Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this Annual Report. This discussion and analysis contain forward-looking statements that are based on our management’s current beliefs and assumptions, which statements are subject to substantial risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those discussed in “Risk Factors” in Item 1A of this Annual Report. Please also see “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factor Summary” at the beginning of this Annual Report.
Overview
We are leveraging experience with pre-clinical enhanced ultrasound devices to develop technology for increasing the capabilities of clinical diagnostic ultrasound, to broaden patient access to the safe diagnosis and treatment of a number of significant medical conditions in circumstances where expensive X-ray computed tomography (“CT”) and magnetic resonance imaging (“MRI”) technology, or other diagnostic technologies such as surgical biopsy, are unavailable or impractical. 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.
The first-generation TAEUS application is a standalone ultrasound accessory designed to cost-effectively quantify fat in the liver and stage progression of nonalcoholic fatty liver disease (“NAFLD”), which can otherwise 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 and the United States, followed by China.
In March 2020, we received CE mark approval for our TAEUS FLIP (Fatty Liver Imaging Probe) System, enabling its marketing and sales in the European Union and other CE mark geographies, including the 27 EU member states.
In June 2020, we submitted a 510(k) Application to the FDA for our TAEUS FLIP System. In February 2022, we announced that we will pursue FDA approval of our TAEUS ® FLIP System through the FDA’s “de novo” process. We plan to voluntarily withdraw our 510(k) application and subsequently submit an application for de novo review, which will include additional clinical data.
Financial Operations Overview
Revenue
No revenue has been generated by our TAEUS technology, which we have not commercially sold as of December 31, 2021.
Research and Development Expenses
Our research and development expenses primarily include wages, fees and equipment for the development of our TAEUS technology platform and the proposed applications. Additionally, we incur certain costs associated with the protection of our products and inventions through a combination of patents, licenses, applications and disclosures. These costs and expenses include:
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employee-related expenses, such as salaries, bonuses and benefits, consultant-related expenses such as consultant fees and bonuses, stock-based compensation, overhead related expenses and travel-related expenses for our research and development personnel;
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expenses incurred under agreements with contract research organizations (CROs), contract manufacturing organizations (CMOs) as well as consultants that support the implementation of our clinical and non-clinical studies;
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manufacturing and packaging costs in connection with conducting clinical trials;
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formulation, research and development expenses related to our TAEUS technology; and
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costs for sponsored research.
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We plan to incur research and development expenses for the foreseeable future as we expect to continue the development of TAEUS and pursue FDA approval of the NAFLD TAEUS system. At this time, due to the inherently unpredictable nature of clinical development and regulatory approvals, we are unable to estimate with certainty the costs we will incur and the timelines we will require in our continued development efforts.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of headcount and consulting costs, and marketing and tradeshow expenses. Currently, our marketing efforts are through our website and attendance of key industry meetings and conferences. In connection with the commercialization of our TAEUS applications, we are building a small sales and marketing team to train and support global ultrasound distributors, and expect to execute traditional marketing activities such as promotional materials, electronic media and participation in industry events and conferences. As of December 31, 2021, we had one full-time sales representative in the United Kingdom, two representatives in France and one in Germany. We expect to continue actively adding to our sales representation and support headcount for operations in the EU in the coming quarters, as well begin staffing our sales efforts in the United States once we have obtained FDA approval for the sale of the NAFLD TAEUS device in that region.
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 for accounting, consulting and legal services. We anticipate that our general and administrative expenses will increase in the future as we support our continued research and development activities, expand our sales and marketing operations, and continue as a public company. These increases would likely include increased costs related to the hiring of personnel, including compensation and employee-related expenses, including stock-based compensation, and fees to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with The Nasdaq Capital Market and SEC requirements, directors and officers insurance, increased legal and accounting costs and investor relations costs.
Critical Accounting Policies and Estimates
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Management makes estimates that affect certain accounts including deferred income tax assets, accrued expenses, fair value of equity instruments and reserves for any other commitments or contingencies. Any adjustments applied to estimates are recognized in the period in which such adjustments are determined.
