Item 1. Business
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. As of 2013,
there were only approximately 64,000 CT systems and 32,000 MRI
systems in the world, approximately 50% of which were 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.
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. 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.
Ultrasound
systems are more broadly available to patients than either CT or
MRI systems. There are an estimated 925,000 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
$200,000. 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.
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 used.
Ultrasound Market
Sales
of ultrasound diagnostic equipment were approximately $4.4 billion
globally in 2017 and are expected to grow at approximately 4.4%
annually. There are an estimated 925,000 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 338,000 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.
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 Solutions
Our
Thermo-Acoustic Enhanced Ultrasound, or TAEUS, technology, as well
as our commercially available Nexus 128 system, 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.
Our TAEUS Technology Platform for Clinical
Applications
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 (discussed
below), 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 displayed to complement conventional gray-scale
ultrasound images. The TAEUS imaging process is illustrated
below:
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. 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
NAFLD, a precursor to non-alcoholic steatohepatitis
(“NASH”), 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.
In
addition, to further test the capability of our TAEUS platform to
distinguish tissue composition in conjunction with an NAFLD
application, we have engaged the Centre for Imaging Technology
Commercialization (“CIMTEC”), a contract research
organization, to initiate human studies.
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 $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 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 be designed to 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 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 is positioned in proximity to 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.
Sales
of ultrasound diagnostic equipment were approximately $4.4 billion
globally in 2017 and are expected to grow at approximately 4.4%
annually. There are an estimated 925,000 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 338,000 cart-based
ultrasound systems currently in use throughout the
world.
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 30% 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 fibrosis, 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 estimated that
liver cancer kills 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 targeting liver
disease are in development by companies such as Bristol-Myers
Squibb Company, Intercept Pharmaceuticals, Inc., Gilead Sciences,
Inc., Genfit SA, Conatus Pharmaceuticals Inc., Allergan plc and
Immuron Limited.
Billions
of dollars are spent annually on the diagnosis and treatment of
NAFLD and related liver diseases. In the United States alone, the
median Medicare inpatient charge per NAFLD patient is estimated to
be $36,000
and the total
annual direct medical costs for NAFLD are estimated to be $103
billion. 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.
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: Depiction of ex-vivo TAEUS tissue composition analysis
overlaid on traditional ultrasound image. First version of TAEUS is
expected to assess fat in liver only.
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.
Image below: Depiction of 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.
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
term of the agreement has been extended to January 2020, but the
agreement is subject to termination by either party upon not less
than 60 days’ notice.
Our Nexus 128 System for Laboratory
Research
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 $500,000 in 2016 and
$287,000 in 2017. 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.
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 US and two
foreign issued patents, nine patent applications pending in the
United States and ten 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 four U.S. patents, three foreign
patents. 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.
Sales
and Marketing
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.
We
currently market our Nexus 128 pre-clinical system domestically in
North America through a small internal marketing team and a 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.
Engineering, Design and Manufacturing
Development of TAEUS Device
We have
contracted with StarFish Product Engineering, Inc.
(“StarFish”), a medical device contract manufacturing
company, to commence the productization of our NAFLD TAEUS
application. In particular, we have retained StarFish to develop
ENDRA’s current prototype TAEUS device into a clinical
product meeting CE regulatory requirements required for commercial
launch. We expect to further engage StarFish to support our
application for 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 for our TAEUS device has been developed and
tested, and to lead the preparation of documentation for regulatory
approval submission both in the European Union and in the United
States. In order to foster collaboration, our Chief Technology
Officer regularly visits StarFish’s facilities to monitor the
TAEUS application manufacturing process.
Additionally,
we have also engaged CriTech Research, Inc.
(“CriTech”), a firm specializing in medical device
software, to develop the software that will support the operation
of our TAEUS device.
We
believe 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 are or
will be single sourced.
