Item7. 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 consolidated financial statements and the related notes thereto included in Item 8 under the heading “Financial Statements and Supplementary Data”. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K contains forward-looking statements that involve risks and uncertainties, including statements regarding our expected financial results in future periods. The words “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. 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 thisForm 10-Kfor 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.

Overview

Pulse Biosciences, Inc. is a novel bioelectric medicine company committed to health innovation using its patented Nano-Pulse StimulationTM technology, a revolutionary energy modality that delivers nanosecond-duration pulses of electrical energy, each less than a millionth of a second long, to non-thermally clear targeted cells while sparing adjacent noncellular tissue. NPS technology, also referred to as a Nanosecond Pulsed-Field AblationTM or nsPFATM technology when used to ablate cellular tissue, can be used to treat a variety of medical conditions for which an optimal solution remains unfulfilled. We developed our proprietary CellFX System®, a novel nsPFA delivery platform, and commercialized the initial application of our nsPFA technology to treat benign lesions of the skin. In parallel, we designed a variety of applicators to explore the potential use of the CellFX platform to treat disorders in other medical specialties, such as cardiology, gastroenterology, gynecology, and ear nose and throat. These applicators include devices for open surgical procedures, endoscopic or minimally invasive procedures, and endoluminal catheters, and each has been used in preclinical studies. Based on our preclinical experience and the potential to significantly improve outcomes for patients in a large and growing market, we decided in 2022 to focus our efforts on the use of nsPFA and the CellFX platform in the treatment of atrial fibrillation ("AF").

AF is a type of heart arrythmia, or irregular heartbeat, caused by faulty electrical signals in the heart. AF is a highly prevalent condition and is growing significantly with an ageing population. It is estimated that 43 million people worldwide are affected by AF. Treatment requires the precise and safe ablation of heart tissue to block or otherwise prevent these faulty electrical signals from causing the irregular heartbeat, and we believe nsPFA technology is uniquely suited to perform an integral role for this application and that it will prove to be highly differentiated from standard thermal energy modalities in use today. We have developed a cardiac ablation clamp for use in cardiac surgery and a cardiac ablation catheter for use in electrophysiology and we are currently testing both in preclinical models. While these devices serve different physicians, the application of the energy to safely and effectively ablate cardiac tissue and the treatment of AF are the same, and we believe there will be important synergies realized through their contemporaneous development. Our cardiac ablation clamp and cardiac ablation catheter both use the CellFX System to generate our proprietary pulses of electrical energy.

Our surgical cardiac ablation clamp is designed for use by cardiac surgeons during the surgical treatment of AF. The standard of care surgical procedure for the treatment of AF is performed by cardiac surgeons and called the Cox-Maze procedure. The Cox-Maze procedure typically uses thermal ablation technologies, such as heat with radiofrequency ablation or cold with cryoablation, to create specific ablation lines in the heart muscle. The ablation lines block the conduction of electrical impulses and can cure the patient of their atrial fibrillation.

We believe our nsPFA technology can provide important advantages over today’s thermal modalities in creating these ablation lines. For example, surgeons using the CellFX System should be able to deliver faster ablations through thicker tissue than thermal modalities because of the nonthermal mechanism of action that nsPFA employs, which is not affected by heatsinks such as the blood in the heart. Thermal modalities are also known to have problems with char formation on electrode surfaces which can cause gaps in the ablation lines leading to treatment failure and require the char to be scraped off by the surgeon during the procedure. Again, this should not be an issue with nsPFA ablation given its nonthermal nature. Because nsPFA ablation does not impact acellular tissue, such as collagen or cartilage, our technology has the potential to offer significant safety advantages over thermal modalities by allowing surgeons to ablate near and into vessels and valves without concern of permanent damage. And finally, nsPFA ablation has been shown to spare nerves of any permanent damage even when treated directly, which is another concern for thermal modalities. We believe these advantages will be profoundly important to cardiac surgeons treating AF, so we are working with leaders in the field to develop this technology quickly.

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 have sufficient cash and cash equivalents on hand to support current operations for the twelve months following the filing of this Annual Report. We plan to seek to raise capital from time to time through public or private equity offerings, debt financings, our at-the-market equity offering program, or to enter into collaborations with third parties, to fund our future operations.

Over the past few years, Mr. Duggan has made significant investments in our Company to fund its operations. In June 2022, we completed a common stock rights offering to our existing stockholders of record, which raised $15 million in aggregate. Mr. Duggan purchased approximately 56% of the shares offered through this offering. Then, in September 2022, we entered into the 2022 Loan Agreement pursuant to which Mr. Duggan lent the Company $65 million to fund its product development operations. Mr. Duggan may or may not elect to participate in any number of our future fundraisings, as described above, and he may choose to invest more than his current pro rata share in any of these fundraisings, or alternatively he may offer to provide additional debt financing as may be needed in order to maintain the Company as a going concern.

