Pulse Biosciences, Inc. — FY2018 Form 10-K
Business context and reporting period. This clinical-stage medical therapy company reported for the fiscal year ended December 31, 2018; the filing also provides unaudited quarterly data, including Q4 2018. Its CellFX System uses Nano-Pulse Stimulation (NPS) technology. The company had no commercial product or product revenue and was pursuing dermatology applications as its initial market.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $37.963 million | $25.814 million |
| Net loss | $37.545 million | $25.567 million |
| Net loss per share, basic and diluted | $2.20 | $1.73 |
| Cash used in operating activities | $23.896 million | $11.087 million |
- FY2018 operating expenses included $20.045 million of general and administrative costs and $17.253 million of research and development costs. Management attributed their increases to higher headcount, public-company and legal costs, product development, prototypes, and clinical studies.
- At year-end, cash, cash equivalents and investments totaled $59.583 million, up from $38.069 million. Working capital was $57.254 million; total assets were $70.640 million and total liabilities were $4.306 million. The filing reports no borrowings or debt balance.
- Financing activities provided $45.496 million, primarily from a December 2018 rights offering that generated approximately $44.8 million net. Operating cash use rose from the prior year. Profitability and operating margins are not meaningful because the company had no revenue and incurred losses.
- Q4 2018 revenue was $0 and net loss was $8.953 million, compared with Q4 2017 revenue of $0 and net loss of $8.703 million.
Material changes versus the prior comparable period
- Net loss increased by $11.978 million year over year, while operating expenses increased by $12.149 million. R&D spending rose $7.607 million and general and administrative spending rose $4.542 million.
- Operating cash use more than doubled to $23.896 million. The company raised substantial equity capital: it issued 3,581,148 shares in the rights offering at $12.57 per share for approximately $44.8 million net proceeds. Chairman Robert W. Duggan bought 3,146,226 of those shares.
- Year-end cash and investments increased, principally reflecting the equity financing. Shares outstanding were 20.593 million at December 31, 2018, versus 16.819 million a year earlier.
Outlook, developments and risks
- In February 2019, the company submitted a 510(k) premarket notification to FDA seeking clearance for CellFX use in common dermatologic procedures to remove benign lesions, including sebaceous hyperplasia and seborrheic keratosis. It planned a U.S. launch during 2019, conditional on regulatory clearance; clearance was not assured.
- In company-reported studies, more than 99% of treated sebaceous hyperplasia lesions were rated clear or mostly clear at 60 days, and 82% of treated seborrheic keratosis lesions at 106 days. These are study results, not evidence of FDA clearance or commercial outcomes. Studies were also underway or initiated for warts, acne and basal cell carcinoma; the BCC study was a biomarker study, not a therapeutic-endpoint trial.
- Management said existing cash, cash equivalents and investments were expected to fund projected operating requirements for at least 12 months from the 10-K filing date, while also stating that additional capital would be needed in the future. Continued losses, increasing development and commercialization costs, and potential equity dilution are key risks.
- Key uncertainties include FDA clearance and the scope of any permitted indication; clinical safety and efficacy; adoption, reimbursement and cash-pay demand; manufacturing and supplier readiness; competition; and the company’s ability to raise capital. Management expects G&A and R&D expenses to increase substantially in 2019.
- The company and certain directors received SEC subpoenas concerning trading ahead of the September 2017 financing announcement and cooperated with the non-public investigation. The company said it could not estimate any possible loss and did not believe pending matters would materially adversely affect it based on its then-current understanding.
- Nasdaq notified the company in July 2018 of noncompliance with the audit committee composition requirement; the disclosed cure period ran until the earlier of the next annual meeting or July 27, 2019. Failure to regain compliance could risk delisting.
- Management reported effective disclosure controls and internal control over financial reporting at December 31, 2018. A material weakness identified in 2016 had been reported as remediated in 2017. The independent auditor opined that the 2018 financial statements were fairly presented in accordance with U.S. GAAP; it did not provide an opinion on internal controls.
Important facts for investors to verify
- Whether FDA clears CellFX, when clearance occurs, and the exact approved indications and claims.
- Final and longer-term clinical data, adverse-event reporting, and whether results can be replicated in broader use.
- Cash burn, actual runway, and the timing, terms and dilution effects of future financing.
- Commercial launch readiness, manufacturing capacity, customer demand, pricing and reimbursement prospects.
- Status and outcome of the SEC inquiry and the company’s Nasdaq audit committee compliance.
- Potential dilution from outstanding equity awards and warrants, and the effects of concentrated ownership; the chairman held approximately 44% of outstanding common stock after the rights offering.