PULSE BIOSCIENCES, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes thereto included in Item 8 under the heading "Financial Statements and Supplementary Data". Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K contains forward-looking statements that involve risks and uncertainties, including statements regarding our expected financial results in future periods. The words "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "might," "plans," "projects," "will," "would," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. You should read the "Risk Factors" section of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. We do not assume any obligation to update any forward-looking statements. Overview We are a novel bioelectric medicine company committed to health innovation that improves and potentially extends the lives of patients. We are pursuing regulatory clearance from the FDA to market our first product, our proprietary CellFX™ System. The CellFX System utilizes its patented Nano-Pulse Stimulation™ (NPS™) technology to treat a variety of applications for which an optimal solution remains unfulfilled. NPS is a proprietary technology that delivers nanosecond duration pulses of high amplitude electrical energy to non-thermally clear targeted cells while sparing adjacent non-cellular tissue. The cell-specific effects of NPS technology have been validated in a series of completed and ongoing clinical studies. We have incurred substantial operating losses and have used cash in our operating activities since inception. Based on our current operating plan, we believe we do not have sufficient cash and cash equivalents on hand to support current operations for at least twelve months from the date that our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K were issued. To finance our operations beyond that point, we will need to raise additional capital, which cannot be assured. We have concluded that this circumstance raises substantial doubt about our ability to continue as a going concern for at least twelve months from the date that our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K were issued. As such, we plan to seek to raise capital from time to time this year through future debt or equity financings to fund our future operations and remain as a going concern including by pursuing a proposed rights offering, seeking to raise net proceeds of approximately$30 million assuming such rights offering is fully subscribed. There is no assurance that the rights offering will be successful, or that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to us. Plan of Operation
We plan to establish ourselves as a medical therapy company with a local, non-thermal, and drug-free treatment platform that initiates cell death in targeted tissue by a process of cell signaling and also induces an adaptive immune response to the targeted tissue. In order to accomplish this, we plan to:
· Improve our technology by continuing our research and product development
efforts. We expect to develop interchangeable tissue applicators to target
different tissue types that will leverage the novel characteristics of our
technology platform.
· Further explore and understand the benefits of NPS technology platform with the
objectives of broadening the currently planned cosmetic and therapeutic
applications and identifying new applications. We anticipate that results of
our clinical studies will enable us to recognize certain unmet medical needs
that may be addressed by our technology.
· Continue to protect and expand our intellectual property portfolio with respect
to NPS technology, which we expect will increase our ability to deter
competitors and position our company for favorable licensing and partnering
opportunities.
· Partner with medical or biomedical device companies for certain applications
which we anticipate may accelerate product development and acceptance into
target market areas and allow us to gain the sales and marketing advantages of
the distribution infrastructure.
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Critical Accounting Policies and Significant Judgments
The discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with the rules and regulations of theSEC . Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by management or can be materially affected by changes from period to period in economic factors or conditions that are outside of the company's control. As a result, these issues are subject to an inherent degree of uncertainty. In applying these policies, management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, future business plans and the projected financial results, the terms of existing contracts, trends in the industry and information available from other outside sources. Long-Lived Assets We review long-lived assets, consisting of property and equipment and intangible assets, for impairment at each fiscal year end or when events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets. Assets to be disposed of are separately presented in the consolidated balance sheet, reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.Goodwill We record goodwill when the consideration paid in a business acquisition exceeds the fair value of the net tangible assets and the identified intangible assets acquired. We review goodwill for impairment at least annually or whenever changes in circumstances indicate that the carrying value of the goodwill may not be recoverable based on the fair value of the reporting units. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, goodwill is not considered impaired and no further testing is required. If further testing is required, we perform a two step-process. The first step involves comparing the fair value of the reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. For the purpose of impairment testing, we have determined that the Company has one reporting unit. To date, there has been no impairment of goodwill. Stock-Based Compensation We periodically issue stock options to officers, directors, employees and consultants for services rendered. Such issuances vest and expire according to terms established at the issuance date. Stock-based payments to officers, directors and employees, including grants of employee stock options, are recognized in the financial statements based on their fair values. Stock option grants, which are generally time vested, are measured at the grant date fair value and charged to operations on a straight-line basis over the vesting period. We estimate the grant date fair value of stock options, using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fair value of stock-based awards. The assumptions used in our option-pricing model represent management's best estimates. These estimates are complex, involve a number of variables, uncertainties and assumptions and the application of management's judgment, so that they are inherently subjective. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. Income Taxes
We account for income taxes using the asset and liability method, whereby deferred tax assets and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted rates and laws that will be in effect when the differences are expected to reverse.
