Overview
We were
incorporated as a Delaware corporation in 2007. We are leveraging
experience with pre-clinical enhanced ultrasound devices to develop
technology for increasing the capabilities of clinical diagnostic
ultrasound in order to broaden patient access to the safe diagnosis
and treatment of a number of significant medical conditions in
circumstances where expensive X-ray computed tomography
(“CT”) and magnetic resonance imaging
(“MRI”) technology, or other diagnostic technologies
such as surgical biopsy, are unavailable or
impractical.
In
2010, we began marketing and selling our Nexus 128 system, which
combined light-based thermoacoustics and ultrasound to address the
imaging needs of researchers studying disease models in
pre-clinical applications. Building on this expertise in
thermoacoustics, we have developed a next-generation technology
platform — Thermo Acoustic Enhanced Ultrasound, or TAEUS
— which is intended to enhance the capability of clinical
ultrasound technology and support the diagnosis and treatment of a
number of significant medical conditions that currently require the
use of expensive CT or MRI imaging or where imaging is not
practical using existing technology. We ceased production, service
support and party for our Nexus 128 system in July 2019 in order to
focus our resources exclusively on the development of our TAEUS
technology.
Unlike
the near-infrared light pulses used in our legacy Nexus 128 system,
our TAEUS technology uses radio frequency (“RF”) pulses
to stimulate tissues, using a small fraction (less than 1%) of the
energy that would be transmitted into the body during an MRI scan.
The use of RF energy allows our TAEUS technology to penetrate deep
into tissue, enabling the imaging of human anatomy at depths
equivalent to those of conventional ultrasound. The RF pulses are
absorbed by tissue and converted into ultrasound signals, which are
detected by an external ultrasound receiver and a digital
acquisition system that is part of the TAEUS system. The detected
ultrasound is processed into images and other forms of data using
our proprietary algorithms and displayed to complement conventional
gray-scale ultrasound images.
As
described below, our first TAEUS platform application focuses on
quantifying fat in the liver and stage progression of nonalcoholic
fatty liver disease (“NAFLD”) which, untreated, can
progress to Nonalcoholic Steatohepatitis (“NASH”),
cirrhosis and liver cancer. In April 2016, we entered into a
Collaborative Research Agreement with General Electric Company,
acting through its GE Healthcare business unit and the GE Global
Research Center (collectively, “GE Healthcare”), under
which GE Healthcare has agreed to assist us in our efforts to
commercialize this application. In November 2017, we contracted
with the Centre for Imaging Technology Commercialization
(“CIMTEC”) to initiate human studies, through
Canada-based Robarts Research Institute, with our TAEUS device
targeting NAFLD. In October 2018, we received an Investigational
Testing Authorization (“ITA”) from Health Canada to
commence the first human studies in healthy volunteers with our
TAEUS clinical system targeting NAFLD, guiding our algorithm
development, and comparing our technology to MRI. The feasibility
study, the first of several planned human studies, was conducted in
collaboration with the widely respected Robarts Research Institute
in London, Ontario, Canada. We reported the completion and
top-level findings of this study in September 2019. The data
collected from the study, including additional usability inputs,
was included in our TAEUS liver device technical file submission
for device CE mark, which we submitted in December 2019. We
received CE mark approval for our NAFLD TAEUS application in March
2020 and, in June 2020, we completed the 510(k) Premarket
Notification submission to the FDA for the
application.
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.
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 site the
CT and MRI equipment. 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 2018, there were only approximately 63,000 CT systems and 50,000
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 people suffering from 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.
