2020-03-31 Q1_Taxonomy2019







UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________

Form 10-Q

___________________________________

(Mark One)



 

  

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2020

Or



 

  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from             to

Commission File Number 001-34899

___________________________________

Pulse Biosciences, Inc.

(Exact name of registrant as specified in its charter)





 

Delaware

46-5696597

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

3957 Point Eden Way

Hayward,  CA

94545

(Address of principal executive offices)

(Zip Code)

(510906-4600

(Registrant’s telephone number, including area code)

___________________________________

Securities registered pursuant to Section 12(b) of the Act:





 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

PLSE

The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 



 

 

 

Large accelerated filer   

Accelerated filer   

Non-accelerated filer   

 

Smaller reporting company   



 

Emerging growth company



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes    No  

As of May 4, 2020, there were 20,869,443 shares of the registrant's common stock, par value $0.001 per share, outstanding.



 


 

Table of Contents

 

TABLE OF CONTENTS





 



PAGE No.

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (unaudited):

3

Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

3

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three-month Periods Ended March 31, 2020 and 2019

4

Condensed Consolidated Statements of Cash Flows for the Three-month Periods Ended March 31, 2020 and 2019

5

Condensed Consolidated Statements of Stockholders’ Equity for the Three-month Periods Ended March 31, 2020 and 2019

6

Notes to Condensed Consolidated Financial Statements

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3. Quantitative and Qualitative Disclosures About Market Risk

22

Item 4. Controls and Procedures

22



 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

22

Item 1A. Risk Factors

23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

53

Item 3. Default Upon Senior Securities

53

Item 4. Mine Safety Disclosures

53

Item 5. Other Information

53

Item 6. Exhibits

54

Signatures

55

 

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PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



PULSE BIOSCIENCES, INC.

Condensed Consolidated Balance Sheets

(in thousands except per share amounts)

(Unaudited)







 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2020

 

2019

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,864 

 

$

6,899 

Investments

 

 

8,022 

 

 

18,499 

Prepaid expenses and other current assets

 

 

545 

 

 

1,005 

Total current assets

 

 

16,431 

 

 

26,403 



 

 

 

 

 

 

Property and equipment, net

 

 

2,633 

 

 

2,566 

Intangible assets, net

 

 

4,381 

 

 

4,547 

Goodwill

 

 

2,791 

 

 

2,791 

Right-of-use assets

 

 

5,043 

 

 

5,114 

Other assets

 

 

562 

 

 

494 

Total assets

 

$

31,841 

 

$

41,915 



 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

1,214 

 

$

1,963 

Accrued expenses

 

 

2,071 

 

 

2,496 

Lease liability, current

 

 

98 

 

 

 —

Total current liabilities

 

 

3,383 

 

 

4,459 



 

 

 

 

 

 



 

 

 

 

 

 

Lease liability, less current

 

 

6,690 

 

 

6,719 

Total liabilities

 

 

10,073 

 

 

11,178 



 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 



 

 

   

 

 

   

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.001 par value;
authorized – 50,000 shares; no shares issued and outstanding

 

 

 —

 

 

 —

Common stock, $0.001 par value:
authorized – 500,000 shares; issued and outstanding20,869 shares and 20,825 shares at March 31, 2020 and December 31, 2019, respectively  

 

 

21 

 

 

21 

Additional paid-in capital

 

 

156,291 

 

 

153,401 

Accumulated other comprehensive income

 

 

17 

 

 

Accumulated deficit

 

 

(134,561)

 

 

(122,689)

Total stockholders’ equity

 

 

21,768 

 

 

30,737 

Total liabilities and stockholders’ equity

 

$

31,841 

 

$

41,915 



See accompanying notes to the condensed consolidated financial statements.

 

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PULSE BIOSCIENCES, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

(Unaudited)







 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Month Periods Ended



 

March 31,



 

2020

 

2019

Revenue

 

$

 —

 

$

 —

Operating expenses:

 

 

 

 

 

 

General and administrative

 

 

5,603 

 

 

4,401 

Research and development

 

 

6,181 

 

 

5,842 

Amortization of intangible assets

 

 

166 

 

 

167 

Total operating expenses

 

 

11,950 

 

 

10,410 

Other income:

 

 

 

 

 

 

Interest income

 

 

78 

 

 

332 

Total other income

 

 

78 

 

 

332 

Net loss

 

 

(11,872)

 

 

(10,078)

Other comprehensive loss:

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

 

13 

 

 

Comprehensive loss

 

$

(11,859)

 

$

(10,075)

Net loss per share:

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.57)

 

$

(0.49)

Weighted average shares used to compute net loss per common share basic and diluted

 

 

20,838 

 

 

20,679 







See accompanying notes to the condensed consolidated financial statements.







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PULSE BIOSCIENCES, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)







 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Month Periods Ended



 

March 31,



 

2020

 

2019

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(11,872)

 

$

(10,078)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation

 

 

104 

 

 

162 

Amortization of intangible assets

 

 

166 

 

 

167 

Stock-based compensation

 

 

2,626 

 

 

2,361 

Net premium amortization and discount on available-for-sale securities

 

 

(4)

 

 

(96)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

460 

 

 

229 

Right-of-use assets

 

 

71 

 

 

 —

Other long-term assets

 

 

(68)

 

 

(107)

Accounts payable

 

 

(749)

 

 

(72)

Accrued expenses

 

 

(425)

 

 

98 

Lease liabilities

 

 

69 

 

 

 —

Other current and long-term liabilities

 

 

 —

 

 

Net cash used in operating activities

 

 

(9,622)

 

 

(7,330)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(171)

 

 

(45)

Purchases of investments

 

 

(3,006)

 

 

(44,186)

Maturities of investments

 

 

13,500 

 

 

8,500 

Net cash provided by (used) in investing activities

 

 

10,323 

 

 

(35,731)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of common stock under employee stock purchase plan

 

 

255 

 

 

272 

Proceeds from exercises of stock options

 

 

 

 

222 

Net cash provided by financing activities

 

 

264 

 

 

494 

Net increase (decrease) in cash

 

 

965 

 

 

(42,567)

Cash and cash equivalents at beginning of period

 

 

6,899 

 

 

51,103 

Cash and cash equivalents at end of period

 

$

7,864 

 

$

8,536 



 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

Change in unrealized gains on available-for-sale securities

 

$

13 

 

$



 

 

 

 

 

 



 

 

 

 

 

 



See accompanying notes to the condensed consolidated financial statements.

 

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PULSE BIOSCIENCES, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

  

Additional

 

Accumulated Other

 

 

 

 

Total



 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stockholders’



 

Shares

 

Amount

  

Capital

 

Income (Loss)

 

Deficit

 

Equity

Balance, December 31, 2019

 

20,825 

 

$

21 

 

$

153,401 

 

$

 

$

(122,689)

 

$

30,737 

Issuance of shares upon exercise of stock options

 

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

Issuance of shares under employee stock purchase plan

 

43 

 

 

 —

 

 

255 

 

 

 —

 

 

 —

 

 

255 

Stock-based compensation expense

 

 —

 

 

 —

 

 

2,626 

 

 

 —

 

 

 —

 

 

2,626 

Unrealized gain on available-for-sale securities

 

 —

 

 

 —

 

 

 —

 

 

13 

 

 

 —

 

 

13 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(11,872)

 

 

(11,872)

Balance, March 31, 2020

 

20,869 

 

$

21 

 

 

156,291 

 

$

17 

 

$

(134,561)

 

$

21,768 











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

  

Additional

 

Accumulated Other

 

 

 

 

Total



 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stockholders’



 

Shares

 

Amount

  

Capital

 

Income (Loss)

 

Deficit

 

Equity

Balance, December 31, 2018

 

20,593 

 

$

21 

 

$

142,032 

 

$

(1)

 

$

(75,718)

 

$

66,334 

Issuance of shares upon exercise of stock options

 

99 

 

 

 —

 

 

272 

 

 

 —

 

 

 —

 

 

272 

Issuance of shares under employee stock purchase plan

 

18 

 

 

 —

 

 

222 

 

 

 —

 

 

 —

 

 

222 

Stock-based compensation expense

 

 —

 

 

 —

 

 

2,361 

 

 

 —

 

 

 —

 

 

2,361 

Unrealized gain on available-for-sale securities

 

 —

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,078)

 

 

(10,078)

Balance, March 31, 2019

 

20,710 

 

$

21 

 

$

144,887 

 

$

 

$

(85,796)

 

$

59,114 



See accompanying notes to the condensed consolidated financial statements.





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PULSE BIOSCIENCES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1.  Description of the Business



Pulse Biosciences, Inc. (together with its subsidiaries, the Company) is a novel bioelectric medicine company committed to health innovation that improves and potentially extends the lives of patients. The Company is pursuing regulatory clearance to market its first product, its proprietary CellFX® System. The Company’s CellFX System utilizes its patented Nano-Pulse Stimulation™ (NPS™) technology to treat a variety of applications for which an optimal solution remains unfulfilled. NPS is a proprietary technology that delivers nano-second duration pulses of high amplitude electrical energy to non-thermally clear targeted cells while sparing adjacent non-cellular tissue. The cell-specific effects of NPS technology have been validated in a series of completed and ongoing clinical studies.



The Company was incorporated in Nevada on May 19, 2014. On June 18, 2018, the Company reincorporated from the State of Nevada to the State of Delaware. The Company’s headquarters and manufacturing and research facility are located in Hayward, California.



The Company’s activities are subject to significant risks and uncertainties, including the need for additional capital. The Company has not yet commenced any revenue-generating operations, does not have any cash flows from operations, and will need to raise additional capital to finance its operations. However, there can be no assurances that the Company will be able to obtain additional financing on acceptable terms and in the amounts necessary to fully fund its operating requirements.



