Pulse Biosciences, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. The unaudited quarter and nine months ended September 30, 2016. Pulse is a development-stage medical technology company developing Nano-Pulse Stimulation (NPS) applications in oncology, dermatology, aesthetics and other areas. It had not commercialized its technology or generated revenue. NPS results cited by the company were preclinical.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $0 in 2016 and 2015 | $0 in 2016 and 2015 |
| Operating expenses | $2.798m vs. $1.234m | $6.744m vs. $2.933m |
| Net loss | $2.767m vs. $0.751m | $6.709m vs. $1.794m |
| Net loss per share | $0.21 vs. $0.10 | $0.66 vs. $0.24 |
| Operating cash used | $5.733m in the first nine months of 2016 vs. $1.987m in 2015 |
Figures are in U.S. dollars; financial statement amounts are rounded to thousands. Gross and operating margins are not meaningful because the company reported no revenue.
- At September 30, 2016, cash and cash equivalents were $4.628m and short-term investments were $14.085m, totaling $18.713m. Current assets were $19.007m and current liabilities $0.967m, for working capital of about $18.040m.
- Total liabilities were $0.967m; the balance sheet reported no debt. Stockholders’ equity was $27.863m.
- Investing activities used $14.160m, mainly for investment purchases; financing activities provided $20.915m, primarily from the IPO. Cash increased $1.022m during the nine-month period.
- The company sold 5,000,000 IPO shares at $4.00 per share and 749,846 additional shares through the underwriters’ overallotment. Management states net proceeds were approximately $20.3m; the cash flow statement reports $20.915m of financing proceeds.
Material changes versus prior periods
- Quarterly R&D expense rose $1.080m year over year, to $1.739m; nine-month R&D increased $2.555m, to $4.182m. Drivers included outside services, prototypes and development supplies, compensation, and intellectual-property legal costs.
- Quarterly G&A expense increased $0.485m, to $0.893m; nine-month G&A increased $1.256m, to $2.063m. The company cited higher compensation, stock-based compensation, insurance and public-company costs.
- Net loss comparisons were also affected by income tax benefits in 2015—$0.483m for the quarter and $1.139m for the nine months—with no corresponding benefit in 2016.
- Cash and investments rose substantially following the IPO; at December 31, 2015, cash was $3.606m and the company reported no investments.
Outlook, risks and unusual items
- Management said existing cash and investments should fund projected operating requirements for at least the next 12 months, based on current plans. The company expects no product-sales revenue for the next few years and anticipates continued losses and negative cash flow.
- Management expects R&D and G&A expenses to increase as development activities expand and public-company costs continue. Further financing may be needed; availability and terms are uncertain, and equity financing could dilute shareholders.
- The company is pursuing research and product development, clinical applications, intellectual-property protection and potential partnerships. No specific financial guidance or commercialization timetable was provided.
- A sponsored research agreement with Old Dominion University Research Foundation was extended for April 2016–March 2017, with $1.0m of research sponsorship. The filing reports $0.664m of related costs paid and incurred in the first nine months of 2016. The foundation was also identified as a greater-than-10% stockholder.
- The Burlingame facilities lease was extended through March 31, 2017, at approximately $19,000 per month. The company also disclosed a license obligation to commence pursuing one or more FDA applications by December 15, 2018 to maintain an ODURF/EVMS license.
- Key risks include technical and clinical development failure, regulatory approval and reimbursement uncertainty, need for additional capital, competition, intellectual-property challenges and potential impairment of goodwill or intangible assets. Federal funding may also carry government “march-in” rights for certain patents.
- Management reported disclosure controls effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter. No material adverse effect was expected from ordinary-course legal matters, though outcomes are inherently uncertain.
Important facts for investors to verify
- Reconcile the approximately $20.3m net IPO proceeds described in the notes and MD&A with the $20.915m financing proceeds shown in the cash flow statement.
- Assess the assumptions behind management’s at-least-12-month runway estimate against the increased operating cash burn and planned development spending.
- Track evidence of clinical progress, regulatory strategy and milestones, and whether NPS can advance beyond preclinical findings to commercially viable products.
- Review the sponsored-research commitment, license milestones, and potential future financing needs and dilution. The filing excludes 2,129,400 options and warrants from diluted loss per share as anti-dilutive.
- Consider potential share-supply and dilution effects: 574,985 underwriter warrants were issued at $5.00 per share, and certain existing shares became eligible for resale subject to applicable restrictions.