We provide a valuation allowance to reduce its deferred tax assets to the amount
that is more likely than not to be realized. If we determine that we would be
able to realize deferred tax assets in the future in excess of the recorded
amount, an adjustment
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Table of Contents to the deferred tax assets would be credited to operations in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of its deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to operations in the period such determination was made. We account for uncertainties in income tax law under a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed byFinancial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 740-10 - Accounting for Uncertainty in Income Taxes. The tax effects of a position are recognized only if it is "more-likely-than-not" to be sustained by the taxing authority as of the reporting date. If the tax position is not considered "more-likely-than-not" to be sustained, then no benefits of the position are recognized. We are subject toU.S. federal income taxes and income taxes inCalifornia . As our net operating losses have yet to be utilized, previous tax years remain open to examination by federal authorities and other jurisdictions in which we currently operate or have operated in the past. We are not currently under examination by any tax authority.
Components of Results of Operations
Operating Expenses We generally recognize operating expenses as general and administrative costs and research and development costs, as well as non-cash amortization of intangible assets. Our operating expenses also include non-cash components related to depreciation and amortization of property and equipment and stock-based compensation costs, which are allocated, as appropriate, to general and administrative costs and research and development costs.
· General and administrative expenses consist of salaries and related expenses
for executive, finance, legal, human resources, information technology and
administrative personnel, professional fees, patent filing fees and costs,
insurance costs and other general corporate expenses. We expect general and
administrative expenses to increase in the future as we hire personnel and
incur additional costs to support the expansion of our research and development
activities and our operation as a public company, including higher legal,
accounting, insurance, compliance, compensation and other costs.
· Research and development expenses consist of salaries and related expenses and
consulting costs related to the design, development and enhancement of our
potential future products, prototypes material and devices, including rent. We
expect research and development costs to increase in the future as we initiate
additional clinical trials, continue development and enhancement of our CellFX
System and pursue commercial applications of our NPS technology.
Results of Operations
Comparison of the Years ended
Our consolidated statements of operations as discussed herein are presented
below:
Year Ended
December 31,
(in thousands) 2019 2018 $ Change
Revenue $ - $ - $ -
Operating expenses:
General and administrative 22,327 20,045 2,282
Research and development 24,961 17,253 7,708
Amortization of intangible assets 666 665 1
Total operating expenses 47,954 37,963 9,991
Other income (expense):
Interest income 983 446 537
Other expense - (28) 28
Total other income 983 418 565
Loss from operations, before income taxes (46,971) (37,545) (9,426)
Income tax benefit - - -
Net loss $ (46,971) $ (37,545) $ (9,426)
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Table of Contents General and Administrative General and administrative expenses consist of salaries and related expenses for executives, marketing, sales, finance, legal, human resources, information technology and administrative personnel. General and administrative expenses increased by$2.3 million to$22.3 million in 2019 from$20.0 million in 2018 due primarily to$1.2 million of increased headcount related expenses and$1.1 million of increased corporate insurance policy andDelaware franchise tax expense due to our expanded operational infrastructure. General and administrative expenses are expected to increase during 2020 with the buildout of additional operational infrastructure to support the anticipated commercialization of our CellFX System in the aesthetic dermatology market. Research and Development Research and development expenses consist of salaries and related expenses for research and development personnel, clinical trials professional fees and consulting costs related to the design, development and enhancement of our potential future products, engineering prototypes supplies and pre-commercial manufacturing supplies. Research and development expenses increased by$7.7 million to$25.0 million in 2019 from$17.3 million in 2018 due primarily to$3.7 million of increased headcount related expenses,$1.4 million of increased clinical trial and sponsored research related expense from the Company's expanded clinical studies of NPS technology including the treatment of sebaceous hyperplasia, seborrheic keratosis, warts, and other general benign lesions,$1.7 million of increased engineering and manufacturing supplies and consulting expenses in support of continued development of the CellFX System capabilities and pre-commercial supply chain,$0.5 million of increased CellFX ecommerce system development and facility expenses from the expansion of ourHayward facility, and$0.4 million of increased travel expenses. Other Income (Expense) Other income increased by approximately$0.6 million to$1.0 million in 2019 from$0.4 million due primarily to higher interest income earned as a result of higher average monthly investment balances.