Share-based Compensation
Our 2016 Omnibus Incentive Plan (the “Omnibus Plan”) permits the grant of stock options and other stock awards to our employees, consultants and non-employee members of our board of directors. Each January 1 the pool of shares available for issuance under the Omnibus Plan automatically increases by an amount equal to the lesser of (i) the number of shares necessary such that the aggregate number of shares available under the Omnibus Plan equals 25% of the number of fully-diluted outstanding shares on the increase date (assuming the conversion of all outstanding shares of preferred stock and other outstanding convertible securities and exercise of all outstanding options and warrants to purchase shares) and (ii) if the board of directors takes action to set a lower amount, the amount determined by the board. On January 1, 2022, the pool of shares issuable under the Omnibus Plan automatically increased by 1,622,848 shares from 7,461,228 shares to 9,084,076. As of December 31, 2021, prior to the 1,622,848-share increase, there were 2,212,018 shares of common stock remaining available for issuance under the Omnibus Plan.
We record share-based compensation in accordance with the provisions of the Share-based Compensation Topic of the FASB Codification. The guidance requires the use of option-pricing models that require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends, and the resulting charge is expensed using the straight-line attribution method over the vesting period.
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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.
Debt Discount and Detachable Debt-Related Warrants
The Company accounts for debt discounts originating in connection with conversion features that are embedded in certain previously outstanding notes and warrants in accordance with ASC Subtopic 470-20, Debt with Conversion and Other Options . These costs are classified on the consolidated balance sheet as a direct deduction from the debt liability. The Company amortized these costs over the term of the securities as interest expense-debt discount in the consolidated statement of operations. Debt discounts relate to the relative fair value of warrants issued in conjunction with the debt and are also recorded as a reduction to the debt balance and accreted over the expected term of the securities to interest expense.
Recent Accounting Pronouncements
See Note 2 of the accompanying financial statements for a discussion of recently issued accounting standards.
Results of Operations
Years ended December 31, 2021 and 2020
Revenue
We had no revenue during the years ended December 31, 2021 and 2020.
Cost of Goods Sold
We had no cost of goods sold during the years ended December 31, 2021 and 2020.
Research and Development
Research and development expenses were $5,482,531 for the year ended December 31, 2021, as compared to $5,917,944 for the year ended December 31, 2020, a decrease of $435,413, or 7%. The costs include primarily wages, fees and equipment for the development of our TAEUS product line. Research and development expenses decreased from the same period for the prior year as we completed development of our initial TAEUS product and allocated a portion of our spending on commercialization of the product that has been developed.
Sales and Marketing
Sales and marketing expenses were $1,075,376 for the year ended December 31, 2021, as compared to $581,893 for the year ended December 31, 2020, an increase of $493,483, or 85%. The increase was primarily due to additional headcount and pre-selling activities for our TAEUS product line. Currently, our marketing efforts are through our website and attendance of key industry meetings. During the year ending December 31, 2021 we began hiring and training additional staff to support our sales efforts.
General and Administrative
Our general and administrative expenses for the year ended December 31, 2021 were $4,940,398, compared to $5,002,080 for the year ended December 31, 2020, a decrease of $61,682, or 1%. Our wage and related expenses for the year ended December 31, 2021 were $1,966,666, compared to $2,070,747 for the year ended December 31, 2020. Wage and related expenses in the year ended December 31, 2021 included $193,764 for bonuses and $497,947 of stock compensation expense related to the issuance and vesting of options and RSU’s, compared to $215,988 for bonuses, $811,871 of stock compensation expense related to the issuance and vesting of options, for the year ended December 31, 2020. Our professional fees, which include legal, audit, and investor relations, for the year ended December 31, 2021 were $2,050,351, compared to $2,512,878 for the year ended December 31, 2020.
Gain on Extinguishment of Debt
During the year ending December 31, 2021, we received notice that the U.S. Small Business Administrative approved forgiveness of our loan received under the Paycheck Protection Program (the “PPP”) in accordance with the terms and provisions of the PPP, and recorded a gain on extinguishment of debt of $308,600.
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Amortization of Debt Discount
During the year ended December 31, 2020, we incurred non-cash expenses of $232,426 related to the amortization of debt discount incurred as result of our issuance of our convertible notes and warrants issued in July 2019. During the year ended December 31, 2021, we did not have such expense.
Net Loss
As a result of the foregoing, for the year ended December 31, 2021, we recorded a net loss of $11,231,250, compared to a net loss of $11,725,501 for the year ended December 31, 2020.
Liquidity and Capital Resources
Since inception, we have incurred losses and expect to continue to incur losses for the foreseeable future. As of December 31, 2021, we had an accumulated deficit of $68.7 million and had $9.5 million in cash. To date we have funded our operations through private and public sales of our securities and will need to raise additional funds in order to execute on our business plan, fully commercialize our TAEUS technology, and generate revenues.
