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 has the potential to improve the lives of patients. The CellFX System is the first commercial product to harness the distinctive advantages of the Company's proprietary NPS technology, such as the ability to non-thermally clear cells while sparing non-cellular tissue, to treat a variety of applications for which an optimal solution remains unfulfilled. InFebruary 2021 , we received 510(k) clearance from the FDA for the CellFX System with initial clearance for a general dermatologic indication. With FDA clearance, we will commence a controlled launch in theU.S. with KOLs in dermatology. Following this general dermatologic indication, we plan to pursue specific indications for the CellFX System, starting with an indication for the treatment of SH lesions. This will require an additional 510(k) submission, as will each subsequent indication, and will likely be based on comparative clinical data. InJanuary 2021 , we received CE marking approval for the CellFX System, which allows us to market the system in the EU. With CE mark approval, we will initiate a controlled launch to medical practices within the EU for the treatment of general dermatologic conditions, including SH, SK, and cutaneous non-genital warts.
In
We have also submitted a Medical Device License application to
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.
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?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.
COVID-19 Pandemic
The COVID-19 pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. In accordance with these measures, we are requiring all of our employees to work remotely unless they cannot perform their essential functions remotely, and have also suspended all non-essential travel for our employees. While many of our employees are accustomed to working remotely, much of our workforce has not historically been remote. Although we continue to monitor the situation and may adjust our current policies as more information and public health guidance becomes available, temporarily suspending travel and restricting the ability to do business in person may create operational or other challenges, any of which could harm our business, financial condition and results of operations. In addition, our clinical trials may be affected by the COVID-19 pandemic. Site initiation and patient enrollment may be delayed, for example, due to prioritization of hospital resources toward the COVID-19 pandemic, travel restrictions imposed by governments, and the inability to access sites for initiation and monitoring. Also, it is possible that delivery from some of our suppliers of certain materials used in the production of our product candidates could be delayed due to COVID-19 which could affect our ability to obtain sufficient materials for our product candidates. COVID-19 has and will continue to adversely affect global economies and financial markets, resulting in an economic downturn that could affect demand for our product candidates and impact our operating results. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of the continued global economic impact of the pandemic. We cannot anticipate all of the ways in which health epidemics such as COVID-19 could adversely impact our business. Although we are continuing to monitor and assess the effects of the COVID-19 pandemic on our business, the ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. See the Risk Factors section for further discussion of the possible impact of the COVID-19 pandemic on our business.
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. 50
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Table of ContentsGoodwill 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 and restricted stock units (RSUs)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 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. 51
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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 executives, marketing, sales, 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 our commercialization efforts, 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 current and potential future products, prototype material and devices, and regulatory and clinical costs. We expect research and development costs to increase in the future as we initiate additional clinical trials and pursue additional 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) 2020 2019 $ Change Revenue $ - $ - $ - Operating expenses: General and administrative 22,856 22,327 529 Research and development 26,444 24,961 1,483 Amortization of intangible assets 665 666 (1) Total operating expenses 49,965 47,954 2,011 Other income (expense): Interest income 114 983 (869) Other expense - - - Total other income 114 983 (869) Loss from operations, before income taxes (49,851) (46,971) (2,880) Income tax benefit - - - Net loss$ (49,851) $ (46,971) $ (2,880) 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$0.5 million to$22.9 million in 2020 from$22.3 million in 2019 due to$2.1 million of increased compensation and other employee related costs primarily related to headcount growth,$0.6 million of increased administrative costs primarily due to D&O insurance, and$0.3 million of increased facilities related costs due to the lease expansion of our headquarters inHayward, California . These increases were offset by decreases of$1.4 million in stock-based compensation,$0.6 million in travel expenses, and$0.5 million in paid services and supplies. General and administrative expenses are expected to increase during 2021 with the buildout of additional operational infrastructure to support the commercialization efforts of our CellFX System in the aesthetic dermatology market. 52
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Table of Contents 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 current and potential future products, engineering prototypes supplies and pre-commercial manufacturing supplies. Research and development expenses increased by$1.5 million to$26.4 million in 2020 from$25.0 million in 2019 due to$1.9 million of increased compensation costs related to headcount growth,$1.6 million of increased paid services, and$1.0 million of increased facilities related costs due to our lease expansion, all offset by decreases of$1.9 million in external research driven by the timing and stage of clinical studies,$1.0 million in prototype equipment, materials and supplies related to our initial product builds, and$0.4 million in travel expenses.