Pulse Biosciences, CellFX, Nano-Pulse Stimulation, and NPS and the stylized logos are trademarks or registered trademarks of the Company in the United States and other countries.

 

2.  Summary of Significant Accounting Policies



Going concern



As of March 31, 2020, the Company had an accumulated deficit of $134.6 million, cash outflows from operations of $9.6 million for the three months then ended, and cash, cash equivalents and investments of $15.9 million and anticipates that it may continue to incur significant operating losses for the next several years. Until such time as the Company can generate substantial product revenue and achieve profitability, the Company will need to raise additional capital. The Company plans to raise additional capital to fund its operations for at least the next twelve months from the date of issuance of the accompanying consolidated financial statements, including via a proposed rights offering that seek to raise gross proceeds of approximately $30 million, assuming such rights offering is fully subscribed and excluding the proceeds from any warrants which may be issued in the rights offering and exercised following the completion of the offering. There is no assurance that the rights offering will be successful, or that additional financing will be available when needed or that management of the Company will be able to obtain financing on terms acceptable to the Company. Accordingly, the Company’s management cannot conclude that such plans will be effectively implemented within twelve months from the date of issuance of the accompanying consolidated financial statements.



These factors, combined with the Company’s forecast of cash required to fund operations for a period of at least twelve months from the date of issuance of the accompanying consolidated financial statements, raise substantial doubt about the Company’s ability to continue as a going concern. 



The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.



COVID-19 Pandemic



The Company is subject to risks and uncertainties as a result of the novel coronavirus pandemic (COVID-19). The extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict, as the response

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to the pandemic is in its incipient stages and information is rapidly evolving. The Company considered the impact of COVID-19 on the assumptions and estimates used to determine the results reported and asset valuations as of March 31, 2020.



Basis of Presentation



The accompanying unaudited condensed consolidated financial statements have been prepared on a basis consistent with the Company’s December 31, 2019 audited Consolidated Financial Statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth herein. The condensed consolidated financial statements have been prepared in accordance with the applicable rules and regulations of the Securities and Exchange Commission (SEC) and, as permitted by such rules and regulations, omit certain information and footnote disclosures necessary to present the financial statements in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The condensed consolidated balance sheet as of December 31, 2019 was derived from the audited consolidated financial statements as of that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for the three-month period ended March 31, 2020 are not necessarily indicative of the results to be expected for the entire year or any future periods.



Principles of Consolidation



The accompanying condensed consolidated financial statements include the financial statements of Pulse Biosciences, Inc. and its wholly-owned subsidiaries. Intercompany balances and transactions, if any, have been eliminated in consolidation.



Use of Estimates



The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the Financial Statements and accompanying notes to the condensed consolidated financial statements. Estimates include, but are not limited to, the valuation of cash equivalents and investments, the valuation and recognition of share-based compensation and the useful lives assigned to long-lived assets. The Company evaluates its estimates and assumptions based on historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ materially from these estimates.



Significant Accounting Policies



There have been no material changes to the Company’s significant accounting policies during three-month period ended March 31, 2020, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.



Net Loss per Share



The Company calculates basic net loss per share by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential dilutive common stock equivalents outstanding during the period. For purposes of this calculation, options to purchase common stock and common stock warrants are considered common stock equivalents. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted net loss per share.



Basic and diluted net loss per common share is the same for all periods presented because all warrants, stock options and restricted stock units outstanding are anti-dilutive.



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The following outstanding stock options, warrants and restricted stock units were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect:







 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Month Periods Ended



 

March 31,



 

2020

 

2019

Common stock warrants

 

 

167,847 

 

 

213,485 

Common stock options

 

 

3,891,607 

 

 

2,871,770 

Restricted stock units

 

 

222,606 

 

 

222,606 

Total

 

 

4,282,060 

 

 

3,307,861 



 

 

 

 

 

 





 Recent Accounting Pronouncement



In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the general principles in Accounting Standards Codification (ASC) 740 and makes amendments to other areas with the intention of simplifying various aspects related to accounting for income taxes. The new standard is effective for fiscal years beginning after December 15, 2020, including interim periods therein; with early adoption permitted. The Company is currently evaluating the impact that the standard will have on its financial statements and related disclosures; and does not expect the adoption to have a material impact on the Company’s financial statements.



3.  Fair Value of Financial Instruments



The authoritative guidance with respect to fair value established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels, and requires that assets and liabilities carried at fair value to be classified and disclosed in one of three categories, as presented below.



Level 1 -  Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include money market funds.



Level 2 - Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include commercial paper, corporate bonds, and asset-backed securities.



Level 3 - Unobservable inputs for which there is little or no market data for the asset or liability which requires the reporting entity to develop its own assumptions. The Company did not classify any of its investments within Level 3 of the fair value hierarchy.



The following table sets forth the fair value of the Company’s financial assets measured on a recurring basis as of March 31, 2020 and December 31, 2019, respectively (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

March 31, 2020

 

December 31, 2019

Assets

 

Classification

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

Money market funds

 

Cash and cash equivalents

 

$

6,989 

 

 

 

 

 

$

6,989 

 

$

6,429 

 

$

 

$

 

$

6,429 

U.S. Treasury Securities

 

Investments

 

 

 

 

8,022 

 

 

 

 

8,022 

 

 

 

 

18,499 

 

 

 

 

18,499 

Total assets measured at fair value

 

 

 

$

6,989 

 

$

8,022 

 

$

 

$

15,011 

 

$

6,429 

 

$

18,499 

 

$

 

$

24,928 



The Company did not have any financial liabilities measured on a recurring basis as of March 31, 2020 or December 31, 2019.



During the three-month period ended March 31, 2020, there were no transfers between Level 1, Level 2 or Level 3 assets or liabilities reported at fair value on a recurring basis, and the valuation techniques used did not change compared to the Company’s established practice.

 

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4.  Balance Sheet Components



Property and Equipment, net



Property and equipment, net consisted of the following (in thousands):

 





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2020

 

2019

Leasehold improvements

 

$

2,248 

 

$

2,248 

Laboratory equipment

 

 

677 

 

 

677 

Furniture, fixtures, and equipment

 

 

466 

 

 

466 

Software

 

 

118 

 

 

118 

Construction in progress

 

 

714 

 

 

543 



 

 

4,223 

 

 

4,052 

Less: Accumulated depreciation

 

 

(1,590)

 

 

(1,486)



 

$

2,633 

 

$

2,566 



Depreciation expense was $0.1 million for the three-month periods ended March 31, 2020 and 2019, respectively.



Intangible Assets, Net



Intangible assets primarily consist of acquired licenses to utilize certain patents, know-how and technology relating to the Company’s NPS for biomedical applications acquired from Old Dominion University Research Foundation (ODURF), Eastern Virginia Medical School, and the University of Southern California. In addition, the Company entered into a Sponsored Research Agreement with Old Dominion University’s Frank Reidy Research Center for Bioelectrics, which includes certain intellectual property rights arising from the research. The Company is amortizing the intangible assets over an estimated useful life of 12 years.



Intangible assets, net consisted of the following (in thousands):







 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2020

 

2019

Acquired patents and licenses

 

$

7,985 

 

$

7,985 

Less: Accumulated amortization

 

 

(3,604)

 

 

(3,438)



 

$

4,381 

 

$

4,547 



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A schedule of the amortization of intangible assets for the remainder of 2020 and the succeeding five fiscal years and thereafter is as follows (in thousands):







 

 

Year Ending December 31:

 

 

2020 (remaining 9 months)

$

499 

2021

 

665 

2022

 

665 

2023

 

665 

2024

 

665 

2025

 

665 

Thereafter

 

557 



$

4,381 

 

Accrued Expenses



Accrued expenses consisted of the following (in thousands):

 





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2020

 

2019

Compensation expense

  

$

1,172 

 

$

1,699 

Accrued clinical

 

 

512 

 

 

262 

Professional fees

  

 

37 

 

 

51 

Property and equipment

 

 

234 

 

 

234 

Other

 

 

116 

 

 

250 



  

$

2,071 

 

$

2,496 

 

5Goodwill



In 2014, the Company acquired three companies (the acquisitions) for aggregate consideration of $5.5 million. In accordance with ASC Topic 805, Business Combinations, the Company recorded goodwill of $2.8 million in connection with the acquisitions as the consideration paid exceeded the fair value of the net tangible assets and the intangible assets acquired.



The Company reviews goodwill for impairment at least annually or whenever changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Based on the Company’s annual impairment test as of December 31, 2019 the Company determined that no impairment of goodwill existed and was not aware of any indicators of impairment at such date. In addition, there were no indicators of impairment at March 31, 2020.

 

6.  Stockholders’ Equity and Stock-Based Compensation



Common Stock Warrants



In connection with a private placement of the Company’s common stock, par value $0.001 per share, in 2014, the Company issued warrants as compensation to the placement agent to purchase a total of 299,625 shares of its common stock at a price of $2.67 per share (the Private Placement Warrants). The Private Placement Warrants are exercisable for period of seven years from issuance. As of March 31, 2020, a total of 46,238 of Private Placement Warrants were outstanding. In connection with the closing of the Company’s initial public offering in 2016, the Company issued warrants as compensation to its underwriters to purchase a total of 574,985 shares of its common stock at a price of $5.00 per share (the IPO Warrants). The IPO Warrants are exercisable for a period of five years from issuance.  As of March 31, 2020, a total of 121,609 of the IPO Warrants were outstanding.



