and strategic planning, and mergers and
acquisitions.
Mr. DiGiandomenico
has also worked on a wide range of transactions for growth-oriented
companies in biotechnology, nutritional supplements, manufacturing
and entertainment industries. Prior to forming MDB Capital Group
LLC in 1997, Mr. DiGiandomenico served as President and CEO of the
Digian Company, a real estate development company.
Mr. DiGiandomenico
holds an MBA from the Haas School of Business at the University of
California, Berkeley and a BS in Finance from the University of
Colorado. Mr. DiGiandomenico’s financial expertise, general
business acumen and significant executive leadership experience
position him well to make valuable contributions to our board of
directors.
Dr.
Sanjiv Sam Gambhir − Director
Dr. Sanjiv Sam
Gambhir joined our board of directors in 2008. He is the Virginia
& D.K. Ludwig Professor of Cancer Research and the Chair of
Radiology at Stanford University School of Medicine. He also heads
the Canary Center at Stanford for Cancer Early Detection and
directs the Molecular Imaging Program at Stanford
(MIPS).
He received an
MD/PhD from the UCLA Medical Scientist Training Program. He has
many publications in the field and numerous patents pending or
granted. He has developed and clinically translated several
multimodality molecular imaging strategies including imaging of
gene and cell therapies. He has also pioneered imaging areas such
as Bioluminescence Resonance Energy Transfer (BRET), split-reporter
technology, Raman imaging in vivo, Molecular Photoacoustic imaging,
PET reporter genes, and novel in vitro and in vivo strategies for
the early detection of cancer.
Dr. Gambhir serves
on numerous academic advisory boards for universities around the
world and also served as a member of the Board of Scientific
Advisors of the National Cancer Institute from 2004 to 2012. He has
also founded or co-founded several startups in the diagnostics
space. Among his many awards are the George Von Hevesy Prize and
the Paul C. Aebersold Award for outstanding achievement in basic
nuclear medicine science from the Society of Nuclear Medicine,
Outstanding Researcher Award from the Radiological Society of
Northern America, the Distinguished Clinical Scientist Award from
the Doris Duke Charitable Foundation, the Holst Medal, the Tesla
Medal, and the Hounsfield Medal from Imperial College, London. He
was elected to the Institute of Medicine of the U.S. National
Academies in 2008. Dr. Gambhir’s unique and extensive
scientific and technical expertise positions him well to serve on
our board of directors.
61
Michael
Harsh − Director
Michael Harsh
joined ENDRA’s board of directors in 2015. He has 36
years’ experience in healthcare technology, focused on
diagnostic imaging. Mr. Harsh was most recently GE
Healthcare’s Vice President and Chief Technology Officer,
leading its global science and technology organization and research
and development teams in diagnostics, healthcare IT and life
sciences.
In 2004, Mr. Harsh
was named Global Technology Leader – Imaging Technologies Lab
at the GE Global Research Center, where he led the research
for imaging technologies across the company as well as the research
associated with computer visualization/image analysis and
superconducting systems. He led the Engineering division for GE
Industrial and Enterprise Solutions from 2006 to 2009. Mr.
Harsh was named an officer of General Electric Company in November
2006. Mr. Harsh is a co-founder and current Chief Product Officer
of Terapede Systems Inc., a digital x-ray detector startup, a
member of the board of directors of FloDesign Sonics, Inc., a
member of the Scientific Advisory Board of Phoenix Nuclear Labs,
LLC and a consultant to start-ups in the medical device
industry.
Mr. Harsh is a
graduate of Marquette University, where he earned a
bachelor’s degree in Electrical Engineering. He holds
numerous U.S. patents in the field of medical imaging and
instrumentation. In 2008, Mr. Harsh was elected to the American
Institute for Medical and Biological Engineering College of
Fellows for his significant contributions to the medical and
biological engineering field. Mr. Harsh’s extensive industry,
executive and board experience position him well to serve on our
board of directors.
Alexander
Tokman − Director
Alexander Tokman
joined ENDRA’s board of directors in 2008. He has served as
President, Chief Executive Officer, and a director of Microvision,
Inc., a publicly traded laser beam scanning projection and imaging
company, since January 2006.
Previously, Mr.
Tokman completed a 10+ year tenure as an executive with GE
Healthcare, where he led several global businesses, most recently
as a General Manager of its Global Molecular Imaging and
Radiopharmacy multi-technology business unit from 2003 to
2005.
Between 1995 and
2003, Mr. Tokman served in various leadership roles at GE
Healthcare, where he led the definition and successful
commercialization of several product segments, including PET/CT,
which generated over $500 million of revenue within the first three
years of its launch.
Mr. Tokman is a
certified Six Sigma and Design for Six Sigma (DFSS) Black Belt and
Master Black Belt and as one of General Electric Company’s
Six Sigma pioneers, he drove the quality culture change across GE
Healthcare in the late 1990s. From 1989 to 1995, Mr. Tokman served
as development programs lead and a head of Industry and Regional
Development at Tracor Applied Sciences. Mr. Tokman has both an MS
and BS in Electrical Engineering from the University of
Massachusetts, Dartmouth. Mr. Tokman’s industry expertise and
significant executive leadership and director experience position
him well to make valuable contributions to our board of
directors.
Director
Independence
Our board of
directors has determined that Anthony DiGiandomenico, Dr. Sanjiv
Sam Gambhir, Michael Harsh and Alexander Tokman are “independent
directors” as such term is defined by Nasdaq Marketplace Rule
5605(a)(2). We have established an Audit Committee, a
Compensation Committee and a Nominating and Corporate Governance
Committee. Each of Mr. DiGiandomenico, Mr. Harsh and Mr.
Tokman serve as members of the Audit Committee and Compensation
Committee. Mr. Gambhir, Mr. Harsh and Mr. Tokman serve as members
of the Nominating and Corporate Governance Committee. Our board of
directors has determined that Mr. DiGiandomenico is an audit
committee financial expert, as defined under the applicable rules
of the SEC, and that all members of the Audit Committee are
“independent” within the meaning of the applicable
Nasdaq listing standards and the independence standards of Rule
10A-3 of the Exchange Act. Each of the members of the Audit
Committee meets the requirements for financial literacy under the
applicable rules and regulations of the SEC and The Nasdaq Stock
Market.
62
Scientific
Advisory Board
Our Scientific
Advisory Board members work with our management team in the
planning, development and execution of scientific and business
strategies. It reviews, and advises management on our progress in
research and clinical development as well as new scientific
perspectives.
Jonathan
Rubin, MD, PhD − Scientific Advisor
Dr. Jonathan Rubin
is the Martel Collegiate Professor of Radiology and Section Head
for Ultrasound and Abdominal Interventional Radiology at the
University of Michigan Medical School.
Dr. Rubin has over
200 peer-reviewed publications, over 125 invited presentations, and
10 patents. In 2005 he was awarded the University of Michigan
Medical School Innovation Award. In 2007 he won the American
Institute of Ultrasound in Medicine Joseph H. Holmes Clinical
Pioneer Award. In 2011 he received the Society of Radiologists in
Ultrasound Lawrence Mack Lifetime Achievement Award.
Dr. Rubin received
a BA in Chemistry from the University of Utah. He received an MD
from the University of Chicago Pritzker School of Medicine and a
PhD in Biophysics and Theoretical Biology from the University of
Chicago. From 1979 to 1984, Dr. Rubin was the director of the
Section of Body Computed Tomography and Ultrasound Imaging in the
Department of Radiology at the University of Chicago.
Dr. Jing Gao, MD − Scientific Advisor
Dr. Jing Gao is
currently Research Assistant Professor of Radiology at Weill
Cornell Medicine in New York, NY. Dr. Gao brings over 30 years of
clinical and research experience in abdominal ultrasound, in both
the United States and China.
Dr. Gao completed
her medical education at Changchun and Dalian Medical Colleges in
China. Besides her post at Cornell, Dr. Gao is also Deputy
President and guest professor at the Dalian University
International Institute of Medical Imaging in China.
Her numerous honors
and professional affiliations include being named one of
China’s Top 100 Ultrasound Physicians by the Chinese
Association of Medical Imaging Technology. She is a Fellow of the
Chinese Association of Ultrasound in Medicine and Biology, a Fellow
of the American Institute of Ultrasound in Medicine and an
Editorial Board Member of Clinical Imaging (Elsevier).
Dr. Gao has
numerous peer reviewed publications in the areas of liver, spleen
and kidney diseases and quantitative ultrasound
imaging.
63
Our compensation
philosophy is to offer our executive officers compensation and
benefits that are competitive and meet our goals of attracting,
retaining and motivating highly skilled management, which is
necessary to achieve our financial and strategic objectives and
create long-term value for our stockholders. We believe the levels
of compensation we provide should be competitive, reasonable and
appropriate for our business needs and circumstances and our board
of directors uses benchmark compensation studies in determining
compensation elements and levels. The principal elements of our
executive compensation program have to date included base salary,
annual bonus opportunity and long-term equity compensation in the
form of stock options. We believe successful long-term Company
performance is more critical to enhancing stockholder value than
short-term results. For this reason and to conserve cash and better
align the interests of management and our stockholders, we
emphasize long-term performance-based equity compensation over base
annual salaries.
The following table
sets forth information concerning the compensation earned by the
individual that served as our Principal Executive Officer during
2016 and our two most highly compensated executive officers other
than the individual who served as our Principal Executive Officer
during 2016 (collectively, the “named executive
officers”):
2016
Summary Compensation Table
Name &
Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Option
Awards($)(1)
|
All Other
Compensation ($)
|
Total
($)
|
Francois
Michelon
|
2016
|
262,152
|
-
|
-
|
-
|
262,152
|
Chief Executive Officer
|
2015(2)
|
177,083
|
-
|
248,359
|
-
|
425,442
|
Michael
Thornton
|
2016
|
218,056
|
-
|
-
|
-
|
218,056
|
Chief Technology Officer
|
2015
|
200,000(3)
|
-
|
-
|
-
|
200,000
|
David R.
Wells
|
2016
|
96,000(4)
|
-
|
-
|
-
|
96,000
|
Chief Financial Officer
|
2015
|
96,000(5)
|
-
|
-
|
-
|
96,000
|
________
(1)
The amounts shown
in this column indicate the grant date fair value of option awards
granted in the subject year computed in accordance with FASB ASC
Topic 718. For additional information regarding the assumptions
made in calculating these amounts, see notes 2 and 8 to our audited
financial statements included herein.
(2)
Represents a
partial year of employment. Mr. Michelon joined us on April 16,
2015.
(3)
Includes $33,403 of
accrued compensation settled for 3,969 shares of common stock.
(4)
Represents fees earned by StoryCorp Consulting (d/b/a
Wells Compliance Group) pursuant to the consulting agreement
described below. $60,000 of this was paid in cash and the balance
will be paid in shares of restricted stock upon the completion of
this offering.
(5)
Represents fees
earned by StoryCorp Consulting (d/b/a Wells Compliance Group)
pursuant to the consulting agreement described below. $60,000 of
this was paid in cash and the balance will be paid in shares of
restricted stock upon the completion of this
offering.
64
Outstanding
Equity Awards at 2016 Fiscal Year-End
The following table
provides information regarding equity awards held by the named
executive officers as of December 31, 2016.
Name
and Principal Position
|
Number
of Securities Underlying Unexercised Options Exercisable
(#)
|
Number
of Securities Underlying Unexercised Options Unexercisable
(#)
|
Option
Exercise Price ($)
|
Option
Expiration Date
|
Francois
Michelon
|
11,833
|
23,666(1)
|
$ 10.01
|
July
1, 2020
|
Chief Executive Officer
|
|
|
|
|
Michael
Thornton
|
29,471
|
-
|
$ 10.01
|
November
1, 2018
|
Chief Technology Officer
|
|
|
|
|
David
R. Wells
|
-
|
-
|
-
|
-
|
Chief Financial Officer
|
|
|
|
|
________
(1) These options
vest in two equal annual installments on July 1 of 2017 and
2018.
Employment
Agreements and Change of Control Arrangements
Employment Agreements
The following is a
summary of the employment arrangements with our executive officers
as currently in effect.
Francois
Michelon. On July 21, 2016, our board of
directors approved an amended and restated employment agreement
with Francois Michelon, our Chief Executive Officer and Chairman of
our board of directors, which shall become effective upon the
closing of this offering. The term of the employment agreement runs
through December 31, 2019. The employment agreement provides for an
annual base salary of $325,000. Under the employment agreement, Mr.
Michelon is eligible for an annual cash bonus (in 2016, up to 35%
of his base salary then in effect) based upon achievement of
performance-based objectives established by our board of directors.
Pursuant to Mr. Michelon’s employment agreement, upon the
closing of this offering he is entitled to be granted options to
purchase a number of shares of common stock that, taken together
with the option to purchase 35,499
shares of common stock he already holds, equals 5.0% of the
Company’s total issued and outstanding shares of common stock
on the date of grant on a fully diluted basis. The options will
have an exercise price equal to the price at which our common stock
is offered to investors in this offering and will vest in three
equal annual installments beginning on the first anniversary of its
grant date. 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 option will automatically vest. Upon termination for any
other reason, the entire unvested portion of the option 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. On July 21, 2016, our board of
directors approved an amended and restated employment agreement
with Michael Thornton, our Chief Technology Officer, which shall
become effective upon the closing of this offering. Under the
employment agreement, Mr. Thornton’s title will be Chief
Technology Officer. The term of the employment agreement runs
through December 31, 2019. The employment agreement provides for an
annual base salary of $245,000. Under the employment agreement, Mr.
Thornton is eligible for an annual cash bonus (in 2016, up to 22%
of his base salary then in effect) based upon achievement of
performance-based objectives established by our board of directors.
Pursuant to Mr. Thornton’s employment agreement, upon the
closing of this offering he is entitled to be granted options to
purchase a number of shares of common stock that, taken together
with the option to purchase 29,471 shares of common stock he
already holds, equals 5.0% of the Company’s total issued and
outstanding shares of common stock on the date of grant on a fully
diluted basis. The options will have an exercise price equal to the
price at which our common stock is offered to investors in this
offering and will vest in three equal annual installments beginning
on the first anniversary of its grant date. 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 option will
automatically vest. Upon termination for any other reason, the
entire unvested portion of the option 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).
65
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.
David R. Wells. We
entered into a consulting agreement with StoryCorp Consulting
(d/b/a Wells Compliance Group),or StoryCorp, in July 2014 for
services provided to the Company by David R. Wells, our Chief
Financial Officer. Under this consulting agreement, the Company
pays to StoryCorp a monthly fee of $8,000, of which $5,000 is
payable in cash and $3,000 is payable in shares of restricted stock
of the Company at the closing of this offering in an amount based
on the per share price of our common stock sold in this offering.
Additionally, StoryCorp may issue invoices to the Company for
services provided outside of those described in the consulting
agreement at a rate of $250 per hour, payable in cash, and the
Company will reimburse StoryCorp for reasonable and necessary
expenses incurred in connection with the performance of its
services under the consulting agreement. The consulting
agreement’s term renews monthly and the agreement may be
terminated by the Company with or without cause immediately and
without prior notice to StoryCorp. On July 21, 2016, our board of
directors approved a one-time grant to
Mr. Wells effective upon the closing of this offering of
options to purchase $35,000 worth of shares of our common stock
with an exercise price equal to the price at which our common stock
is offered to investors in this offering.
Director
Compensation
Members of our
board of directors received a one-time grant of fully vested stock
options in January 2016 for their service as directors for the year
ended December 31, 2015. On July 21, 2016, we adopted a
non-employee director compensation policy that will become
effective upon the closing of this offering pursuant to which our
non-employee directors will receive on an annual basis a $36,000
retainer paid in cash and an annual equity award with a value of
$30,000. The equity award will consist of a stock option grant made
on the first trading day following December 31 of each year
covering a number of shares of common stock equal to $30,000
divided by the closing price of our common stock on such date and
that vests in full on the one year anniversary of grant;
provided, the grant for 2017 will be made upon the closing of this
offering and the number of shares covered will be equal to $30,000
divided by the price at which our securities are offered to
investors in this offering. Because our non-employee directors did
not receive any compensation for their service during 2016, the
non-employee director policy provides that, in addition, upon the
closing of this offering each non-employee director is entitled to
a stock option award covering a number of shares of securities
equal to $30,000 divided by the price at which our securities are
offered to investors in this offering and that will be immediately
exercisable.