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The source, timing and availability of any future financing will depend largely upon market conditions and perceived progress in the Company’s on-going product development initiatives, as well as future clinical and regulatory developments concerning the CellFX System and our other NPS-based technologies. Funding may not be available when needed, at all or on terms acceptable to us. Lack of necessary funds may require us to, among other things, delay, scale back or eliminate some or all of our commercial activities, reduce headcount, trim research and product development programs, discontinue clinical trials, stop all or some of our manufacturing operations, defer capital expenditures, deregister from being a publicly traded company and delist from Nasdaq, or license our potential products or technologies to third parties, possibly on terms that cannot sustain our current business. In addition, the recent decline in economic activity caused by the armed conflict between Russia and Ukraine and by the COVID pandemic, together with the deterioration of the credit, banking and capital markets, could have an adverse impact on potential sources of future financing.

Critical Accounting Policies and Significant Judgments

The discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with the rules and regulations of the SEC. Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by management or can be materially affected by changes from period to period in economic factors or conditions that are outside of the Company’s control. As a result, these issues are subject to an inherent degree of uncertainty. In applying these policies, management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, future business plans and the projected financial results, the terms of existing contracts, trends in the industry and information available from other outside sources. We continually evaluate the accounting policies and estimates used in preparing our consolidated financial statements.

Income Taxes

We account for income taxes using the asset and liability method, whereby deferred tax assets and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted rates and laws that will be in effect when the differences are expected to reverse.

We provide a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. If we determine that we would be able to realize deferred tax assets in the future in excess of the recorded amount, an adjustment to the deferred tax assets would be credited to operations in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of its deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to operations in the period such determination was made.

We account for uncertainties in income tax law under a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed by Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 740-10- Accounting for Uncertainty in Income Taxes. The tax effects of a position are recognized only if it is “more-likely-than-not” to be sustained by the taxing authority as of the reporting date. If the tax position is not considered “more-likely-than-not” to be sustained, then no benefits of the position are recognized.

We are subject to U.S. federal income taxes and income taxes in California and various states. As our net operating losses have yet to be utilized, previous tax years remain open to examination by federal authorities and other jurisdictions in which we currently operate or have operated in the past. We are not currently under examination by any tax authority.

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Results of Operations

Comparison of the Years ended December 31, 2022 and 2021

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

Year Ended

December 31,

Revenues:

Cost and expenses:

Other expense:

Income tax benefit — — —

Revenues

Revenues decreased by $0.7 million to $0.7 million for the year ended December 31, 2022, from $1.4 million during the same period in 2021. The decrease in revenues was driven primarily by the September 2022 announcement to shift our strategic direction and advance our core NPS technology outside of dermatology, discontinuing further sales in the dermatology market.

Cost of Revenues

Cost of revenues increased by $10.0 million to $11.9 million for the year ended December 31, 2022, from $2.0 million during the same period in 2021 primarily driven by a $8.5 million inventory write-off recorded for excessive and obsolete inventory in accordance with our announced strategic shift to advance our core NPS technology outside of dermatology.

Research and Development

Research and development expenses consist of salaries and related expenses for 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 decreased by $7.8 million to $20.8 million in 2022 from $28.6 million in 2021 due to decreases of $3.6 million in stock-based compensation, $2.0 million in compensation and other employee related expenses and $2.0 million in clinical trial and other outside research costs. Compensation and other employee related expenses decreased primarily due to the decrease in headcount.

Sales and Marketing

Sales and marketing expenses consist of compensation and other related employee expenses for sales and marketing personnel, expenses associated with advertising and training, and marketing studies including our Controlled Launch program. Sales and marketing expenses decreased by $2.7 million to $12.0 million in 2022 from $14.7 million in 2021 due to decreases of $2.0 million in stock-based compensation and $1.9 million in paid services and promotional activities. These decreases were partially offset by an increase of $1.1 million in compensation and other employee related expenses. The reduction in paid services was related primarily to non-cash Controlled Launch expenses (see Footnote 8 for details of these non-cash expenses) and the reduction in stock-based compensation was related to the reduction in force. The increase in compensation and other employee related expenses was driven by timing, whereby the Company built up the sales force in the latter part of 2021 and early part of 2022, prior to the reduction in force in 2022.

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General and Administrative

General and administrative expenses consist of compensation and other related employee expenses for executives, 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 decreased by $5.1 million to $14.0 million in 2022 from $19.1 million in 2021 due to decreases of $3.8 million in stock-based compensation, $0.8 million in administrative costs driven by D&O insurance, $0.3 million in compensation and other employee related expenses, and $0.2 million in paid services. The reduction in stock-based compensation was related to the reduction in force and the decrease in compensation and other employee related expenses was driven by an overall reduction due to decrease in headcount, partially offset by an increase in severance costs in relation to the reduction in force.

Other Expense, net

Interest expense increased by $0.2 million to $0.9 million for the year ended December 31, 2022, from $0.7 million during the same period in 2021 driven by the 2022 Loan Agreement. Other expense increased by $0.2 million driven by a loss on disposal of assets. These were offset by an increase in interest income of $0.6 million primarily due to the higher cash and cash equivalents balance.

Comparison of the Years ended December 31, 2021, and 2020

Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations located in our Form 10-K for the fiscal year ended December 31, 2021, filed on March 31, 2022, for the discussion of the comparison of the fiscal year ended December 31, 2021, to the fiscal year ended December 31, 2020, the earliest of the three fiscal years presented in the consolidated financial statements.