Equity Plans



2017 Equity Incentive Plan and 2017 Inducement Equity Incentive Plan



The Board of Directors of the Company (the Board) previously adopted, and the Company’s stockholders approved, the Company’s 2017 Equity Incentive Plan (the 2017 Plan).



The 2017 Plan has a 10-year term, and provides for the grant of stock options, stock appreciation rights, restricted stock,

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restricted stock units, performance units, and performance shares to employees, directors and consultants of the Company and any parent or subsidiary of the Company, as the Compensation Committee of the Board may determine. Subject to an annual evergreen increase and adjustment in the case of certain capitalization events, the Company initially reserved 1,500,000 shares of the Company’s common stock for issuance pursuant to awards under the 2017 Plan. In addition, shares remaining available under the Company’s 2015 Equity Incentive Plan, as amended (the 2015 Plan), and shares reserved but not issued pursuant to outstanding equity awards that expire or terminate without being exercised or that are forfeited or repurchased by the Company will be added to the shares of common stock available for issuance under the 2017 Plan. The 2017 Plan is administered by the Board’s Compensation Committee. Effective January 1, 2020, the Company’s Board authorized an increase in the number of shares of common stock available under the 2017 Plan increased by 833,018 shares pursuant to the evergreen provision of the 2017 Plan. Pursuant to the 2017 Plan, the 2019 share increase is determined based on the least of (i) 1,200,000 shares, (ii) 4% of the Company’s common stock outstanding at December 31 of the immediately preceding year, or (iii) such number of shares as determined by the Board. As of March 31, 2020, 1,721,093 shares of common stock remained available for issuance under the 2017 Plan.



During November 2017, the Board adopted the 2017 Inducement Equity Incentive Plan (the Inducement Plan) and reserved 1,000,000 shares of the Company’s common stock for issuance pursuant to equity awards granted under the Inducement Plan. The Inducement Plan was adopted without stockholder approval.



The Inducement Plan has a 10-year term, and provides for the grant of equity-based awards, including nonstatutory stock options, restricted stock units, restricted stock, stock appreciation rights, performance shares and performance units, and its terms are substantially similar to the 2017 Plan, including with respect to treatment of equity awards in the event of a “merger” or “change in control” as defined under the Inducement Plan. Options issued under the Inducement Plan may have a term up to ten years and have variable vesting provisions. New hire grants generally vest 25% annual starting upon the first anniversary of the grant. Equity-based awards issued under the Inducement Plan are only issuable to individuals not previously engaged as employees or non-employee directors of the Company prior to the Inducement Plan’s adoption date. As of March 31, 2020,  8,492 shares of common stock remained available for issuance under the Inducement Plan.



Certain stock options awarded to the Company’s executives contain performance conditions related to certain financial measures and achievements of strategic/operational milestones (performance options). As of March 31, 2020, it is not probable that these performance conditions will be achieved and accordingly no stock compensation has been recorded for these performance options to date.



2017 Employee Stock Purchase Plan 



The Board previously adopted and the stockholders approved the Company’s 2017 Employee Stock Purchase Plan (the 2017 ESPP).



The 2017 ESPP is a broad-based plan that provides employees of the Company and its designated affiliates with the opportunity to become stockholders through periodic payroll deductions that are applied towards the purchase of Company common shares at a discount from the then-current market price. Subject to adjustment in the case of certain capitalization events, a total of 250,000 common shares of the Company were available for purchase at adoption of the 2017 ESPP. Pursuant to the 2017 ESPP, the annual share increase pursuant to the evergreen provision is determined based on the least of (i) 450,000 shares, (ii) 1.5% of the Company’s common stock outstanding at December 31 of the immediately preceding year, or (iii) such number of shares as determined by the Board. During January 2019, the Board determined not to increase the number of shares of common stock available under the 2017 ESPP pursuant to the evergreen provision of the 2017 ESPP. During the three-month period ended March 31, 2020, the Company issued 43,224 shares of common stock under the 2017 ESPP. As of March 31, 2020,  396,971 shares of common stock remained available for issuance under the 2017 ESPP.



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A  summary of stock option activity under the 2015 Plan, 2017 Plan and Inducement Plan for the three-month period ended March 31, 2020 is presented below:







 

 

 

 

 



 

Stock Options Outstanding



 

 

 

 

Weighted



 

Number

 

 

average



 

of shares

 

 

exercise price

Balances — December 31, 2019

 

3,749,186 

 

$

16.18 

Options granted

 

178,000 

 

 

 

Options exercised

 

(750)

 

 

 

Options canceled

 

(12,855)

 

 

 

Options expired

 

(21,974)

 

 

 

Balances — March 31, 2020

 

3,891,607 

 

$

15.67 

Exercisable — March 31, 2020

 

2,301,566 

 

$

16.48 



The table above excludes 69,375 performance stock options granted for which the performance criteria had not been established as of March 31, 2020.



Stock-based Compensation



Total stock-based compensation expense consisted of the following (in thousands):







 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Month Periods Ended



 

March 31,



 

2020

 

2019

General and administrative

 

$

1,749 

 

$

1,485 

Research and development

 

 

877 

 

 

876 

Total stock-based compensation expense

 

$

2,626 

 

$

2,361 



The Company estimated the fair value of employee stock options on the grant date using the Black-Scholes option pricing model. The estimated fair value of employee stock options is amortized on a straight-line basis over the requisite service period of the awards. The Company reviews and, when deemed appropriate, updates the assumptions used on a periodic basis. Due to the limited trading history of the Company’s common stock, the Company utilizes a portfolio of comparable companies to estimate volatility. The fair value of employee stock options was estimated using the following weighted-average assumptions:









 

 

 

 

 



 

Three-Month Periods Ended March 31,



 

2020

 

 

2019

Expected term in years

 

 6.1

 

 

0.4 - 6.1

Expected volatility

 

70%

 

 

70%

Risk-free interest rate

 

0.4% - 1.7%

 

 

2.4% - 2.7%

Dividend yield

 

 

 



The Company estimated the fair value of ESPP on the grant date using the Black-Scholes option pricing model. The estimated fair value of ESPP is amortized on a straight-line basis over the requisite service period of the awards. The Company reviews and, when deemed appropriate, updates the assumptions used on a periodic basis. The Company utilizes its estimated volatility in the Black-Scholes option pricing model to determine the fair value of ESPP. The fair value of ESPP was estimated using the following weighted-average assumptions:







 

 

 

 

 



 

Three-Month Periods Ended March 31,



 

2020

 

 

2019

Expected term in years

 

0.5 - 1.0

 

 

0.5 - 1.0

Expected volatility

 

70%

 

 

70%

Risk-free interest rate

 

0.9% - 1.0%

 

 

2.5% - 2.6%

Dividend yield

 

 

 



The fair value of restricted stock unit (RSUs) awards is determined based on the number of units granted and the closing price of the Company’s common stock as of the grant date. The estimated fair value of RSUs is recognized on a straight-line basis over the requisite service period.

 

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7.  Research Grants and Agreements



Sponsored Research Agreement



The Company may annually sponsor research activities (SRAs) performed by Old Dominion University’s Frank Reidy Center (ODURF). ODURF is compensated by the Company for its conduct of each study in accordance with the budget and payment terms set forth in the applicable task order. During the year ended December 31, 2019, the Company agreed to sponsor $0.8 million in research during the subsequent 12-month period funded through monthly payments made upon ODURF certifying, to the Company’s reasonable satisfaction, that ODURF has met its obligations pursuant to the specified task order and statement of work. The principal investigator may transfer funds with the budget as needed without the Company’s approval so long as the obligations of ODURF under the task order and statement of work remain unchanged and unimpaired. As of March 31, 2020, approximately $0.4 million remained payable under this agreement.



During the three-month periods ended March 31, 2020 and 2019, the Company paid and incurred costs related to the SRAs equal to $0.2 million, respectively.

 

8.  Commitments and Contingencies



Operating Leases



During January 2017, the Company entered into a five-year lease (the Existing Lease) for approximately 15,700 square feet for its corporate headquarters located in Hayward, California (the Existing Premises). The lease commenced during July 2017.



During May 2019, the Company entered into Lease Amendment 1 (the Amendment) in relation to the Existing Lease and added the lease of new premises of approximately 34,600 square feet (Expansion Premises);  additionally, the term of the Existing Lease was extended to October 2029.



The Company evaluated the Amendment under the provisions of ASC 842 that it adopted on January 1, 2019, and accounted the Amendment as a single contract with the Existing Lease because the additional lease payments due to the Amendment was not commensurate with the right-of-use (ROU) asset granted to the Company. Though the Amendment was accounted for as a single contract, the Existing Premises and Expansion Premises are accounted for as separate lease components. Accordingly, the Company measured and allocated consideration to each lease component as of the modification date. Upon commencement of each lease component, the Company will reassess and calculate the lease liability and ROU asset for the respective component.





Information related to the Company’s ROU assets and related lease liabilities were as follows (in thousands except for remaining lease term and discount rate):







 

 

Year Ending December 31:

 

 

2020 (remaining 9 months)

$

549 

2021

 

986 

2022

 

1,071 

2023

 

1,094 

2024

 

1,133 

2025

 

1,172 

Thereafter

 

4,885 

Total lease payments

 

10,890 

Less imputed interest

 

(4,102)

Total lease liabilities

$

6,788 

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Other supplemental non-cash information:

 

 

Cash paid for operating lease liabilities

$

377 

Operating lease liabilities arising from ROU assets

 

5,027 



 

 

Current operating lease liabilities

 

98 

Non-current operating lease liabilities

 

6,690 

Total lease liabilities

$

6,788 



 

 

Weighted average remaining lease term

 

9.59 years

Weighted average discount rate

 

10% 



During the three-month periods ended March 31, 2020 and 2019, rent expense, including common area maintenance charges, was approximately $0.2 million and $0.1 million, respectively.