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. To this end, we have contracted with medical
device contract engineering firms to perform the commercial product
engineering for our NAFLD TAEUS application. 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 have contracted the Centre
for Imaging Technology Commercialization, a medical imaging
research group, to conduct human studies to demonstrate our NAFLD
TAEUS application’s ability to distinguish fat from lean
tissue.
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. 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.
Nexus 128 Product
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.
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.
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.
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.
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.
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 $1,931,075 and $495,377 for
the years ended December 31, 2017 and 2016,
respectively.
Employees
As of
December 31, 2017, we had 13 employees, all of whom are employed on
a full-time basis. 6 full-time employees were engaged in research
and development activities, 3 full-time employees were engaged in
administrative activities, 2 full-time employees were engaged in
product assembly and 2 employees were engaged in marketing
activities. None of our employees are 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.
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You
should carefully consider the following risks and all other
information contained in this Annual Report, including our
financial statements and the related notes, before investing in our
common stock. The risks and uncertainties described below are not
the only ones we face, but include the most significant factors
currently known by us that make investing in our securities
speculative or risky. Additional risks and uncertainties that we
are unaware of, or that we currently believe are not material, also
may become important factors that affect us. If any of the
following risks materialize, our business, financial condition and
results of operations could be materially harmed. In that case, the
trading price of our common stock could decline, and you may lose
some or all of your investment.
Risks Related to Our Business
We have a history of operating losses, we may never achieve or
maintain profitability, and we will need to raise significant
additional capital if we are going to continue as a going
concern.
We have limited commercial experience 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, 2017, we had an accumulated deficit of approximately $17.9
million. Our independent registered public accounting firm, in its
report on our financial statements for the year ended
December 31, 2017, has raised substantial doubt about our
ability to continue as a going concern.
We will require additional capital in the near term to continue as
a going concern to proceed with the commercialization of our
planned TAEUS applications and to meet our growth and profitability
targets. We believe that cash on hand at December 31, 2017 and
other potential sources of cash, including revenues we may generate
from sales of our Nexus 128 system, will be sufficient to fund our
current operations into the third quarter of 2018. If we do not
raise additional capital in the next several months we will need to
significantly slow or pause our development activities until we
raise additional funds.
We have expended and expect to continue 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, expenses associated with the development of
relationships with strategic partners, intellectual property
development and prosecution, marketing and promotion, capital
expenditures, working capital, and general and administrative
expenses. We also expect to incur costs and expenses related to
consulting, laboratory development, and the hiring of scientists
and other operational personnel.
We may not be able to secure financing on favorable terms, or at
all, to meet our future capital needs and our failure to obtain
financing when needed could force us to delay, reduce or eliminate
our product development programs and commercialization
efforts.
We will need to raise additional capital in order to finance the
full commercialization of our first TAEUS application in the
European Union and to complete the development of any other TAEUS
application through public or private equity offerings, debt
financings, corporate collaboration and licensing arrangements or
other financing alternatives.
To date, we have financed our operations primarily through the net
proceeds from the issuance of securities, including our initial
public offering, as well as sales of our Nexus 128 system. We do
not know when or if our operations will generate sufficient cash to
fund our ongoing operations. Therefore, we will 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; and (vi) respond to
business opportunities, challenges, increased regulatory
obligations or unforeseen circumstances. 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;
●
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 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 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. 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 and our
collaborators and strategic partners may not perform as
expected.
General market conditions or the market price of our common stock
may not support capital raising transactions such as a 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, 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.
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.
Our 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, become
commercially viable or generate significant revenue. 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 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.
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 (“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.
Our TAEUS platform applications may not achieve adequate market
acceptance by the physicians, patients, third-party payors and
others in the medical community.
Even if any of our TAEUS applications receives regulatory approval,
it may nonetheless fail to gain sufficient market acceptance by
physicians, patients, third-party payors and others in the medical
community. If our TAEUS applications do not achieve an adequate
level of acceptance, we may not generate significant product
revenues or any profits from sales. The degree of market acceptance
of products based on our TAEUS platform will depend on a number of
factors, including:
●
potential
or perceived advantages or disadvantages compared to alternative
products;
●
pricing
relative to competitive products and availability of third-party
coverage or reimbursement;
●
the
timing of bringing our product to market as compared to possible
other new entrants to the market;
●
our
ability to effectively raise market awareness and explain product
benefits and whether we have resources sufficient to do
so;
●
relative
convenience, dependability and ease of administration;
and
●
willingness
of the target patient population to try new products and of
physicians to utilize such products.