The following table
sets forth information with respect to compensation earned by or
awarded to each of our non-employee directors who served on our
board of directors during the fiscal year ended December 31,
2016:
Name
|
Fees Earned or
Paid in Cash ($)
|
Option Awards
($)(1)
|
All Other
Compensation ($)
|
Total
($)
|
Anthony
DiGiandomenico
|
-
|
12,589
|
-
|
12,589
|
Dr. Sanjiv Sam
Gambhir
|
-
|
12,589
|
-
|
12,589
|
Michael
Harsh
|
-
|
12,589
|
-
|
12,589
|
Alexander
Tokman
|
-
|
12,589
|
-
|
12,589
|
(1)
The amounts shown
in this column indicate the grant date fair value of option awards
granted in the subject year computed in accordance with FASB ASC
Topic 718. For additional information regarding the assumptions
made in calculating these amounts, see notes 2 and 8 to our audited
financial statements included herein. The following table shows the
number of shares subject to outstanding option awards held by each
non-employee director as of December 31, 2016:
Name
|
Shares subject to Outstanding Stock Option Awards
(#)
|
Anthony
DiGiandomenico
|
8,092
|
Dr. Sanjiv Sam
Gambhir
|
19,828
|
Michael
Harsh
|
5,370
|
Alexander
Tokman
|
12,165
|
2016 Omnibus Incentive Plan
In
September 2016, our board of directors and stockholders approved
the 2016 Omnibus Incentive Plan, or the Incentive Plan, pursuant to
which, effective following completion of the offering, the total
number shares available for issuance under such plan shall equal
18% of the total number of shares of common stock outstanding
immediately following the completion of the offering (assuming for
this purpose the issuance of all shares issuable under the
Company’s equity plan, the conversion into common stock of
all outstanding securities that are convertible by their terms into
common stock and the exercise of all options and warrants
exercisable for shares of common stock and including shares and
warrants included in the units issued to the
underwriters pursuant to the offering upon exercise of its
over-allotment option, if any) (i.e. on a “fully diluted
basis”). Concurrently with the closing of the offering and as
described above, we expect to grant stock options to our executive
officers and directors covering a significant number of shares.
Following such grants we estimate that the shares remaining
available for grant under the Incentive Plan will be approximately
6.2% of the total number of shares of common stock outstanding on a
fully diluted basis following completion of the
offering.
66
We have set forth
in the following table certain information regarding our common
stock beneficially owned by (i) each stockholder we know to be the
beneficial owner of 5% or more of our outstanding common stock,
(ii) each of our directors and named executive officers, and (iii)
all executive officers and directors as a
group. Generally, a person is deemed to be a
“beneficial owner” of a security if that person has or
shares the power to dispose or to direct the disposition of such
security. A person is also deemed to be a beneficial
owner of any securities of which the person has the right to
acquire beneficial ownership within 60 days pursuant to options,
warrants, conversion privileges or similar
rights. Unless otherwise indicated, ownership
information is as of March 17,
2017, and is based on 723,374 shares of common stock
outstanding on that date (adjusted for the reverse stock
split). The percentage ownership after the offering is
based on shares of common stock outstanding, including shares of
common stock issuable upon the conversion of our promissory notes
and the issuance of the common stock included in the
units being sold in this offering.
Name of Beneficial Owner
(1)
|
Number
of Shares Beneficially Owned (2)
|
Percentage
Owned Prior to the Offering
|
Percentage
Owned After the Offering
|
|
|
|
|
Francois
Michelon
|
38,077(3)(4)
|
5.0%
|
1.1%
|
Michael
Thornton
|
89,840(4)(5)
|
11.1%
|
2.6%
|
David
R. Wells
|
-(6)
|
*
|
*
|
Dr.
Sanjiv Sam Gambhir
|
21,626(7)
|
2.9%
|
*
|
Michael
Harsh
|
7,168(8)
|
*
|
*
|
Alexander
Tokman
|
13,964(9)
|
1.9%
|
*
|
Anthony
DiGiandomenico
|
69,300(4)(10)
|
9.2%
|
2.0%
|
All
directors and named executive officers as a group (7
individuals)
|
239,975
|
26.1%
|
6.7%
|
|
|
|
|
5%
or More Shareholders
|
|
|
|
Blue
Earth Fund, LP (11)
|
207,979(4)(12)
|
23.4%
|
5.9%
|
Jeffrey
S. Padnos and Margaret M. Padnos (13)
|
137,146(4)(14)
|
16.8%
|
4.0%
|
Benjamin
L. Padnos (15)
|
137,301(4)(16)
|
16.3%
|
3.9%
|
Erick
Richardson (17)
|
101,268(4)(18)
|
13.0%
|
3.0%
|
Robert
C. Clifford (19)
|
75,423(4)(20)
|
10.1%
|
2.2%
|
Peter
Appel (21)
|
70,141(4)(22)
|
9.1%
|
2.1%
|
Daniel
Landry (23)
|
66,114(24)
|
8.8%
|
2.0%
|
Don
Miloni (25)
|
63,281(4)(26)
|
8.2%
|
1.9%
|
ENDRA
Holdings LLC (27)
|
58,813
|
8.1%
|
1.8%
|
Andreas
Typaldos (28)
|
62,250(4)(29)
|
8.1%
|
1.8%
|
Mark
L. Baum (30)
|
53,061(31)
|
7.3%
|
1.6%
|
* Less than one
percent.
(1)
The
address of each officer and director is 3600 Green Court, Suite
350, Ann Arbor, MI 48105-1570.
(2)
Beneficial
ownership is determined in accordance with Rule 13d-3 under the
Exchange Act and is generally determined by voting powers and/or
investment powers with respect to securities. Unless otherwise
noted, the shares of common stock listed above are owned as
of March 17, 2017, and are owned of
record by each individual named as beneficial owner and such
individual has sole voting and dispositive power with respect to
the shares of common stock owned by each of
them.
(3)
Consists of 11,833
shares of common stock issuable upon the exercise of options held
directly that are presently exercisable and 26,243 shares of common stock issuable
upon the conversion of a convertible promissory note.
(4)
Amounts
of shares of common stock issuable upon the conversion of
outstanding convertible promissory notes assume that such notes are
converted immediately prior to the offering at a conversion price
of $1.40 per share pursuant to the terms thereof, as elected by the
holders of a majority of the outstanding principal amount of such
convertible promissory notes. These amounts exclude shares to be
issued with respect to interest accrued on such convertible
promissory notes after March 17,
2017. See “Description of Our Capital Stock
Convertible Promissory Notes” for a description of the terms
of our convertible promissory notes.
67
(5)
Consists of (a)
4,967 shares of common stock held directly; (b) 29,471 shares of
common stock issuable upon the exercise of options held directly
that are presently exercisable; (c) 999 shares of common stock
issuable upon the exercise of warrants held directly that are
presently exercisable; and (d) 54,402 shares of common stock
issuable upon the conversion of convertible promissory
notes.
(6)
Does
not include shares issuable upon the exercise of options awarded
upon the closing of this offering pursuant to our consulting
agreement with StoryCorp. See “Executive Compensation
Employment Agreements and Change of Control
Arrangements.”
(7)
Consists of 21,626
shares of common stock issuable upon the exercise of options held
directly that are presently exercisable.
(8)
Consists of 7,168
shares of common stock issuable upon the exercise of options held
directly that are presently exercisable.
(9)
Consists of 13,964
shares of common stock issuable upon the exercise of options held
directly that are presently exercisable.
(10)
Consists of (a)
39,199 shares of common stock held directly; (b) 9,890 shares of
common stock issuable upon the exercise of options held directly
that are presently exercisable; (c) 999 shares of common stock
issuable upon the exercise of warrants held directly that are
presently exercisable; and (d) 19,211 shares of common stock
issuable upon the conversion of a convertible promissory note held
directly.
(11)
The
address of Blue Earth Fund, LP is 1312 Cedar Street, Santa Monica,
CA 90405. Sole voting and dispositive power with respect to all of
Blue Earth Fund, LP's 207,917 shares of common stock is held by
Brett Conrad, the manager of Blue Earth Fund, LP, whose address is
also 1312 Cedar Street, Santa Monica, CA 90405.
(12)
Consists of (a)
42,458 shares of common stock held directly; (b) 12,488 shares of
common stock issuable upon the exercise of warrants held directly
that are presently exercisable; and (c) 153,033 shares of common
stock issuable upon the conversion of a convertible promissory
note.
(13)
The
address of Jeffrey S. Padnos and Margaret M. Padnos is 1088 West
27th Street, Holland, MI 49423.
(14)
Consists of (a)
18,007 shares of common stock held jointly by Mr. and Mrs. Padnos;
(b) 7,717 shares of common stock issuable upon the exercise of
warrants held jointly by Mr. and Mrs. Padnos that are presently
exercisable; (c) 44,667 shares of common stock issuable upon the
conversion of a convertible promissory note held jointly by Mr. and
Mrs. Padnos; (d) 9,091 shares of common stock held by Jeffrey &
Margaret Padnos 2010 Generation Trust fbo Benjamin Padnos (as to
which Mr. and Mrs. Padnos have shared voting and investment power);
(e) 3,896 shares of common stock issuable upon the exercise of
warrants held by Jeffrey & Margaret Padnos 2010 Generation
Trust fbo Benjamin Padnos (as to which Mr. and Mrs. Padnos have
shared voting and investment power) that are presently exercisable;
(f) 10,332 shares of common stock issuable upon the conversion of a
convertible promissory note held by Jeffrey & Margaret Padnos
2010 Generation Trust fbo Benjamin Padnos (as to which Mr. and Mrs.
Padnos have shared voting and investment power); (g) 5,682 shares
of common stock held by Jeffrey & Margaret Padnos 2010
Generation Trust fbo Rebecca Padnos (as to which Mr. and Mrs.
Padnos have shared voting and investment power); (h) 2,435 shares
of common stock issuable upon the exercise of warrants held by
Jeffrey & Margaret Padnos 2010 Generation Trust fbo Rebecca
Padnos (as to which Mr. and Mrs. Padnos have shared voting and
investment power) that are presently exercisable; (i) 6,361 shares
of common stock issuable upon the conversion of a convertible
promissory note held by Jeffrey & Margaret Padnos 2010
Generation Trust fbo Rebecca Padnos (as to which Mr. and Mrs.
Padnos have shared voting and investment power); (j) 5,682 shares
of common stock held by Jeffrey & Margaret Padnos 2010
Generation Trust fbo Joshua Padnos (as to which Mr. and Mrs. Padnos
have shared voting and investment power); (k) 2,435 shares of
common stock issuable upon the exercise of warrants held by Jeffrey
& Margaret Padnos 2010 Generation Trust fbo Joshua Padnos (as
to which Mr. and Mrs. Padnos have shared voting and investment
power) that are presently exercisable; (l) 6,361 shares of common
stock issuable upon the conversion of a convertible promissory note
held by Jeffrey & Margaret Padnos 2010 Generation Trust fbo
Joshua Padnos (as to which Mr. and Mrs. Padnos have shared voting
and investment power); (m) 5,682 shares of common stock held by
Jeffrey & Margaret Padnos 2010 Generation Trust fbo Samuel
Padnos (as to which Mr. and Mrs. Padnos have shared voting and
investment power); (n) 2,435 shares of common stock issuable upon
the exercise of warrants held by Jeffrey & Margaret Padnos 2010
Generation Trust fbo Samuel Padnos (as to which Mr. and Mrs. Padnos
have shared voting and investment power) that are presently
exercisable; and (o) 6,361 shares of common stock issuable upon the
conversion of a convertible promissory note held by Jeffrey &
Margaret Padnos 2010 Generation Trust fbo Samuel Padnos (as to
which Mr. and Mrs. Padnos have shared voting and investment
power).
(15)
The
address of Benjamin L. Padnos is 221 34th Street, Manhattan Beach,
CA 90266.
(16)
Consists of (a) 20,610 shares of common stock held
directly; and (b) 116,691 shares
of common stock issuable upon the conversion of a convertible
promissory note.
(17)
The
address of Erick Richardson is 11290 Chalon Road, Los Angeles, CA
90049.
(18)
Consists
of (a) 36,049 shares of common stock held directly; (b) 11,239
shares of common stock held jointly by Erick and Molly Richardson;
(c) 8,117 shares of common stock issuable upon the exercise of
warrants held jointly by Mr. and Mrs. Richardson; and (d) 45,863
shares issuable upon the conversion of a promissory note held
directly.
(19)
The
address of Robert C. Clifford is 1057 Corsica Drive, Pacific
Palisades, CA 90272.
68
(20)
Consists of (a)
37,201 shares of common stock held by 1999 Clifford Family Trust,
dated 12/22/1999 (as to which Mr. Clifford has shared voting and
investment power); (b) 14,081 shares of common stock held by The
Kingdom Trust Company Custodian fbo Robert C. Clifford (as to which
Mr. Clifford has voting and investment power); (c) 9,246 shares of
common stock issuable upon the exercise of warrants held by The
Kingdom Trust Company Custodian fbo Robert C. Clifford (as to which
Mr. Clifford has voting and investment power); and (d) 14,895
shares of common stock issuable upon the conversion of a
convertible promissory note held by The Kingdom Trust Company
Custodian fbo Robert C. Clifford (as to which Mr. Clifford has
voting and investment power).
(21)
The
address of Peter Appel is 77 Oregon Road, Bedford Corners, NY
10549.
(22)
Consists of (a)
24,975 shares of common stock held by Lone Wolf Holdings, LLC (as
to which Mr. Appel has voting and investment power); (b) 18,731
shares of common stock issuable upon the exercise of warrants held
by Lone Wolf Holdings, LLC (as to which Mr. Appel has voting and
investment power); and (c) 26,434 shares of common stock issuable
upon the conversion of a promissory note held by Lone Wolf
Holdings, LLC (as to which Mr. Appel has voting and investment
power).
(23)
The
address of Daniel Landry is 216 Avenue B, Redondo Beach, CA
90277.
(24)
Consists of (a)
39,200 shares of common stock held directly; (b) 6,294 shares of
common stock issuable upon the exercise of options held directly
that are presently exercisable; (c) 1,499 shares of common stock
issuable upon the exercise of warrants held directly that are
presently exercisable; and (d) 19,121 shares of common stock
issuable upon the conversion of a convertible promissory note held
by The Kingdom Trust Company Custodian fbo Daniel Landry (as to
which Mr. Landry has voting and investment power).
(25)
The
address of Don Miloni is 1425 E. Greenwood Lane, Greenwood Village,
CO 80121.
(26)
Consists of (a)
17,483 shares of common stock held by RCHER Financial LLC (as to
which Mr. Miloni has voting and investment power); (b) 7,493 shares
of common stock issuable upon the exercise of warrants held by
RCHER Financial LLC (as to which Mr. Miloni has voting and
investment power); and (c) 38,305 shares of common stock issuable
upon the conversion of a convertible promissory note held
directly.
(27)
The
address of ENDRA Holdings LLC is 500 Boylston Street, Suite 1600,
Boston, MA 02116.The manager of ENDRA
Holdings LLC is Enlight Biosciences LLC, which also has an address
of 500 Boylston Street, Suite 1600, Boston MA 02116. Daphne Zohar,
chief executive officer of Enlight Biosciences LLC, has sole voting
and dispositive power with respect to all of Endra Holdings LLC's
58,813 shares of common stock.
(28)
The
address of Andreas Typaldos is 666 Greenwich Street, Suite 734, New
York, NY 10014.
(29)
Consists of (a)
19,980 shares of common stock held by Andreas Typaldos LTD
Partnership (as to which Mr. Typaldos has voting and investment
power); and (b) 42,269 shares of common stock issuable upon the
conversion of a convertible promissory note held by Andreas
Typaldos LTD Partnership (as to which Mr. Typaldos has voting and
investment power).