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 one million 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 generally
considered to be 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 one million 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 currently intend to address ultrasound systems focused on
applications in 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 365,000 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 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
TAEUS technology uses a pulsed energy source – specifically,
radio-frequency (“RF”) – to generate ultrasonic
waves in tissue. These waves are then detected with ultrasound
equipment and used to create high-contrast images and other forms
of data 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 earlier photoacoustic
systems, 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. Our
RF-based thermoacoustics imaging is not adversely affected by
blood-filled organs, enabling our TAEUS technology to be used in
clinical liver applications, among others. The detected ultrasound
can then be processed into ultrasound overlays or quantitative data
that may be translated into clinically useful metrics using our
proprietary algorithms and displayed to complement conventional
gray-scale ultrasound images. The TAEUS imaging concept is
illustrated below:
After
required regulatory approvals, 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 substantially new clinical workflows or large
capital investments. We are also developing TAEUS for incorporation
into new ultrasound systems manufactured by companies such as 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
currently require the use of expensive CT or MRI imaging systems,
where imaging is not practical using existing technology, or where
other assessment tools such as surgical biopsy are required. To
demonstrate the capabilities of our TAEUS platform, we have
conducted various internal ex-vivo laboratory experiments and
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 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.
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. 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 is 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 would be similar to those in the first
generation product but the multi-element transducer would 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.
Potential Clinical Applications for our TAEUS
Technology
Early Diagnosis and Monitoring of Nonalcoholic 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 NASH, cirrhosis and liver cancer. In 2015, 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.
Left
untreated, an estimated 30% of NAFLD cases progress to NASH, a
condition in which liver fat causes inflammation and decreased
liver function, possibly resulting in fatigue, weight loss, muscle
pain and abdominal pain. Excess liver fat remains a root cause of
and key clinical concern for both of NASH and NAFLD.
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 2018, the World Health Organization estimated that
liver cancer kills 782,000 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 and
bleeding. 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 Pfizer, Viking
Theraputics, Inventiva, Madrigal Pharmaceuticals, Inc. and Galmed
Pharmaceuticals.
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.
In
April 2016, we entered into a Collaborative Research Agreement with
General Electric Company, acting through its GE Healthcare business
unit and the GE Global Research Center (collectively, “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 NAFLD TAEUS
application, we will offer to negotiate an exclusive ultrasound
manufacturer relationship with GE Healthcare for a period of at
least one year of commercial sales. The commercial sales would
involve, within our sole discretion, either our commercially
selling GE Healthcare ultrasound systems as the exclusive
ultrasound system with our TAEUS fatty liver application embedded,
or GE Healthcare being the exclusive ultrasound manufacturer to
sell ultrasound systems with our TAEUS fatty liver application
embedded. The agreement 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 (1) 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 and (2) prior to selling any equity interests to a
healthcare device manufacturer, we must first offer to negotiate in
good faith to sell such equity interests to GE Healthcare. The
agreement is subject to termination by either party upon not less
than 60 days’ notice. On December 16, 2020, we and GE
Healthcare entered into an amendment to our agreement, extending
its term to December 16, 2022.
In
October 2018, we received an Investigational Testing Authorization
(“ITA”) from Health Canada to commence the first human
studies in healthy volunteers with our TAEUS clinical system
targeting NAFLD, guiding our algorithm development, and comparing
our technology to MRI. The feasibility study was conducted in
collaboration with the widely respected Robarts Research Institute
in London, Canada. The data Robarts Research Institute collected
with our investigational device included the
following:
●
Integration
evaluation of hardware and software design elements of the TAEUS
platform;
●
Substantial
user and patient human-factors data, including clinical workflow
and ergonomic considerations to support our CE mark application and
commercial product design; and
●
Quantitative
MRI liver fat fraction measurements for each study subject, that
will both guide our algorithm development and provide data for
initial correlation to the TAEUS measurements.
In
December 2018, Robarts Research Institute completed its initial
healthy subject enrollment and data collection of 25 subjects and
received authorization from Health Canada to expand the study to 50
subjects. We reported the completion of this expanded study and
reported top-level findings in September 2019. The data collected
from the study, including additional usability inputs, was included
in our TAEUS liver device technical file submission for device CE
mark.
In 2019
we entered into clinical evaluation agreements with Rocky Vista
University College of Osteopathic Medicine (RVUCOM) and the
University of Pittsburgh Medical Center (UPMC).