Our revenues will be adversely affected if, due to these or other
factors, the products we are able to commercialize do not gain
significant market acceptance.
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 have limited data regarding the efficacy of our TAEUS platform
applications. If any of our applications that receive regulatory
approval do not perform in accordance with our expectations, we are
unlikely to successfully commercialize our
applications.
Since our success depends in large part on the medical and
third-party payors community’s acceptance of our TAEUS
applications, 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 also be required to
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 received the results of clinical studies relating to our TAUES
applications, including human studies to be conducted by the Centre
for Imaging Technology Commercialization (“CIMTEC”)
pursuant to a service agreement, and there can be no assurance that
the results of any such studies will be positive. Negative results
of these clinical studies could have a material, adverse impact on
our business.
Our limited commercial experience 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 product in 2010. No application based on our
TAEUS technology has been approved for commercialization. This
limited commercial experience 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.
We have formed, and may in the future form or seek, strategic
alliances and 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 lasting
until January 22, 2020 and is subject to termination by either
party upon not less than 60 days’ notice. See the section of
this Annual Report titled “Collaboration with GE
Healthcare” under “Item 1. Business” for further
description of this agreement.
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, restrict
our ability to collaborate with other third parties or otherwise
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 intended 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 have limited resources and will depend on third parties to
design and manufacture, and seek regulatory approval of, our TAEUS
applications. If any third party fails to successfully design,
manufacture or obtain regulatory approval of TAEUS applications,
our business will be materially harmed.
We do not currently have, nor do we plan to acquire, the
infrastructure or capability to design or manufacture our TAEUS
applications. To support our design and manufacturing efforts, we
have contracted StarFish Product Engineering, Inc., a medical
device contract manufacturing company, and CriTech Research, Inc.,
a firm specializing in medical device software development, rather
than design or manufacture our TAEUS applications ourselves. We
have limited control over the efforts and resources that these and
any other third-party original equipment manufacturers
(“OEMs”) will devote to developing and manufacturing
our TAEUS applications and their capabilities to serve our needs,
including quality control, quality assurance and qualified
personnel. 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 followed by corresponding FDA
approval.
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 to perform in accordance with
our expectations would substantially harm the value of our TAEUS
technology, brand and business.
We will need to develop marketing and distribution capabilities
both internally and through our relationships with third parties in
order to sell any of our TAEUS products receiving regulatory
approval. If we experience problems in developing these
capabilities, our ability to sell our products could be
limited.
We have limited experience selling our products and will need to
develop marketing, sales and distribution capabilities in order to
sell any of our TAEUS applications that receive the necessary
regulatory approval. We have limited experience managing a sales
force and customer support operations and may be unable to attract,
retain and manage the collaborative manufacturing and distribution
arrangements or the specialized workforce necessary to successfully
commercialize our products. In addition, our sales and marketing
organization must effectively explain the uses and benefits of our
products as compared to alternatives in order to promote market
acceptance and demand for our products. Developing these functions
is time consuming and expensive and our efforts may not be
successful.
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 which to enter into these arrangements and any
such third parties may not perform as expected.
Furthermore, third-party 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 TAEUS
applications and grow or maintain product sales. If these
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.
If we are unable to manage the 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 continually 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.
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 that offer significant advantages over
alternative imaging products and procedures for such
applications.
While we believe the technology behind our TAEUS platform is unique
in the industry, 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.
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 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. 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. In addition, we will need
to identify and hire sales executives and competition for
commercial and marketing talent is significant. 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.
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, as well as product field
actions and regulatory proceedings, initiated against us 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;
●
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;
●
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
research and 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.