(30)
The
address of Mark L. Baum is 1127 Cuchara Drive, Del Mar, CA
92014.
(31)
Consists of (a)
46,767 shares of common stock held by Mark Baum Trust dated May 17,
2011 (as to which Mr. Baum has voting and investment power); and
(b) 6,294 shares of common stock issuable upon the exercise of
options held by Mr. Baum that are presently
exercisable.
69
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
We have been
authorized to list our units, common stock and
warrants on the Nasdaq Capital Market, therefore, our determination
of the independence of directors is made using the definition of
“independent” contained in the listing standards of the
Nasdaq Stock Market. On the basis of information solicited from
each director, the board has determined that each of Anthony
DiGiandomenico, Dr. Sanjiv Sam Gambhir, Michael Harsh and Alexander
Tokman has no material relationship with the Company and is
independent within the meaning of such rules.
SEC regulations
define the related person transactions that require disclosure to
include any transaction, arrangement or relationship in which the
amount involved exceeds the lesser of $120,000 or one percent of
the average of the Company’s total assets at year end for the
last two completed fiscal years in which we were or are to be a
participant and in which a related person had or will have a direct
or indirect material interest. A related person is: (i) an
executive officer, director or director nominee of the Company,
(ii) a beneficial owner of more than 5% of our common stock, (iii)
an immediate family member of an executive officer, director or
director nominee or beneficial owner of more than 5% of our common
stock, or (iv) any entity that is owned or controlled by any of the
foregoing persons or in which any of the foregoing persons has a
substantial ownership interest or control.
For the period from
January 1, 2014 through the date of this prospectus (the
“Reporting Period”), described below are certain
transactions or series of transactions between us and certain
related persons.
In May 2014, Mr.
Tokman, Dr. Gambhir and Mr. DiGiandomenico received stock options
as compensation for their service on the Company's board of
directors. Mr. Tokman, Dr. Gambhir and Mr. DiGiandomenico each
received options exercisable for 2,997 shares of the Company's
common stock at an exercise price of $10.01 that expire in May
2017. Mr. Tokman also received options exercisable for 3,571 shares
of the Company's common stock at an exercise price of $10.01 that
expire in May 2019 in satisfaction of an outstanding obligation of
the Company to Mr. Tokman.
On August 28, 2014,
the Company entered into a services agreement with StoryCorp
Consulting (dba Wells Compliance Group) for financial reporting and
compliance services. David R. Wells is the owner of this firm and
is the Company's Chief Financial Officer. The services agreement
calls for payments of $5,000, and accrues an additional $3,000 per
month in fees to be paid by common stock at the time of a public
offering. The accrued balance due under the cash portion as of
December 31, 2016 and December 31, 2015 was $2,195 and $7,500,
respectively, and the accrued balance due under the stock portion
was $81,000 and $45,000, respectively. The Company can cancel the
contract at any time without notice.
In September 2014,
the Company issued to Mr. DiGiandomenico 13,589 shares of its
common stock in exchange for the cancellation of a warrant and of
outstanding principal and accrued interest on a promissory note
held by Mr. DiGiandomenico.
In July 2015, Mr.
Thornton received 3,968 shares of the Company's common stock for
accrued salary of approximately $33,000.
On November 31,
2015, Kevin Cotter, an ENDRA common stockholder, transferred to Mr.
Thornton warrants to purchase 999 shares of the Company's common
stock at an exercise price of $5.01. On January 19, 2016, Mr.
Thornton exercised these warrants, and received an additional 999
warrants at an exercise price of $20.02 as a part of the warrant
exchange program.
On January 28,
2016, we issued convertible promissory notes to Sanjiv Gambhir (the
“Gambhir Note”), Michael Harsh (the “Harsh
Note”) and Alexander Tokman (the “Tokman Note”),
each a member of our board of directors. The Gambhir Note and the
Tokman Note are each in the principal sum of $20,000 and the Harsh
Note is in the principal sum of $10,000. None of the notes accrue
interest and all three are payable upon the earlier of (1)
completion by the Company of an equity financing of $4.0 million or
more and (2) the one-year anniversary of the issuance
date.
From April 2016 through March 2017, we issued
convertible promissory notes to the following related persons: (i)
Francois Michelon, our Chief Executive Officer, in the principal
sum of $35,000, (ii) Michael Thornton, our Chief Technology
Officer, in the principal sum of $52,000, (iii) Anthony
DiGiandomenico, a director of the Company, in the principal sum of
$25,000, (iv) a trust beneficially owned by Robert C. Clifford, a
beneficial owner of more than 5% of our common stock, in the
principal sum of $19,474, (v) a trust beneficially owned by Daniel
Landry, a beneficial owner of more than 5% of our common stock, in
the principal sum of $25,000, (vi) Benjamin L. Padnos, a beneficial
owner of more than 5% of our common stock, in the principal sums of
$35,000, $54,500 and$100,000, (vii) Cynthia Padnos, an immediate
family member of a beneficial owner of more than 5% of our common
stock, in the principal sum of $12,096, (viii) Daniel Padnos, an
immediate family member of a beneficial owner of more than 5% of
our common stock, in the principal sums of $7,258 and $25,000, (ix) Jeffrey S. Padnos
and Margaret M. Padnos (including trusts which they beneficially
own), joint beneficial owners of more than 5% of our common stock,
in the principal sums of $25,000 and $96,811, (x) Jonathan Padnos,
an immediate family member of a beneficial owner of more than 5% of
our common stock, in the principal sums of $17,258 and $25,000,
(xi) Sivan Padnos Caspi, an immediate family member of a beneficial
owner of more than 5% of our common stock, in the principal sum of
$7,258, (xii) Michael Thornton, our Chief Technology Officer, in
the principal sum of $20,000, and (xiii) Conal Thornton, the father
of Michael Thornton, our Chief Technology Officer, in the principal
sum of $20,000. These convertible promissory notes mature on
May 12, 2017, accrue interest at the rate of 8% per annum,
are payable at maturity and are secured by all assets of the
Company, now owned or hereafter acquired. Upon the election of
noteholders holding a majority of the outstanding principal amount
of the convertible promissory notes, all outstanding convertible
promissory notes are convertible into shares of the Company's
common stock, in each case at a conversion price of $1.40 per
share. Pursuant to such terms, the noteholders have elected to
convert all of the outstanding principal and accrued interest on
the convertible promissory notes into shares of common stock of the
Company immediately prior to the completion of the
offering.
70
DESCRIPTION OF THE
SECURITIES WE ARE OFFERING
The following is a
brief description of our capital stock. This summary does not
purport to be complete in all respects. This description is subject
to and qualified entirely by the terms of our Fourth Amended and
Restated Certificate of Incorporation (the “Certificate of
Incorporation”), and our amended and restated bylaws, each of
which we plan to adopt prior to the completion of this offering and
copies of which have been filed with the SEC and are also available
upon request from us.
Authorized
Capitalization
We have
60,000,000 shares of
capital stock authorized under our Certificate of Incorporation,
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 December 31, 2016, we had 723,374 shares of common stock
outstanding held of record by 72 stockholders and no shares of
preferred stock outstanding. Our authorized but unissued shares of
common and preferred stock are available for issuance without
further action by our stockholders, unless such action is required
by applicable law or the rules of any stock exchange or automated
quotation system on which our securities may be listed or
traded.
Units
Each unit consists
of one share of common stock, $0.0001 par value per share, and a
warrant to purchase one share of our common stock. The common stock
and warrants comprising each unit are not immediately separable.
The units are expected to begin trading on or promptly after the
date of this prospectus. The common stock and warrants comprising
the units will begin trading separately on the first day following
the 60th day after the date of this prospectus, or such earlier
date as may be determined by National Securities Corporation, as
representative of the underwriters, at which time trading of the
units will be suspended, the units will be delisted and only our
common stock and warrants will continue to be listed for trading on
the Nasdaq Capital Market.
Common
Stock
Based on the
723,374 shares of common stock outstanding as of March 17, 2017,
and assuming (1) the conversion of $1,636,448 aggregate principal amount of
our convertible notes (plus accrued interest thereon as of
March 17, 2017 into 1,236,894
shares of our common stock) and a conversion date of March 17, 2017 and (2) the issuance by us
of 1,400,000 shares of common stock in this offering, there will be
3,360,267 shares of common stock outstanding upon the closing of
this offering (or 3,570,267 shares if the underwriters exercise
their option to purchase additional units in
full).
Holders of our
common stock are entitled to such dividends as may be declared by
our board of directors out of funds legally available for such
purpose. The shares of common stock are neither redeemable nor
convertible. Holders of common stock have no preemptive or
subscription rights to purchase any of our securities.
Each holder of our
common stock is entitled to one vote for each such share
outstanding in the holder’s name. No holder of
common stock is entitled to cumulate votes in voting for
directors.
In the event of our
liquidation, dissolution or winding up, the holders of our common
stock are entitled to receive pro rata our assets, which are
legally available for distribution, after payments of all debts and
other liabilities. All of the outstanding shares of our
common stock are fully paid and non-assessable. The
shares of common stock offered by this prospectus will also be
fully paid and non-assessable.
Description
of Warrants
The following
summary of certain terms and provisions of the warrants
included in the units offered hereby is not complete
and is subject to, and qualified in its entirety by, the provisions
of the warrant, the form of which has been filed as an exhibit to
the registration statement of which this prospectus is a part.
Prospective investors should carefully review the terms and
provisions of the form of warrant for a complete description of the
terms and conditions of the warrants.
71
Form. The warrants will be issued as
individual warrants to the investors, all of which will be governed
by a warrant agreement.
Exercisability. The warrants will
be exercisable on the first trading day following the
60th day after the date of this prospectus or on such date National
Securities Corporation, as representative of the underwriters,
determines to separate the units, whichever date is earlier, and
following such separation at any time up to the date that is
five years after their original issuance date. The warrants will be
exercisable, at the option of each holder, in whole or in part by
delivering to us a duly executed exercise notice and, at any time a
registration statement registering the issuance of the shares of
common stock underlying the warrants under the Securities Act is
effective and available for the issuance of such shares, or an
exemption from registration under the Securities Act is available
for the issuance of such shares, by payment in full in immediately
available funds for the number of shares of common stock purchased
upon such exercise. If a registration statement registering the
issuance of the shares of common stock underlying the warrants
under the Securities Act is not effective or available and an
exemption from registration under the Securities Act is not
available for the issuance of such shares, the holder may, in its
sole discretion, elect to exercise the warrant through a cashless
exercise, in which case the holder would receive upon such exercise
the net number of shares of common stock determined according to
the formula set forth in the warrant. No fractional shares of
common stock will be issued in connection with the exercise of a
warrant. In lieu of fractional shares, we will pay the holder an
amount in cash equal to the fractional amount multiplied by the
exercise price.
Exercise Limitation. A holder will not
have the right to exercise any portion of the warrant if the holder
(together with its affiliates) would beneficially own in excess of
4.99% of the number of shares of our common stock outstanding
immediately after giving effect to the exercise, as such percentage
ownership is determined in accordance with the terms of the
warrants. However, any holder may increase or decrease such
percentage to any other percentage not in excess of 9.99% upon at
least 61 days’ prior notice from the holder to
us.
Exercise Price. The warrants will have
an exercise price equal to 125% of
the initial public offering price per unit set forth
on the cover page of this prospectus. The exercise price is subject
to appropriate adjustment in the event of certain stock dividends
and distributions, stock splits, stock combinations,
reclassifications or similar events affecting our common stock and
also upon any distributions of assets, including cash, stock or
other property to our stockholders.
Transferability. Subject to applicable
laws, the warrants may be offered for sale, sold, transferred or
assigned without our consent.
Fundamental Transactions. In the event
of a fundamental transaction, as described in the warrants and
generally including any reorganization, recapitalization or
reclassification of our common stock, the sale, transfer or other
disposition of all or substantially all of our properties or
assets, our consolidation or merger with or into another person,
the acquisition of more than 50% of our outstanding common stock,
or any person or group becoming the beneficial owner of 50% of the
voting power represented by our outstanding common stock, the
holders of the warrants will be entitled to receive upon exercise
of the warrants the kind and amount of securities, cash or other
property that the holders would have received had they exercised
the warrants immediately prior to such fundamental
transaction.
Rights as a Stockholder. Except as
otherwise provided in the warrants or by virtue of such
holder’s ownership of shares of our common stock, the holder
of a warrant does not have the rights or privileges of a holder of
our common stock, including any voting rights, until the holder
exercises the warrant.
Waivers and Amendments. Subject to
certain exceptions, any term of the warrants may be amended or
waived with our written consent and the written consent of the
holders of at least two-thirds of the then-outstanding
warrants.
Stock
Options and Warrants
As of March 17,
2017, we had reserved the
following shares of common stock for issuance pursuant to stock
options, warrants and equity plans:
●
152,812 shares
of common stock issuable upon the exercise of outstanding warrants,
at a weighted average exercise price of $18.94 per share;
●
151,881 shares of our common stock issuable
upon the exercise of outstanding stock options issued pursuant to
our 2016 Omnibus Incentive Plan, or our Incentive Plan, at a
weighted average exercise price of $10.01 per share and an estimated 556,559
shares of our common stock
issuable upon the exercise of stock options expected to be granted
to our directors and certain of our officers upon the completion of
this offering at an exercise price equal to the public offering
price set forth on the cover of this prospectus;
and
●
an estimated 385,252 shares of our common
stock that will be reserved for future issuance under our Incentive
Plan.
72
Convertible
Promissory Notes
As of March 17,
2017, we had reserved an estimated 1,236,894 shares of our common
stock for future issuance under convertible promissory notes. These
convertible promissory notes mature on May 12, 2017,
accrue interest at the rate of 8% per annum, are payable at
maturity and are secured by all assets of the Company, now owned or
hereafter acquired. Upon the election of noteholders holding a
majority of the outstanding principal amount of the convertible
promissory notes, all outstanding convertible promissory notes are
convertible into shares of the Company’s common stock, in
each case at a conversion price of $1.40 per share. Pursuant to such terms, the
noteholders have elected to convert all of the outstanding
principal and accrued interest on the convertible promissory notes
into shares of common stock of the Company immediately prior to the
completion of the offering.
Preferred
Stock
Our board of
directors will have the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of preferred stock
in one or more series and to fix the designations, powers, rights,
preferences, qualifications, limitations and restrictions thereof.
These designations, powers, rights and preferences could include
voting rights, dividend rights, dissolution rights, conversion
rights, exchange rights, redemption rights, liquidation
preferences, and the number of shares constituting any series or
the designation of such series, any or all of which may be greater
than the rights of common stock. The issuance of preferred stock
could adversely affect the voting power of holders of common stock
and the likelihood that such holders will receive dividend payments
and payments upon liquidation. In addition, the issuance of
preferred stock could have the effect of delaying, deferring or
preventing change in our control or other corporate action. No
shares of preferred stock are outstanding, and we have no present
plan to issue any shares of preferred stock.
GE
Healthcare Right
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, or GE Healthcare. The agreement
provides that prior to selling any equity interests in our company
to a healthcare device manufacturer, we will first offer to
negotiate in good faith to sell such equity interests to GE
Healthcare.
Anti-Takeover
Effects of Certain Provisions of Delaware Law and Our Charter
Documents
The following is a
summary of certain provisions of Delaware law, our Certificate of
Incorporation and our bylaws. This summary does not purport to be
complete and is qualified in its entirety by reference to the
corporate law of Delaware and our Certificate of Incorporation and
bylaws.