As of the date of this Annual Report, we believe that our cash on hand at December 31, 2021 will be sufficient to fund our current operations into the second half of 2022. We will need additional capital by such time to allow us to continue to execute our commercialization plans. We continue to evaluate and manage our capital needs to support our clinical, regulatory and operational activities, progress EU commercialization, and prepare for US commercialization upon FDA approval of our NAFLD TAEUS device. We are considering potential financing options that may be available to us, including additional sales of our common stock through our At-The-Market Issuance Sales Agreement with Ascendiant Capital Markets, LLC, dated June 21, 2021 (the “June 2021 ATM Agreement”). However, except for the June 2021 ATM Agreement, we have no commitments to obtain any additional funds, and there can be no assurance funds will be available in sufficient amounts or on acceptable terms. If we are unable to obtain sufficient additional financing in a timely fashion and on terms acceptable to us, our financial condition and results of operations may be materially adversely affected and we may not be able to continue operations or execute our stated commercialization plan.
The consolidated financial statements included in this Form 10-K have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, during the year ended December 31, 2021, we incurred net losses of $11,230,463 and used cash in operations of $11,122,384. While we maintain cash balances in excess of our anticipated needs for cash for the next nine months, it is likely that we will need to raise additional capital prior to any ability to fund operations from revenue generated from the sale of our products. The financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.
Operating Activities
During the year ended December 31, 2021, we used $11,122,384 of cash in operating activities primarily as a result of our net loss of $11,231,250, offset by share-based compensation of $1,444,572, gain on extinguishment of debt of $308,600, depreciation expense of $116,238, amortization of right of use assets of $108,177, fixed assets write-off of $9,874, and net changes in operating assets and liabilities of $(1,261,395).
During the year ended December 31, 2020, we used $10,746,595 of cash in operating activities primarily as a result of our net loss of $11,725,501, offset by share-based compensation of $2,102,352, amortization of debt discount of $232,426, depreciation expense of $99,342, amortization of Right of Use assets of $65,907, and net changes in operating assets and liabilities of $(1,521,121).
Investing Activities
During the year ended December 31, 2021, we used $45,000 in investing activities related to purchases of equipment.
During the year ended December 31, 2020, we used $75,333 in investing activities related to purchases of equipment.
Financing Activities
During the year ended December 31, 2021, our financing activities provided $13,401,602, including $10,615,975 in proceeds from issuances of common stock, and $2,785,627 in proceeds from warrant exercises.
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During the year ended December 31, 2020, financing activities provided $11,875,037, including $6,780,942 in proceeds from issuances of common stock, $4,757,011 in proceeds from warrant exercises, and $337,084 in proceeds from loans.
Funding Requirements
We have not completed the commercialization of any 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:
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advance the engineering design and development of our NAFLD TAEUS application;
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acquire parts and build finished goods inventory of the TAEUS FLIP system;
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complete regulatory filings required for marketing approval of our NAFLD TAEUS application in the United States;
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seek to hire a small internal marketing team to engage and support channel partners and clinical customers for our NAFLD TAEUS application;
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expand marketing of our NAFLD TAEUS application;
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advance development of our other TAEUS applications; and
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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.
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 except for the June 2021 ATM Agreement. We do not expect that our existing cash will be sufficient for us to complete the commercialization of our NAFLD TAEUS application or to complete the development of any other TAEUS application and we will need to raise substantial additional capital for those purposes. As a result, we will need to finance our future cash needs through public or private equity offerings, debt financings, corporate collaboration and licensing arrangements or other financing alternatives. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in the section of this Annual Report on Form 10-K entitled “Risk Factors”. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.
Until we can generate a sufficient amount of revenue from our TAEUS platform applications, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaborations and licensing arrangements. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. As described below, the COVID-19 pandemic has impacted our business operations to some extent and is expected to continue to do so and, in light of the effect of such pandemic on financial markets, these impacts may include reduced access to capital. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs or our commercialization efforts or perhaps even cease the operation of our business. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies or applications or grant licenses on terms that may not be favorable to us. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.