Legal Proceedings



The Company maintains indemnification agreements with its directors and officers that may require the Company to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law.



From time to time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings relating to securities laws, product liability, patent infringement, contract disputes and other matters relating to various claims that arise in the normal course of the Company’s business. The Company currently believes that these ordinary course matters are not material to the condensed consolidated financial statements of the business; however, the results of litigation and claims are inherently unpredictable.

 

9.   Related Party Transactions



Kenneth A. Clark, a director of the Company since November 2017, is a member of the law firm of Wilson Sonsini Goodrich and Rosati (WSGR), which also serves as the outside corporate counsel to the Company. During the three-month periods ended March 31, 2020 and 2019, the Company incurred expenses reported in general and administrative expenses in the consolidated statement of operations for legal services rendered by WSGR totaling approximately $0.1 million, respectively.   



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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.



You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes included in this Quarterly Report and those in our Annual Report on Form 10-K.



This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements relate to expectations concerning matters that are not historical facts. Words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “projects,” “will,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, but are not limited to, statements related to our expected business, new product introductions, procedures and procedure adoption, future results of operations, future financial position, our ability to generate revenues, the anticipated mix of our revenues between procedure and system revenues, our financing plans and future capital requirements, anticipated costs of revenue, anticipated expenses, the effect of recent accounting pronouncements, our investments, anticipated cash flows, our ability to finance operations from cash flows and similar matters, the impact of the recent COVID-19 coronavirus pandemic and related public health measures on our business, and statements based on current expectations, estimates, forecasts and projections about the economies and markets in which we intend to operate and our beliefs and assumptions regarding these economies and markets. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. You should read the “Risk Factors” section of this Quarterly Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. We do not assume any obligation to update any forward-looking statements.



Pulse Biosciences, CellFX, Nano-Pulse Stimulation, and NPS and the stylized logos are trademarks or registered trademarks of the Company in the United States and other countries.



Overview



We are a novel bioelectric medicine company committed to health innovation that improves and potentially extends the lives of patients. We are pursuing regulatory clearance from the FDA to market our first product, our proprietary CellFX® System. The CellFX System utilizes its patented Nano-Pulse Stimulation™ (NPS™) technology to treat a variety of applications for which an optimal solution remains unfulfilled. NPS is a proprietary technology that delivers nanosecond duration pulses of high amplitude electrical energy to non-thermally clear targeted cells while sparing adjacent non-cellular tissue. The cell-specific effects of NPS technology have been validated in a series of completed and ongoing clinical studies.



We have incurred substantial operating losses and have used cash in our operating activities since inception. Based on our current operating plan, we believe we do not have sufficient cash and cash equivalents on hand to support current operations for at least twelve months from the date that our audited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q were issued. To finance our operations beyond that point, we will need to raise additional capital, which cannot be assured. We have concluded that this circumstance raises substantial doubt about our ability to continue as a going concern for at least twelve months from the date that our audited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q were issued. As such, we plan to seek to raise capital from time to time this year through future debt or equity financings to fund our future operations and remain as a going concern including by pursuing a proposed rights offering, seeking to raise gross proceeds of approximately $30 million assuming such rights offering is fully subscribed and excluding the proceeds from any warrants which may be issued in the rights offering and exercised following the completion of the offering. There is no assurance that the rights offering will be successful, or that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to us.



Plan of Operation



We plan to establish ourselves as a medical therapy company with a local, non-thermal, and drug-free treatment platform that initiates cell death in targeted tissue by a process of cell signaling and also induces an adaptive immune response to the targeted tissue. In order to accomplish this, we plan to:



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·

Improve our technology by continuing our research and product development efforts. We expect to develop interchangeable tissue applicators to target different tissue types that will leverage the novel characteristics of our technology platform.



·

Further explore and understand the benefits of NPS technology platform with the objectives of broadening the currently planned cosmetic and therapeutic applications and identifying new applications. We anticipate that results of our clinical studies will enable us to recognize certain unmet medical needs that may be addressed by our technology.



·

Continue to protect and expand our intellectual property portfolio with respect to NPS technology, which we expect will increase our ability to deter competitors and position our company for favorable licensing and partnering opportunities.



·

Partner with medical or biomedical device companies for certain applications which we anticipate may accelerate product development and acceptance into target market areas and allow us to gain the sales and marketing advantages of the distribution infrastructure.



COVID-19 Pandemic



In accordance with local and state guidelines regarding the COVID-19 pandemic, we are requiring all of our employees to work remotely unless they cannot perform their essential functions remotely, and have also suspended all non-essential travel for our employees. While many of our employees are accustomed to working remotely, much of our workforce has not historically been remote. Although we continue to monitor the situation and may adjust our current policies as more information and public health guidance becomes available, temporarily suspending travel and restricting the ability to do business in person may create operational or other challenges, any of which could harm our business, financial condition and results of operations.



In addition, our clinical trials may be affected by the COVID-19 outbreak. Site initiation and patient enrollment may be delayed, for example, due to prioritization of hospital resources toward the COVID-19 outbreak, travel restrictions imposed by governments, and the inability to access sites for initiation and monitoring. Also, some of our suppliers of certain materials used in the production of our product candidates are located in areas impacted by COVID-19 which could limit our ability to obtain sufficient materials for our product candidates. COVID-19 has and will continue to adversely affect global economies and financial markets, resulting in an economic downturn that could affect demand for our product candidates, if approved, and impact our operating results. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of the continued global economic impact of the pandemic. We cannot anticipate all of the ways in which health epidemics such as COVID-19 could adversely impact our business. Although we are continuing to monitor and assess the effects of the COVID-19 pandemic on our business, the ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. See the Risk Factors section for further discussion of the possible impact of the COVID-19 pandemic on our business.



Critical Accounting Policies and Estimates



The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



There have been no material changes to the critical accounting policies and estimates discussed in our Annual Report on Form 10-K as of and for the year ended December 31, 2019 filed with the SEC on March 16, 2020.



Recent Accounting Pronouncements



Refer to “Recent Accounting Pronouncements” in Note 2 of Notes to Condensed Consolidated Financial Statements of this Quarterly Report.



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Segment and Geographical Information 



We operate and manage our business as one reportable and operating segment. Our Chief Executive Officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. All of our long-lived assets are based in the United States.



Results of Operations



Comparison of the three-month periods ended March 31, 2020 and 2019



Our condensed consolidated statements of operations as discussed herein are presented below:

 







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Three-Month Periods Ended

 

 

 



 

March 31,

 

 

 

(in thousands)

 

2020

 

2019

 

$ Change

Revenue

 

$

 —

 

$

 —

 

$

 —

Operating expenses:

 

 

 

 

 

 

 

 

 

General and administrative

 

 

5,603 

 

 

4,401 

 

 

1,202 

Research and development

 

 

6,181 

 

 

5,842 

 

 

339 

Amortization of intangible assets

 

 

166 

 

 

167 

 

 

(1)

Total operating expenses

 

 

11,950 

 

 

10,410 

 

 

1,540 

Other income:

 

 

 

 

 

 

 

 

 

Interest income

 

 

78 

 

 

332 

 

 

(254)

Total other income

 

 

78 

 

 

332 

 

 

(254)

Net loss

 

$

(11,872)

 

$  

(10,078)

 

$

(1,794)



General and Administrative



General and administrative expenses consist of salaries and related expenses for executives, sales and marketing, finance, legal, human resources, information technology and administrative personnel, professional fees, patent fees and costs, insurance costs and other general corporate expenses. General and administrative expenses increased by $1.2 million to $5.6 million for the three-month period ended March 31, 2020, from $4.4 million during the same period in 2019 primarily due to $0.9 million of increased employee compensation and $0.3 million of increased stock-based compensation. Compensation-related expenses increased due to an increase in headcount. General and administrative expenses are expected to continue at approximately the current rate for the remainder of 2020.



Research and Development



Research and development expenses consist of salaries and related expenses for manufacturing, research and development personnel, clinical trials and consulting costs related to the design, development and enhancement of our potential future products, prototype material and devices. Research and development expenses increased by $0.3 million to $6.2 million for the three-month period ended March 31, 2020, from $5.8 million during the same period in 2019 primarily due to increased employee compensation costs. Headcount increases during 2020 contributed to increased employee compensation costs. Research and development expenses are expected to continue at approximately the current rate for the remainder of 2020.



Interest Income



Interest income decreased by $0.2 million, to $0.1 million for the three-month period ended March 31, 2020, from $0.3 million during the same period in 2019 primarily due to decreased cash and investment balances.



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Liquidity and Capital Resources



To date, we have not generated any revenues from product sales and do not expect to generate revenues from product sales in 2020. Since inception, we have funded our business primarily through the issuance of equity securities and grants from governmental agencies. Over the next few years, we intend to invest in research and development to develop commercially viable products and to assess the feasibility of potential future products. Additionally, we expect that our general and administrative expenses will increase as we incur substantial incremental costs associated with operating as a public company.



Our condensed consolidated statements of cash flows as discussed herein are presented below:







 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Month Periods Ended



 

March 31,

(in thousands)

 

2020

 

2019

Net cash used in operating activities

 

$

(9,622)

 

$

(7,330)

Net cash provided by (used) in investing activities

 

 

10,323 

 

 

(35,731)

Net cash provided by financing activities

 

 

264 

 

 

494 

Net increase (decrease) in cash

 

 

965 

 

 

(42,567)



At March 31, 2020, we had cash, cash equivalents and investments of $15.9 million. We have determined that there is substantial doubt concerning our ability to continue as an ongoing business for the next twelve months from the date that our unaudited condensed consolidated financial statements included elsewhere on this Quarterly Report on Form 10-Q were issued unless we obtain additional capital. To date, we have not generated any revenue. As a result, we have incurred significant operating losses in each year since our inception and we may continue to incur additional losses for the next several years.



We plan to raise additional capital in the future, including by pursuing a proposed rights offering, seeking to raise gross proceeds of approximately $30 million assuming such rights offering is fully subscribed and excluding the proceeds from any warrants which may be issued in the rights offering and exercised following the completion of the offering. There is no assurance that the rights offering will be successful, or that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to us. The ongoing COVID-19 pandemic and resulting negative impact on the global macroeconomic environment and capital markets may make it more difficult for us to raise additional funds.



These expectations are based on our current operating and financing plans which are subject to change. Until we are able to generate sustainable product revenues at profitable levels, we expect to finance our future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. Such additional funds may not be available on terms acceptable to us or at all. If we raise funds by issuing equity or equity-linked securities, the ownership of some or all of our stockholders will be diluted and the holders of new equity securities may have priority rights over our existing stockholders. If adequate funds are not available, we may be required to curtail operations significantly or to obtain funds by entering into agreements on unattractive terms. Our inability to raise capital could have a material adverse effect on our business, financial condition and results of operations.



Operating Activities



Our primary uses of cash in operating activities are for ongoing product development.



During the three-month period ended March 31, 2020, we used cash of $9.6 million in operating activities. The difference between cash used in operating activities and net loss consisted primarily of stock-based compensation and depreciation and amortization, and a decrease in accounts payable, partially offset by decreases in prepaid expenses and other current assets and accrued expenses.



During the three-month period ended March 31, 2019, we used cash of $7.3 million in operating activities. The difference between cash used in operating activities and net loss consisted primarily of depreciation and amortization,  stock-based compensation, and an increase in prepaid expenses.



Investing Activities



Our investing activities consist primarily of investment purchases, sales and maturities and capital expenditures.



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During the three-month period ended March 31, 2020, $10.3 million of cash provided by investing activities primarily from $13.5 million of cash proceeds from the maturities of investments, partially offset by the purchase of available-for-sale securities of $3.0 million.



During the three-month period ended March 31, 2019, $35.7 million of cash was used in investing activities, consisting of $44.2 million of cash used to purchase available-for-sale securities partially offset by $8.5 million of cash proceeds from the maturities of investments.



Financing Activities



During the three-month periods ended March 31, 2020 and 2019, cash provided from financing activities was $0.3 million and $0.5 million, respectively, primarily due to cash received from stock option exercises and the sale of stock under our employee stock purchase plan. 



Contractual Obligations



There have been no material changes outside the ordinary course of our business to the contractual obligations since disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.



Off-Balance Sheet Arrangements



At March 31, 2020, we did not have any transactions, obligations or relationships that constitute off-balance sheet arrangements.



In the ordinary course of business, we enter into standard indemnification arrangements. Pursuant to these arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its technology, or from claims relating to our performance or non-performance under a contract. The maximum potential amount of future payments we could be required to make under these agreements is not determinable because it involves claims that may be made against us in future periods, but have not yet been made. To date, we have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements.



We also enter and have entered into indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law. In addition, we may have obligations to hold harmless and indemnify third parties involved with our fundraising efforts and their respective affiliates, directors, officers, employees, agents or other representatives against any and all losses, claims, damages and liabilities related to claims arising against such parties pursuant to the terms of agreements entered into between us and such third parties in connection with such fundraising efforts. No liability associated with such indemnification agreements has been recorded as of March 31, 2020.



JOBS Act Accounting Election



Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.



Trends, Events and Uncertainties



Research and development of new technologies are, by their nature, unpredictable. Although we undertake development efforts with commercially reasonable diligence, there can be no assurance that the net proceeds from our financings will be sufficient to enable us to develop our technology to the extent needed to generate future sales to sustain our operations. If we do not continue to have enough funds to sustain our operations, we will consider other options to continue our path to commercialization of our CellFX System, including, but not limited to, additional financing through follow-on stock offerings, debt financings, or co-development agreements and /or other alternatives.



We cannot assure investors that our technology will be adopted or that we will ever achieve sustainable revenues sufficient to support our operations. Even if we are able to generate revenues, there can be no assurances that we will be able to achieve profitability or positive operating cash flows. There can be no assurances that we will be able to secure additional

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financing in the future on acceptable terms or at all. If cash resources are insufficient to satisfy our ongoing cash needs, we would be required to scale back or discontinue our technology and product development programs, or obtain funds, if available, although there can be no assurances, through the sale, licensing or strategic alliances that could require us to relinquish rights to our technology and intellectual property, or to curtail, suspend or discontinue our operations entirely.



See the section entitled “COVID-19 Pandemic” above and elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the current and potential future impact of COVID-19 on our business, financial condition and results of operation.



Other than as discussed above and elsewhere in this Quarterly Report, we are not currently aware of any trends, events or uncertainties that are likely to have a material effect on our financial condition in the near term, although it is possible that new trends or events may develop in the future that could have a material effect on our financial condition. 



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Item 3. Quantitative and Qualitative Disclosures About Market Risk



Except for the broad effects of COVID-19 as a result of its negative impact on the global economy and financial markets, there have been no material changes in market risk from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2019. We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates. We do not hold financial instruments for trading purposes.





Item 4. Controls and Procedures



Evaluation of Disclosure Controls and Procedures



Our management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, our principal executive and principal financial officers, respectively, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of March 31, 2020, our disclosure controls and procedures were effective (a) to ensure that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (b) to include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.



Changes in Internal Control Over Financial Reporting 



There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act, as amended, that occurred during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Internal control over financial reporting means a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.



Inherent Limitations on Effectiveness of Controls



Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.



PART II. OTHER INFORMATION



Item 1. Legal Proceedings



From time to time, we may be involved in a variety of legal proceedings and claims relating to securities laws, product liability, patent infringement, contract disputes, employment matters and other matters relating to the normal course of our business in addition to governmental and other regulatory investigations and proceedings. In addition, third parties may, from time to time, assert claims against us in the form of letters and other communications.



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The results of legal proceedings and claims are inherently unpredictable. We do not believe any currently pending matters will have a material adverse effect on our business based on our current understanding of such matters. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

Item 1A. Risk Factors



Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this Quarterly Report, including our financial statements and related notes, which could have a material adverse effect on our business, financial condition, results of operations and prospects. The risks described below are not the only risks facing us. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition, results of operations and prospects. In addition, the impact of COVID-19 and any worsening of the economic environment may exacerbate the risks described below, any of which could have a material impact on us. This situation is changing rapidly and additional impacts may arise that we are not aware of currently.



Risks Relating to Our Business, Industry and Financial Condition 



Since we have a limited operating history and have not commenced any revenue producing operations, it is difficult to evaluate the future of our business.  



We are a bioelectric medicine technology company and have not yet commenced revenue-producing operations. To date, our operations on a consolidated basis have consisted of the continued development and clinical studies of our technologies and implementation of the early parts of our business plan. We have incurred significant operating losses in each year since our inception and we may continue to incur additional losses for the next several years. In addition, a high percentage of our expenses will continue to be fixed; accordingly, our losses may be greater than expected and our operating results may suffer. We have limited historical financial data upon which we may base our projected revenue and base our planned operating expenses. Our limited operating history makes it difficult to evaluate our technology or prospective operations and business prospects. 



We currently have no commercial products or product revenue and may never become profitable. 



To date, we have not generated revenue and have relied on financing from the sale of equity securities to fund our operations. We expect that our future financial results will depend primarily on our success in obtaining clearance or approval for, launching, selling and supporting our therapies and treatments utilizing our CellFX System or other products based on NPS technology; however, our technology is still in development and has not been cleared or approved to treat any disease or condition. We expect to expend significant resources on hiring of personnel, continued scientific and product research and development, potential product testing and pre-clinical and clinical investigation, intellectual property development and prosecution, marketing and promotion, capital expenditures, working capital, general and administrative expenses, and fees and expenses associated with our capital raising efforts. We expect to incur costs and expenses related to consulting costs, laboratory development costs, hiring of scientists, engineers, sales representatives and other operational personnel, and the continued development of relationships with potential partners as we continue to seek regulatory clearance or approval for our products. We are incurring significant operating losses, we expect to continue to incur additional losses for at least the next several years, and we cannot assure you that we will generate revenue or be profitable in the future. Our future products may never be cleared or approved or become commercially viable or accepted for use. Even if we find commercially viable applications for our technology, which may include licensing, we may never recover our research and development expenses.



Investment in medical technology is highly speculative, because it entails substantial upfront capital expenditures and significant risk that any potential product will fail to demonstrate adequate efficacy or clinical utility. Investors should evaluate an investment in us in light of the uncertainties encountered by developing medical technology companies in a competitive environment. There can be no assurance that our efforts will be successful or that we will ultimately be able to achieve profitability. Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable could adversely affect the market price of our common stock and could significantly impair our ability to raise capital, expand our business or continue to implement our business plan.



There is substantial doubt about our ability to continue as a going concern.



To date, we have not generated any revenue and  we have incurred significant operating losses in each year since our inception and we may continue to incur additional losses for the next several years. In connection with our Annual Report on

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Form 10-K for the year ended December 31, 2019, management concluded that there is substantial doubt we can continue as an ongoing business for the next twelve months from the date that our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019 were issued unless we obtain additional capital. As a result, our independent registered public accountants included an explanatory paragraph in their auditors’ report relating to going concern.   



We plan to raise additional capital to fund our operations, including via a proposed rights offering seeking to raise gross proceeds of approximately $30 million, assuming such rights offering is fully subscribed and excluding the proceeds from any warrants which may be issued in the rights offering and exercised following the completion of the offering. There is no assurance that the rights offering will be successful, or that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to us. Accordingly, management cannot conclude that such plans will be effectively implemented within the twelve months from the date that our unaudited condensed consolidated interim financial statements included in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 were issued.  



These factors, combined with our forecast of cash required to fund operations for a period of at least twelve months from the date that unaudited condensed consolidated interim financial statements included in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 were issued, raise substantial doubt about our ability to continue as a going concern.    





If we are unable to obtain sufficient funding, we may be unable to execute our business plan and fund operations. We may not be able to obtain additional financing on commercially reasonable terms, or at all. 



We have experienced operating losses, and we may continue to incur operating losses for the next several years as we implement our business plan. Currently, we have no revenue and do not have arrangements in place for all the anticipated financing that would be required to fully implement our business plan. Our prior losses combined with expected future losses, have had and will continue to have, for the foreseeable future, an adverse effect on our stockholders’ equity and working capital.



We will need to raise additional capital in order to continue to execute our business plan in the future including by pursuing a rights offering, which has been approved by our board of directors, to raise gross proceeds of approximately $30 million, assuming such rights offering is fully subscribed and excluding the proceeds from any warrants which may be issued in the rights offering and exercised following the completion of the offering.



There is no assurance that the rights offering will be successful, or that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to us. If we are unable to raise sufficient additional funds, we will have to scale back our operations. The ongoing COVID-19 pandemic and resulting negative impact on the global macroeconomic environment and capital markets may make it more difficult for us to raise additional funds.



We cannot give any assurance that we will be able to obtain all the necessary funding that we may need. In addition, we believe that we will require additional capital in the future to fully develop our technologies and planned products to the stage of a commercial launch. We have pursued and may pursue additional funding through various financing sources, including the private sale of our equity and debt securities, licensing fees for our technology, joint ventures with capital partners and project type financing. If we raise funds by issuing equity or equity-linked securities, dilution to some or all our stockholders will result. Any equity securities issued may also provide for rights, preferences or privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings could impose significant restrictions on our operations. We also may seek government-based financing, such as development and research grants. There can be no assurance that funds will be available on commercially reasonable terms, if at all.



The incurrence of indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights, and other operating restrictions that could adversely affect our ability to conduct our business. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our common stock to decline. In the event that we enter into collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms. These agreements may require that we relinquish, or license to a third party on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves, or reserve certain opportunities for future potential arrangements when we might otherwise be able to achieve more favorable terms. In addition, we may be forced to work with a partner on one or more of our products or market development programs, which could lower the economic value of those programs to us.



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If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, we may terminate or delay the development of one or more of our products, delay clinical trials necessary to market our products, or delay establishment of sales and marketing capabilities or other activities necessary to commercialize our products. If this were to occur, our ability to grow and support our business and to respond to market challenges could be significantly limited or we may be unable to continue operations, in which case you could lose your entire investment.



Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations.



Our quarterly and annual operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. These fluctuations may occur due to a variety of factors, many of which are outside of our control and may be difficult to predict, including:



·

the timing and cost of, and level of investment in, research, development and commercialization activities relating to our product candidates, which may change from time to time;



·

the timing of receipt of approvals or clearances for our product candidates from regulatory authorities in the United States (U.S.) or internationally;



·

the timing and status of enrollment for our clinical trials;



·

coverage and reimbursement policies with respect to our product candidates, if approved or cleared, including the degree to which treatments using our products are covered and receive adequate reimbursement from third-party payors, and potential future drugs or devices that compete with our product candidates;



·

the cost of manufacturing our product candidates, as well as building out our supply chain, which may vary depending on the quantity of production and the terms of our agreements with manufacturers;



·

expenditures that we may incur to acquire, develop or commercialize additional product candidates and technologies;



·

the level of demand for our products, if approved or cleared, which may vary significantly over time;



·

litigation, including patent, employment, securities class action, stockholder derivative, general commercial and other lawsuits;



·

future accounting pronouncements or changes in our accounting policies; and



·

the timing and success or failure of nonclinical studies and clinical trials for our product candidates or competing product candidates, or any other change in the competitive landscape of our industry, including consolidation among our competitors or partners.



The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance.



This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenue or earnings guidance we may provide.



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We expect to operate in a highly competitive market, we may face competition from large, well-established medical technology, device and product manufacturers with significant resources, and we may not be able to compete effectively.



The medical technology, medical device, biotechnology and pharmaceutical industries are characterized by intense and dynamic competition to develop new technologies and proprietary therapies. We face competition from a number of sources, such as pharmaceutical companies, medical device companies, generic drug companies, biotechnology companies and academic and research institutions. We may find ourselves in competition with companies that have competitive advantages over us, such as:



·

significantly greater name recognition;



·

established relations with healthcare professionals, customers and third-party payers;



·

greater efficacy or better safety profiles;



·

established distribution networks;



·

additional lines of products, and the ability to offer rebates, higher discounts or incentives to gain a competitive advantage;



·

greater experience in obtaining patents and regulatory approvals for product candidates and other resources;



·

greater experience in conducting research and development, manufacturing, clinical trials, obtaining regulatory approval for products, and marketing approved products; and



·

greater financial and human resources for product development, sales and marketing, and patent litigation.



We may also face increased competition in the future as new companies enter our markets and as scientific developments surrounding electro-signaling therapeutics continue to accelerate. While we will seek to expand our technological capabilities to remain competitive, research and development by others may render our technology or product candidates obsolete or noncompetitive or result in treatments or cures superior to any therapy developed by us. In addition, certain of our product candidates, if cleared or approved, may compete with other dermatological products, including over-the-counter (OTC) treatments, for a share of some patients’ discretionary budgets and for physicians’ attention within their clinical practices. Even if a generic product or an OTC product is less effective than our product candidates, a less effective generic or OTC product may be more quickly adopted by physicians and patients than our competing product candidates based upon cost or convenience. As a result, we may not be able to compete effectively against current and potential future competitors or their devices and products. 



Our business may be adversely affected by health epidemics including the recent coronavirus outbreak.



In December 2019, an outbreak of a novel strain of coronavirus (COVID-19) originated in Wuhan, China and has since spread globally. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. In addition, most states in the U.S., including California, where we are headquartered, have declared a state of emergency.  The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns.

In accordance with local and state guidelines regarding the COVID-19 pandemic, we are requiring all of our employees to work remotely unless they cannot perform their essential functions remotely, and have also suspended all non-essential travel for our employees. While many of our employees are accustomed to working remotely or working with other remote employees, much of our workforce has not historically been remote. Although we continue to monitor the situation and may adjust our current policies as more information and public health guidance becomes available, temporarily suspending travel and restricting the ability to do business in person may create operational or other challenges, any of which could harm our business, financial condition and results of operations.



In addition, our clinical trials may be affected by the COVID-19 outbreak. Site initiation and patient enrollment may be delayed, for example, due to prioritization of hospital resources toward the COVID-19 outbreak, travel restrictions imposed by governments, and the inability to access sites for initiation and monitoring. Also, some of our suppliers of certain materials used in the production of our product candidates are located in areas impacted by COVID-19 which could limit our ability to

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obtain sufficient materials for our product candidates. COVID-19 has and will continue to adversely affect global economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our product candidates, if approved, and impact our operating results. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of the continued global economic impact of the pandemic. We could harm our business and we cannot anticipate all of the ways in which health epidemics such as COVID-19 could adversely impact our business. Although we are continuing to monitor and assess the effects of the COVID-19 pandemic on our business, the ultimate impact of the COVID-19 outbreak or a similar health epidemic is highly uncertain and subject to change.



We may rely on third parties for our sales, marketing, manufacturing and/or distribution, and these third parties may not perform satisfactorily. 



We do not currently conduct any aspects of sales, marketing, large-scale manufacturing or distribution. To be able to commercialize our planned products, we may elect to internally develop all of the foregoing or utilize third parties with respect to one or more of these items. Our reliance on these third parties may reduce our control over these activities; however, reliance on third parties does not relieve us of our responsibility to ensure compliance with all required legal, regulatory and scientific standards. These third parties may be adversely impacted by COVID-19 which could affect their ability to perform satisfactorily. Any failure of these third parties to perform satisfactorily and in compliance with relevant laws and regulations could lead to delays in the development of our planned products, including delays in our clinical trials, or failure to obtain regulatory approval for our planned products, or failure to successfully commercialize our planned products or other future products. Some of these events could be the basis for FDA or other regulatory action, including injunction, recall, seizure or total or partial suspension of production.



We do not have any corporate experience in establishing these capabilities, and therefore, we may be unsuccessful in achieving commercialization and earning revenues. We believe that setting up the commercialization aspects of a company will take a substantial amount of capital and commitment of time and effort. We may seek development and marketing partners and license our technology to others in order to avoid our having to provide the marketing, manufacturing and distribution capabilities within our organization. There can be no assurance that we will find any development and marketing partners or companies that are interested in licensing our technology. If we are unable to establish and maintain adequate sales, marketing, manufacturing and distribution capabilities, independently or with others, we will not be able to generate product revenue, and may not become profitable.



If we lose key management personnel, our ability to identify, develop and commercialize new or next generation product candidates will be impaired, could result in loss of markets or market share and could make us less competitive.