Effect of Delaware Anti-Takeover
Statute. We are subject to Section 203 of the
Delaware General Corporation Law, an anti-takeover
law. In general, Section 203 prohibits a Delaware
corporation from engaging in any business combination (as defined
below) with any interested stockholder (as defined below) for a
period of three years following the date that the stockholder
became an interested stockholder, unless:
●
prior to that date,
the board of directors of the corporation approved either the
business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
●
upon consummation
of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining
the number of shares of voting stock outstanding (but not the
voting stock owned by the interested stockholder) those shares
owned by persons who are directors and officers and by excluding
employee stock plans in which employee participants do not have the
right to determine whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
●
on or subsequent to
that date, the business combination is approved by the board of
directors of the corporation and authorized at an annual or special
meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
73
Section 203 defines
“business combination” to include the
following:
●
any merger or
consolidation involving the corporation and the interested
stockholder;
●
any sale, transfer,
pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder;
●
subject to certain
exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
●
subject to limited
exceptions, any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any
class or series of the corporation beneficially owned by the
interested stockholder; or
●
the receipt by the
interested stockholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section
203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of
the corporation, or who beneficially owns 15% or more of the
outstanding voting stock of the corporation at any time within a
three-year period immediately prior to the date of determining
whether such person is an interested stockholder, and any entity or
person affiliated with or controlling or controlled by any of these
entities or persons.
Our Charter Documents. Our
charter documents include provisions that may have the effect of
discouraging, delaying or preventing a change in control or an
unsolicited acquisition proposal that a stockholder might consider
favorable, including a proposal that might result in the payment of
a premium over the market price for the shares held by our
stockholders. Certain of these provisions are summarized
in the following paragraphs.
Effects of authorized but unissued common
stock. One of the effects of the existence of
authorized but unissued common stock may be to enable our board of
directors to make more difficult or to discourage an attempt to
obtain control of our Company by means of a merger, tender offer,
proxy contest or otherwise, and thereby to protect the continuity
of management. If, in the due exercise of its fiduciary
obligations, the board of directors were to determine that a
takeover proposal was not in our best interest, such shares could
be issued by the board of directors without stockholder approval in
one or more transactions that might prevent or render more
difficult or costly the completion of the takeover transaction by
diluting the voting or other rights of the proposed acquirer or
insurgent stockholder group, by putting a substantial voting block
in institutional or other hands that might undertake to support the
position of the incumbent board of directors, by effecting an
acquisition that might complicate or preclude the takeover, or
otherwise.
Cumulative Voting. Our
Certificate of Incorporation does not provide for cumulative voting
in the election of directors, which would allow holders of less
than a majority of the stock to elect some directors.
Vacancies. Our Certificate
of Incorporation provides that all vacancies may be
filled by the
affirmative vote of a majority of directors then in office, even if
less than a quorum.
Special Meeting of
Stockholders. A
special meeting of stockholders may only be called by the Chairman
of the board of directors, the President, the Chief Executive
Officer, or the board of directors at any time and for any purpose
or purposes as shall be stated in the notice of the meeting, or by
request of the holders of record of at least 20% of the outstanding
shares of common stock. This provision could prevent
stockholders from calling a special meeting because, unless certain
significant stockholders were to join with them, they might not
obtain the percentage necessary to request the
meeting. Therefore, stockholders holding less than 20%
of the issued and outstanding common stock, without the assistance
of management, may be unable to propose a vote on any transaction
that would delay, defer or prevent a change of control, even if the
transaction were in the best interests of our
stockholders.
Transfer
Agent and Warrant Agent
The transfer agent
of our units and common stock and warrant agent
for our warrants included in our units offered hereby
is Corporate Stock Transfer, Inc., 3200 Cherry Creek Dr. South,
Suite 430, Denver, CO 80209. Its telephone number is (303)
282-4800.
74
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to this
offering, there has been no public market for our securities, and
we cannot predict the effect, if any, that market sales of our
securities or the availability of our securities for sale will have
on the market price of our securities prevailing from time to time.
Nevertheless, sales of substantial amounts of our common stock,
including shares issued upon exercise of outstanding options and
warrants, in the public market following this offering could
adversely affect market prices prevailing from time to time and
could impair our ability to raise capital through the sale of our
equity securities.
Upon the closing of
this offering, we will have a total of 3,360,267 shares of our
common stock outstanding (or 3,570,267 shares if the underwriters
exercise their option to purchase additional units in
full), and a total of 4,760,267 shares of our common stock
outstanding if the warrants sold in this offering are exercised in
full (or 5,180,267 shares if the underwriters exercise their option
to purchase additional units in full and
the warrants included in such units are
exercised) based on the 1,960,267 shares of our common stock
outstanding as of March 17, 2017, which includes the conversion
immediately prior to the closing of this offering of all
convertible promissory notes outstanding as of March 17, 2017 into
an aggregate of 1,236,894 shares of common stock at a conversion
price of $1.40 per share, as elected by holders of a majority of
the outstanding principal amount of such convertible promissory
notes. Of these outstanding shares, all of the 1,400,000
units will be freely tradable, except that any shares
and warrants purchased in this offering by our affiliates, as that
term is defined in Rule 144 under the Securities Act of 1933, as
amended, or the Securities Act, would only be able to be sold in
compliance with the Rule 144 limitations described below. In
addition, we expect that the warrants and the shares issued upon
exercise of the warrants issued in this offering will be freely
tradeable except for any such warrants or shares issued to our
affiliates, as that term is defined in Rule 144 under the
Securities Act, which would only be able to be sold in compliance
with the Rule 144 limitations described below.
The remaining
outstanding shares of our common stock will be deemed
“restricted securities” as defined in Rule 144.
Restricted securities may be sold in the public market only if they
are registered under the Securities Act or if they qualify for an
exemption from registration under Rule 144 or Rule 701 promulgated
under the Securities Act, which rules are summarized below. In
addition, our executive officers, directors and substantially all
of our existing stockholders have entered into lock-up agreements
with the underwriters under which they have agreed, subject to
specific exceptions, not to sell any of our common stock or
warrants for at least 180 or 365 days following the date of this
prospectus, as described below. As a result of these agreements,
subject to the provisions of Rule 144 or Rule 701, based on an
assumed offering date of March 17, 2017, securities will be
available for sale in the public market as follows:
●
Beginning on the
date of this prospectus, all of the units sold in this
offering will be immediately available for sale in the public
market;
●
Beginning 181 days
after the date of this prospectus, approximately 250,000 additional
shares of common stock will become eligible for sale in the public
market; and
●
The remainder of
the shares will be eligible for sale in the public market from time
to time thereafter, subject in some cases to the volume and other
restrictions of Rule 144, as described below.
Rule
144
In general, under
Rule 144 as currently in effect, once we have been subject to
public company reporting requirements for at least 90 days, a
person who is not deemed to have been one of our affiliates for
purposes of the Securities Act at any time during the 90 days
preceding a sale and who has beneficially owned the shares proposed
to be sold for at least six months, including the holding period of
any prior owner other than our affiliates, is entitled to sell
those shares without complying with the manner of sale, volume
limitation or notice provisions of Rule 144, subject to compliance
with the public information requirements of Rule 144. If such a
person has beneficially owned the shares proposed to be sold for at
least one year, including the holding period of any prior owner
other than our affiliates, then that person would be entitled to
sell those shares upon expiration of the lock-up agreements
described below, without complying with any of the requirements of
Rule 144.
75
In general, under
Rule 144, as currently in effect, our affiliates or persons selling
shares on behalf of our affiliates are entitled to sell upon
expiration of the lock-up agreements described above, within any
three-month period, a number of shares that does not exceed the
greater of:
●
1% of the number of
shares of common stock then outstanding, which will equal
approximately 33,603 shares immediately after this offering;
or
●
the average weekly
trading volume of common stock on the Nasdaq Capital Market during
the four calendar weeks preceding the filing of a notice on Form
144 with respect to that sale.
Sales under Rule
144 by our affiliates or persons selling shares on behalf of our
affiliates are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public
information about us.
Rule
701
Rule 701 generally
allows a stockholder who purchased shares of our common stock
pursuant to a written compensatory plan or contract and who is not
deemed to have been an affiliate of our company during the
immediately preceding 90 days to sell these shares in reliance upon
Rule 144, but without being required to comply with the public
information or holding period provisions of Rule 144. Rule 701 also
permits affiliates of our company to sell their Rule 701 shares
under Rule 144 without complying with the holding period
requirements of Rule 144. All holders of Rule 701 shares, however,
are required by that rule to wait until 90 days after the date of
this prospectus before selling those shares pursuant to Rule 701,
subject to the market standoff agreements and lock-up agreements
described above.
Stock
Options
As soon as
practicable after the closing of this offering, we intend to file
one or more registration statements on Form S-8 under the
Securities Act covering all of the shares of our common stock
subject to outstanding options and the shares of our common stock
reserved for issuance under our stock plans. In addition, we intend
to file a registration statement on Form S-8 or such other form as
may be required under the Securities Act for the resale of shares
of our common stock issued upon the exercise of options that were
not granted under Rule 701. We expect to file this registration
statement as soon as permitted under the Securities Act and the
terms of the lock-up agreements described below. However, the
shares registered on Form S-8 may be subject to the volume
limitations and the manner of sale, notice and public information
requirements of Rule 144 and will not be eligible for resale until
expiration of the lock-up and market standoff agreements to which
they are subject.
Lock-up
Agreements
For a description
of the lock-up agreements with the underwriters that restrict sales
of shares and warrants by us, our executive officers, and our
directors and substantially all our shareholders see the
information under the heading
“Underwriting.”
76
UNDERWRITING
We
have entered into an underwriting agreement with National
Securities Corporation, acting as the representative of the several
underwriters named below, with respect to the units subject to this
offering. Subject to certain conditions, we have agreed to sell to
the underwriters, and the underwriters have severally agreed to
purchase, the number of units provided below opposite their
respective names.
Underwriters
|
Number of
Units
|
National Securities
Corporation
|
|
Dougherty &
Company LLC
|
|
Total
|
1,400,000
|
The underwriters
are offering the units subject to their acceptance of the units
from us and subject to prior sale. The underwriting agreement
provides that the obligations of the several underwriters to pay
for and accept delivery of the units offered by this prospectus are
subject to the approval of certain legal matters by their counsel
and to certain other conditions. The underwriters are obligated to
take and pay for all of the units if any such units are taken.
However, the underwriters are not required to take or pay for the
units covered by the underwriters' over-allotment option described
below.
Over-Allotment
Option
We have granted the
underwriters an option, exercisable for 45 days from the date of
this prospectus, to purchase up to an additional 210,000 units to
cover over-allotments, if any, of the units offered by this
prospectus. If the underwriters exercise this option, each
underwriter will be obligated, subject to certain conditions, to
purchase a number of additional units proportionate to that
underwriter's initial purchase commitment as indicated in the table
above for which the option has been exercised.
Discount,
Commissions and Expenses
The underwriters
have advised us that they propose to offer the units to the public
at the initial public offering price set forth on the cover page of
this prospectus and to certain dealers at that price less a
concession not in excess of
$ per unit.
The underwriters may allow, and certain dealers may reallow, a
discount from the concession not in excess of
$ per unit to
certain brokers and dealers. After this offering, the initial
public offering price, concession and reallowance to dealers may be
changed by the representative. No such change shall change the
amount of proceeds to be received by us as set forth on the cover
page of this prospectus. The units are offered by the underwriters
as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. The
underwriters have informed us that they do not intend to confirm
sales to any accounts over which they exercise discretionary
authority.
The following table
shows the underwriting discount payable to the underwriters by us
in connection with this offering. Such amounts are shown assuming
both no exercise and full exercise of the underwriters'
over-allotment option to purchase additional
units.
77
|
Per
Unit(1)
|
Total Without
Exercise of Over-Allotment Option
|
Total With
Exercise of Over-Allotment Option
|
Initial
public offering price
|
$
|
$
|
$
|
Underwriting
discount
|
$
|
$
|
$
|
__________________________
(1)
Does not include
the warrants to purchase shares of common stock equal to 8% of the
number of units sold
in the offering to be issued to the underwriters at the
closing.
We
have agreed to pay the underwriters a non-accountable expense
allowance equal to 1% of the public offering price of securities in
this offering. Additionally, we have agreed to reimburse the
underwriters for expenses relating to this offering, subject to a
cap of $150,000, which includes (i) the fees and expenses of
underwriters' counsel; (ii) the fees and expenses of the
underwriters related to the road show; and (iii) the fees, expenses
and disbursements relating to background checks of the Company's
officers and directors. We estimate that expenses payable by us in
connection with this offering, other than the underwriting discount
referred to above but including the reimbursement of the
underwriters' expenses and the fees and expenses relating to
compliance with state securities laws and clearance of the offering
with the Financial Industry Regulatory Authority, Inc., will be
approximately $750,000.
Underwriters’
Warrants
We have also agreed
to issue underwriters' warrants to purchase a number of our shares
of common stock equal to an aggregate of 8% of the number of
units issued in this offering. The warrants will have
an exercise price equal to 125% of the initial public offering
price of the units sold in this offering and may be
exercised on a cashless basis. The warrants are not redeemable by
us. Each warrant also provides for one demand registration of the
shares of common stock underlying the warrant at our expense and an
additional demand at the warrant holder's expense during the
five-year period commencing on the date six months after the date
of effectiveness of this offering. The warrants will provide for
adjustment in the number and price of such warrants (and the shares
of common stock underlying such warrants) in the event of
recapitalization, merger or other fundamental transaction. The
warrants and the underlying shares of common stock have been deemed
compensation by FINRA and are therefore subject to FINRA Rule
5110(g)(1). In accordance with FINRA Rule 5110(g)(1), neither the
underwriters' warrants nor any shares of our common stock issued
upon exercise of the underwriters' warrants may be sold,
transferred, assigned, pledged, or hypothecated, or be the subject
of any hedging, short sale, derivative, put, or call transaction
that would result in the effective economic disposition of such
securities by any person for a period of 180 days immediately
following the date of effectiveness or commencement of sales of the
offering pursuant to which the underwriters' warrants are being
issued, except the transfer of any security:
●
by operation of law
or by reason of reorganization of the Company;
●
to any FINRA member
firm participating in this offering and the officers or partners
thereof, if all securities so transferred remain subject to the
lock-up restriction described above for the remainder of the time
period;
●
if the aggregate
amount of securities of the Company held by either an underwriter
or a related person do not exceed 1% of the securities being
offered;
●
that is
beneficially owned on a pro-rata basis by all equity owners of an
investment fund, provided that no participating member manages or
otherwise directs investments by the fund, and participating
members in the aggregate do not own more than 10% of the equity in
the fund; or
●
the exercise or
conversion of any security, if all securities received remain
subject to the lock-up restriction set forth above for the
remainder of the time period.
78
No
Public Market
Prior to this
offering, there has not been a public market for our
units, common stock or warrants in the United States
and the initial public offering price for our units
will be determined through negotiations between us and the
underwriters. Among the factors to be considered in these
negotiations will be prevailing market conditions, our financial
information, market valuations of other companies that we and the
underwriters believe to be comparable to us, estimates of our
business potential, the present state of our development and other
factors deemed relevant.
No assurance can be
given that the initial public offering price will correspond to the
price at which our units will trade in the public
market subsequent to this offering or that an active trading market
for our units, common stock or warrants will develop
and continue after this offering.
Indemnification
We have agreed to
indemnify the underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended, or the
Securities Act, or to contribute to payments that the underwriters
may be required to make in respect of those
liabilities.
Lock-up
Agreements
We, our officers,
directors and substantially all of our existing stockholders have
agreed, subject to limited exceptions, for a period of 365 days
after the date of the underwriting agreement, not to offer, sell,
contract to sell, pledge, grant any option to purchase, make any
short sale or otherwise dispose of, directly or indirectly any
shares of common stock or any securities convertible into or
exchangeable for our units, common stock, including
warrants, either owned as of the date of the underwriting agreement
or thereafter acquired without the prior written consent of the
representative; provided, that the lock-up period applicable to
persons other than our officers and directors with respect to
shares purchased from us prior to the date hereof for a purchase
price per share of $10.01 or more is 180 days. The representative
may, in its sole discretion and at any time or from time to time
before the termination of the lock-up period release all or any
portion of the securities subject to lock-up agreements; provided,
however, that, subject to limited exceptions, at least three
business days before the release or waiver or any lock-up
agreement, the representative must notify us of the impending
release or waiver and we will be required to announce the impending
release or waiver through a major news service at least two
business days before the release or waiver.