Comparison of the Years ended
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations located in our 10-K for the fiscal year endedDecember 31, 2018 , filed onMarch 14, 2019 , for the discussion of the comparison of the fiscal year endedDecember 31, 2018 to the fiscal year endedDecember 31, 2017 , the earliest of the three fiscal years presented in the consolidated financial statements.
Liquidity and Capital Resources
To date, we have not generated any revenues from product sales. Since inception, we have funded our business plan through the issuance of equity securities and grants from governmental agencies. We intend to invest in research and development to develop commercially viable products and to assess the feasibility of potential future products. Additionally, we expect that our general and administrative expenses will increase as we continue to incur substantial incremental costs associated with being a public company. InDecember 2018 , we completed a rights offering pursuant to which we sold an aggregate of 3,581,148 shares of our common stock, par value$0.001 per share, at a price per share of$12.57 per share, for net proceeds of approximately$44.8 million . Our consolidated statements of cash flows as discussed herein are presented below: Year Ended December 31, (in thousands) 2019 2018 2017 Net cash used in operating activities$ (34,174) $ (23,896) $ (11,087) Net cash provided by (used in) investing activities$ (10,112) $ 26,117 $ (22,998) Net cash provided by financing activities$ 82 $ 45,496 $ 35,382 Net increase (decrease) in cash and cash equivalents$ (44,204) $ 47,717 $ 1,297 AtDecember 31, 2019 , we had cash, cash equivalents and investments of$25.4 million . Our independent registered public accounting firm has issued a "going concern" opinion, meaning that there is substantial doubt we can continue as an ongoing business for the next twelve months from the date that our audited consolidated financial statements included elsewhere 51 --------------------------------------------------------------------------------
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on this Annual Report on Form 10-K were issued unless we obtain additional capital. To date, we have not generated any revenue. As a result, we have incurred significant operating losses in each year since our inception and we expect to continue to incur additional losses for the next several years.
We plan to raise additional capital in the future, including by pursuing a proposed rights offering, which was approved by our board of directors inFebruary 2020 , seeking to raise net proceeds of approximately$30 million assuming such rights offering is fully subscribed. There is no assurance that the rights offering will be successful, or that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to us. These expectations are based on our current operating and financing plans which are subject to change. Until we are able to generate sustainable product revenues at profitable levels, we expect to finance our future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. Such additional funds may not be available on terms acceptable to us or at all. If we raise funds by issuing equity or equity-linked securities, the ownership of certain of our stockholders will be diluted and the holders of new equity securities may have priority rights over our existing stockholders. If adequate funds are not available, we may be required to curtail operations significantly or to obtain funds by entering into agreements on unattractive terms. Our inability to raise capital could have a material adverse effect on our business, financial condition and results of operations. Operating Activities
During 2019, we used cash of
During 2018, we used cash of$23.9 million in operating activities. The difference between cash used in operating activities and net loss consisted primarily of stock-based compensation, depreciation and amortization, increased accounts payable and accrued expenses, partially offset by increased prepaid expenses and decreased deferred rent. Investing Activities
During 2019, we used cash of
During 2018, cash provided from investing activities of$26.1 million from the sale of investments of$24.9 million and$41.8 million of cash proceeds from the maturities of investments, partially offset by$40.3 million cash used for the purchase of investments and$0.3 million cash used for the purchase of property and equipment. Financing Activities
During 2019, cash provided from financing activities was
During 2018, cash provided from financing activities was
Comparison of the Years ended
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations located in our 10-K for the fiscal year endedDecember 31, 2018 , filed onMarch 14, 2019 , for the discussion of the comparison of the fiscal year endedDecember 31, 2018 to the fiscal year endedDecember 31, 2017 , the earliest of the three fiscal years presented in the consolidated financial statements. Contractual Obligations
Frank Reidy Research Center Agreement
As provided for in the license agreement with ODURF and EVMS, effective on