Other Income (Expense)
Other income decreased by approximately$0.9 million to$0.1 million in 2020 from$1.0 million due primarily to lower interest income earned as a result of lower 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 Form 10-K for the fiscal year endedDecember 31, 2019 , filed onMarch 16, 2020 , for the discussion of the comparison of the fiscal year endedDecember 31, 2019 to the fiscal year endedDecember 31, 2018 , 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 issued 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 , for net proceeds of approximately$44.8 million .
In
Our consolidated statements of cash flows as discussed herein are presented below: Year Ended December 31, (in thousands) 2020 2019 2018 Net cash used in operating activities$ (35,365) $ (34,185) $ (23,896) Net cash provided by (used in) investing activities$ 10,044 $ (10,101) $ 26,117 Net cash provided by financing activities$ 30,885 $
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AtDecember 31, 2020 , we had cash, cash equivalents and investments of$20.5 million . We believe that our existing cash, cash equivalents and investments will be sufficient to fund our projected operating requirements for at least the next twelve months from the filing date of this Annual Report on Form 10-K. However, we plan to raise additional capital in the future. InFebruary 2021 , we filed an at-the-market equity offering with theSEC , having an aggregate offering price of up to$60 million under which we may offer and sell shares of our common stock from time to time, although we have no obligation to make sales pursuant such at-the-market equity offering. There is no assurance that the at-the-market equity offering will be successful. Additionally, inMarch 2021 we entered into the Loan Agreement withMr. Duggan . The Loan Agreement matures onJune 11, 2022 . Under the Loan Agreement,Mr. Duggan has provided us, subject to certain conditions, an unsecured term loan facility in an original aggregate principal amount of$41.0 million . The Loan Agreement will bear interest at a rate per annum equal to 5.0%, payable quarterly commencing onJuly 1, 2021 . The interest rate payable under the Loan Agreement increases to 7.0% upon the occurrence of an Event of Default or a Material Adverse Effect, each as defined in the Loan Agreement. The Loan Agreement contains certain covenants and Events of Default (Note 13). There is no assurance that 53
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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, our at-the-market equity offering program, licensing fees for our technology, joint ventures with capital partners and project type financing. 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 2020, we used cash of
During 2019, we used cash of
Investing Activities
During 2020, cash provided from investing activities was$10.0 million , of which$39.5 million was provided from the maturities and sales of investments, offset by$29.5 million for the purchase of investments and property and equipment. During 2019, we used cash of$10.1 million for investing activities, of which$9.5 million was used for the net purchases of investments and$0.6 million for property and equipment. Financing Activities During 2020, cash provided from financing activities was$30.9 million , of which$29.4 million was provided from the rights offering,$1.0 million was provided from the exercise of stock options and warrants, and$0.5 million was provided from the issuance of stock under the employee stock purchase plan.
During 2019, 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 Form 10-K for the fiscal year endedDecember 31, 2019 , filed onMarch 16, 2020 , for the discussion of the comparison of the fiscal year endedDecember 31, 2019 to the fiscal year endedDecember 31, 2018 , 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 onNovember 6, 2014 , we sponsored certain approved research activities atODURF's Frank Reidy Research Center under a sponsored research agreement. InJune 2017 , 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 54
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the years endedDecember 31, 2020 , 2019, and 2018, we incurred costs relating to the sponsored research agreement equal to$0.6 million ,$0.9 million and$0.7 million , respectively. As ofDecember 31, 2020 , there is no remaining balance payable under this research agreement.
Operating Lease
We currently lease approximately 50,300 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 approximately 15,700 square feet for 62 months and commenced onJuly 1, 2017 . InMay 2019 , we entered into an amendment which enabled us to expand the lease by approximately 34,600 additional square feet, for a total of approximately 50,300 square feet. The amendment also included an option to extend the term of the lease. Approximately 13,300 square feet of the additional space was occupied inNovember 2019 as part of the first phase, and the remaining approximately 21,300 square feet was occupied inMay 2020 as part of the second phase. The term of the total lease was extended throughOctober 2029 . Under the original lease agreement, the landlord provided a$2.1 million allowance for tenant improvements, which was recorded as deferred rent at the inception of the lease term. Future minimum lease payments are net of amortization of tenant improvement allowance. The following table summarizes our contractual obligations as ofDecember 31, 2020 (in thousands): Payments Due by Period More Than 5 (in thousands) Total Less Than 1 Year 1 to 3 Years 3 to 5 Years Years Operating leases$ 17,418 $ 1,643$ 3,651 $ 3,886 $ 8,238
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, or cash flows.
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 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 our 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. ? 55
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