During
the year ended December 31, 2020 we entered into agreements with
several new sites for additional clinical evaluations including
Medical College of Wisconsin (MCW), Universitätsmedizin der
Johannes Gutenberg-Universität Mainz and Centre Hospitalier
Universitaire d'Angers, France (CHU Angers).
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 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.
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.
As of
the date of this Annual Report, we maintain a patent portfolio
consisting of fourteen (14) patents issued in the United States and
thirteen (13) issued patents in foreign jurisdictions, twenty-one
(21) patent applications pending in the United States and
twenty-six (26) patent applications pending in foreign
jurisdictions relating to our technology. These patents and patent
applications mostly cover certain innovations relating to fat
imaging, fat quantitation, and temperature monitoring in the liver
and other tissues. In addition, we have three (3) licensed U.S.
patents.
Each of
our utility patents generally has a term of 20 years from its
respective priority (earliest filing) date. Design patents have a
term of 14 years from a respective filing date. Among our issued
utility patents in the U.S., the first patent is set to expire in
2033 and the last patent is set to expire in 2039. Our licensed
patents are set to expire on June 19, 2021.
Sales and Marketing
During
2019 we hired our Chief Commercial Officer and began planning to
build a sales and marketing team dedicated to our TAEUS clinical
applications. In parallel to securing all necessary government
marketing approvals, we have begun to hire a small internal sales
and marketing team to engage and support channel partners and
clinical customers. As we previously did 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 the applications would 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 $35,000 to $55,000,
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 future TAEUS offerings are expected to be implemented via a
hardware platform that can run multiple individual software
applications that we plan to 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 offer a license for our TAEUS technology to OEMs, such as
GE Healthcare, for incorporation in their new ultrasound
systems.
Engineering, Design and Manufacturing
Development of TAEUS Device
We contracted with StarFish Product Engineering, Inc.
(“StarFish”), a medical device contract manufacturing
company, to develop ENDRA’s prototype TAEUS device into a
clinical product that met CE regulatory requirements required for
commercial launch. We leveraged StarFish’s expertise in the
preparation and submission of our CE Technical File documentation,
submitted in December 2019, which enabled us to secure the European
Union CE Mark for the TAEUS liver application in March 2020.
We also leveraged StarFish’s
expertise in preparation of documentation for the 510(k) submission
made to the FDA in June 2020.
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 and Human Study
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 sought
initial approval of our applications for sale in the European
Union, followed by the United States and plan to seek additional
approval in 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. For commercial reasons and to support our
application for CE marking, we contracted with CIMTEC, a medical
imaging research group, to conduct human studies through
Canada-based Robarts Research Institute to demonstrate our NAFLD
TAEUS application’s ability to distinguish fat from lean
tissue. In December 2018, Robarts Research Institute completed its
initial healthy subject enrollment and data collection of 25
subjects and received authorization from Health Canada to expand
the study to 50 subjects. In September 2019, we announced the
completion and reported top-level findings of the expanded study,
which was included in our TAEUS liver device technical file
submission for device CE mark. We received CE mark approval for our
NAFLD TAEUS application in March 2020. We are now in the
process of notifying the competent authorities that we have
received the CE mark and registering the product in each of the
initial target markets.
In
2021, Regulation (EU)2017/745 on medical devices (the
“Medical Device Regulation” or “MDR”) will
come into effect. The MDR imposes significant additional
obligations on medical device-related companies. Changes imposed by
the MDR include more restrictive requirements for clinical evidence
and pre-market assessment of safety and performance, revised
classifications to indicate risk levels, stricter requirements for
third party testing by government accredited groups for some types
of medical devices, and tightened and streamlined quality
management system assessment procedures. These new rules could
impose additional requirements on our business, such as a
requirement to conduct clinical trials to maintain our existing and
obtain additional CE mark applications for existing and new
products. Also, the MDR provides for additional post-market
surveillance obligations, and further requirements for the
traceability of products, transparency, refined responsibilities
for economic operators (including manufacturer, distributors and
importers) as well as a tightened and more comprehensive quality
management system.
