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Item 7. Management’s Discussion and Analysis

2024-03-28 compared with 2023-03-16 · 30 added, 50 removed, 100 unchanged (44% of the section changed)

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Please also see “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factor Summary” at the beginning of this Annual Report.

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 CT and MRI technology, or other diagnostic technologies such as surgical biopsy, are unavailable or impractical.

We are leveraging experience with pre-clinical enhanced ultrasound devices to develop technology for increasing the capabilities of clinical diagnostic ultrasound and other types of capital equipment, to broaden patient access to the safe diagnosis and treatment of a number of significant medical conditions in circumstances where expensive X-ray CT and 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.

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 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.

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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 reclassification and clearance of our TAEUS® FLIP System through the FDA’s “de novo” process.

We voluntarily withdrew our 510(k) application and plan to submit an application for de novo review, which will include additional clinical data, as soon as practicable in 2023.

In June 2020, we submitted a 510(k) Application to the FDA for our TAEUS Fatty Live Imaging Probe (“FLIP”) System.

In February 2022, we announced that we would pursue FDA reclassification and clearance of our TAEUS FLIP System through the FDA’s “de novo” process.

We subsequently voluntarily withdrew our 510(k) Application submitted a de novo request for the TAEUS system to the FDA in the third quarter of 2023.

In the fourth quarter of 2023, the FDA sent us an AI request related to our de novo application.

Since we received the AI request, we have had several interactions with the FDA and have provided additional information.

In order to fully respond to the FDA’s questions, we will need to compile additional clinical data, provide additional device test data, and respond to cybersecurity related questions in a new de novo submission.

We have a scheduled in-person pre-submission meeting with the FDA in the second quarter of 2024.

We currently anticipate completing the necessary clinical studies by the fourth quarter of 2024 and submitting the new de novo request to the FDA in the first half of 2025.

Financial Operations Overview

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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.

Management makes estimates that affect certain accounts including inventory reserve, 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.

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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

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Research and Development

Research and development expenses were $6,554,194 for the year ended December 31, 2022, as compared to $5,482,531 for the year ended December 31, 2021, an increase of $1,071,663, or 20%.

Research and development expenses were $5,003,695 for the year ended December 31, 2023, as compared to $6,554,194 for the year ended December 31, 2022, a decrease of $1,550,499 or 24%.

The costs include primarily wages, fees and equipment for the development of our TAEUS product line.

Research and development expenses increased from the same period due to increased wage and related expenses.

Research and development expenses decreased from the prior year as we completed development of our initial TAEUS product and began focusing our spending on commercialization of the product that has been developed.

Sales and Marketing

Sales and marketing expenses were $1,429,150 for the year ended December 31, 2022, as compared to $1,075,376 for the year ended December 31, 2021, an increase of $353,774, or 33%.

The increase was primarily due to additional headcount and pre-selling activities for our TAEUS product line.

Sales and marketing expenses were $820,554 for the year ended December 31, 2023, as compared to $1,429,150 for the year ended December 31, 2022, a decrease of $608,596, or 43%.

The costs include primarily headcount and pre-selling activities for our TAEUS product line.

Sales and marketing expenses decreased largely due to the departure of our Chief Commercial Officer.

Currently, our marketing efforts are through our website and attendance of key industry meetings.

General and Administrative

Our general and administrative expenses for the year ended December 31, 2022 were $5,174,215, compared to $4,940,398 for the year ended December 31, 2021, an increase of $233,817, or 5%.

Our general and administrative expenses for the year ended December 31, 2023 were $4,696,486, compared to $5,174,215 for the year ended December 31, 2022, a decrease of $477,729, or 9%.

Our wage and related expenses for the year ended December 31, 2023 were $1,554,670, compared to $2,123,291 for the year ended December 31, 2022.

Wage and related expenses in the year ended December 31, 2022 included $259,339 for accrued bonuses and $416,508 of stock compensation expense related to the issuance and vesting of options, compared to $193,764 for bonuses and $497,947 of stock compensation expense related to the issuance and vesting of options, for the year ended December 31, 2021.

Wage and related expenses in the year ended December 31, 2023 included $339,696 of stock compensation expense related to the issuance and vesting of options, compared to $416,508 of stock compensation expense related to the issuance and vesting of options, for the year ended December 31, 2022.

Our professional fees, which include legal, audit, and investor relations, for the year ended December 31, 2023 were $1,980,464, compared to $2,047,964 for the year ended December 31, 2022.

Gain on Extinguishment of Debt

During the year ending December 31, 2021, we received notice that the U.S.

SBA approved forgiveness of our loan received under the PPP in accordance with the terms and provisions of the PPP, and recorded a gain on extinguishment of debt of $308,600.

Other income for the year ended December 31, 2023 was $460,485, and resulted mostly from the Employer Retention Tax Credit for employee retention in 2021 and 2022 of $413,844.

As a result of the foregoing, for the year ended December 31, 2023, we recorded a net loss of $10,060,250, compared to a net loss of $13,179,092 for the year ended December 31, 2022.

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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.

We continue to evaluate and manage our capital needs to support our clinical, regulatory and operational activities, progress EU commercialization, and prepare for U.S.

commercialization upon FDA approval of our NAFLD TAEUS device.

We need additional capital to allow us to continue to execute our commercialization plans beyond the second quarter of 2023.

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, as of the date of this Annual Report, based on the market value of our public float, we are prevented from making additional sales under our shelf registration statement by General Instruction I.B.6 of Form S-3.

