Pulse Biosciences, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; balance-sheet comparisons are to December 31, 2016. The unaudited statements are consolidated. Pulse is a clinical-stage medical technology company developing its Nano-Pulse Stimulation (NPS) platform and has not generated product revenue.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $6.221 million | $2.261 million | $9.458 million | $3.945 million |
| Net loss | $6.180 million | $2.258 million | $9.378 million | $3.942 million |
| Net loss per share, basic and diluted | $0.43 | $0.23 | $0.67 | $0.45 |
- Cash and liquidity: At June 30, cash and cash equivalents were $1.990 million and investments were $13.409 million, totaling $15.399 million. Current assets were $16.116 million and current liabilities were $1.972 million.
- Cash flow, six months: Cash used in operations was $3.707 million, versus $3.751 million in 2016; investing used $1.578 million; financing provided $5.186 million. Cash declined by $99,000 to $1.990 million. Investing included $2.464 million of property and equipment purchases, partly offset by net investment maturities.
- Debt and margins: No debt is reported on the balance sheet. With no revenue, gross and operating margins are not meaningful.
- Equity and other balance-sheet items: Stockholders’ equity was $24.160 million. Property and equipment rose to $2.730 million, principally reflecting facility improvements. Total liabilities were $3.788 million, including $2.119 million of deferred rent.
Changes versus the prior period
- Six-month operating expenses rose $5.513 million and net loss widened $5.436 million year over year.
- General and administrative expense increased to $4.992 million from $1.170 million for the first half, and to $3.772 million from $642,000 in Q2. The company attributed the increase mainly to stock-based compensation, public-company costs, consulting and higher headcount.
- Research and development expense increased to $4.133 million from $2.443 million for the first half, and to $2.282 million from $1.453 million in Q2. Drivers included product-development and regulatory consulting, additional staff, stock compensation and clinical-trial costs.
- Six-month stock-based compensation was $3.053 million, versus $389,000 in 2016. The company said Q2 equity grants and the trading price of its stock contributed to the increase.
- Cash provided by financing was substantially lower than in the 2016 comparable period, which included IPO proceeds. In February 2017, the company raised approximately $5 million gross through a private placement of 819,673 shares at $6.10 per share.
Outlook, risks and unusual items
- Management believed available proceeds would fund projected operating requirements through the end of Q2 2018, but said it planned to raise additional capital. It warned financing may not be available on acceptable terms or at all, and equity financing could dilute shareholders.
- The company expects G&A and R&D expenses to increase substantially during 2017 as it builds operational infrastructure, expands clinical studies, develops PulseTx systems and pursues regulatory clearance. Management did not expect product sales revenue for the next few years.
- The filing describes a 510(k) submission to the FDA and initiation of a clinical study in patients with seborrheic keratosis; it does not report a regulatory decision or study outcome. NPS benefits cited by the company include preclinical results, not established commercial efficacy.
- The company moved to a larger Hayward facility in July 2017. Its new 62-month lease began July 1, with two months’ base rent abated and first-year base rent of $42,400 per month thereafter, subject to increases. The landlord-funded improvements were capitalized with a corresponding deferred-rent liability.
- Management reported a material weakness in internal controls over financial reporting involving inadequate access restrictions and segregation of duties in the accounting function. Remediation was underway but incomplete; management concluded disclosure controls were not effective as of June 30. The company reported no material misstatement from the weakness based on procedures performed.
- Management cited development, clinical, regulatory, commercialization, intellectual-property and funding risks. Ordinary-course legal matters were disclosed; the company did not expect them to have a material adverse effect, while noting litigation outcomes are unpredictable.
Investor verification priorities
- Verify cash use and financing needs against the stated runway through Q2 2018, including assumptions behind planned spending and future fundraising.
- Check the status, design and results of clinical studies and the FDA 510(k) submission; the filing provides no clearance or clinical outcome.
- Track remediation of the material weakness and whether subsequent filings conclude internal controls are effective.
- Assess the effect of stock-based compensation and outstanding options, warrants and restricted stock units on future expenses and dilution. Shares outstanding were 14,334,069 as of July 31, 2017.
- Review costs and obligations associated with the new facility lease and tenant improvements, and whether operating growth is consistent with management’s plans.