The United Kingdom’s vote to leave the European Union will
have uncertain effects and could adversely affect us.
On June 23, 2016, the United Kingdom held a referendum in which a
majority of voters voted to exit the European Union
(“EU”), commonly referred to as “Brexit”,
and on March 29, 2017, notified the EU that it intended to exit as
provided in Article 50 of the Treaty of Lisbon. The terms of the
withdrawal are subject to a negotiation period that could last at
least two years from the withdrawal notification date. This will be
either accompanied or followed by additional negotiations
concerning future terms of the United Kingdom’s relationship
with the EU including, among other things, the terms of trade
between the United Kingdom and the EU. The effects of Brexit will
depend on any agreements the United Kingdom makes to retain access
to EU 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 EU laws to replace or replicate. In addition, Brexit may lead
other EU member countries to consider referendums regarding their
EU membership. 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, which
entails significant expense and resources, 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 two US and
two foreign issued patents, nine patent applications pending in the
United States and ten patent applications pending in foreign
jurisdictions relating to our technology. In addition, we currently
license four US 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.
Expenses related to a patent portfolio include periodic maintenance
fees, renewal fees, annuity fees, various other governmental fees
on patents and/or applications due in several stages over the
lifetime of patents and/or applications, as well as the cost
associated with complying with numerous procedural provisions
during the patent application process. We may or may not choose to
pursue or maintain protection for particular inventions. In
addition, there are situations in which a failure to make certain
payments or noncompliance with certain requirements in the patent
process can result in abandonment or lapse of a patent or patent
application, resulting in partial or complete loss of patent rights
in the relevant jurisdiction.
Policing unauthorized use of our proprietary rights can be
difficult, expensive and time-consuming, and we might be unable to
determine the extent of this unauthorized use
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.
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.
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.
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.
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. 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.
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;
●
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 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.
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
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.
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 any OEMs fail to comply with the FDA’s Quality System
Regulations or other regulatory bodies’ equivalent
regulations, manufacturing operations could be delayed or shut down
and the development of our TAEUS platform could
suffer.
The manufacturing processes of OEMs are 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. They may also be subject to similar state
requirements and licenses and engage in extensive recordkeeping and
reporting and make available their manufacturing facilities and
records for periodic unannounced inspections by governmental
agencies, including the FDA, state authorities and comparable
agencies in other countries. If any OEM fails 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, these OEMs may be engaged with other companies to
supply and/or manufacture materials or products for such companies,
which would expose our OEMs to regulatory risks for the production
of such materials and products. As a result, failure to meet the
regulatory requirements for the production of those materials and
products may also affect the regulatory clearance of a third-party
manufacturers’ facility. If the FDA or a foreign regulatory
agency does not approve these facilities for the manufacture of our
products, or if it withdraws its approval in the future, we may
need to find alternative manufacturing facilities, which would
impede or delay our ability to develop, obtain regulatory approval
for or market our products, if approved. Additionally, 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.
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;
●
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.
Risks Related to Owning Our Securities, Our Financial Results and
Our Need for Financing
Our quarterly and annual results may fluctuate significantly, may
not fully reflect the underlying performance of our business and
may result in volatility 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. Additionally,
the risks surrounding our business, as well as the limited market
for our common stock, have resulted, and will likely continue to
result, in volatility in the price of our common stock and
warrants. Since shares of our common stock and warrants to purchase
our common stock were first listed on the Nasdaq Capital Market on
June 28, 2017 through December 31, 2017, the intra-day trading
prices have fluctuated from a low of $2.15 to a high of $5.88 with
respect to shares of our common stock and from a low of $0.28 to a
high of $2.00 with respect to our warrants and may continue to
fluctuate significantly in the future.
We may be subject to securities litigation, which is expensive and
could divert management attention.
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.
There is a limited
market for our common stock
.