In June
2020, we submitted to the FDA our application under the Food, Drug
and Cosmetic Act (the “FD&C Act”) to sell our NAFLD
TAEUS application in the U.S. The application was submitted for
approval under Section 510(k) of the FD&C Act and we anticipate
that any other TAEUS applications that we develop will similarly be
submitted under Section 510(k). 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 would submit one or more additional
applications to the FDA, each of which would need to include
additional clinical trial data, so that following receipt of the
necessary clearances we may make those diagnostic
claims.
Regulation
European Union
The
primary regulatory environment in Europe is the European Union,
which consists of 27 member states encompassing most of the major
countries in Europe. In the European Union, applications
incorporating our TAEUS technology are regulated as Class IIa
medical devices by the European Medicines Agency (the
“EMA”) and the European Union Commission. As described
above, our NAFLD TAEUS application has received, and we expect our
future applications will need to receive, a CE mark from an
appropriate Competent Authority or government-accredited group (a
“Notified Body”), as the case may be, 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 regularly
recertified 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 provides the certifications necessary to fix a CE
mark to the products. 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, clearance of a
premarket notification, or 510(k)
submission, 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 thus require FDA authorization prior to marketing by
means of a 510(k) clearance rather than a PMA
application.
To
request marketing authorization by means of a 510(k) clearance, we
must submit a 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 an order finding substantial equivalence. Historically, the
typical 510(k) review time has been approximately nine to twelve
months from the date of the initial 510(k) submission. However, the
COVID-19 pandemic has resulted in the FDA reallocating a number of
its reviewers to address emergency use authorizations for
COVID-19-related products, which may result in longer 510(k) review
times for other devices.
In many
instances, the 510(k) pathway for product marketing requires only
non-clinical testing as proof of substantial equivalence to a
lawfully marketed predicate device for a given indication. However,
in some instances the FDA may require clinical studies to
demonstrate substantial equivalence to the predicate device.
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. If the FDA determines that
the changed 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 PMA 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. Additionally,
third parties designing, manufacturing or conducting human studies
of our devices will be subject to local regulations, such as those
of Health Canada. 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.
Employees
As of
December 31, 2020, we had 18 employees, all of whom are employed on
a full-time basis. 12 full-time employees were engaged in research
and development activities, 2 full-time employees were engaged in
sales activities, 1 full-time employee was engaged in product
assembly, and 3 full-time employees were engaged in administrative
activities. Geographically we employ 14 people in the United
States, 3 people in Canada, and 1 person in the United Kingdom.
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.
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
securities. 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 securities 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, 2020, we
had an accumulated deficit of $57,338,489. Our independent
registered public accounting firm, in its report on our financial
statements for the year ended December 31, 2020, 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
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 offerings of common stock and convertible notes, as
well as sales of our discontinued 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) continue to 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
progress, timing, costs and outcomes of our clinical trials,
including the ability to timely enroll patients in our planned and
potential future clinical trials;
●
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
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. See
“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.” below. 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.
Our
TAEUS technology is still in development. We have received
regulatory clearance for the commercial sale of our NAFLD
application in the European Union but otherwise do not have any
applications for our TAEUS technology approved for sale.
Applications for our TAEUS technology, even if approved for sale,
may never 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 all 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.
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 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.
Our
TAEUS applications that receive regulatory approval 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.
The outbreak of the novel strain of coronavirus, SARS-CoV-2, which
causes COVID-19, has adversely impacted our business, including our
pre-sales activities, clinical trials and ability to obtain
regulatory approvals.