Liquidity and Capital Resources

To date, we have not generated significant revenues from product sales. Since inception, we have funded our business primarily through the issuance of equity securities and debt. Over the next few years, we intend to invest in research and development to develop additional commercially viable products and to assess the feasibility of potential future products.

In June 2020, we completed a rights offering pursuant to which we sold an aggregate of 4,279,600 shares of our common stock, par value $0.001 per share, and 641,571 warrants, for net proceeds of $29.4 million. On December 31, 2020, the Company met the requirements for redemption of these warrants. Pursuant to the redemption, the Company redeemed 5,139 warrants at a redemption price of $0.01 per warrant. 636,432 warrants were exercised, generating approximately $4.5 million of additional net proceeds to the Company.

On February 4, 2021, we entered into a Sales Agreement with Stifel as sales agent, pursuant to which we may offer and sell, from time to time, through Stifel, up to $60.0 million in shares of our common stock, by any method permitted by law deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. We have no obligation to make any sales of our common stock pursuant to such Sales Agreement. During the year ended December 31, 2022, the Company did not issue or sell any shares of common stock under the Sales Agreement. During the year ended December 31, 2021, the Company issued and sold 288,490 shares of common stock under the Sales Agreement. The shares were sold at a weighted average price of $27.73 per share for aggregate net proceeds of approximately $7.4 million, after deducting sales commissions and offering costs payable by us.

In March 2021 we entered into a Loan Agreement with Robert W. Duggan, our Executive Chairman, in connection with Mr. Duggan lending the principal sum of $41.0 million to the Company. The Loan Agreement had a maturity date of June 11, 2022. Under the Loan Agreement, Mr. Duggan provided us, subject to certain conditions, an unsecured term loan facility in an original aggregate principal amount of $41.0 million. The Loan Agreement bore interest at a rate per annum equal to 5.0%, payable quarterly commencing on July 1, 2021. The Loan Agreement contained certain covenants and Events of Default.

On June 30, 2021, we entered into a Securities Purchase Agreement with Mr. Duggan, pursuant to which the Company issued and sold to Mr. Duggan 3,048,780 shares of the Company’s common stock, par value $0.001 per share, in a private placement, at a price per share of $16.40. The shares were paid for through (i) the conversion of the $41 million aggregate principal amount, together with all accrued and unpaid interest outstanding, pursuant to the Loan Agreement by and between the Company and Mr. Duggan (Note 13), and (ii) additional cash in the amount of approximately $8.4 million. Upon closing of this Private Placement and satisfaction of the outstanding debt, the Loan Agreement was terminated, without early termination fees or penalties being owed by the Company, and no additional amounts were owed to Mr. Duggan under the Loan Agreement. The cash proceeds of approximately $8.4 million were received by the Company in July 2021.

On June 9, 2022, we completed the 2022 Rights Offering resulting in the sale of 7,317,072 Units, at a price of $2.05 per Unit, with each Unit consisting of one share of the Company’s common stock, par value $0.001 per share, and one warrant to purchase one share of common stock. 7,317,072 shares of common stock and warrants to acquire up to an additional 7,317,072 shares of common stock were issued in the 2022 Rights Offering. The Company received aggregate gross proceeds from the 2022 Rights Offering of $15 million. If exercised, additional gross proceeds of up to $15 million may be received through the exercise of warrants issued in the 2022 Rights Offering. Each warrant is exercisable for one share of the Company’s common stock at an exercise price equal to $2.05. Warrants are exercisable immediately and expire on the fifth anniversary of the closing of the 2022 Rights Offering.

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In September 2022 we entered into the 2022 Loan Agreement with Robert W. Duggan, our Executive Chairman, in connection with Mr. Duggan lending the principal sum of $65.0 million to the Company. The 2022 Loan Agreement had a maturity date of March 20, 2024. Under the 2022 Loan Agreement, Mr. Duggan provided us, subject to certain conditions, an unsecured term loan facility in an original aggregate principal amount of $65.0 million. The 2022 Loan Agreement bears interest at a rate per annum equal to 5.0%, payable quarterly, commencing on January 1, 2023. On March 17, 2023, the Company and Mr. Duggan agreed to amend certain terms of the Loan Agreement. There were no changes to the interest rate, but the principal sum is now due and payable on September 30, 2024. The 2022 Loan Agreement contains certain covenants and Events of Default.

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

Year Ended December 31,

Net cash provided by (used in) investing activities $ (401 ) $ 7,563 $ 10,044

To date, we have generated limited revenue and used cash in our operating activities. 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. As of December 31, 2022, the Company had cash and cash equivalents of $61.1 million. We believe that our existing cash and cash equivalents will be sufficient to fund our projected operating requirements for at least the next twelve months from the filing date of this Annual Report. However, we plan to raise additional capital in the future. We can give no assurance, at this time, that additional financing or a collaboration will be available when needed on terms acceptable to us, however.