Although our common stock is traded on the Nasdaq Capital Market,
the volume of trading has historically been limited. Our average
daily trading volume of our shares from June 28, 2017, when our
common stock began trading publicly, to December 31, 2017 was
approximately 14,954 shares. Thinly traded stock can be more
volatile than stock trading in a more active public market. While
we have made efforts to increase trading in our stock, we cannot
predict the extent to which an active public market for our common
stock will develop or be sustained. Therefore, a holder of our
common stock who wishes to sell his or her shares may not be able
to do so immediately or at an acceptable price.
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 is 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.
If we are unable to implement and maintain effective internal
control over financial reporting, 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 are 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.
Currently, we have material weaknesses in our internal control over
financial reporting and, as a result, we may not detect errors on a
timely basis and our financial statements may be materially
misstated. Specifically, we have insufficient personnel resources
within the accounting function to segregate the duties over
financial transaction processing and reporting. We are in the
process of improving our internal control over financial reporting,
which process is 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, if 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 (the “SEC”) or other regulatory
authorities, which could require additional financial and
management resources and could result in fines, trading suspensions
or other remedies.
Our disclosure controls and procedures may not prevent or detect
all errors or acts of fraud.
We are 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.
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 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 after the date of our initial public offering, 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.
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 will,
at any time, generate sufficient surplus cash that would be
available for distribution to the holders of our common stock as a
dividend.
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 are
made by our board of directors and our officers, who beneficially
own approximately 12.7% of our common stock, as calculated in
accordance with Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange
Act”).
In
addition, Longboard Capital Advisors, LLC beneficially owns 15.7%
of our common stock, as calculated in accordance with Rule 13d-3
promulgated under the Exchange Act. As a result, this stockholder
is able to exercise a substantial level of control over all matters
requiring stockholder approval, including the election of directors
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, which in
turn could have a material adverse effect on the market price of
the Company’s common stock or prevent stockholders from
realizing a premium over the market price for their
shares.
We incur significant costs as a result of being a public company
that reports to the SEC and our management is required to devote
substantial time to meet compliance obligations.
As a public company listed in the United States, we incur
significant legal, accounting and other expenses. We are
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 corporate
governance practices. In addition, there are significant
corporate governance and executive compensation-related provisions
in the Dodd-Frank Act Wall Street Reform and Protection Act that
contribute to our legal and financial compliance costs, make some
activities more difficult, time-consuming or costly and also place
undue strain on our personnel, systems and
resources. Our management and other personnel need to
devote a substantial amount of time to these compliance
initiatives. Furthermore, 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.
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. We currently have outstanding 3,923,027 shares of
common stock. Of these outstanding shares, approximately
1,971,521 are restricted under securities laws or as a result of
lock-up agreements but will be able to be resold in the near
future.
Future sales and issuances of our common stock or rights to
purchase common stock, including pursuant to our equity incentive
plan, could result in dilution of the percentage ownership of our
stockholders and could cause the price of our securities to
fall.
We expect that significant capital will be needed in the future to
continue our planned operations. To the extent we raise capital by
issuing common stock, convertible securities or other equity
securities, our stockholders may experience substantial dilution,
and new investors could gain rights superior to our existing
stockholders.
Our charter documents and Delaware law may inhibit a takeover that
stockholders consider favorable.
Certain provisions of our Fourth Amended and Restated Certificate
of Incorporation (our “Certificate of Incorporation”)
and Amended and Restated Bylaws (our “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:
●
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 capital 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;
●
provide
that all vacancies in our board of directors may be filled by the
affirmative vote of a majority of directors then in office, even if
less than a quorum;
●
provide
that stockholders must comply with advance notice procedures with
respect to stockholder proposals and the nomination of candidates
for director;
●
provide
that stockholders may only amend our Certificate of Incorporation
upon a supermajority vote of stockholders; and
●
provide
that the Court of Chancery of the State of Delaware will be the
exclusive forum for certain legal claims.
In addition, section 203 of the Delaware General Corporation Law
limits 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 any such
person’s share acquisition. These provisions may
have the effect of entrenching our management team and may deprive
stockholders of the opportunity to sell their 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.