Pulse Biosciences, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company is developing its CellFX System, which uses Nano-Pulse Stimulation technology, and had not begun generating product revenue.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $11.354 million | $11.649 million | $23.304 million | $22.059 million |
| Net loss | $11.333 million | $11.359 million | $23.205 million | $21.437 million |
| Net loss per share, basic and diluted | $0.53 | $0.55 | $1.10 | $1.04 |
| Cash used in operating activities | Not presented quarterly | Not presented quarterly | $17.561 million | $17.024 million |
Q2 operating expenses comprised $5.317 million general and administrative, $5.870 million research and development, and $0.167 million amortization. For the first half, those items were $10.920 million, $12.051 million, and $0.333 million, respectively. The company reported no product gross margin because it had no revenue.
At June 30, cash and cash equivalents were $37.765 million; investments were zero, compared with $18.499 million at December 31, 2019. Current assets were $38.672 million and current liabilities were $4.890 million. Total liabilities were $16.054 million, including $11.442 million of lease liabilities; the filing reports no borrowings or other debt. Management stated that existing cash, cash equivalents and investments should fund projected requirements for at least 12 months from the filing date, while also saying it expects to raise additional capital in the future.
First-half cash flows included $18.404 million provided by investing activities, primarily investment maturities and sales, and $30.023 million provided by financing activities. The latter chiefly reflected $29.5 million net proceeds from a June rights offering. The offering issued 4,279,600 shares and 641,571 warrants at $7.01 per unit. Shares outstanding rose to 25.149 million at June 30 from 20.825 million at year-end; the filing reports 25,212,025 shares outstanding as of July 31.
Changes versus prior periods
- Q2 net loss was nearly unchanged year over year, while first-half net loss increased by $1.768 million. Lower first-half interest income ($0.099 million versus $0.622 million) and higher general and administrative expense drove the increase.
- Q2 operating expenses declined $0.295 million year over year, as lower research and development expense more than offset higher general and administrative expense. Management attributed lower clinical-trial spending to the timing and stage of active studies.
- First-half general and administrative expense rose $1.373 million, primarily from higher compensation and professional services. Research and development expense declined $0.128 million.
- Operating cash use increased $0.537 million year over year for the first half. The rights offering and investment maturities and sales substantially increased reported period-end cash.
Outlook, risks and notable items
- Regulatory plans: After receiving an FDA “not substantially equivalent” decision on its earlier 510(k) in February 2020, the company planned a new submission for a general dermatologic indication after completing a GLP preclinical study, then expected within 60–90 days of the August filing. It anticipated submitting an IDE for a sebaceous hyperplasia study in Q3 2020 and starting that study in Q4. It was seeking a CE mark in Q1 2021 and a Health Canada license in the first half of 2021.
- Funding and execution: The company expects continuing losses and needs additional capital to develop and commercialize its products. Financing may be unavailable or dilutive, and could require unfavorable partnerships, reductions in development, or curtailment of operations.
- COVID-19: Remote work and travel restrictions could create operational challenges; clinical-site access, enrollment and monitoring may be delayed; and suppliers, demand and access to capital could be affected. The ultimate impact was described as uncertain.
- Product and regulatory risk: CellFX had no FDA clearance or commercial sales. Further clinical or regulatory requirements, delays, limited indications, manufacturing challenges, reimbursement uncertainty, or lack of physician adoption could prevent commercialization.
- Related-party arrangement: The company did not renew D&O insurance because of high premiums. Chairman Robert W. Duggan agreed to provide one year of indemnity coverage, secured by $30 million he deposited, in exchange for a $2.5 million fee due May 13, 2021. The company reported $0.3 million accrued under the agreement at June 30. Duggan participated in the rights offering and owned approximately 47% of shares after it.
- Other items: The company reported no material pending legal matters and no off-balance-sheet arrangements. It reported no material changes in internal control over financial reporting. A new director was appointed on August 6, 2020.
Key facts for investors to verify
- Whether the GLP study and planned FDA submission, IDE, clinical study, CE-mark and Canadian licensing timelines were achieved.
- Cash burn, spending plans and funding needs relative to management’s stated 12-month liquidity outlook; this outlook is not a guarantee of runway.
- The financial and governance terms of the Duggan indemnity arrangement, including the fee, collateral and coverage period.
- The potential dilution from outstanding warrants, options and future financing; 6.06 million potential shares were excluded from diluted loss per share as anti-dilutive.
- The disclosure-controls section says controls were effective “as of June 30, 2019,” although the report covers June 30, 2020; verify whether this is a typographical error.