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, our at-the-market equity offering program, and/or potential new collaborations. 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 may 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 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, results of operations and cash flows. For example, lack of necessary funds may require us to, among other things, reduce headcount, trim research and product development programs, discontinue clinical trials, defer capital expenditures, deregister from being a publicly traded company and delist from Nasdaq, or license our potential products or technologies to third parties, possibly on terms that cannot sustain our current business. In addition, the recent decline in economic activity caused by the armed conflict between Russia and Ukraine and by the COVID pandemic, together with the deterioration of the credit and capital markets, could have an adverse impact on potential sources of future financing.

Operating Activities

During 2022, we used cash of $47.0 million in operating activities. The difference between cash used in operating activities and net loss consisted primarily of stock-based compensation, reserve for excessive and obsolete inventory, depreciation and amortization, accounts payable and accrued expenses, and right-of-use assets, partially offset by increases in accrued interest and inventory.

During 2021, we used cash of $54.1 million in operating activities. The difference between cash used in operating activities and net loss consisted primarily of stock-based compensation, depreciation and amortization, accounts payable and accrued expenses, and right-of-use assets, partially offset by increases in prepaid expenses and inventory.

Investing Activities

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

During 2022, cash used in investing activities was $0.4 million, which was for the purchase of property and equipment.

During 2021, cash provided from investing activities was $7.6 million, of which $8.0 million was provided from the maturities of investments, partially offset by cash used for the purchase of property and equipment.

Financing Activities

During 2022, cash provided from financing activities was $79.9 million, primarily due to $65.0 million of proceeds from our 2022 Loan Agreement, $14.9 million of proceeds from the sale of common stock in our rights offering and $0.5 million from the sale of stock under our employee stock purchase plan, partially offset by payments made on the Insurance Loan Agreement.

During 2021, cash provided from financing activities was $62.7 million, primarily due to $49.3 million net cash received from our Loan Agreement and Private Placement, $7.4 million net cash received from our at-the-market equity offering, $5.0 million received from stock option and warrant exercises, $0.4 million received, net of payments made to date, from the Insurance Loan Agreement and $0.8 million received from the sale of stock under our employee stock purchase plan.

Comparison of the Years ended December 31, 2021 and 2020

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Contractual Obligations

Frank Reidy Research Center Agreement

As provided for in the license agreement with Old Dominion University Research Foundation (“ODURF”) and Eastern Virginia Medical School (“EVMS”), effective on November 6, 2014, we sponsored certain approved research activities at ODURF’s Frank Reidy Research Center under a sponsored research agreement (“SRA”). In September 2019, we agreed to sponsor a task order for research in the amount of $0.8 million each to be performed during the subsequent 12-month period. In March 2021, we agreed to sponsor a task order for research in the amount of $0.3 million and in May 2021 we sponsored an additional task order for $0.3 million each to be performed during their respective subsequent 12-month periods. These sponsored researches are funded through monthly payments made upon ODURF certifying, to our reasonable satisfaction, that ODURF has met its obligations pursuant to the specified task order and statement of work. The principal investigator may transfer funds within the budget as needed with our approval so long as the obligations of ODURF under the task order and statement of work remain unchanged and unimpaired. During the years ended December 31, 2022, 2021 and 2020, we incurred costs relating to the SRA equal to $0.2 million, $0.3 million and $0.6 million, respectively. As of December 31, 2022, there are no unbilled SRAs left under the task orders.

Operating Lease

We currently lease approximately 50,300 square feet of premises located in Hayward, California, which is used for our corporate headquarters and principal operating facility. The term of the original lease included approximately 15,700 square feet for 62 months and commenced on July 1, 2017. In May 2019, we entered into an amendment which enabled us to expand the lease by approximately 34,600 additional square feet, for a total of approximately 50,300 square feet. The amendment also included an option to extend the term of the lease. Approximately 13,300 square feet of the additional space was occupied in November 2019 as part of the first phase, and the remaining approximately 21,300 square feet was occupied in May 2020 as part of the second phase. The term of the total lease was extended through October 2029.

The following table summarizes our contractual obligations as of December 31, 2022 (in thousands):

Payments Due by Period

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, or cash flows.

JOBS Act Accounting Election

Through the end of 2021, we were an emerging growth company as defined by the JOBS Act. Under the JOBS Act, we were given the option to 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 irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we were 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 the research and development of our technology, 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 financing in the future on acceptable terms or at all. If our technology cannot be used to successfully treat AF or if our cash resources are insufficient to satisfy our ongoing cash needs, we would be required to, among other things, delay, scale back or eliminate some or all of our activities, reduce headcount, trim research and product development programs, discontinue clinical trials, stop all or some of our manufacturing operations, defer capital expenditures, deregister from being a publicly traded company and delist from Nasdaq, license our potential products or technologies to third parties, possibly on terms that cannot sustain our current business, or curtail, suspend or discontinue our operations entirely.

Other than as discussed above and elsewhere in this Annual 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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Item7A.Quantitative and Qualitative Disclosures About Market Risk

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.

Interest Rate and Market Risk

Our exposure to interest rate and market risk is confined to our cash, cash equivalents and investments, all of which have maturities of less than one year. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of our cash and investments. We also seek to maximize income from our investments without assuming significant risk. To achieve our goals, we may maintain a portfolio of cash equivalents and investments in a variety of securities of high credit quality. The securities in our investment portfolio are not leveraged, are classified as available-for-sale, and are, due to their relatively short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that a hypothetical 10% change in market interest rates would have a material negative impact on the value of our investment portfolio. At December 31, 2022, we did not have any investments.

Foreign Exchange Risk

The majority of our expense and capital purchasing activities are transacted in U.S. dollars. In 2021, we expended operations and sales into Europe and Canada. While we currently have limited international operations, we may incur foreign exchange gains or losses in the future as we further commercialize and expand internationally.

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Item8. Financial Statements and Supplementary Data

PULSE BIOSCIENCES, INC.

Index to Consolidated Financial Statements

Page

Number

CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34) 38

Consolidated Balance Sheets 39

Consolidated Statements of Operations and Comprehensive Loss 40

Consolidated Statements of Stockholders’ (Deficit) Equity 41

Consolidated Statements of Cash Flows 42

Notes to Consolidated Financial Statements 43

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Pulse Biosciences, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Pulse Biosciences, Inc. and its wholly owned subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, stockholders' (deficit) equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

Critical audit matters are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

/s/ Deloitte & Touche LLP

San Jose, California

March 31, 2023

We have served as the Company's auditor since 2018.

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PULSE BIOSCIENCES, INC.

Consolidated Balance Sheets

(in thousands, except par value)

December 31,

ASSETS

Current assets:

Accounts receivable — 61

Prepaid expenses and other current assets 1,008 2,131

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Deferred revenue — 16

Lease liability, current 896 774

Note payable, current — 436

Related party note payable, current 917 —

Lease liability, less current portion 9,144 10,040

Related party note payable, less current 65,000 —

Commitments and contingencies (Note 13)

Stockholders’ equity:

Accumulated other comprehensive income (loss) — —

Total stockholders’ (deficit) equity (2,248 ) 35,690

Total liabilities and stockholders’ equity $ 77,877 $ 54,249

See accompanying notes to the consolidated financial statements.

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PULSE BIOSCIENCES, INC.

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share data)

Year Ended December 31,

Revenues:

Cost and expenses:

Other income (expense):

Interest income (expense), net (448 ) (646 ) 114

Total other income (expense) (448 ) (646 ) 114

Income tax benefit — — —

Other comprehensive gain (loss):

Unrealized gain (loss) on available-for-sale securities — 1 (5 )

Net loss per share:

Basic and diluted net loss per share $ (1.72 ) $ (2.28 ) $ (2.14 )

See accompanying notes to the consolidated financial statements.

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PULSE BIOSCIENCES, INC.

Consolidated Statements of Stockholders’ (Deficit) Equity

(in thousands, except per share amount)

Additional Accumulated Other Total

Common Stock Paid-in Comprehensive Accumulated Stockholders’

Shares Amount Capital Loss Deficit (Deficit) Equity

Issuance of common stock upon exercise of stock options 175 — 887 — — 887

Issuance of shares under employee stock purchase plan 83 — 490 — — 490

Issuance of shares upon exercise of warrants 187 — 1,127 — — 1,127

Stock-based compensation expense — — 10,075 — — 10,075

Unrealized loss on marketable investments, net of tax — — — (5 ) — (5 )

Issuance of shares upon exercise of warrants 585 1 3,333 — — 3,334

Issuance of shares under employee stock purchase plan 91 — 810 — — 810

Issuance of common stock upon exercise of stock options 54 — 616 — — 616

Stock-based compensation expense — — 14,601 — — 14,601

Unrealized gain on available-for-sale securities — — — 1 — 1

Issuance of shares under employee stock purchase plan 188 1 485 — — 486

Issuance of shares upon exercise of warrants 14 — 26 — — 26

Stock-based compensation expense — — 5,191 — — 5,191

See accompanying notes to the consolidated financial statements.

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PULSE BIOSCIENCES, INC.

Consolidated Statements of Cash Flows

(in thousands)

Year Ended December 31,

Cash flows from operating activities:

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

Write-off of excessive and obsolete inventory 8,477 — —

Net premium amortization and discount on available-for-sale securities — 13 5

Loss on disposal of fixed assets 185 — 119

Gain on U.S. Treasury securities — — (8 )

Changes in operating assets and liabilities:

Accounts receivable 61 (61 ) —

Prepaid expenses and other current assets 1,164 (1,374 ) 194

Other receivables (41 ) 54 —

Other long-term assets — — 129

Deferred revenue (16 ) 16 —

Accrued interest on related party note payable 917 — —

Accrued interest on note payable 1 658 —

Cash flows from investing activities:

Purchases of property and equipment (401 ) (437 ) (441 )

Purchases of investments — — (29,025 )

Sales of investments — — 4,510

Net cash provided by (used in) investing activities (401 ) 7,563 10,044

Cash flows from financing activities:

Proceeds from exercises of warrants 26 4,217 244

Proceeds from exercises of stock options — 786 717

Proceeds from issuance of related party note 65,000 — —

Proceeds from insurance loan agreement — 1,939 —

Payments made on insurance loan agreement (437 ) (1,532 ) —

Supplemental disclosure of noncash investing and financing activities:

Other receivable from exercise of warrants and stock options $ — $ — $ 1,053

Change in unrealized gains on available-for-sale securities $ — $ 1 $ (5 )

See accompanying notes to the consolidated financial statements.

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PULSE BIOSCIENCES, INC.

Notes to Consolidated Financial Statements

1. Description of the Business

Pulse Biosciences, Inc. is a novel bioelectric medicine company committed to health innovation using its patented Nano-Pulse Stimulation (“NPS”) technology, a revolutionary energy modality that delivers nanosecond-duration pulses of electrical energy, each less than a millionth of a second long, to non-thermally clear targeted cells while sparing adjacent noncellular tissue. NPS technology, also referred to as a Nanosecond Pulsed-Field Ablation (“nsPFA”) technology when used to ablate cellular tissue, can be used to treat a variety of medical conditions for which an optimal solution remains unfulfilled. The Company developed its proprietary CellFX System, a novel nsPFA delivery platform, and commercialized the initial application of its nsPFA technology to treat benign lesions of the skin. In parallel, the Company has designed a variety of applicators to explore the potential use of the CellFX platform to treat disorders in other medical specialties, such as cardiology, gastroenterology, gynecology, and ear nose and throat. These applicators include devices for open surgical procedures, endoscopic or minimally invasive procedures, and endoluminal catheters, and each has been used in preclinical studies. Based on our preclinical experience and the potential to significantly improve outcomes for patients in a large and growing market, the Company decided in 2022 to focus its efforts on the use of nsPFA and the CellFX platform in the treatment of atrial fibrillation (“AF”)

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 is located in Hayward, California.

The Company’s activities are subject to significant risks and uncertainties, including the need for additional capital. The Company does not currently have any material cash flows from operations. It has minimal revenue 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.

2. Summary of Significant Accounting Policies

Basis of Presentation

Certain prior period balances have been reclassified to conform to the current period presentation in the consolidated financial statements and the accompanying notes. Sales and marketing expenses are reclassified out of general and administrative expenses, both of which are presented as separate line items. Amortization of intangible assets are reclassified to general and administrative expenses.

Principles of Consolidation

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities Exchange Commission (the “SEC”). The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries and intercompany balances and transactions 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 that affect the amounts reported in the financial statements and accompanying notes to the financial statements. Estimates include, but are not limited to, the valuation and recognition of share-based compensation, inventory valuation, warranty obligations, income taxes, 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.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and investments. The Company places its cash equivalents and investments with high credit quality financial institutions and, by policy, limits the amounts invested with any one financial institution or issuer. Deposits held with banks may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses since inception.

Fair Value of Financial Instruments

The Company believes the carrying amounts of its financial instruments, including cash equivalents, prepaid expenses and other current assets, accounts payable and accrued expenses, approximate fair value due to the short-term nature of such instruments.

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Cash and Cash Equivalents

The Company invests its cash primarily in money market funds. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Property and Equipment

Property and Equipment is recorded at cost and depreciated using the straight-line method over their estimated useful lives, ranging from three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life. Upon the sale or retirement of property and equipment, the costs and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is reflected in operating expenses. Maintenance and repairs are charged to operations as incurred.

Valuation of Inventory

Inventory is stated at lower of cost or net realizable value. The Company establishes the inventory basis by determining the cost based on standard costs approximating the purchase costs on a first-in, first-out basis. Net realizable value is the estimated selling price in the ordinary course of the Company’s business, less reasonably predictable costs of completion, disposal, and transportation. The cost basis of the Company’s inventory will be reduced for any products that are considered excessive or obsolete based upon assumptions about future demand and market conditions. At December 31, 2022, the inventory balance has been fully written off due to excessive and obsolete inventory.

Intangible Assets

The Company’s intangible assets consist of acquired patents and licenses, which are amortized over their estimated useful lives of twelve years.

Long-Lived Assets

The Company reviews long-lived assets, consisting of property and equipment and intangible assets, for impairment during each fiscal year or when events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. No impairment losses were incurred during the periods presented.

Goodwill

The Company records goodwill when the consideration paid in a business acquisition exceeds the fair value of the net tangible assets and the identified intangible assets acquired. The Company reviews goodwill for impairment at the reporting unit level at least annually or whenever changes in circumstances indicate that the carrying value of the goodwill may not be recoverable. To date, there has been no impairment of goodwill.

Revenue from Contracts with Customers

The Company recognizes revenue at a point in time when it satisfies performance obligations by transferring control of promised goods to its customers. The amount of revenue recognized is equal to the consideration which the Company is entitled to in exchange for the promised goods, excluding any amounts assessed by government authorities for taxes which might be collected from a customer. Sales contracts often involve the sale and delivery of multiple products, each of which typically represent a separate performance obligation in the contract. While the Company sells these products on a stand-alone basis at their respective SSP, initial customer contracts will likely involve the bundling of products which will be delivered concurrently to the customer. In such instances, the full consideration of the contract will be recognized upon shipment of the products. The Company generally requires receipt of full payment prior to shipment, however, from time to time, payment terms may be extended to customers upon which the Company will perform a necessary credit evaluation to ensure future collectability of the outstanding balance. Refer to Note 9 for further details.

Product Warranty

The Company provides a standard warranty on eligible products which provides the customer assurances that the products comply with the agreed-upon specifications. The standard warranty does not provide any services in addition to those assurances. The Company accrues a warranty reserve for products sold based upon the best estimate of the nature, frequency, and costs of future claims. These estimates are inherently uncertain given the short history of sales, and changes to the historical or projected warranty experience may cause material changes to the warranty reserve in the future. The warranty reserve is included within Accrued expenses on the consolidated balance sheets. Warranty expense is recorded as a component of Cost of Revenues in the consolidated statements of operations and comprehensive loss.

Warranty accrual activity consisted of the following (in thousands):

Year Ended December 31,

Beginning balance $ 80 $ —

Add: Accruals for warranties issued during the period 42 80

Ending balance $ 50 $ 80

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Stock-Based Compensation

The Company recognizes the cost of stock-based compensation in the financial statements based upon fair value. The fair value of stock options is determined as of the grant date using the Black-Scholes option pricing model. The fair value of Restricted Stock Units (“RSU”) awards is determined based on the number of units granted and the closing price of the Company’s common stock on the grant date. The fair value of each purchase under the employee stock purchase plan (“ESPP”) is estimated at the beginning of the offering period using the Black-Scholes option pricing model. The Company’s determination of the fair value of equity-settled awards is impacted by the price of the Company’s common stock as well as changes in assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the expected term that awards will remain outstanding, expected common stock price volatility over the term of the awards, risk-free interest rates and expected dividends. The fair value of an award is recognized over the period during which service is required to be performed in exchange for the award, the requisite service period (usually the vesting period) on a straight-line basis. The Company accounts for all equity instruments awarded to non-employees at the fair value of the award issued on the day of the grant. The fair value of these equity instruments are expensed over the requisite service period. Certain stock options awarded to the Company’s executives and other key employees contain performance conditions related to certain financial measures and achievements of strategic/operational milestones (“performance options”). These performance options can contain both service and performance-based vesting conditions. The fair value of these performance options is recognized using the graded vesting method over the requisite service period beginning in the period in which the awards are deemed probable to vest, to the extent such awards are probable to vest.

Estimates of the fair value of equity-settled awards as of the grant date using valuation models, such as the Black-Scholes option pricing model, are affected by assumptions regarding a number of complex variables. Changes in the assumptions can materially affect the fair value of the award and the stock-based compensation expense recognized. These inputs are subjective and generally require significant analysis and judgment to develop. The Company determines the volatility factor based on its own historical volatility. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award. For all stock options granted to date, the Company used the simplified method to calculate the expected term, which is the average of the contractual term and vesting period.

See Note 6 for a detailed discussion of the Company’s stock plans and stock-based compensation expense.

Research and Development Costs

Research and development costs consist primarily of compensation costs, fees paid to consultants and outside service providers and organizations (including university research institutes), costs associated with clinical trials, development prototypes and other expenses relating to the acquisition, design, development and testing of the Company’s product candidates, and certain facilities related costs. Research and development costs incurred by the Company are expensed as incurred, unless the achievement of milestones, the completion of contracted work, or other information indicates that a different expensing schedule is more appropriate.

Patent Costs

The Company is the owner of numerous domestic and foreign patents. Due to the significant uncertainty associated with the successful development of one or more commercially viable products based on the Company’s research efforts and any related patent applications, patent costs not related to acquired patents, including patent-related legal fees, filing fees and other costs, including internally generated costs, are expensed as incurred. During the years ended December 31, 2022, 2021 and 2020, patent costs totaled $0.5 million, $0.6 million and $0.5 million, respectively. Patent costs are included in general and administrative costs in the consolidated statements of operations and comprehensive loss.

Income Taxes

The Company accounts for income taxes under an asset and liability approach for financial accounting and reporting for income taxes. Accordingly, the Company recognizes deferred tax assets and liabilities for the expected impact of differences between the financial statements and the tax basis of assets and liabilities.

The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more-likely-than-not to be realized. In the event the Company determines that it would be able to realize its deferred tax assets in the future in excess of its recorded amount, an adjustment to the deferred tax assets would be credited to operations in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to operations in the period such determination was made.

The Company is subject to U.S. federal income taxes and state income taxes in various states. As the Company’s net operating losses have yet to be utilized, previous tax years remain open to examination by federal authorities and other jurisdictions in which the Company currently operates or has operated in the past. The Company is not currently under examination by any tax authority.

The Company accounts for uncertainties in income tax law under a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed by U.S. GAAP. The tax effects of a position are recognized only if it is more-likely-than-not to be sustained by the taxing authority as of the reporting date. If the tax position is not considered more-likely-than-not to be sustained, then no benefits of the position are recognized. At December 31, 2022 and 2021, the Company had not recorded any liability for uncertain tax positions. The Company includes interest and penalties related to uncertain tax positions as a component of income tax expense.