We are highly dependent upon the principal members of our management team, including our Chief Executive Officer, Darrin Uecker, and members of our finance, sales, marketing, scientific and engineering teams. These persons have significant experience and knowledge with sub-microsecond pulsed electric fields and more broadly in aesthetics, dermatology, life sciences and medical technologies. The loss of any team member could impair our ability to design, identify, and develop new intellectual property and new scientific or product ideas. The loss of a key employee, the failure of a key employee to perform in his or her current position or our inability to attract and retain skilled employees could result in our inability to continue to grow our business or to implement our business strategy. We compete for qualified management and scientific personnel with other life science companies, academic institutions and research institutions. Our employees could leave our company with little or no prior notice and may be free to work for a competitor. If one or more of our senior executives or other key personnel were unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, and other senior management may be required to divert attention from other aspects of the business. In addition, we do not have “key person” life insurance policies covering any member of our management team or other key personnel. The loss of any of these individuals or any inability to attract or retain qualified personnel, including scientists, engineers and others, could prevent us from pursuing collaborations and materially and adversely affect our product development and introductions, business growth prospects, results of operations and financial condition. 



There is a limited talent pool of experienced professionals in our industry. If we are not able to retain and recruit personnel with the requisite technical skills, we may be unable to successfully execute our business strategy.



The specialized nature of our industry results in an inherent scarcity of experienced personnel in the field. Our future success depends upon our ability to attract and retain highly skilled personnel, including scientific, technical, commercial, business, regulatory and administrative personnel, necessary to support our anticipated growth, develop our business and perform certain contractual obligations. Given the scarcity of professionals with the scientific knowledge that we require and the competition for qualified personnel among life science businesses, we may not succeed in attracting or retaining the personnel we require to continue and grow our operations.

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Rapidly changing technology in life sciences could make the products we are developing obsolete. 



The life sciences industries are characterized by rapid and significant technological changes, frequent new product introductions and enhancements and evolving industry standards. Our future success will depend on our ability to continually develop and then improve the products that we design and to develop and introduce new products that address the evolving needs of our customers on a timely and cost-effective basis. We also will need to pursue new market opportunities that develop as a result of technological and scientific advances. These new market opportunities may be outside the scope of our proven expertise or in areas which have unproven market demand. Any new products developed by us may not be accepted in the intended markets. Our inability to gain market acceptance of new products could harm our future operating results.



If we are unable to manage the anticipated growth of our business, our future revenue and operating results may be harmed.



We have experienced rapid growth in our business. Recent and future growth imposes significant added responsibilities on management, including the need to identify, recruit, train and integrate additional employees. Rapid expansion in personnel could mean that less experienced people carry out our research and development activities, manufacture, market and sell CellFX System and NPS therapies and treatments, which could result in inefficiencies and unanticipated costs, reduced quality and disruptions to our operations. In addition, rapid and significant growth may strain our administrative and operational infrastructure, and the failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrence of unexpected expansion difficulties could have a material adverse effect on our business, financial condition and results of operations and our ability to timely execute our business plan. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our business could be harmed.



Unfavorable global economic or political conditions could adversely affect our business, financial condition or results of operations.



Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets including the negative impact of COVID-19 on the global economy and markets. Furthermore, the market for aesthetic medical treatments may be particularly vulnerable to unfavorable economic conditions. A global financial crisis or a global or regional political disruption could cause extreme volatility in the capital and credit markets as has recently been the case due to COVID-19. A severe or prolonged economic downturn or political disruption could result in a variety of risks to our business, including weakened demand for our lead product candidates or any future product candidates, if approved, and our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy or political disruption could also strain our manufacturers or suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the political or economic climate and financial market conditions could adversely impact our business.



We are subject to laws and regulations relating to personally identifiable information, and maintain other sensitive information. Security breaches, loss of data and other disruptions to us or our third-party service providers could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation. 



In the ordinary course of our business, we, and our third-party service providers may collect and store sensitive data, including legally protected health information, personally identifiable information about our patients, information related to our trials, intellectual property, and our proprietary business and financial information. We manage and maintain our applications and data utilizing a combination of on-site and vendor-owned systems. We face a number of risks related to our protection of, and our service providers’ protection of, this critical information, including loss of access, data, unauthorized disclosure and unauthorized access, as well as risks associated with our ability to identify and audit such events.



Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure, or those of our vendors, may be vulnerable to attacks by hackers or viruses or otherwise breached due to employee error, malfeasance or other activities. While we have not experienced any such attack or breach, we, and our vendors may be unable to anticipate attacks, to implement adequate preventative or mitigation measures, to identify any attacks or incidents on a timely basis, or to remediate or otherwise address any attacks or incidents in a timely manner. If any such attack or other incident were to occur, our systems and networks would be compromised and the information we store on those systems and networks could be accessed by unauthorized parties, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in a loss of intellectual property protection, legal claims or proceedings, liability under laws that protect the privacy of personal information, such as the federal Health Insurance Portability and Accountability Act

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of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act of 2009  (HITECH), and the California Consumer Privacy Act of 2018 (the CCPA), which was enacted in June 2018 and became operative on January 1, 2020, or regulatory penalties, and could require substantial efforts to remediate and otherwise respond to the incident. The CCPA requires covered companies to, among other things, make certain enhanced disclosures related to California residents regarding our use or disclosure of their personal information, allow California residents to opt-out of certain uses and disclosures of their personal information without penalty, provide Californians with other choices related to personal data in our possession, and obtain opt-in consent before engaging in certain uses of personal information relating to Californians under the age of 16. The California Attorney General may seek substantial monetary penalties and injunctive relief in the event of our non-compliance with the CCPA. The CCPA also allows for private lawsuits from Californians in the event of certain data breaches. Certain aspects of the CCPA and its interpretation remain uncertain, and we may need to modify our policies or practices in an effort to comply with it.



Unauthorized access, loss or dissemination could also disrupt our operations, including our ability to process tests, provide test results, provide services, conduct research and development activities, collect, process and prepare company financial information, provide information about our product candidates and manage the administrative aspects of our business and could damage our reputation, any of which could adversely affect our business. We cannot be certain that our insurance coverage will be adequate for data handling or data security liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any future claim will not be excluded or otherwise be denied coverage by any insurer. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results and reputation.



In addition, the interpretation and application of federal and state consumer, health-related and data protection laws in the U.S. are often uncertain, contradictory and in flux. It is possible that these laws may be interpreted and applied in a manner that is, or alleged to be, inconsistent with our practices. If so, this could result in regulatory investigations and enforcement actions, private litigation, claims for damages, and government-imposed fines or orders requiring that we change our practices, any of which could adversely affect our business. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices, systems and compliance procedures in a manner adverse to our business.



Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop. 



We face an inherent risk of product liability exposure related to the future sale of planned products and the use of planned products in human clinical studies. For example, we may be sued if any of our product candidates, including any that are developed in combination therapies, allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. We may also be subject to liability for a misunderstanding of, or inappropriate reliance upon, the information we provide. If we cannot successfully defend ourselves against claims that our planned products caused injuries, we may incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:



·

decreased demand for any planned products that we may develop;



·

injury to our reputation and significant negative media attention;



·

withdrawal of patients from clinical studies or cancellation of studies;



·

significant costs to defend the related litigation and distraction to our management team;



·

substantial monetary awards to patients;



·

loss of revenue; and



·

the inability to commercialize any products that we may develop.



For example, for our clinical trials in the field of oncology, patients with the types and stages of cancer targeted by our NPS technology may already be in severe and advanced stages of disease, may have worsened conditions despite traditional therapies, may not be surgical candidates, and/or may have both known and unknown significant pre-existing and potentially

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life-threatening conditions. During the course of treatment, patients may suffer adverse events, including death, for reasons that may be related to our CellFX System or our NPS technology. Such events could subject us to costly litigation, require us to pay substantial amounts of money to injured patients, delay, negatively impact or end our opportunity to receive or maintain regulatory approval to market those products, or require us to suspend or abandon our commercialization efforts. Even in a circumstance in which we do not believe that an adverse event is related to our product, the investigation into the circumstance may be time-consuming or inconclusive. These investigations may interrupt our sales efforts, delay our regulatory approval processes, or impact and limit the type of regulatory approvals our products could receive or maintain. As a result of these factors, a product liability claim, even if successfully defended, could harm our business.



We currently maintain product liability insurance coverage, which may not be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.



We may become involved in litigation that may materially adversely affect us.



From time to time, we may be involved in a variety of claims, lawsuits, investigations and proceedings relating to securities laws, product liability, patent infringement, contract disputes and other matters relating to various claims that arise in the normal course of our business in addition to governmental and other regulatory investigations and proceedings. In addition, third parties may, from time to time, assert claims against us in the form of letters and other communications. Such matters can be time-consuming, divert management’s attention and resources, cause us to incur significant expenses or liability and/or require us to change our business practices. Because of the potential risks, expenses and uncertainties of litigation, we may, from time to time, settle disputes, even where we have meritorious claims or defenses, by agreeing to settlement agreements. Because litigation is inherently unpredictable, we cannot assure you that the results of any of these actions will not have a material adverse effect on our business, financial condition, results of operations and prospects. See the section entitled “Legal Proceedings” for more detail on our current legal proceedings.



Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited. 



We have incurred net losses since our inception and anticipate that we may continue to incur significant losses for the foreseeable future. If not utilized, the federal and state net operating losses (NOL) carryforwards will begin to expire in various years beginning after 2034. Under the Internal Revenue Code of 1986, as amended, or the Code, and certain similar state tax provisions, a corporation is generally allowed a deduction for NOLs, carried over from a prior taxable year. Under those provisions, we can carry forward our NOLs to offset our future taxable income, if any, until such NOLs are used or expire. The same is true of other unused tax attributes, such as tax credits.



