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 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 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 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
Revenue
No revenue has been generated by our TAEUS technology, which we have not commercially sold as of December 31, 2023.
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, 2023, we had a full-time sales representative in each of the United Kingdom, France and Germany. We expect to continue actively adding to our sales representation and support headcount for operations in the EU in the coming quarters, and plan to 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 continued 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 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.
Share-based Compensation
Our 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, 2024, the pool of shares issuable under the Omnibus Plan automatically increased by 1,717,783 shares from 1,322,169 shares to 3,039,952 shares. As of December 31, 2023, there were 663,633 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.
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, 2023 and 2022
Revenue
We had no revenue during the years ended December 31, 2023 and 2022.
Cost of Goods Sold
We had no cost of goods sold during the years ended December 31, 2023 and 2022.
Research and Development
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 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 $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, 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, 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.
Other Income
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.
Net Loss
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.
Near-Term 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, 2023, we had an accumulated deficit of $91,930,152 and had $2,833,907 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. 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.
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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.
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, 2023, we incurred net losses of $10,060,250 and used cash in operations of $9,548,775. In light of our cash balance as of December 31, 2023, we will need to raise additional capital in order to fund operations through the next twelve months, and 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, 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, 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.
Long-Term Liquidity
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 TAEUS technology;
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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, including clinical studies to advance our de novo application with the FDA;
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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 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. 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 Risk Factors section of this Annual Report on Form 10-K. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.
Until we can generate a sufficient amount of revenue from our TAEUS platform applications, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaborations and licensing arrangements. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs or our commercialization efforts or perhaps even cease the operation of our business. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies or applications or grant licenses on terms that may not be favorable to us. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.
Off-Balance Sheet Transactions
At December 31, 2023, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.