Price
Stabilization, Short Positions and Penalty Bids
In connection with
the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering
transactions and penalty bids in accordance with Regulation M under
the Exchange Act:
●
Stabilizing
transactions permit bids to purchase the underlying security so
long as the stabilizing bids do not exceed a specified
maximum.
●
Over-allotment
involves sales by the underwriters of securities in excess of the
number of securities the underwriters are obligated to purchase,
which creates a syndicate short position. The short position may be
either a covered short position or a naked short position. In a
covered short position, the number of securities over-allotted by
the underwriters is not greater than the number of securities that
they may purchase in the over-allotment option. In a naked short
position, the number of securities involved is greater than the
number of securities in the over-allotment option. The underwriters
may close out any covered short position by either exercising their
over-allotment option and/or purchasing securities in the open
market.
●
Syndicate covering
transactions involve purchases of securities in the open market
after the distribution has been completed in order to cover
syndicate short positions. In determining the source of securities
to close out the short position, the underwriters will consider,
among other things, the price of securities available for purchase
in the open market as compared to the price at which it may
purchase securities through the over-allotment option. If the
underwriters sell more securities than could be covered by the
over-allotment option, a naked short position, the position can
only be closed out by buying securities in the open market. A naked
short position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the
securities in the open market after pricing that could adversely
affect investors who purchase in the offering.
●
Penalty bids permit
the representative to reclaim a selling concession from a syndicate
member when the securities originally sold by the syndicate member
is purchased in a stabilizing or syndicate covering transaction to
cover syndicate short positions.
79
These stabilizing
transactions, syndicate covering transactions and penalty bids may
have the effect of raising or maintaining the market price of our
securities or preventing or retarding a decline in the market price
of the securities. As a result, the price of our securities may be
higher than the price that might otherwise exist in the open
market. Neither we nor the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the
securities. In addition, neither we nor the underwriters make any
representations that the underwriters will engage in these
stabilizing transactions or that any transaction, once commenced,
will not be discontinued without notice.
Listing
and Transfer and Warrant Agent
Our
units have been approved for listing on the Nasdaq
Capital Market under the trading the
symbol “NDRAU” and our common stock and warrants
under the symbols “NDRA” and
“NDRAW,” respectively. The transfer agent of our
units and common stock is Corporate Stock Transfer,
Inc., 3200 Cherry Creek Dr. South, Suite 430, Denver, CO 80209. Its
telephone number is (303) 282-4800. Corporate Stock Transfer, Inc.
will also act as the warrant agent for the warrants.
Electronic
Distribution
This prospectus in
electronic format may be made available on websites or through
other online services maintained by the underwriters, or by their
affiliates. Other than this prospectus in electronic format, the
information on any underwriter’s website and any information
contained in any other website maintained by any underwriter is not
part of this prospectus or the registration statement of which this
prospectus forms a part, has not been approved and/or endorsed by
us or the underwriters in their capacity as underwriters, and
should not be relied upon by investors.
Other
From time to time,
certain of the underwriters and/or their affiliates have provided,
and may in the future provide, various investment banking and other
financial services for us for which services they have received
and, may in the future receive, customary fees. In the course of
their businesses, the underwriters and their affiliates may
actively trade our securities or loans for their own account or for
the accounts of customers, and, accordingly, the underwriters and
their affiliates may at any time hold long or short positions in
such securities or loans. Except for services provided in
connection with this offering, no underwriter has provided any
investment banking or other financial services to us during the
180-day period preceding the date of this prospectus and we do not
expect to retain any underwriter to perform any investment banking
or other financial services for at least 90 days after the date of
this prospectus.
CONFLICTS OF
INTEREST
Under the rules of
FINRA, National Securities Corporation, an underwriter in this
offering, has a conflict of interest in offering our units since
affiliates of National Securities Corporation beneficially own more
than 10% of our outstanding common stock. As a result, National
Securities Corporation is deemed to have a “conflict of
interest” within the meaning of FINRA Rule 5121. Robert C.
Clifford and Daniel Landry, stockholders of ours who beneficially
own 10.1% and 8.8% of our common stock, respectively, are both
principals of Liquid Venture Partners, LLC, an affiliate of
National Securities Corporation.
Accordingly, this
offering is being made in compliance with the applicable
requirements of Rule 5121. FINRA Rule 5121 prohibits National
Securities Corporation from making sales to discretionary accounts
without the prior written approval of the account holder and
requires a "qualified independent underwriter," as defined in Rule
5121, participate in the preparation of the registration statement
and prospectus and exercise the usual standards of due diligence
with respect thereto. Dougherty & Company LLC is assuming the
responsibilities of acting as the qualified independent underwriter
in this offering and is undertaking the legal responsibilities and
liabilities of an underwriter under the Securities Act, that
specifically include those inherent in Section 11 thereunder.
Dougherty & Company LLC will receive $50,000 from us as
compensation for that role. We have agreed to indemnify Dougherty
& Company LLC against certain liabilities incurred in
connection with acting as a “qualified independent
underwriter,” including liabilities under the Securities
Act.
Other
Relationships
From time to time,
the underwriters and certain of their affiliates have provided, and
may provide in the future, various advisory, investment and
commercial banking and other services to us in the ordinary course
of business, for which they have received and may continue to
receive customary fees and commissions. However, except as
disclosed in this prospectus, we have no present arrangements with
any underwriter for any further services. See “Certain
Relationships and Related Party
Transactions.”
NOTICE TO INVESTORS
Notice
to Investors in the United Kingdom
In relation to each
Member State of the European Economic Area which has implemented
the Prospectus Directive, each a Relevant Member State, an offer to
the public of any securities which are the subject of the offering
contemplated by this prospectus may not be made in that Relevant
Member State except that an offer to the public in that Relevant
Member State of any such securities may be made at any time under
the following exemptions under the Prospectus Directive, if they
have been implemented in that Relevant Member State:
80
(a)
to legal entities
which are authorized or regulated to operate in the financial
markets or, if not so authorized or regulated, whose corporate
purpose is solely to invest in securities;
(b)
to any legal entity
which has two or more of (1) an average of at least 250 employees
during the last financial year; (2) a total balance sheet of more
than €43,000,000 and (3) an annual net turnover of more than
€50,000,000, as shown in its last annual or consolidated
accounts;
(c)
by the underwriter
to fewer than 100 natural or legal persons (other than qualified
investors as defined in the Prospectus Directive); or
(d)
in any other
circumstances falling within Article 3(2) of the Prospectus
Directive, provided that no such offer of these securities shall
result in a requirement for the publication by the issuer or the
underwriter of a prospectus pursuant to Article 3 of the Prospectus
Directive.
For the purposes of
this provision, the expression an “offer to the public”
in relation to any of the securities in any Relevant Member State
means the communication in any form and by any means of sufficient
information on the terms of the offer and any such securities to be
offered so as to enable an investor to decide to purchase any such
securities, as the same may be varied in that Member State by any
measure implementing the Prospectus Directive in that Member State
and the expression “Prospectus Directive” means
Directive 2003/71/EC and includes any relevant implementing measure
in each Relevant Member State.
Each underwriter
has represented, warranted and agreed that:
(a)
it has only
communicated or caused to be communicated and will only communicate
or cause to be communicated any invitation or inducement to engage
in investment activity (within the meaning of section 21 of the
Financial Services and Markets Act 2000 (the FSMA)) received by it
in connection with the issue or sale of any of the securities in
circumstances in which section 21(1) of the FSMA does not apply to
the issuer; and
(b)
it has complied
with and will comply with all applicable provisions of the FSMA
with respect to anything done by it in relation to the securities
in, from or otherwise involving the United Kingdom.
European Economic Area
In particular, this
document does not constitute an approved prospectus in accordance
with European Commission’s Regulation on Prospectuses no.
809/2004 and no such prospectus is to be prepared and approved in
connection with this offering. Accordingly, in relation to each
Member State of the European Economic Area which has implemented
the Prospectus Directive (being the Directive of the European
Parliament and of the Council 2003/71/EC and including any relevant
implementing measure in each Relevant Member State) (each, a
Relevant Member State), with effect from and including the date on
which the Prospectus Directive is implemented in that Relevant
Member State (the Relevant Implementation Date) an offer of
securities to the public may not be made in that Relevant Member
State prior to the publication of a prospectus in relation to such
securities which has been approved by the competent authority in
that Relevant Member State or, where appropriate, approved in
another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with the
Prospectus Directive, except that it may, with effect from and
including the Relevant Implementation Date, make an offer of
securities to the public in that Relevant Member State at any
time:
●
to legal entities
which are authorized or regulated to operate in the financial
markets or, if not so authorized or regulated, whose corporate
purpose is solely to invest in securities;
●
to any legal entity
which has two or more of (1) an average of at least 250 employees
during the last financial year; (2) a total balance sheet of more
than €43,000,000; and (3) an annual net turnover of more than
€50,000,000, as shown in the last annual or consolidated
accounts; or
●
in any other
circumstances which do not require the publication by the Issuer of
a prospectus pursuant to Article 3 of the Prospectus
Directive.
For the purposes of
this provision, the expression an “offer of securities to the
public” in relation to any of the securities in any Relevant
Member State means the communication in any form and by any means
of sufficient information on the terms of the offer and the
securities to be offered so as to enable an investor to decide to
purchase or subscribe for the securities, as the same may be varied
in that Member State by any measure implementing the Prospectus
Directive in that Member State. For these purposes the shares of
our common stock and warrants offered hereby are
“securities.”
Notice to Prospective Investors in
Canada
The units may be sold only to
purchasers purchasing, or deemed to be purchasing, as principal
that are accredited investors, as defined in National Instrument
45-106 Prospectus
Exemptions or subsection
73.3(1) of the Securities
Act (Ontario), and are
permitted clients, as defined in National Instrument
31-103 Registration Requirements,
Exemptions and Ongoing Registrant Obligations. Any resale of the units must be
made in accordance with an exemption from, or in a transaction not
subject to, the prospectus requirements of applicable securities
laws.
Securities
legislation in certain provinces or territories of Canada may
provide a purchaser with remedies for rescission or damages if this
prospectus (including any amendment thereto) contains a
misrepresentation, provided that the remedies for rescission or
damages are exercised by the purchaser within the time limit
prescribed by the securities legislation of the purchaser’s
province or territory. The purchaser should refer to any applicable
provisions of the securities legislation of the purchaser’s
province or territory for particulars of these rights or consult
with a legal advisor.
81
LEGAL
MATTERS
The validity of the
units offered hereby will be passed upon for us by
K&L Gates LLP, Charlotte, North Carolina. Faegre Baker Daniels
LLP, Minneapolis, Minnesota, has acted as counsel for the
underwriters in connection with certain legal matters related to
this offering.
EXPERTS
The financial
statements of ENDRA
Life Sciences Inc. as of December 31, 2016 and December
31, 2015 included in this prospectus have been audited by RBSM LLP,
independent registered public accounting firm. We have included
these financial statements in this prospectus in reliance upon the
report of RBSM LLP, given on their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND
MORE INFORMATION
We have filed with
the SEC a registration statement on Form S-1, including exhibits,
under the Securities Act that registers the units to
be sold in this offering. This prospectus does not contain all the
information contained in the registration statement and the
exhibits filed as part of the registration statement. For further
information with respect to us and our securities, we refer you to
the registration statement and the exhibits filed as part of the
registration statement. Statements contained in this prospectus as
to the contents of any contract or other document are not
necessarily complete. If a contract or document has been filed as
an exhibit to the registration statement, we refer you to the
copies of the contract or document that has been filed. Each
statement in this prospectus relating to a contract or document
filed as an exhibit is qualified in all respects by the filed
exhibit.
Upon the
consummation of this offering, we will file annual, quarterly and
current reports, proxy statements and other information with the
SEC under the Exchange Act. You can read our SEC filings, including
the registration statement, at the SEC’s website at
www.sec.gov.
You may read and
copy this information at the SEC’s Public Reference Room at
100 F Street, N.E., Washington D.C. 20549, at prescribed rates. You
may obtain information regarding the operation of the public
reference room by calling the SEC at 1-800-SEC-0330.
The SEC also
maintains a website (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding
issuers that file electronically with the SEC.
Our website can be
accessed at www.endrainc.com. The information contained on, or that
may be obtained from, our website is not, and shall not be deemed
to be, a part of this prospectus.
The
representations, warranties and covenants made by us in any
agreement that is filed as an exhibit to the registration statement
of which this prospectus is a part were made solely for the benefit
of the parties to such agreement, including, in some cases, for the
purpose of allocating risk among the parties to such agreements,
and should not be deemed to be a representation, warranty or
covenant to you. Moreover, such representations, warranties or
covenants were made as of an earlier date. Accordingly, such
representations, warranties and covenants should not be relied on
as accurately representing the current state of our
affairs.
This prospectus
includes statistical and other industry and market data that we
obtained from industry publications and research, surveys and
studies conducted by third parties. Industry publications and
third-party research, surveys and studies generally indicate that
they have gathered their information from sources they believe to
be reliable, although they do not guarantee the accuracy or
completeness of such information. While we believe that these
industry publications and third-party research, surveys and studies
are reliable, we have not independently verified such
data.
82
ENDRA
LIFE SCIENCES INC.
FINANCIAL
STATEMENTS
Table
of Contents
Report of
Independent Registered Public Accounting Firm
|
F-2
|
Balance Sheets as
of December 31, 2016 and 2015 (restated)
|
F-3
|
Statements of
Operations for the Years Ended December 31, 2016 and 2015
(restated)
|
F-4
|
Statement of
Stockholders’ Equity (Deficit) for the Years Ended December
31, 2016 and 2015 (restated)
|
F-5
|
Statements of Cash
Flows for the Years Ended December 31, 2016 and 2015
(restated)
|
F-6
|
Notes to the
Financial Statements
|
F-7
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of
Directors and Stockholders of
ENDRA Life Sciences
Inc.
We have audited the
accompanying balance sheets of ENDRA Life Sciences Inc. (the
“Company”) as of December 31, 2016 and 2015 and the
related statements of operations, stockholders’ equity
(deficit) and cash flows for each of the years in the two-year
period ended December 31, 2016. The Company’s management is
responsible for these financial statements. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our
audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform an audit of the Company’s internal control
over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the
financial statements referred to above present fairly, in all
material respects, the financial position of ENDRA Life Sciences
Inc. as of December 31, 2016 and 2015 and the results of its
operations and cash flows for each of the years in the two-year
period ended December 31, 2016 in conformity with accounting
principles generally accepted in the United States of
America.
The accompanying
financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered losses from
operations, which raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in
regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
As described in
Note 3, the financial statements for the year ended December 31,
2015 have been restated. We audited the adjustments described in
Note 3 that were applied to restate 2015 financial statements. In
our opinion, such adjustments are appropriate and have been
properly applied.
/s/ RBSM LLP
Henderson,
Nevada
March 24,
2017
F-2
ENDRA
LIFE SCIENCES INC.
BALANCE
SHEETS
|
December
31,
|
December
31,
|
Assets
|
2016
|
2015
|
|
|
(Restated)
|
Assets
|
|
|
Cash
|
$ 144,953
|
$ 19,128
|
Inventory
|
40,105
|
99,004
|
Other current
assets
|
10,535
|
8,486
|
Total Current
Assets
|
195,593
|
126,618
|
Other
Assets
|
|
|
Fixed assets,
net
|
295,168
|
360,104
|
Total
Assets
|
$ 490,761
|
$ 486,722
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
Current
Liabilities:
|
|
|
Accounts payable
and accrued liabilities
|
$ 434,552
|
$ 236,421
|
Notes
payable
|
50,000
|
-
|
Convertible notes
payable, related party, net of discount
|
99,804
|
-
|
Convertible notes
payable, net of discount
|
800,172
|
-
|
Total Current
Liabilities
|
1,384,528
|
236,421
|
Total
Liabilities
|
1,384,528
|
236,421
|
|
|
|
Stockholders’
Equity (Deficit)
|
|
|
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; 2,531,808 and
2,528,311 shares issued and outstanding
|
253
|
253
|
Stock
payable
|
81,000
|
45,000
|
Additional paid in
capital
|
11,543,453
|
9,948,151
|
Accumulated
deficit
|
(12,518,473)
|
(9,743,104)
|
Total
Stockholders’ Equity (Deficit)
|
(893,767)
|
250,300
|
Total
Liabilities and Stockholders’ Equity (Deficit)
|
$ 490,761
|
$ 486,722
|
The accompanying
notes are an integral part of these financial
statements.
F-3
ENDRA
LIFE SCIENCES INC.
STATEMENTS
OF OPERATIONS
|
Year
Ended
|
Year
Ended
|
|
December
31,
|
December
31,
|
|
2016
|
2015
|
|
|
(Restated)
|
Revenue
|
$ 515,582
|
$ 1,410,065
|
|
|
|
Cost of Goods
Sold
|
235,878
|
666,233
|
|
|
|
Gross Profit
|
$ 279,704
|
$ 743,831
|
|
|
|
Operating Expenses
|
|
|
Research and
development
|
495,377
|
1,038,878
|
Sales and
marketing
|
34,130
|
50,635
|
General and
administrative
|
1,541,956
|
1,222,888
|
Total operating
expenses
|
2,071,462
|
2,312,402
|
|
|
|
Operating income
(loss)
|
(1,791,759)
|
(1,568,570)
|
|
|
|
Other Expenses
|
|
|
Loss on warrant
exercise
|
(5,823)
|
(711,343)
|
Other income
(expense)
|
(977,787)
|
709
|
Total other
expenses
|
(983,610)
|
(710,634)
|
|
|
|
Income/(Loss) from
operations before Taxes
|
(2,775,369)
|
(2,279,204)
|
|
|
|
Provision for
income taxes
|
-
|
-
|
|
|
|
Net Income/(Loss)
|
$ (2,775,369)
|
$ (2,279,204)
|
|
|
|
Net loss per share - basic and diluted
|
$ (1.10)
|
$ (0.98)
|
|
|
|
Weighted average common shares - basic and diluted
|
2,531,626
|
2,320,045
|
The accompanying
notes are an integral part of these financial
statements.
F-4
ENDRA
LIFE SCIENCES INC.
STATEMENT
OF STOCKHOLDERS’ EQUITY
(Restated)
|
Common
stock
|
Additional
|
|
|
Total
|
|
|
Shares
|
Amount
|
Paid
in
Capital
|
Stock to be
Issued
|
Accumulated
Equity/(Deficit)
|
Stockholders'
Equity/(Deficit)
|
Balance as of December 31, 2014
|
2,002,336
|
$ 200
|
$ 8,060,032
|
$ 9,000
|
$ (7,463,899)
|
$ 605,333
|
Common stock
issued for cash
|
87,415
|
9
|
249,991
|
-
|
-
|
250,000
|
Common stock
issued for exercise of warrants
|
412,045
|
41
|
589,183
|
-
|
-
|
589,224
|
Common stock
issued for accrued salaries - related parties
|
26,515
|
3
|
63,765
|
-
|
-
|
63,768
|
Common stock
to be issued for service
|
-
|
-
|
-
|
36,000
|
-
|
36,000
|
Additional
warrants issued during exchange
|
-
|
-
|
686,343
|
-
|
-
|
686,343
|
Loss on
exercise of warrant
|
-
|
-
|
25,000
|
-
|
-
|
25,000
|
Fair value
of vested stock options
|
-
|
-
|
273,837
|
-
|
-
|
273,837
|
Net
loss
|
-
|
-
|
-
|
-
|
(2,279,204)
|
(2,279,204)
|
Balance as of December 31, 2015
|
2,528,311
|
$ 253
|
$ 9,948,152
|
$ 45,000
|
$ (9,743,104)
|
$ 250,300
|
Common stock
issued for exercise of warrants
|
3,497
|
-
|
5,000
|
-
|
-
|
5,000
|
Common stock
to be issued for service
|
-
|
-
|
-
|
36,000
|
-
|
36,000
|
Imputed
interest on promissory notes
|
-
|
-
|
3,704
|
-
|
-
|
3,704
|
Additional
warrants issued during exchange
|
-
|
-
|
5,823
|
|
-
|
5,823
|
Fair value
of vested stock options
|
-
|
-
|
194,326
|
-
|
-
|
194,326
|
Discount on
convertible notes
|
-
|
-
|
1,386,448
|
-
|
-
|
1,386,448
|
Net
loss
|
-
|
-
|
-
|
-
|
(2,775,369)
|
(2,775,369)
|
Balance as of December 31, 2016
|
2,531,808
|
$ 253
|
$ 11,543,453
|
$ 81,000
|
$ (12,518,473)
|
$ (893,767)
|
The accompanying
notes are an integral part of these financial
statements.
F-5
ENDRA
LIFE SCIENCES INC.
STATEMENTS
OF CASH FLOWS
|
Year
Ended
|
Year
Ended
|
|
December
31,
|
December
31,
|
|
2016
|
2015
|
Cash
Flows from Operating Activities
|
|
|
Net
loss
|
$ (2,775,369)
|
$ (2,279,204)
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
Depreciation and
amortization
|
64,936
|
72,225
|
Common stock and
options issued for services
|
230,326
|
309,837
|
Additional warrants
issued during exchange
|
5,823
|
686,343
|
Interest on
discount of convertible debt
|
899,976
|
-
|
Imputed interest on
promissory note
|
3,704
|
-
|
Loss on warrant
exercise
|
-
|
25,000
|
Changes in
operating assets and liabilities:
|
|
|
Increase in
inventory
|
58,899
|
139,984
|
Increase in
other asset
|
(2,049)
|
500
|
Increase in
accounts payable and accrued liabilities
|
198,131
|
202,588
|
Net cash used in
operating activities
|
(1,315,623)
|
(842,727)
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
Purchases of fixed
assets
|
-
|
(133,811)
|
Net cash used in
investing activities
|
-
|
(133,811)
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
Proceeds from
issuance of common stock
|
5,000
|
839,224
|
Proceeds from notes
payable
|
50,000
|
-
|
Proceeds from
convertible notes, related party
|
132,000
|
-
|
Proceeds from
convertible notes
|
1,254,448
|
-
|
Net cash provided
by financing activities
|
1,441,448
|
839,224
|
|
|
|
Net
Increase/(Decrease) in cash
|
125,825
|
(137,314)
|
|
|
|
Cash, beginning of
period
|
19,128
|
156,442
|
|
|
|
Cash,
end of period
|
$ 144,953
|
$ 19,128
|
|
|
|
Supplemental
disclosures:
|
|
|
Interest
paid
|
$ -
|
$ -
|
Income
tax paid
|
$ -
|
$ -
|
|
|
|
Supplemental
disclosures of non-cash Items:
|
|
|
Discount on
convertible notes
|
$ 1,386,448
|
$ -
|
Common shares
issued for accrued salaries - related parties
|
$ -
|
$ 63,768
|
Common shares to be
issued for accrued salaries - related parties
|
$ -
|
$ 78,565
|
The accompanying
notes are an integral part of these financial
statements.
F-6
ENDRA
LIFE SCIENCES INC.
NOTES
TO FINANCIAL STATEMENTS
For the years ended
December 31, 2016 and 2015
Note
1 – Nature of the Business
ENDRA Life Sciences
Inc. (“ENDRA” or the “Company”) was
incorporated on July 18, 2007 as a Delaware
corporation.
ENDRA has developed
a medical imaging technology based on the thermoacoustic effect
that significantly improves the sensitivity and specificity of
clinical ultrasound.
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.
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 three months or
less, when purchased, to be cash and cash equivalents. As of
December 31, 2016 and December 31, 2015 the Company had no cash
equivalents.
Inventory
The Company's
inventory is stated at the lower of cost or estimated realizable
value, with cost primarily determined on a weighted-average cost
basis on the first-in, first-out (“FIFO”) method. The
Company periodically determines whether a reserve should be taken
for devaluation or obsolescence of inventory. As of December 31,
2016 and December 31, 2015 no such reserve was
taken.
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.
Capitalization of Intangible Assets
The Company records the purchase of intangible assets not purchased
in a business combination in accordance with the ASC Topic
350.
F-7
Revenue Recognition
The Company
recognizes revenue in accordance with the requirements of ASC
605-10-599, which directs that it should recognize revenue when (1)
persuasive evidence of an arrangement exists (contracts); (2)
delivery has occurred; (3) the seller’s price is fixed or
determinable (per the customer’s contract); and (4)
collectability is reasonably assured (based upon our credit
policy). For products sold to end users revenue is recognized when
title has passed to the customer and collectability is reasonably
assured; and no further efforts are required. Future revenue from
anticipated new products will follow this same policy.
Advertising Expense
The cost
of advertising is expensed as
incurred. Advertising expense for the year ended December
31, 2016 was approximately $3,936. Advertising expense for the
year ended December 31, 2015 was approximately $7,223.
Income Taxes
The Company
utilizes ASC 740, “Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference
between the tax basis of assets and liabilities and their financial
reporting amounts based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to
affect taxable income. A valuation allowance is recorded when it is
“more likely-than-not” that a deferred tax asset will
not be realized.
The Company
generated a deferred tax asset through net operating loss
carry-forwards. However, a valuation allowance of 100% has been
established due to the uncertainty of the Company’s
realization of the net operating loss carry forward prior to its
expiration.
Research and Development Costs
The Company follows
ASC 730-10, “Research and Development”. Research and
development costs are charged to the statement of operations as
incurred. During the years ended December 31, 2016 and 2015 the
Company incurred $495,377 and $1,038,878 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 4,712,543 and 1,332,921 potentially
dilutive shares, which include outstanding common stock options,
warrants, and convertible notes, as of December 31, 2016 and
December 31, 2015.
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:
|
December 31,
2016
|
December 31,
2015
|
Options to purchase
common stock
|
531,584
|
499,012
|
Warrants to
purchase common stock
|
534,842
|
833,909
|
Convertible
notes
|
3,646,117
|
-
|
Potential
equivalent shares excluded
|
4,712,543
|
1,332,921
|
F-8
Fair Value Measurements
Disclosures about fair value of financial instruments require
disclosure of the fair value information, whether or not recognized
in our balance sheet, where it is practicable to estimate that
value. As of December 31, 2016 and 2015, the amounts reported for
cash, accrued liabilities and accrued interest approximated fair
value because of their short maturities.
In accordance with ASC Topic 820, “Fair Value Measurements
and Disclosures,” we measure 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.
|
Share-based Compensation
The Company’s
Second Amended and Restated 2013 Stock Incentive Plan (the
“Plan”), which has been approved by its board of
directors, permits the grant of share options and shares to its
employees and consultants for up to 1,318,182 shares of common
stock. 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 2016 and 2015. A nonpublic entity that
is unable to estimate the expected volatility of the price of its
underlying share 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 bench mark for the volatility of the entity’s
own share price. Currently, there is no active market for the
company’s common shares. The Company has used the historical
closing values of these companies to estimate volatility, which was
calculated to be 90%.
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 each of the option plans as described
above.
Beneficial
Conversion Feature
If the conversion
features of conventional convertible debt provides for a rate of
conversion that is below market value, this feature is
characterized as a beneficial conversion feature
(“BCF”). A BCF is recorded by the Company as a debt
discount pursuant to ASC Topic 47020 “Debt with
Conversion and Other Options.” In those circumstances, the
convertible debt is recorded net of the discount related to the BCF
and the Company amortizes the discount to interest expense over the
life of the debt using the effective interest method.
Debt
Discount
The Company
determines if the convertible debenture should be accounted for as
liability or equity under ASC 480, Liabilities —
Distinguishing Liabilities from Equity. ASC 480, applies to certain
contracts involving a company’s own equity, and requires that
issuers classify the following freestanding financial instruments
as liabilities. Mandatorily redeemable financial instruments,
obligations that require or may require repurchase of the
issuer’s equity shares by transferring assets (e.g., written
put options and forward purchase contracts), and certain
obligations where at inception the monetary value of the obligation
is based solely or predominantly on:
●
A fixed
monetary amount known at inception, for example, a payable
settleable with a variable number of the issuer’s equity
shares with an issuance date fair value equal to a fixed dollar
amount;
●
Variations in
something other than the fair value of the issuer’s equity
shares, for example, a financial instrument indexed to the S&P
500 and settleable with a variable number of the issuer’s
equity shares; or
●
Variations
inversely related to changes in the fair value of the
issuer’s equity shares, for example, a written put that could
be net share settled.
If the entity determined the
instrument meets the guidance under ASC 480 the instrument is
accounted for as a liability with a respective debt discount. The
Company records debt discounts in connection with raising funds
through the issuance of promissory notes (see Note 6). These costs
are amortized to noncash interest expense over the life of
the debt. If a conversion of the underlying debt occurs, a
proportionate share of the unamortized amounts is immediately
expensed.
F-9
Going Concern
The Company’s
financial statements are prepared using 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 operating history and had a cumulative net loss
from inception to December 31, 2016 of $12,518,473. The Company has
a working capital deficit of $1,188,934 as of December 31, 2016.
The Company has not yet 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 December 31, 2016, have been prepared assuming the
Company will continue as a going concern. The Company believes its
cash resources are 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 borrowing and sales of common
stock. 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 forced to delay or
scale down some or all of its development activities 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 within one
year after the date that the financial statements are issued. The
accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a
going concern.
Recent Accounting Pronouncements
In May 2014, the
Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2014-09, Revenue from Contracts with
Customers. ASU 2014-09 is a comprehensive revenue recognition
standard that will supersede nearly all existing revenue
recognition guidance under current U.S. GAAP and replace 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. Early adoption is permitted only in annual reporting
periods beginning after December 15, 2016, including interim
periods therein. 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 is
currently in the process of analyzing the information necessary to
determine the impact of adopting this new guidance on its financial
position, results of operations, and cash flows. The Company will
adopt the provisions of this statement 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 is currently
evaluating the expected impact that the standard could have on its
financial statements and related disclosures.
In March 2016, the
FASB issued the ASU 2016-09, Compensation - Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment
Accounting. The amendments in this ASU require, among other things,
that all income tax effects of awards be recognized in the income
statement when the awards vest or are settled. The ASU also allows
for an employer to repurchase more of an employee's shares than it
can today for tax withholding purposes without triggering liability
accounting and allows for a policy election to account for
forfeitures as they occur. The amendments in this ASU are effective
for fiscal years beginning after December 15, 2016, including
interim periods within those fiscal years. Early adoption is
permitted for any entity in any interim or annual period. The
Company is currently evaluating the expected impact that the
standard could have on its financial statements and related
disclosure
Other recent
accounting pronouncements issued by the FASB, including its
Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did
not or are not believed by management to have a material impact on
the Company’s present or future financial
statements.
Note
3 – Restatement
The
Company determined that a restatement of its originally issued
financial statements for the period ended December 31, 2015 was
required for the following reasons:
●
Due
to additional accrued salary and reclassification of accrued salary
from stock payable to accrued liabilities, the Company has restated
its balance sheet, statement of operations, statement of
stockholders’ equity (deficit) and statement of cash flows
for the year ended December 31, 2015 to account for the
following:
o
Increase
of accrued liabilities of $150,734; and
o
Reduction
of stock payable by $78,565.
●
Due
to a revision of its inventory and cost of goods sold, the Company
has restated its balance sheet, statement of operations, statement
of stockholders’ equity (deficit) and statement of cash flows
for the year ended December 31, 2015 to account for the
following:
o
Increase
of inventory of $99,004;
o
Increase
to fixed assets, net, of $85,278 in 2015; and
o
Increase
to cost of goods sold by $55,936.
F-10
A
summary of the effect of the restatements for December 31, 2015 is
as follows:
|
As
Previously Reported (1)
|
Restatement
Adjustments
|
As
Restated
|
Balance
Sheet - December 31,
2015
|
|
|
|
Inventory
|
$ -
|
$ 99,004
|
$ 99,004
|
Total
current assets
|
$ 27,614
|
$ 99,004
|
$ 126,618
|
Fixed
assets, net
|
$ 274,826
|
$ 85,278
|
$ 360,104
|
Total
assets
|
$ 302,440
|
$ 184,282
|
$ 486,722
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$ 85,687
|
$ 150,734
|
$ 236,421
|
Total
liabilities
|
$ 85,687
|
$ 150,734
|
$ 236,421
|
Stock
payable
|
$ 123,565
|
$ (78,565)
|
$ 45,000
|
Accumulated
deficit
|
$ (9,855,217)
|
$ 112,113
|
$ (9,743,104)
|
Total
stockholders’ equity
|
$ 216,753
|
$ 33,547
|
$ 250,300
|
|
|
|
|
Statement
of Operations - For the Year Ended December 31, 2015
|
|
|
|
Cost
of goods sold
|
$ 610,297
|
$ 55,936
|
$ 666,233
|
General
and administrative
|
$ 375,885
|
$ 847,004
|
$ 1,222,888
|
Depreciation
and amortization
|
$ 62,655
|
$ 9,570
|
$ 72,225
|
Net
loss
|
$ (2,147,634)
|
$ (131,570)
|
$ (2,279,204)
|
|
|
|
|
Statement
of Cash Flows - For the Year Ended December 31, 2015
|
|
|
|
Net
loss
|
$ (2,147,634)
|
$ (131,570)
|
$ (2,279,204)
|
Increase/(Decrease
in inventory
|
$ -
|
$ 139,984
|
$ 139,984
|
Decrease/(Increase)
in accounts payable and accrued liabilities
|
$52,956
|
$149,632
|
$202,588
|
Purchases
of fixed assets
|
$ (29,963)
|
$ (103,848)
|
$ (133,811)
|
(1) Certain
reclassifications have been made to the 2015 financial statement
amounts and disclosures. A portion of
wages and related
expenses for the year ended December 31, 2015 have been
reclassified in the financial statements from general and
administrative to research and development expenses.
Note
4 – Inventory
As of December 31,
2016 and 2015, inventory consisted of certain finished assemblies
to be used in the assembly of a Nexus 128 system. As of December
31, 2016 and 2015, no orders were pending for such
units.
Note
5 – Fixed Assets
As of December 31,
2016 and 2015, fixed assets consisted of the
following:
|
December 31,
2016
|
December 31,
2015
|
Computer equipment
and fixtures
|
$ 571,318
|
$ 571,318
|
Accumulated
depreciation
|
(276,150)
|
(211,214)
|
Fixed
assets, net
|
$ 295,168
|
$ 360,104
|
Depreciation
expense for the years ended December 31, 2016 and 2015 was $64,936
and $72,225, respectively.
F-11
Note
6 – Current Liabilities
As of December 31,
2016 and 2015, current liabilities consisted of the
following:
|
December 31,
2016
|
December 31,
2015
|
Accounts
payable
|
$227,743
|
$80,945
|
Accrued
payroll
|
105,258
|
144,629
|
Accrued employee
benefits
|
29,552
|
10,847
|
Accrued
interest
|
71,998
|
-
|
Notes
payable
|
50,000
|
-
|
Convertible notes,
related party, net of discount
|
99,804
|
-
|
Convertible notes,
net of discount
|
800,172
|
-
|
Total
|
$1,384,528
|
$236,421
|
On January 28, 2016
the Company entered into promissory notes with three investors for
a total amount of $50,000. The notes mature one year from the
issue date, accrue no interest and are payable at maturity. The
Company accounted for imputed interest of $3,704 for the year ended
December 31, 2016, which was calculated at a rate of 8% per annum,
consistent with other notes issued by the Company. Subsequent to
the period ending December 31, 2016 the Company and the promissory
note holders agreed to extend the maturity date of all three notes
to July 31, 2017 on the same terms as previously
agreed.
On April 22, 2016,
the Company entered into convertible promissory notes with
approximately 60 investors for a total amount of $1,386,448,
$132,000 of which were purchased by Related Parties (the
“April 2016 Notes”). The April 2016 Notes mature
on May 12, 2017, accrue interest at the rate of 8% per
annum, are payable at maturity and are secured by all assets of the
Company, now owned or hereafter acquired. Pursuant to the terms of
the April 2016 Notes, noteholders holding a majority of the
outstanding principal amount of the convertible promissory notes
have elected to convert all outstanding April 2016 Notes into
shares of the Company’s common stock at a conversion price of
$0.40 per share, or 3,576,225 shares of the Company’s common
stock (which numbers do not take into account the anticipated
reverse stock split (see Note 11)). In connection with the issuance
of the April 2016 Notes, the Company recorded a debt discount at an
initial aggregate value of $1,386,448, of which $899,976 was
amortized during the year ended December 31, 2016, resulting in a
debt discount balance of $486,472 as of December 31,
2016.
The Company accrued
interest expense of $71,998 for the period ended December 31, 2016,
$5,601 of which was payable for the notes due to Related
Parties.
Subsequent to the
period ending December 31, 2016, the Company extended the April 22,
2016 note offering by $250,000. The extension was made available
only to existing noteholders and obtained subscriptions for
$225,000.
Note
7 – Capital Stock
At December 31,
2016, 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.
During the year
ended December 31, 2016, the Company issued 3,497 shares of common
stock for warrants exercised for $5,000. There was $36,000 stock to
be issued during the year ended December 31, 2016 for services.
There was $81,000 of stock payable as of December 31,
2016.
As of December 31,
2016, there were 2,531,808 shares of Common Stock issued and
outstanding, and no Preferred Stock outstanding for either
period.
F-12
Note
8 – Stock Options and Warrants
During the year
ended December 31, 2016, the Company granted options to purchase
34,617 shares of common stock with an exercise price of $2.86 per
share to employees of the Company. The stock options vest
immediately. The fair value of these options was determined to be
$194,362 using the Black-Scholes-Merton option-pricing model based
on the following assumptions: (i) volatility rate of 90%, (ii)
discount rate of 0%, (iii) zero expected dividend yield, and (iv)
expected life of 5 years. A summary of option activity under the
Company option plans as of December 31, 2016, and changes during
the period then ended is presented below:
|
Number of
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
|
Balance outstanding
at December 31, 2014
|
301,165
|
$ 2.86
|
3.62
|
Granted
|
197,847
|
2.84
|
4.51
|
Exercised
|
-
|
-
|
-
|
Forfeited
|
-
|
-
|
-
|
Cancelled
or expired
|
-
|
-
|
-
|
Balance outstanding
at December 31, 2015
|
499,012
|
$ 2.86
|
3.62
|
Granted
|
34,617
|
2.86
|
4.26
|
Exercised
|
-
|
-
|
-
|
Forfeited
|
-
|
-
|
-
|
Cancelled or
expired
|
(2,045)
|
2.86
|
-
|
Balance outstanding
at December 31, 2016
|
531,584
|
$ 2.86
|
2.72
|
Exercisable at
December 31, 2016
|
447,843
|
$ 2.86
|
2.52
|
During the year
ended December 31, 2016, the Company granted warrants to purchase
3,497 shares of common stock with an exercise price of $5.72 per
share during the warrant exchange program for exercised warrants.
The warrants vest immediately. The fair value of these warrants was
determined to be $5,823 using the Black-Scholes-Merton
option-pricing model based on the following assumptions: (i)
volatility rate of 90%, (ii) discount rate of 0%, (iii) zero
expected dividend yield, and (iv) expected life of 5
years.
The following table
summarizes all stock warrant activity for the year ended December
31, 2016:
|
Number of
Warrants
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
|
Balance outstanding
at December 31, 2014
|
879,805
|
$ 1.82
|
1.52
|
Granted
|
502,082
|
5.21
|
3.81
|
Exercised
|
(412,046)
|
1.49
|
0.05
|
Forfeited
|
-
|
-
|
-
|
Expired
|
(204,114)
|
1.91
|
0.07
|
Balance outstanding
at December 31, 2015
|
837,406
|
$ 4.08
|
2.87
|
Granted
|
3,497
|
5.72
|
4.31
|
Exercised
|
(3,497)
|
1.43
|
-
|
Forfeited
|
-
|
-
|
-
|
Expired
|
(302,564)
|
1.75
|
-
|
Balance outstanding
at December 31, 2016
|
534,842
|
$ 5.41
|
3.56
|
Exercisable at
December 31, 2016
|
534,842
|
$ 5.41
|
3.56
|
F-13
Note
9 – Income Taxes
Deferred income
taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax assets
as of December 31, 2016 and 2015 are summarized below.
|
2015
|
2016
|
Net
operating loss carryforward
|
$ (3,294,333)
|
$ (3,881,317)
|
Stock
based compensation
|
241,857
|
1,980
|
Fair
value of options
|
93,105
|
78,311
|
Total
deferred tax assets
|
(2,959,372)
|
3,801,026
|
Valuation
allowance
|
2,959,372
|
(3,801,026)
|
Net
deferred tax asset
|
-
|
-
|
In assessing the
potential realization of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the Company attaining future
taxable income during the periods in which those temporary
differences become deductible. As of December 31, 2016 and 2015,
management was unable to determine if it is more likely than not
that the Company’s deferred tax assets will be realized, and
has therefore recorded an appropriate valuation allowance against
deferred tax assets at such dates.
No federal tax
provision has been provided for the years ended December 31, 2016
and 2015 due to the losses incurred during such periods. Reconciled
below is the difference between the income tax rate computed by
applying the U.S. federal statutory rate and the effective tax rate
for the years ended December 31, 2016 and 2015.
|
2015
|
2016
|
U.S.
federal statutory income tax
|
-34.00%
|
-34.00%
|
State
tax, net of federal tax benefit
|
-5.80%
|
-5.80%
|
Stock
based compensation
|
0.00%
|
0.00%
|
Change
in valuation allowance
|
39.80%
|
39.80%
|
Effective
tax rate
|
0.00%
|
0.00%
|
At December 31,
2016, the Company has available net operating loss carryforwards
for federal and state income tax purposes of approximately $11.2
million and $8.6 million, respectively, which, if not utilized
earlier, expire through 2036.
Note
10 – Commitments & Contingencies
From time to time the Company may become a party to litigation in
the normal course of business. Management believes that there are
no current legal matters that would have a material effect on the
Company’s financial position or results of
operations.
F-14
On November 11,
2007, the Company entered into an at-will employment agreement with
its Chief Operating Officer (now its Chief Technology Officer). The
employment agreement requires annual base salary payments of
$200,000 per year, with a bonus potential of 20% of the then
current base salary. In addition, the executive has been granted an
option to purchase 103,000 shares of Company's common stock
exercisable at $2.86 per share, vesting in 3 equal annual
installments on each anniversary of its three year term. The
agreement also provides for severance compensation if terminated
other than for cause (as defined) of 6 months of the then
applicable base salary if the COO has been employed at least 6
months, and compensation equal to 12 months of the then applicable
base salary if employed over 12 months.
On August 28, 2014,
the Company entered into a services agreement with StoryCorp
Consulting dba Wells Compliance Group for financial reporting and
compliance services. David R. Wells is the owner of this firm and
is the Company’s Chief Financial Officer. The services
agreement calls for payments of $5,000, and accrues an additional
$3,000 per month in fees to be paid by common stock at the time of
a public offering. The accrued balance due under the cash portion
as of December 31, 2016 and December 31, 2015 was $25,000 and
$10,000 respectively, and the accrued balance due under the stock
portion was $81,000 and $45,000, respectively. The Company can
cancel the contract at any time without notice.
Effective January
1, 2015, we 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. 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:
2017
|
$ 75,454
|
2018
|
77,348
|
2019
|
79,269
|
Total
|
$ 232,071
|
For the periods
ended December 31, 2016 and December 31, 2015, the Company incurred
rent expense of $74,250 and $73,115, respectively.
On April 16, 2015,
the Company entered into an at-will employment agreement with its
Chief Executive Officer. The employment agreement requires annual
base salary payments of $250,000 per year with a bonus potential of
50% of the then current base salary. In addition, the executive has
been granted an option to purchase 124,248 shares of Company's
common stock exercisable at $2.86 per share, vesting in 3 equal
annual installments on each anniversary of its three year term. The
agreement also provides for severance compensation if terminated
other than for cause (as defined) of 6 months of the then
applicable base salary if the CEO has been employed at least 6
months, and compensation equal to 12 months of the then applicable
base salary if employed over 12 months.
Note
11 – Subsequent Events
Subsequent to the period ending December 31, 2016,
the Company has filed a registration statement on Form S-1 with the
U.S. Securities and Exchange Commission in connection with a
proposed offering of its securities. On March 8, 2017, the board of
directors of the Company approved resolutions authorizing the
Company to effect a reverse split of the Company’s common
stock at certain exchange ratios ranging from 1:2.50 to 1:4.00,
with the board of directors retaining the discretion as to whether
to implement the reverse stock split and which exchange ratio to
implement. The Company has obtained consent from stockholders
holding a majority of the outstanding shares of the Company’s
common stock to effect such a reverse stock split of the
Company’s common stock at the same exchange ratios prior to
the closing of this offering. Following the effectiveness of the
registration statement of which the prospectus is a part, and prior
to the closing of the offering, the Company anticipates that it
will effect the reverse stock split at a ratio of 1 share for each
3.50 shares.
Since
the 1-for-3.50 reverse stock split is to be effected after the
effectiveness of the registration statement, the historical share
information included in the accompanying financial statements and
notes hereto do not assume the 1 for- 3.50 reverse stock split, and
accordingly have not been adjusted.
On a pro forma
basis, taking into account the anticipated reverse stock split at a
ratio of 1 share for each 3.50 shares outstanding as of the
following dates of presentation, the Company’s earnings per
share would change as follows:
As
Presented:
|
Fiscal
Year Ended
|
|
December
31,
2016
|
Net
Loss
|
$ (2,775,369)
|
Basic
and diluted net loss per common share
|
$ (1.10)
|
Weighted
average shares outstanding, basic and diluted
|
2,531,566
|
Pro
forma:
|
Fiscal
Year Ended
|
|
December
31,
2016
|
Net
Loss
|
$ (2,775,369)
|
Basic
and diluted net loss per common share
|
$ (3.84)
|
Weighted
average shares outstanding, basic and diluted
|
723,322
|
Subsequent to the
period ending December 31, 2016, the Company extended the April 22,
2016 note offering by $250,000. The extension was made available
only to existing noteholders and $225,000 of the offering was
subscribed.
Subsequent to the
period ending December 31, 2016, the Company and certain promissory
note holders agreed to extend the maturity date of all three of
such holders' promissory notes to July 31, 2017 on the same terms
as previously agreed. The promissory notes were originally entered
into on January 28, 2016 for a total amount of $50,000. The
notes originally matured one year from the issue date.
F-15
1,400,000
Units
PROSPECTUS
National Securities Corporation
Dougherty & Company
Until
, 2017, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the
dealers’ obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table
sets forth the costs and expenses, other than the underwriting
discount, payable by us in connection with the sale and
distribution of the securities being registered. All amounts are
estimated except the SEC registration fee, the FINRA filing fee and
the initial listing fee for The Nasdaq Capital Market.
SEC
Filing Fee
|
$2,413
|
FINRA
Fee
|
$3,623
|
Underwriters'
Legal Fees and Expenses
|
$225,000
|
Qualified Independent Underwriter Fees and
Expenses
|
$ 50,000
|
Nasdaq
Fee
|
$50,000
|
Printing
Expenses
|
$35,000
|
Accounting
Fees and Expenses
|
$50,000
|
Legal
Fees and Expenses
|
$275,000
|
Transfer
Agent and Registrar Expenses
|
$10,000
|
Miscellaneous
|
$48,964
|
|
|
Total
|
$ 750,000
|
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The following
summary is qualified in its entirety by reference to the complete
text of any statutes referred to below and the Fourth Amended and
Restated Certificate of Incorporation of ENDRA Life Sciences Inc., a Delaware
corporation.
Section 145 of the
General Corporation Law of the State of Delaware (the
“DGCL”) permits a Delaware corporation to indemnify any
person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason of
the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with such action,
suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe
the person’s conduct was unlawful.
In the case of an
action by or in the right of the corporation, Section 145 of the
DGCL permits a Delaware corporation to indemnify any person who was
or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by reason of the
fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys’ fees)
actually and reasonably incurred by the person in connection with
such action, suit or proceeding if the person acted in good faith
and in a manner the person reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to
indemnity for such expenses that the Court of Chancery or such
other court shall deem proper.
II-1
Section 145 of the
DGCL also permits a Delaware corporation to purchase and maintain
insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising
out of such person’s status as such, whether or not the
corporation would have the power to indemnify such person against
such liability under Section 145 of the DGCL.
Article NINTH of
our Fourth Amended and Restated Certificate of Incorporation states
that our directors shall not be personally liable to us or to our
stockholders for monetary damages for any breach of fiduciary duty
as a director, notwithstanding any provision of law imposing such
liability. Under Section 102(b)(7) of the DGCL, the personal
liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty can be limited or
eliminated except (i) for any breach of the director’s duty
of loyalty to the corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct
or a knowing violation of law; (iii) under Section 174 of the DGCL
(relating to unlawful payment of dividend or unlawful stock
purchase or redemption); or (iv) for any transaction from which the
director derived an improper personal benefit.
Article EIGHTH of
our Fourth Amended and Restated Certificate of Incorporation
provides that we shall indemnify (and advance expenses to) our
officers and directors to the full extent permitted by the
DGCL.
Effective upon the
closing of this offering, we will have directors’ and
officers’ liability insurance insuring our directors and
officers against liability for acts or omissions in their
capacities as directors or officers, subject to certain exclusions.
Such insurance also insures us against losses which we may incur in
indemnifying our officers and directors.
As permitted by the
DGCL, prior to the closing of the offering we plan to enter into
indemnification agreements with each of our directors and executive
officers that require us to indemnify such persons against various
actions including, but not limited to, third-party actions where
such director or executive officer, by reason of his or her
corporate status, is a party or is threatened to be made a party to
an action, or by reason of anything done or not done by such
director in any such capacity. We intend to indemnify directors and
executive officers against all costs, judgments, penalties, fines,
liabilities, amounts paid in settlement by or on behalf of such
directors or executive officers and for any expenses actually and
reasonably incurred by such directors or executive officers in
connection with such action, if such directors or executive
officers acted in good faith and in a manner they reasonably
believed to be in or not opposed to our best interests, and with
respect to any criminal proceeding, had no reasonable cause to
believe their conduct was unlawful. We also intend to advance to
our directors and executive officers expenses (including
attorney’s fees) incurred by or on behalf of such directors
and executive officers in advance of the final disposition of any
action after our receipt of a statement or statements from
directors or executive officers requesting such payment or payments
from time to time, provided that such statement or statements are
preceded or accompanied by a written undertaking, by or on behalf
of such directors or executive officers, to repay such amount if it
shall ultimately be determined that they are not entitled to be
indemnified against such expenses by us.
The indemnification
agreements will also set forth certain procedures that will apply
in the event of a claim for indemnification or advancement of
expenses, including, among others, provisions about submitting a
written request to us that includes such documentation and
information as is reasonably available to the director or executive
officer and is reasonably necessary to determine entitlement to
indemnification and provisions. Prior to the closing of this
offering we plan to enter into an underwriting agreement, which
will provide that the underwriters are obligated, under some
circumstances, to indemnify our directors, officers and controlling
persons against specified liabilities.
II-2
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES
During the past
three years, we issued the following securities without
registration under the Securities Act of 1933, as amended (the
“Securities Act”).
Stock, Warrants and Convertible Notes
From July 2013
through April 2014, we issued 274,732 shares of our common stock at
a price of $10.01 per share, for gross proceeds of $2,750,015. The
shares were sold to 64 investors.
From July 2013
through April 2014, we issued warrants to purchase 24,977 shares of
common stock at an exercise price of $20.02 and warrants to
purchase 218,536 shares of common stock at an exercise price of
$5.01 per share.
In September 2014,
we issued to certain accredited investors an aggregate of 77,653
shares of our common stock at a price of $10.01 per share in
exchange for the cancellation of outstanding principal and accrued
interest on senior promissory notes issued in July 2013 and for the
cancellation of certain ten-year warrants issued to these same
investors. In addition, as consideration for its consulting
services, we issued to DALA LLC (i) 19,481 shares of our common
stock and (ii) a warrant to purchase 19,481 shares of common stock
at an exercise price of $10.01 per share, exercisable upon
consummation of a change-in-control transaction or an initial
public offering of our common stock.
In January 2015, we
issued 24,976 shares of our common stock at a price of $10.01 per
share, for gross proceeds of $250,000, to 3 accredited investors.
Additionally, we issued warrants to purchase 6,244 shares of common
stock at an exercise price of $10.01 per share.
From May 2015
through January 2016, pursuant to a warrant exercise program, we
issued 118,726 shares of our common stock at a price of $5.01 per
share, for aggregate gross proceeds of $594,224 in connection with
the exercise of outstanding warrants held by 41 accredited
investors. As an inducement to exercise their warrants, we issued
to the investors exercising their new warrants to purchase 118,726
shares of common stock at an exercise price of $20.02 per share in
connection with a warrant exercise program.
On June 23, 2015,
we issued an aggregate of 7,576 shares of common stock to two
Company employees to satisfy accrued, but unpaid salary obligations
to the two employees.
In January 2016, we
issued promissory notes in the aggregate principal amount of
$50,000 to three accredited investors.
In April and May
2016, we issued convertible promissory notes in the aggregate
principal amount of $1,199,448 to 62 accredited
investors.
In July 2016 we
issued convertible promissory notes in the aggregate principal
amount of $186,389 to three accredited investors.
In March 2017 we
issued convertible promissory notes in the aggregate principal
amount of $225,000 to 10 accredited investors, all of whom were
existing investors and with whom we had a substantive pre-existing
relationship, and none of whom were an officer or
director.
The offers, sales
and issuances of the securities described above were deemed to be
exempt from registration under the Securities Act in reliance on
the exemption provided by Section 4(a)(2) of the Securities Act.
Each of the recipients of securities in these transactions was an
accredited investor and there was no form of general solicitation
or general advertising relating to the offer.
II-3
Stock
Options
In November 2013,
we granted options to purchase an aggregate of 66,291 shares of our
common stock under our Amended and Restated 2013 Stock Incentive
Plan at an exercise price of $10.01 per share, to our executive
officers, employees, certain advisors and members of our Board of
Directors. 56,380 options have a term of five years and vests
immediately or over 3 years in 3 equal installments, remaining
options were fully vested on the date of issuance.
In May 2014, we
granted to each member of our Board of Directors, as consideration
for their agreement to serve on the Board of Directors, stock
options to purchase an aggregate of 19,756 shares of our common
stock at an exercise price of $10.01 per share. The options have a
term of five years and were fully vested on the date of
issuance.
In May 2015, we
granted stock options to purchase an aggregate of 974 shares of our
common stock under our Second Amended and Restated 2013 Stock
Incentive Plan at an exercise price of $10.01 per share, to two
employees. Each option has a term of five years and vests over
three years in three equal installments.
In July 2015, we
granted stock options to purchase 35,499 shares of our common stock
under our Second Amended and Restated 2013 Stock Incentive Plan at
an exercise price of $10.01 per share, to a Company employee. The
options have a term of five years and vest over three years in
three equal installments. We also granted stock options to purchase
3,571 shares of our common stock under our Second Amended and
Restated 2013 Stock Incentive Plan, which options have an exercise
price of $10.01 per share to a new member of our Board of
Directors.
In July 2015, we
granted stock options to purchase 16,483 shares of common stock
under our Second Amended and Restated 2013 Stock Incentive Plan at
an exercise price of $10.01 per share, to each existing independent
member of our Board of Directors. Each option has a term of five
years and was fully vested on the date of issuance.
In January 2016, we
granted stock options to purchase 9,891 shares of common stock
under our Second Amended and Restated 2013 Stock Incentive Plan at
an exercise price of $10.01 per share, to each existing independent
member of our Board of Directors and to each member of our
Scientific Advisory Board. Each option has a term of five years and
was fully vested on the date of issuance.
All of the stock
options described above were granted in reliance upon an available
exemption from the registration requirements of the Securities Act,
including those contained in Rule 701 promulgated under Section
3(b) of the Securities Act. Among other things, we relied on the
fact that, under Rule 701, companies that are not subject to the
reporting requirements of Section 13 or Section 15(d) of the
Exchange Act are exempt from registration under the Securities Act
with respect to certain offers and sales of securities pursuant to
“compensatory benefit plans” as defined under that
rule. We believe that all of the options described above were
issued pursuant qualifying “compensatory benefit
plans”.
II-4
ITEM
16. EXHIBITS
Exhibit No.
|
|
Description of Document
|
1.1
|
|
Form
of Underwriting Agreement**
|
3.1
|
|
Third
Amended and Restated Certificate of Incorporation of the
Registrant, as currently in effect*
|
3.2
|
|
Bylaws
of the Registrant, as currently in effect*
|
3.3
|
|
Form
of Fourth Amended and Restated Certificate of Incorporation of the
Registrant, to be in effect upon completion of this
offering*
|
3.4
|
|
Form
of Amended and Restated Bylaws of the Registrant, to be in effect
upon completion of this offering*
|
3.5
|
|
Certificate of
Amendment to Certificate of Incorporation of the Registrant, as
currently in effect*
|
3.6
|
|
Form of Certificate
of Amendment to Certificate of Incorporation of the Registrant, to
be in effect upon completion of this offering*
|
4.1
|
|
Specimen
Certificate representing shares of common stock of the
Registrant*
|
4.2
|
|
Form
of Warrant Agreement and Warrant**
|
4.3
|
|
Form of
Underwriters' Warrants*
|
4.4
|
|
Form
of Warrant to Purchase Common Stock issued to the placement agent
in the Registrant's 2014 private placement offering*
|
4.5
|
|
Form
of Warrant to Purchase Common Stock issued pursuant to 2013-2014
Bridge Financing*
|
4.6
|
|
Form
of Warrant to Purchase Common Stock issued pursuant to 2015 Warrant
Exercise Program*
|
4.7
|
|
Form
of Senior Promissory Note issued pursuant to Securities Purchase
Agreement dated July 10, 2013*
|
4.8
|
|
Form
of Convertible Promissory Note*
|
4.9
|
|
Form
of Promissory Note issued by the Registrant to certain members of
the Board of Directors*
|
4.10
|
|
Form of Unit Certificate.**
|
5.1
|
|
Opinion
of K&L Gates LLP**
|
10.1
|
|
ENDRA
Life Sciences Inc. Second Amended and Restated 2013 Stock Incentive
Plan*†
|
10.2
|
|
Form
of Non-Qualified Stock Option Award under Second Amended and
Restated 2013 Stock Incentive Plan*†
|
10.3
|
|
Form
of Incentive Stock Option Agreement under Second Amended and
Restated 2013 Stock Incentive Plan*†
|
10.4
|
|
Form
of ENDRA Life Sciences Inc. 2016 Omnibus Incentive Plan, to be in
effect upon completion of this offering*†
|
10.5
|
|
Form
of Stock Option Award under 2016 Omnibus Incentive
Plan*†
|
10.6
|
|
Form
of Restricted Stock Unit Award under 2016 Omnibus Incentive
Plan*†
|
10.7
|
|
Non-Employee
Director Compensation Policy, to be in effect upon completion of
this offering*†
|
10.8
|
|
Form
of Indemnification Agreement by and between the Registrant and each
of its directors and executive officers*
|
10.9
|
|
Form
of Amended and Restated Employment Agreement, by and between the
Registrant and Francois Michelon, to be in effect upon completion
of this offering*†
|
10.10
|
|
Form
of Amended and Restated Employment Agreement, by and between the
Registrant and Michael Thornton, to be in effect upon completion of
this offering*†
|
10.11
|
|
Consulting
Agreement, dated July 23, 2014, by and between the Registrant and
StoryCorp Consulting*†
|
10.12
|
|
Form
of Securities Purchase Agreement, dated July 10, 2013, by and
between the Registrant and the purchasers named
therein*
|
10.13
|
|
Form
of Securities Purchase Agreement, dated July 10, 2013, by and
between the Registrant and the purchasers named
therein*
|
10.14
|
|
Form
of Exchange Agreement, dated September 26, 2014, between the
Registrant and certain security holders*
|
10.15
|
|
Form
of Subscription Agreement between the Registrant and investors in
the Registrant's 2013 private placement offering*
|
10.16
|
|
Form
of Subscription Agreement between the Registrant and investors in
the Registrant's 2014 private placement offering*
|
10.17
|
|
Collaborative
Research Agreement, dated April 22, 2016, by and between the
Registrant and General Electric Company*
|
10.18
|
|
Gross
Lease, dated January 1, 2015, between the Registrant and Green
Court LLC*
|
10.19
|
|
Sublicense
Agreement, dated August 2, 2007, by and between the Registrant and
Optosonics, Inc.*
|
10.20
|
|
Amendment
to Sublicense Agreement, dated January 18, 2011, by and between the
Registrant and Optosonics, Inc.*
|
10.21
|
|
Amendment to Collaborative Research Agreement, dated April 21,
2017, by and between the Registrant and General Electric
Company.**
|
14.1
|
|
Code
of Ethics, to be in effect upon completion of this
offering*
|
23.1
|
|
Consent
of RBSM LLP, Independent Registered Public Accounting
Firm
|
23.2
|
|
Consent
of K&L Gates LLP (included in Exhibit
5.1)**
|
24.1
|
|
Power
of Attorney*
|
|
|
|
*Previously
filed.
** To be
filed by amendment.
†Indicates
management compensatory plan, contract or arrangement.
|
II-5
ITEM
17. UNDERTAKINGS
The undersigned
registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration
statement:
(i) To
include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii)
To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the “Calculation of Registration Fee” table in the
effective registration statement;
(iii)
To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2)
That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3)
To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the
termination of the offering.
(4)
That, for the purpose of determining liability of the registrant
under the Securities Act to any purchaser in the initial
distribution of the securities: The undersigned registrant
undertakes that in a primary offering of securities of the
undersigned registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities
to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the
undersigned registrant will be a seller to the purchaser and will
be considered to offer or sell such securities to such purchaser:
(i) any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed pursuant
to Rule 424; (ii) any free writing prospectus relating to the
offering prepared by or on behalf of the undersigned registrant or
used or referred to by the undersigned registrant; (iii) the
portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the
undersigned registrant; and (iv) any other communication that is an
offer in the offering made by the undersigned registrant to the
purchaser.
(5)
To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and
registered in such names as required by the underwriter to permit
prompt delivery to each purchaser.
(6)
For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus as
filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
(7)
For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(8)
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-6
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933, the registrant has duly
caused this Amendment No. 10 to the registration
statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Ann Arbor, State of Michigan, on
this 1st day of May,
2017.
|
ENDRA
Life Sciences Inc.
/s/Francois
Michelon
Francois
Michelon
Chief Executive
Officer and Director
(Principal
Executive Officer)
|
Pursuant to the
requirements of the Securities Act of 1933, this Amendment No.
10 to the registration statement has been signed by
the following persons in the capacities and on the dates
indicated.
Dated: May
1, 2017
|
/s/Francois
Michelon
Francois
Michelon
Chief Executive
Officer and Director
(Principal
Executive Officer)
|
Dated: May
1, 2017
|
/s/David R.
Wells
David R.
Wells
Chief Financial
Officer
(Principal
Financial and Accounting Officer)
|
Dated: May
1 2017
|
/s/***
Anthony
DiGiandomenico, Director
|
Dated: May
1, 2017
|
/s/***
Sanjiv Gambhir,
M.D., Ph.D, Director
|
Dated: May
1, 2017
|
/s/***
Michael Harsh,
Director
|
Dated: May
1, 2017
|
/s/***
Alexander Tokman,
Director
|
***
By: /s/
Francois Michelon
Francois Michelon Attorney-in-fact |
II-7