Public
health crises such as pandemics or similar outbreaks could
adversely impact our business. In December 2019, a novel strain of
coronavirus, SARS-CoV-2, which causes coronavirus disease 2019
(“COVID-19”), surfaced in Wuhan, China. Since then,
COVID-19 has spread to countries around the world and has been
declared a pandemic by the World Health Organization. The level and
nature of the disruption caused by COVID-19 is unpredictable, may
be cyclical and long-lasting and may vary from location to
location. Beginning in March 2020, we undertook temporary
precautionary measures to help minimize the risk of the virus to
our employees, including by requiring most employees to work
remotely, pausing all non-essential travel worldwide for our
employees, and limiting employee attendance at industry events and
in-person work-related meetings, to the extent those events and
meetings are continuing. As a cash-conserving measure taken in
light of the adverse economic conditions caused by the COVID-19
pandemic, in April 2020 we reduced the cash salaries of members of
management by 33% for the remainder of 2020, including the salaries
of our executive officers. In lieu of cash, the Company paid this
portion of management salaries in the form of restricted stock
units that vested over the remainder of the year. Additionally, we
amended our Non-Employee Director Compensation Policy to provide
that our non-employee directors’ annual retainers for the
second, third and fourth fiscal quarters of 2020 were paid in in
the form of restricted stock units rather than cash. We may take
additional measures to mitigate the effects to our business caused
by COVID-19, any of which could negatively affect our
business.
The
COVID-19 pandemic has impacted our clinical trial activities.
Patient visits in ongoing clinical trials have been delayed, for
example, due to prioritization of hospital resources toward the
COVID-19 outbreak, travel restrictions imposed by governments, and
the inability to access sites for initiation and monitoring. The
continued spread of COVID-19 could further adversely affect our
clinical trial operations in the United States and elsewhere,
including our ability to recruit and retain patients and principal
investigators and site staff who, as healthcare providers, may have
heightened exposure to COVID-19 if an outbreak occurs in their
geography. Further, some patients may be unable to comply with
clinical trial protocols if quarantines or travel restrictions
impede patient movement or interrupt healthcare services, or if the
patients become infected with COVID-19 themselves, which would
delay our ability to conduct clinical trials or release clinical
trial results. COVID-19 may also affect employees of third-party
contract research organizations located in affected geographies
that we rely upon to carry out our clinical trials, which could
result in inefficiencies due to reductions in staff and disruptions
to work environments. In addition, COVID-19 has had an effect on
the business at FDA and other health authorities by causing them to
reallocate resources to addressing the pandemic, which has resulted
in delays of reviews and approvals, including with respect to our
NAFLD TAEUS application.
The
spread of COVID-19, or another infectious disease, could also
negatively affect the operations at our third-party manufacturers,
which could result in delays or disruptions in the
commercialization of our products. In addition, we have taken, and
may continue to take, precautionary measures intended to help
minimize the risk of the virus to our employees, including
temporarily requiring all employees to work remotely, suspending
all non-essential travel worldwide for our employees, and
discouraging employee attendance at industry events and in-person
work-related meetings, which affects our business, including by
attending industry events and conducting marketing activities
virtually rather than in-person.
In
addition to the foregoing effects, as a result of the COVID-19
outbreak or similar pandemics we have and may in the future
experience disruptions that could severely impact our business,
preclinical studies and clinical trials, including:
●
interruption of key
clinical trial activities and attendance at industry events due to
limitations on travel imposed or recommended by federal or state
governments, employers and others or interruption of clinical trial
subject visits and study procedures;
●
delays or
difficulties in enrolling patients in clinical trials of our TAEUS
FLIP device;
●
interruption or
delays in the operations of the FDA and comparable foreign
regulatory agencies, which may impact approval
timelines;
●
absenteeism or loss
of employees at the Company, or at our collaborator companies, due
to health reasons or government restrictions or otherwise, that are
needed to develop, validate, manufacture and perform other
necessary functions for our operations;
●
supply chain
disruptions making it difficult for our collaborator companies to
order and receive materials needed for the manufacture of our TAEUS
product;
●
government
responses including orders that make it difficult for us, our
supplier and our potential customers to remain open for business,
and other seen and unforeseen actions taken by government
agencies;
●
equipment failures,
loss of utilities and other disruptions that could impact our
operations or render them inoperable; and
●
effects of a local
or global recession or depression that could depress economic
conditions for a prolonged period and limit access to capital by
the Company.
These
and other factors arising from the COVID-19 pandemic could worsen
in the United States or locally at the location of our offices or
clinical trials, each of which could further adversely impact our
business generally, and could have a material adverse impact on our
operations and financial condition and results.
We may not remain commercially viable if there is an inadequate
level of reimbursement by governmental programs and other
third-party payors for our planned products or associated
procedures.
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. Negative results of these clinical
studies could have a material, adverse impact on our
business.
We cannot be certain that results from limited animal and human
studies of any of our TAEUS applications will be indicative of
future studies or that any of our TAEUS applications will be
successfully commercialized.
To
successfully commercialize any application based on our TAEUS
platform technology, we expect it will be necessary to conduct
various pre-clinical and human studies to demonstrate that the
product is safe and effective for human use. In October 2018 we
initiated certain human studies of our TAEUS device targeting
NAFLD. In September 2019, we reported top-level findings from a
clinical study conducted by CIMTEC relating to the feasibility of
our TAEUS application for NAFLD. This data enabled us to obtain CE
mark approval for our NAFLD TAEUS application and make a 510(k)
submission to the FDA for that application. However, there can be
no assurance that results from these studies are indicative of
results that would be achieved in future animal studies or human
clinical studies of this or any future TAEUS applications, which
may be required in order for our applications incorporating our
technology to obtain or maintain regulatory approval. Even if
clinical trials or other studies demonstrate safety and
effectiveness of any applications of our technology and the
necessary regulatory approvals are obtained, the commercial success
of any of such application will depend upon their acceptance by
patients, the medical community, and third-party payers and on our
partners’ ability to successfully manufacture and
commercialize a device for such application.
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. Our NAFLD TAEUS device has
obtained CE mark approval but has not yet been fully
commercialized. 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.
In
April 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 December 16,
2022 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 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, 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 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 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. Although we have begun to hire a small
internal sales and marketing team to engage and support channel
partners and clinical customers, further developing these functions
will be 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;
●
local outbreaks of
sickness or disease, including COVID-19;
●
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 FD&C Act and similar laws of other countries, or the
rules and regulations of 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. For any products for
which we obtain regulatory approval and begin commercializing 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 withdrawal from the European Union may have a
negative effect on global economic conditions, financial markets
and our business and operations.
The
United Kingdom exited from the European Union on January 31, 2020
(often referred to as “Brexit”). On December 24, 2020,
the U.K. and the European Union entered into a trade and
cooperation agreement (the “Trade and Cooperation
Agreement”), which was applied on a provisional basis from
January 1, 2021. While the economic integration does not reach the
level that existed during the time the U.K. was a member state of
the European Union, the Trade and Cooperation Agreement sets out
preferential arrangements in areas such as trade in goods and in
services, digital trade and intellectual property. Negotiations
between the U.K. and the European Union are expected to continue in
relation to the relationship between the U.K. and the European
Union in certain other areas which are not covered by the Trade and
Cooperation Agreement. The long term effects
of Brexit will depend on the effects of the
implementation and application of the Trade and Cooperation
Agreement and any other relevant agreements between the U.K. and
the European Union. It is still unclear what terms, if any, may be
agreed within the U.K. and between the U.K. and other countries on
many aspects of fiscal policy, cross-border trade and international
relations, both in the final outcome and for any transitional
period. The withdrawal of the U.K. from the European Union could
potentially disrupt the free movement of goods, services and people
between the U.K. and the European Union, including in Ireland where
we have significant manufacturing operations, undermine bilateral
cooperation in key geographic areas and significantly disrupt trade
between the U.K. and the European Union or other nations as the
U.K. pursues independent trade relations. In
addition, Brexit could lead to legal uncertainty and
potentially divergent national laws and regulations as the U.K.
determines which European Union laws to replace or replicate.
Because this is an unprecedented event, it is unclear what
long-term economic, financial, trade and legal
implications Brexit would have and how it would affect
the regulation applicable to our business globally and in the
region. Any of these developments, along with any political,
economic and regulatory changes that may occur, could cause
political and economic uncertainty in Europe and internationally
and harm our business and financial results. Although we have not
observed a material financial impact or identified any trends or
potential changes to critical accounting estimates as a result
of Brexit at this time, we will continue to assess the
impact of Brexit on our business and operations. The
effects of Brexit and the application of the Trade and
Cooperation Agreement could adversely affect our business,
financial condition or future results.
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.
As of
the date of this Annual Report, we maintain a patent portfolio
consisting of fourteen (14) patents issued in the United States and
thirteen (13) issued patents in foreign jurisdictions, twenty-one
(21) patent applications pending in the United States and
twenty-six (26) patent applications pending in foreign
jurisdictions relating to our technology. These patents and patent
applications mostly cover certain innovations relating to fat
imaging, fat quantitation, and temperature monitoring in the liver
and other tissues. In addition, we have three (3) licensed U.S.
patents.
Each of
our utility patents generally has a term of 20 years from its
respective priority (earliest filing) date. Design patents have a
term of 14 years from a respective filing date. Among our issued
utility patents in the U.S., the first patent is set to expire in
2033 and the last patent is set to expire in 2039. Our licensed
patents are set to expire on June 19, 2021.
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
(“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 will be subject to
regulation by numerous worldwide regulatory bodies, including the
EMA, FDA and other comparable regulatory agencies. Additionally,
third parties designing, manufacturing or conducting human studies
of our devices will be subject to local regulations, such as those
of Health Canada. These agencies and regulations 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.
The
European Union has revised its regulatory system for medical
devices by implementing regulation (EU) 2017/745 on medical devices
(“Medical Device Regulation” or “MDR”) and
regulation (EU) 2017/746 on in vitro diagnostic medical devices.
The MDR was originally meant to apply as from May 26, 2020 (the
“Date of Application” or “DoA”) but, in
light of the COVID-19 pandemic, the Date of Application was
postponed to May 26, 2021. The changes to the regulatory system
implemented by the MDR include stricter requirements for clinical
evidence and pre-market assessment of safety and performance,
refined classifications to indicate risk levels, requirements for
third party testing by Notified Bodies, tightened and streamlined
quality management system assessment procedures and additional
requirements for the quality management system, additional
requirements for traceability of products and transparency as well
a refined responsibility of economic operators.
We are
currently in a transitional period, where our products will be
required to comply with applicable medical device directives
(including the Medical Devices Directive and the Active Implantable
Medical Devices Directive) and, as of the DoA, with the Medical
Device Regulation and to 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 or the MDR, as the case may be. CE mark approvals
issued prior to the DoA will remain in place for the duration of
such approvals or conformity assessments and such products may be
made available for this transitional period, but no later than June
2024. In March 2020, we received CE mark approval for our TAEUS
FLIP (Fatty Liver Imaging Probe) System. The CE marking indicates
that TAEUS FLIP System complies with all applicable European
Directives and Regulations in the European Union, including the
MDR, and other CE mark geographies, including the 27 EU member
states. We believe that future TAEUS applications will qualify for
sale in the European Union as Class IIa medical devices. Although
existing regulations do not require clinical trials to obtain CE
marks for Class IIa medical devices, the MDR requires a clinical
evaluation for all medical devices and clinical trials for selected
medical devices. Depending on the classification of our
applications, future CE mark certifications or recertification of
our applications may require additional clinical evaluations or
trials, as the case may be.
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.
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
many instances, the 510(k) pathway for product marketing requires
only non-clinical testing proof of substantial equivalence to a
lawfully marketed predicate device for a given indication. However,
in some instances the FDA may require clinical studies to
demonstrate substantial equivalence to the predicate device.