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--------------------------------------------------------------------------------Table of Contents we agreed to sponsor$0.7 million in research fromJuly 1, 2017 toJune 30, 2018 . InAugust 2018 , we agreed to sponsor$0.8 million in research fromSeptember 1, 2018 toAugust 1, 2019 . InSeptember 2019 , we agreed to sponsor$0.8 million in research fromOctober 1, 2019 toSeptember 1, 2020 . These sponsored researches were funded through monthly payments made upon ODURF certifying, to our reasonable satisfaction, that ODURF has met its obligations pursuant to the specified task order and statement of work. The principal investigator may transfer funds with the budget as needed with our approval so long as the obligations of ODURF under the task order and statement of work remain unchanged and unimpaired. During the years endedDecember 31, 2019 , 2018, and 2017, we incurred costs relating to the sponsored research agreement equal to$0.9 million ,$0.7 million and$0.8 million , respectively. As ofDecember 31, 2019 ,$0.6 million remained payable under this agreement. In addition, during 2017, we agreed to provide$0.3 million in research funding to researchers affiliated with ODURF and EVMS matching funds made available to those researchers by theVirginia Biosciences Health Research Corporation . Our sponsorship affords access to certain intellectual property, if any, developed during the project. As ofDecember 31, 2019 , no amount remained available under this agreement. Operating Lease We lease approximately 29,000 square feet of premises located inHayward, California , which is used for our corporate headquarters and principal operating facility. The term of the original lease included 15,700 square feet for 62 months and commenced onJuly 1, 2017 . DuringMay 2019 , we entered into an amendment to the lease which amended the existing lease and provided for a total expansion of the premises to approximately 50,300 square feet and an option to extend the term of the lease. Approximately 13,300 square feet of the 34,600 square feet expansion was occupied inNovember 2019 during the first phase, the remaining approximately 21,300 square feet will be occupied in the second phase. The amended lease can be extended up to seven years. Under the original lease agreement, the landlord provided$2.1 million allowance for tenant improvements, which was recorded as deferred rent at the inception of the lease term. Future minimum lease payment are net of amortization of tenant improvement allowance. The following table summarizes our contractual obligations as ofDecember 31, 2019 (in thousands): Payments Due by Period More Than 5 (in thousands) Total Less Than 1 Year 1 to 3 Years 3 to 5 Years Years Operating leases$ 10,988 $ 647$ 2,057 $ 2,227 $ 6,057
Off-Balance Sheet Arrangements
At
In the ordinary course of business, we enter into standard indemnification arrangements. Pursuant to these arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its technology, or from claims relating to our performance or non-performance under a contract. The maximum potential amount of future payments we could be required to make under these agreements is not determinable because it involves claims that may be made against us in future periods, but have not yet been made. To date, we have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. We also enter and have entered into indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law. In addition, we may have obligations to hold harmless and indemnify third parties involved with our fundraising efforts and their respective affiliates, directors, officers, employees, agents or other representatives against any and all losses, claims, damages and liabilities related to claims arising against such parties pursuant to the terms of agreements entered into between us and such third parties in connection with such fundraising efforts. No liability associated with such indemnification agreements has been recorded as ofDecember 31, 2019 . JOBS Act Accounting Election Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have 53 --------------------------------------------------------------------------------
Table of Contents irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Trends, Events and Uncertainties
Research and development of new technologies are, by their nature,
unpredictable. Although we undertake development efforts with commercially
reasonable diligence, there can be no assurance that the net proceeds from our
financings will be sufficient to enable us to develop our technology to the
extent needed to generate future sales to sustain our operations. If we do not
continue to have enough funds to sustain our operations, we will consider other
options to continue our path to commercialization of NPS technology platform,
including, but not limited to, additional financing through follow-on stock
offerings, debt financings, or co-development agreements and /or other
alternatives.
We cannot assure investors that our technology will be adopted or that we will
ever achieve sustainable revenues sufficient to support our operations. Even if
we are able to generate revenues, there can be no assurances that we will be
able to achieve profitability or positive operating cash flows. There can be no
assurances that we will be able to secure additional financing in the future on
acceptable terms or at all. If cash resources are insufficient to satisfy our
ongoing cash needs, we would be required to scale back or discontinue our
technology and product development programs, or obtain funds, if available,
although there can be no assurances, through the sale, licensing or strategic
alliances that could require us to relinquish rights to our technology and
intellectual property, or to curtail, suspend or discontinue our operations
entirely.
Other than as discussed above and elsewhere in this Annual Report on Form 10-K,
we are not currently aware of any trends, events or uncertainties that are
likely to have a material effect on our financial condition in the near term,
although it is possible that new trends or events may develop in the future that
could have a material effect on our financial condition.
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