Coronavirus (“COVID-19”) Pandemic
The COVID-19 pandemic has prompted governments and regulatory bodies throughout the world to issue “stay-at-home” or similar orders, and enact restrictions on the performance of “non-essential” services, public gatherings and travel. These restrictions and other precautionary measures have continued to varying degrees based on local COVID-19 rates and increased infections caused by variants of the coronavirus that causes COVID-19.
Beginning in March 2020, we undertook precautionary measures intended to help minimize the risk of the virus to our employees, including requiring most employees to work remotely, pausing all non-essential travel worldwide for our employees, and limiting employee attendance at industry events and in-person work-related meetings, to the extent those events and meetings are continuing. As a cash-conserving measure taken in light of the adverse economic conditions caused by the COVID-19 pandemic, in April 2020 we reduced the cash salaries of members of management by 33% for the remainder of 2020, including the salaries of our executive officers. In lieu of cash, the Company paid this portion of management salaries in the form of restricted stock units that vested over the remainder of the year. Additionally, we amended our Non-Employee Director Compensation Policy to provide that our non-employee directors’ annual retainers for the second, third and fourth fiscal quarters of 2020 would be paid in in the form of restricted stock units rather than cash. To date we do not believe these actions have had a significant negative impact on our operations. However, these actions or additional measures we may undertake may ultimately delay progress on our developmental goals or otherwise negatively affect our business. In addition, third-party actions taken to contain its spread and mitigate its public health effects of COVID-19 may negatively affect our business.
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The COVID-19 pandemic has impacted our clinical trial activities. Patient visits in ongoing clinical trials have been delayed, for example, due to prioritization of hospital resources toward the COVID-19 outbreak, travel restrictions imposed by governments, and the inability to access sites for initiation and monitoring. COVID-19 has also had an effect on the business at the FDA and other health authorities by causing them to reallocate resources to addressing the pandemic, which has resulted in delays of reviews and approvals, including with respect to our NAFLD TAEUS application. Although we believe conditions are improving in both the EU and United States, allowing us to travel and attend trade shows and conferences in-person and for our clinical trials to progress, it is not certain that these improvements will persist and we be restricted from travelling or need to limit in-person meetings in the future, or our clinical trials may need to be delayed in response to adverse developments in the COVID-19 pandemic.
Nasdaq Capital Market Listing
Our common stock and our public warrants are currently traded on the Nasdaq Capital Market. The Nasdaq Capital Market imposes, among other requirements, listing maintenance standards including minimum bid price and stockholders’ equity requirements. In particular, Nasdaq rules require a listed company’s primary equity securities to have a minimum bid price of at least $1.00 per share and that a listed company maintain a minimum of $2.5 million in stockholders’ equity.
On January 5, 2022, the Company received a notification letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, because the closing bid price for the Company’s common stock listed on Nasdaq was below $1.00 for 30 consecutive trading days, the Company no longer meets the minimum bid price requirement for continued listing on The Nasdaq Capital Market under Nasdaq Marketplace Rule 5550(a)(2), requiring a minimum bid price of $1.00 per share (the “Minimum Bid Price Requirement”).
The notification has no immediate effect on the listing of the Company’s common stock. In accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), the Company has a period of 180 calendar days from January 5, 2022, or until July 5, 2022, to regain compliance with the Minimum Bid Price Requirement. If at any time before July 5, 2022, the bid price of the Company’s common stock closes at or above $1.00 per share for a minimum of 10 consecutive business days, Nasdaq will provide written notification that the Company has achieved compliance with the Minimum Bid Price Requirement.
The notification letter also disclosed that in the event the Company does not regain compliance with the Minimum Bid Price Requirement by July 5, 2022, the Company may be eligible for additional time. To qualify for additional time, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and would need to provide written notice of its intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary. If the Company meets these requirements, Nasdaq will inform the Company that it has been granted an additional 180 calendar days to regain compliance. However, if it appears to the staff of Nasdaq (the “Staff”) that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible, the Staff would notify the Company that its securities will be subject to delisting. In the event of such notification, the Company may appeal the Staff’s determination to delist its securities, but there can be no assurance the Staff would grant the Company’s request for continued listing.
If we do not regain compliance with the Bid Price Rule and maintain compliance with other rules for continued listing on the Nasdaq, our securities may be delisted. If our securities were delisted from the Nasdaq Capital Market, it could, among other things, lead to a number of negative implications, including reduced liquidity in our common stock, the loss of federal preemption of state securities laws and greater difficulty in obtaining financing.
Off-Balance Sheet Transactions
At December 31, 2021, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.