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 adequate financing or financings in the near term on terms satisfactory to us, or at all, we may be forced to undertake additional measures, which may include delaying or reducing our product development programs and commercialization efforts, materially curtailing or eliminating our operations, selling or disposing of our rights or assets, pursuing sale or other strategic transactions, or undergoing restructuring or insolvency proceedings.

We need additional capital to allow us to continue to execute our commercialization plans through the second quarter of 2024.

We are considering potential financing options that may be available to us, including sales of our common stock through our at-the-market sales program (the “ATM Program”) with Ascendiant Capital Markets, LLC.

Except for the ATM Program, 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.

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Operating Activities

During the year ended December 31, 2022, we used $12,769,371 of cash in operating activities primarily as a result of our net loss of $13,179,092, offset by share-based compensation of $1,199,838, depreciation expense of $96,661, amortization of right of use assets of $137,597, fixed assets write-off of $1,391, and net changes in operating assets and liabilities of $(1,025,766).

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, 2023, we used $9,548,775 of cash in operating activities primarily as a result of our net loss of $10,060,250, offset by share-based compensation of $996,430, amortization of right of use assets of $151,725, inventory reserve of $138,045, depreciation expense of $123,726, fixed assets write-off of $24,868, and net changes in operating assets and liabilities of $(923,319).

During the year ended December 31, 2022, we used $12,769,371 of cash in operating activities primarily as a result of our net loss of $13,179,092, offset by share-based compensation of $1,199,838, amortization of right of use assets of $137,597, depreciation expense of $96,661, fixed assets write-off of $1,391, and net changes in operating assets and liabilities of $(1,025,766).

Investing Activities

During the year ended December 31, 2022, we used $202,577 in investing activities related to purchases of equipment.

During the year ended December 31, 2023, we used $33,844 in investing activities related to purchases of fixed assets, and received $9,163 in proceeds from sale of fixed assets.

During the year ended December 31, 2022, we used $202,577 in investing activities related to purchases of equipment.

Financing Activities

During the year ended December 31, 2023, our financing activities provided $6,483,393 in proceeds from issuances of common stock $20,053 in proceeds from issuances of common stock warrants, and $1,014,859 in proceeds from warrant exercises.

During the year ended December 31, 2022, our financing activities provided $8,399,512 in proceeds from issuances of common stock.

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.

Long-Term Liquidity

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We anticipate that our expenses will increase substantially as we:

advance the engineering design and development of our NAFLD TAEUS application;

advance the engineering design and development of our TAEUS technology;

acquire parts and build finished goods inventory of the TAEUS FLIP system;

complete regulatory filings required for marketing approval of our NAFLD TAEUS application in the United States;

complete regulatory filings required for marketing approval of our NAFLD TAEUS application in the United States, including clinical studies to advance our de novo application with the FDA;

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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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, the use of which may be limited due to registration statement rules relating to public float.

We have no committed external sources of funds except for the February 2024 ATM Agreement, the use of which may be limited due to registration statement rules relating to public float.

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.

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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.

Additionally, a recession or other unfavorable market conditions, including economic slowdowns, recessions, inflation, rising interest rates and tightening of credit markets caused by the ongoing COVID-19 pandemic, the conflict in Ukraine or otherwise, may limit our 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.

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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.

Nasdaq Capital Market Listing and Reverse Stock Split

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 met 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”).

In accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), the Company had a period of 180 calendar days from January 5, 2022, or until July 5, 2022, to regain compliance with the Minimum Bid Price Requirement.

Prior to July 5, 2022, the Company applied for, and was provided, an additional 180-day period to regain compliance with the Minimum Bid Price Requirement.

On October 17, 2022, the Company distributed to stockholders and filed with the SEC a definitive proxy statement relating to a special meeting scheduled for November 29, 2022 at which stockholders voted on a proposal to approve an amendment to the Company’s certificate of incorporation to effect, at the discretion of the Company’s board of directors, a reverse stock split of the Company’s common stock at a stock split ratio between 1-for-2 and 1-for-30, with the ultimate ratio to be determined by the board of directors in its sole discretion, and the implementation and timing of which shall be subject to the discretion of the board of directors (the “Reverse Split Proposal”).

On November 29, 2022, the Company held a special meeting of stockholders at which the Company’s stockholders approved the Reverse Split Proposal.

Following the special meeting, the board of directors determined to effect the reverse stock split at a ratio of 1-for-20.

On December 8, 2022, the Company filed a Certificate of Amendment (the “Certificate of Amendment”) to the Company’s Fourth Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) with the Secretary of State of Delaware to effect a 1-for-20 reverse stock split of the shares of the Company’s Common Stock, effective as of December 9, 2022 (the “Reverse Stock Split”).

As a result of the Reverse Stock Split, every 20 shares of issued and outstanding Common Stock was automatically combined into one issued and outstanding share of Common Stock, without any change in the par value per share.

No fractional shares were issued as a result of the Reverse Stock Split.

Any fractional shares that would otherwise have resulted from the Reverse Stock Split were rounded up to the next whole number.

The number of authorized shares of Common Stock under the Certificate of Incorporation remained unchanged at 80,000,000 shares.

Proportionate adjustments were made to the per share exercise price and the number of shares of Common Stock that may be purchased upon exercise of outstanding stock options granted by the Company and the number of shares of Common Stock reserved for future issuance under the Company’s 2016 Omnibus Incentive Plan.

The Common Stock began trading on a reverse stock split-adjusted basis on The Nasdaq Capital Market on December 9, 2022.

As a result of the Reverse Stock Split, the Company regained compliance with the Minimum Bid Price Requirement.

Off-Balance Sheet Transactions

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis