Pulse Biosciences, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Pulse is a development-stage bioelectric medicine company commercializing its CellFX System, which uses its proprietary Nano-Pulse Stimulation technology. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $0.574 | $0 | $0.574 | $0 |
| Cost of revenue | $0.727 | $0 | $0.727 | $0 |
| Research and development | $6.460 | $6.968 | $22.982 | $19.019 |
| Sales and marketing | $3.404 | $1.746 | $10.697 | $4.926 |
| General and administrative | $4.256 | $4.191 | $13.772 | $12.264 |
| Operating loss | $(14.273) | $(12.905) | $(47.604) | $(36.209) |
| Net loss | $(14.282) | $(12.896) | $(48.244) | $(36.101) |
| Basic and diluted loss per share | $(0.48) | $(0.51) | $(1.76) | $(1.60) |
Q3 gross loss was $0.153 million, a gross margin of approximately negative 27%. Revenue was first recognized in August as controlled-launch participants entered sales agreements; it consisted of $0.490 million from systems and $0.084 million from cycle units. Q3 and nine-month revenue are identical. The filing reports no formal revenue or earnings guidance.
- Cash and liquidity: Cash and cash equivalents were $41.991 million at September 30, 2021, versus $12.463 million at December 31, 2020; there were no investments at quarter-end. Current assets were $49.210 million and current liabilities $9.519 million.
- Cash flows: Nine-month operating cash use was $41.403 million, compared with $26.110 million in 2020. Investing provided $7.697 million and financing provided $63.234 million, producing a $29.528 million net increase in cash.
- Debt and leases: The $41 million loan from Chairman Robert W. Duggan, plus accrued interest, was settled through the June private placement and terminated. The remaining note payable was $1.086 million current, relating to insurance financing. Operating lease liabilities totaled $10.991 million, including $0.749 million current.
- Equity: Stockholders’ equity was $47.387 million, up from $22.894 million at year-end. Shares outstanding increased from 25.550 million to 29.631 million. Nine-month stock-based compensation was $10.990 million.
Material changes versus prior period
- Commercial revenue began in Q3 following FDA 510(k) clearance in February, CE marking in January, and Health Canada approval in June 2021. The company had no revenue in the comparable 2020 periods.
- Nine-month operating loss widened by $11.395 million. R&D increased $3.963 million and sales and marketing increased $5.771 million, reflecting hiring, clinical and application-development activity, and commercialization costs.
- Sales and marketing included $1.2 million of controlled-launch costs for the nine-month period. In Q3, approximately $0.5 million of accrued launch-program credits was recognized as revenue when certain participants purchased systems.
- Nine-month net loss included $0.640 million of net interest expense, versus $0.108 million of net interest income in 2020, primarily reflecting the Duggan loan and insurance financing. A modification of performance-option vesting conditions generated $4.2 million of additional stock compensation during the first half of 2021.
- Financing included a $50 million private placement with Mr. Duggan: approximately $41 million principal and accrued interest were converted to shares, and approximately $8.4 million cash was received. The company also received about $7.4 million net from its at-the-market offering.
Outlook, risks and contingencies
Management stated that available resources were expected to fund operations into the third quarter of 2022, but not for twelve months from issuance of the financial statements. The filing therefore identifies substantial doubt about the company’s ability to continue as a going concern. Management plans to seek additional capital through equity, debt, its at-the-market program, or collaborations; availability and acceptable terms are not assured. The company expects continued losses for several years until it achieves substantial product revenue and profitability.
- Key business risks include limited commercial history and adoption, competition, clinical and development uncertainty, further regulatory clearances needed for specific indications, reimbursement uncertainty, and dependence on suppliers and manufacturing execution.
- COVID-19 could disrupt clinical trials, suppliers, demand, and access to capital. The company also highlights product-liability, data-security, intellectual-property, and healthcare-regulatory risks.
- Mr. Duggan beneficially owned approximately 51% of outstanding shares, creating significant ownership concentration and control considerations; he is also the company’s Board Chairman and a major source of prior financing.
- The company reported no material pending legal matter expected to adversely affect it, while noting litigation outcomes are inherently unpredictable. It reported no off-balance-sheet arrangements and no material changes to contractual obligations outside the ordinary course.
- Management concluded disclosure controls were effective as of September 30, 2021, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Cash-burn trajectory, updated cash runway, and whether new financing or a revenue-generating collaboration is secured.
- CellFX system sales, repeat purchases of cycle units, customer conversion from the controlled launch, and gross margin as production scales.
- Clinical evidence, physician adoption, reimbursement prospects, and timing and outcome of additional regulatory submissions for specific indications.
- Potential dilution and related-party financing terms, including the impact of Mr. Duggan’s controlling ownership.
- Inventory demand and valuation, warranty experience, and the company’s ability to manage commercialization and supplier risks.