In addition, under Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. We believe that we have had one or more ownership changes, and, as a result, a portion of our existing NOLs may be subject to limitation. Future changes in our stock ownership could result in additional limitations. We may not be able to utilize a material portion of our NOLs even if we attain profitability.



Further, in December 2017, the Tax Cuts and Jobs Act (TCJA) was enacted into law. The change in the tax law was partially effective in 2017 and fully effective in 2018. The primary impacts to us include a decrease of the corporate income tax rate structure and NOL limitations. We are assessing the TCJA with professional advisers, and believe that the impact of the TCJA on our business may not be fully known for some time, and until such analysis is complete, the full impact of the new tax law on us in future periods is uncertain, and no assurances can be made by us on any potential impacts.



We have a substantial amount of goodwill and intangible assets which over time may have to be written down as we make the required periodic assessments as to their value as reflected in our financial statements.   



A significant portion of our total assets are comprised of goodwill and intangibles that arose from our 2014 business acquisitions. We review goodwill for impairment at least annually or whenever changes in circumstances indicate that the carrying value of the goodwill may not be recoverable. We also review our intangible assets for impairment at each fiscal year end or when events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. If we take an impairment charge for either goodwill or intangible assets, the overall assets will be reduced. Such an impairment charge may result in a change in the perceived value of the company and ultimately may be reflected as a reduction in the market price of our securities. Additionally, an impairment charge may also adversely influence our ability to raise capital in the future.



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If we experience material weaknesses in the future or otherwise fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock. 



As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Generally Accepted Accounting Principles. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective.



In connection with the preparation of our financial statements as of and for the year ended December 31, 2016, we identified a material weakness in our internal control over financial reporting. The material weakness related to a lack of effective controls to adequately restrict access and segregate duties. We implemented measures and remediated the material weakness in 2017; however, we cannot assure you that the measures we have taken to date, and are continuing to implement, will be sufficient to avoid potential future material weaknesses. The identification of one or more material weaknesses would preclude a conclusion that we maintain effective internal control over financial reporting. Accordingly, there could continue to be a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis.



We are required to disclose changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to report on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (JOBS Act) if we continue to take advantage of the exemptions contained in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future. If we are unable to assert that our internal control over financial reporting is effective, or when required in the future, if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be adversely affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources. 



Our facilities in California are located near known earthquake faults, and the occurrence of an earthquake or other catastrophic disaster could cause damage to our facilities and equipment, which could require us to cease or curtail operations. 



Our facilities in Hayward, California are located near known earthquake fault zones and are vulnerable to damage from earthquakes. We are also vulnerable to damage from other types of disasters, including fire, floods, power loss, communications failures and similar events. If any disaster were to occur, our ability to operate our business at our facilities would be seriously, or potentially completely, impaired. In addition, the nature of our activities could cause significant delays in our research programs and commercial activities and make it difficult for us to recover from a disaster. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions. Accordingly, an earthquake or other disaster could materially and adversely harm our ability to conduct business.

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Risks Related to Product Development



We currently do not have any products approved or cleared by the FDA or other similar foreign regulatory authorities for commercial sale or any commercialized products. 



To date, we have invested a substantial amount of time and capital to research and develop the foundations of our technology and potential applications. For us to develop any products that might ultimately be commercialized, we will have to invest further time and capital in research and product development, obtaining regulatory approval or clearance, implementing regulatory compliance standards, and market development. Pending regulatory clearance or approval of our CellFX System, we plan to commercially introduce our CellFX System in the U.S. However, we may never develop any products that can be commercialized. All of our development efforts will require substantial additional investment, which may never result in any revenue. Our efforts may not lead to approved or commercially successful products for a number of reasons, including:



·

we  may not be able to complete the development of any planned products;



·

we may not be able to obtain regulatory approvals or clearances for our planned products and indications that we have studied, or the approved or cleared indications may be narrower than we seek;



·

we  may experience delays in our development program, clinical trials and the regulatory approval or clearance process including as a result of COVID-19;  



·

our NPS technology may not prove to be safe or effective in one or more clinical trials;



·

the actual and perceived effectiveness and reliability of our products, especially relative to alternative products may be perceived negatively;



·

the results of clinical trials relating to the use of our products may not be what we expect or desire;



·

the availability, relative cost and perceived advantages and disadvantages of alternative technologies or uses thereof may impact any future sales of our products;



·

physicians may not adopt our products, or may not adopt our products to a degree sufficient to reach profitability;



·

we may not be able to obtain, maintain, protect and enforce our intellectual property rights with respect to our products;



·

we may not be able to sustain a meaningful clinical benefit better than our competitors and alternative treatments or therapies;



·

we may not be able to achieve and maintain compliance with all regulatory requirements applicable to our products;



·

we may not be successful in educating medical professionals, including about the benefits of our products;



·

the strength of our marketing and distribution infrastructure may not be sufficient;



·

our distributors’ marketing and sales efforts in the U.S. and abroad, including our efforts to build out our sales team,  may be inadequate;



·

the level of education and awareness among medical professionals concerning our products;



·

we may not develop positive reputation among physicians,  clinics or patients;



·

we may not be able to continue to develop, validate and maintain a commercially viable manufacturing process that is compliant with current Good Manufacturing Practices (cGMP) and Quality Systems Regulations (QSR);

·

we may be required by the FDA or comparable non-U.S. regulatory authorities to conduct additional clinical trials for future or current indications;



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·

physicians may not receive any reimbursement from third-party payers, or the level of reimbursement may be insufficient to support widespread adoption of any of our products;



·

any products that are approved or cleared by regulatory authorities may not be accepted in the marketplace by physicians or patients;



·

we  may not be able to manufacture our products in commercial quantities or at an acceptable cost; and



·

rapid technological change or the appearance of a new competitive technology may make our technology and products obsolete.



Clinical development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.



Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure or delay can occur at any time during the clinical trial process. Success in nonclinical studies and early feasibility clinical studies does not ensure that expanded clinical trials that will be used to support regulatory submissions will be successful. These setbacks have been caused by, among other things, nonclinical findings made while clinical trials were underway, and safety or efficacy observations made in clinical trials, including previously unreported adverse events. Even if our clinical trials are completed, the results may not be sufficient to obtain regulatory approval or clearance for our product candidates. 



Interim “top-line” and preliminary results from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.



From time to time, we may publish interim top-line or preliminary results from our clinical trials. Interim results from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Preliminary or top-line results also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, interim and preliminary data should be viewed with caution until the final data are available. Differences between preliminary or interim data and final data could significantly harm our business prospects and may cause the trading price of our common stock to fluctuate significantly.



If we fail to obtain and maintain necessary regulatory clearances or approvals for our planned products, or if clearances or approvals for future devices and indications are delayed or not issued, our commercial operations would be harmed. Additionally, changes in methods of product candidate manufacturing may result in additional costs or delay.



Our product candidates under development are medical devices that are subject to extensive regulation by FDA in the U.S. and by regulatory agencies in other countries where we plan to do business. Government regulations specific to medical devices are wide-ranging and govern, among other things:



·

device design, development and manufacture;



·

laboratory, pre-clinical and clinical testing, labeling, packaging, storage and distribution;



·

premarketing clearance or approval;



·

record keeping;



·

device marketing, promotion and advertising, sales and distribution; and



·

post-marketing surveillance, including reporting of deaths and serious injuries and recalls and correction and removals.



Before a new medical device or a new intended use for, an existing device can be marketed in the U.S., a company must first submit and receive either 510(k) clearance or premarketing approval (PMA) from the FDA, unless an exemption applies. In the 510(k) clearance process, the FDA will determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. Clinical data is sometimes required to support substantial equivalence. The PMA

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pathway requires an applicant to demonstrate reasonable safety and effectiveness of the device based on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. Products that are approved through a PMA application generally need FDA approval before they can be modified. Similarly, some modifications made to products cleared through a 510(k) may require a new 510(k). Either process can be expensive, lengthy and unpredictable. For example, during February 2019, we submitted a 510(k) to the FDA seeking clearance to commercialize our CellFX System. In February 2020, we received a “not substantially equivalent” (NSE) letter from the FDA, indicating that based on the data provided, we had not demonstrated that the CellFX System is substantially equivalent to the predicate device, concluding the 510(k) review process without clearance. This failure to obtain 510(k) clearance has added significant time and expense to our regulatory clearance process (including additional expense that we will incur in preparing a new 510(k) submission), has delayed our ability to generate revenue, and has had a negative impact on our stock price. We will continue to work with the FDA in pursuit of a clearance via a new 510(k) submission. However, we may not be able to obtain the necessary clearances or approvals necessary to market our CellFX System or such approvals or clearances may be unduly delayed, which could harm our business. If the FDA rejects our new 510(k) submission, we may be required to obtain FDA approval through the de novo pathway, which will require additional time and resources, including the need to conduct more clinical studies to demonstrate safety and effectiveness of our candidate device.



The FDA may not approve or clear, or may delay approval or clearance of, our 510(k), de novo, or PMA applications on a timely basis or at all. Such delays or refusals could have a material adverse effect on our business operations and financial condition. The FDA may also change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our products under development. Any of these actions could have a material adverse effect on our business operations and financial condition.



The FDA and the Federal Trade Commission (FTC) also regulate the advertising and promotion of our devices to ensure that the claims we make are consistent with our regulatory clearances or approvals, that there are adequate and reasonable data to substantiate the claims and that our promotional labeling and advertising is neither false nor misleading in any respect. If the FDA or the FTC determines that any of our advertising or promotional claims are misleading, not substantiated or not permiss