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
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 publicly 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 (the “FTC”) also
regulate the advertising and promotion of our planned 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 EU, the Medical Devices Directive is being replaced with the
more expansive Medical Devices Regulation, which may increase the
costs of obtaining and maintaining required regulatory approvals
for our products. We cannot predict what other healthcare
initiatives, if any, will be implemented by EU 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
(the “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. For
example, the Tax Cuts and Jobs Act of 2017 modified certain aspects
of the Affordable Care Act and the Biden Administration and U.S.
Congress may take further action regarding the Affordable Care Act.
Therefore, we cannot assure you that the Affordable Care Act, as
currently enacted or as may be further 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,
including the timing and success of obtaining various regulatory
approvals for our products’ testing, production and
marketing;
●
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. From January 1, 2020 through December 31, 2020, intra-day
trading prices on the Nasdaq Capital Market have fluctuated from a
low of $0.60 to a high of $2.25 with respect to shares of our
common stock, and from a low of $0.06 to a high of $0.60 with
respect to our warrants, and may continue to fluctuate
significantly in the future.
Our stock price has fluctuated in the past, has recently been
volatile and may be volatile in the future for reasons unrelated to
our operating performance or prospects, and as a result, investors
in our common stock could incur substantial losses.
Our
stock price has fluctuated in the past, has recently been volatile
and may be volatile in the future. By way of example, on December
29, 2020, the price of our common stock closed at $0.71 per share
while on January 26, 2021, our stock price closed at $2.85 per
share with no discernible material announcements or developments
relating to our operations. On January 20, 2021, the intra-day
sales price of our common stock fluctuated between a reported low
sale price of $1.81 and a reported high sales price of $2.58. We
may incur rapid and substantial decreases in our stock price in the
foreseeable future that are unrelated to our operating performance
or prospects. In addition, the COVID-19 pandemic has caused broad
stock market and industry fluctuations. The stock market in general
and the market for healthcare companies in particular have
experienced extreme volatility that has often been unrelated to the
operating performance of particular companies. As a result of this
volatility, investors may experience losses on their investment in
our common stock.
These
broad market and industry factors may seriously harm the market
price of our common stock, regardless of our operating performance.
In the past, following periods of volatility in the market,
securities class-action litigation has often been instituted
against companies. Such litigation, if instituted against us, could
result in substantial costs and diversion of management’s
attention and resources, which could materially and adversely
affect our business, financial condition, results of operations and
growth prospects. There can be no guarantee that our stock price
will remain at current prices or that future sales of our common
stock will not be at prices lower than those sold to
investors.
Additionally,
recently, securities of certain companies have experienced
significant and extreme volatility in stock price due to a sudden
increase in demand for stock resulting in aggregate short positions
in the stock exceeding the number of shares available for purchase,
forcing investors with short exposure to pay a premium to
repurchase shares for delivery to share lenders. This is known as a
“short squeeze.” These short squeezes have led to the
price per share of those companies to trade at a significantly
inflated rate that is disconnected from the underlying value of the
company. Many investors who have purchased shares in those
companies at an inflated rate face the risk of losing a significant
portion of their original investment as the price per share
declines steadily as interest in those stocks abates. While we have
no reason to believe our shares would be the target of a short
squeeze, there can be no assurance that they will not be in the
future, and you may lose a significant portion or all of your
investment if you purchase our shares at a rate that is
significantly disconnected from our underlying value.
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 January 1, 2020 to December 31, 2020 was
approximately 301,478 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, including by remediating current
material weaknesses in our 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
(the “Sarbanes-Oxley Act”) requires that we evaluate
and determine the effectiveness of our internal control over
financial reporting and 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 and 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 (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” until December 31,
2022, the end of the fiscal year following the fifth anniversary of
the date of our May 2017 initial public offering, although we will
lose that status sooner if our annual revenues exceed $1.07
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.
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 relating to our compliance
obligations. 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.
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.