Comprehensive Loss

Comprehensive loss consists of net loss and unrealized gains or losses on available-for-sale investments. The Company displays comprehensive loss and its components as part of the consolidated statements of operations and comprehensive loss.

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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.

The following outstanding stock options, warrants, and RSUs to purchase common stock 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:

Year Ended December 31,

Restricted stock units — — 111,305

Segment and Geographical Information

The Company operates in one segment and reports segment information in accordance with ASC 280,Segment Reporting. Management uses one measurement of profitability and does not segregate its business for internal reporting, however in making certain operating decisions and assessing performance, management will additionally review the disaggregated revenue results by product and geography. The Company’s Chief Executive Officer acts as the chief operating decision makers (“CODM”) of the Company. As of December 31, 2022 and 2021,100% of long-lived assets were in the United States. Revenue is attributed to a geographic region based on the location of the end customer.

See Note 10 for details of revenue by product and geography.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No.2014-09,Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This updated standard became effective for the Company in the first quarter of fiscal year 2018. The Company began to recognize revenue in 2021 using this updated standard. See Note 9 for additional details of the revenue recognition approach.

In November 2018, the FASB issued ASU No.2018-18Collaborative Arrangements – Clarifying the Interaction between Topic 808 (Collaborative Arrangements) and Topic 606 (Revenue from Contracts with Customers), which clarifies the interaction between ASC 808,Collaborative Arrangements and ASC 606,Revenue from Contracts with Customers (“ASC 606”). The ASU clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, the ASU precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue if the counterparty is not a customer for that transaction. The Company adopted the standard on January 1, 2020, however, did not record revenue until August 2021 and does not currently have any collaborative arrangements in place. The adoption of the new standard had no impact on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the general principles in 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 adopted the Topic 740 effective January 1,2021. The adoption did not have a material impact on the Company’s financial statements.

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3. Fair Value of Financial Instruments

Fair Value of Financial Instruments

The Company determines the fair value of its financial instruments based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels:

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 in 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 (in thousands):

Assets Classification Level 1 Level 2 Level 3 Total

Money market funds Cash and cash equivalents $ 57,973 $ — $ — $ 57,973

Total assets measured at fair value $ 57,973 $ — $ — $ 57,973

Assets Classification Level 1 Level 2 Level 3 Total

Money market funds Cash and cash equivalents $ 23,675 $ — $ — $ 23,675

Total assets measured at fair value $ 23,675 $ — $ — $ 23,675

During the years ended December 31, 2022 and 2021, the Company did not record impairment charges related to its marketable investments. During the years ended December 31, 2022 and 2021, the Company did not have any transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy. Additionally, the Company did not have any financial assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2022 or 2021.

4. Balance Sheet Components

Inventory

Inventory consisted of the following (in thousands):

Year Ended December 31,

Raw materials $ — $ 2,010

Work in process — 1,371

Finished goods — 2,443

Total inventory $ — $ 5,824

Property and Equipment, net

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

December 31,

Furniture, fixtures and equipment 966 932

Construction in progress 22 186

Less: Accumulated depreciation and amortization (2,953 ) (2,396 )

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Depreciation expense for the years ended December 31, 2022, 2021 and 2020 was $0.7 million, $0.5 million, and $0.4 million, respectively.

Intangible Assets, net

Intangible assets primarily consist of a license 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 (EVMS), and the University of Southern California. In addition, the Company entered into a sponsored research agreement (“SRA”) with Old Dominion University’s Frank Reidy Research Center for Bioelectrics, a leading research organization in the field, 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):

December 31,

Acquired patents and licenses $ 7,985 $ 7,985

Less: Accumulated amortization (5,434 ) (4,769 )

A schedule of the amortization of intangible assets is as follows (in thousands):

Years ending December 31:

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

December 31,

Controlled launch (Note 8) — 534

Director and officer liability insurance (Note 12) 571 —

Clinical trial fees and costs 64 245

5. Goodwill

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, which represents the excess of consideration paid over the fair value of net tangible and intangible assets acquired.

The Company reviews goodwill for impairment annually or whenever changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Based on the Company’s annual review as of December 31, 2022, the Company determined that its goodwill was not impaired.

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6. Stockholders’ Equity and Stock-Based Compensation

Preferred Stock

The Company has authorized a total of 50,000,000 shares of preferred stock, par value $0.001 per share, none of which were outstanding at December 31, 2022 and 2021. The Company’s Board of Directors (the “Board”) has the authority to issue preferred stock and to determine the rights, preferences, privileges, and restrictions, including voting rights, without any further vote or action by the Company’s stockholders.

Common Stock

The Company has authorized a total of 500,000,000 shares of common stock, par value $0.001 per share.

Rights Offering

On June 9,2022, the Company completed a rights offering (the “2022 Rights Offering") resulting in the sale of 7,317,072 units (the “Units”), at a price of $2.05 per Unit, with each Unit consisting of one share of the Company’s common stock, par value $0.001 per share, and one warrant (the “2022 Rights Offering Warrants”) to purchase one share of common stock. The common stock and warrants comprising the Units separated upon the closing of the 2022 Rights Offering and were issued individually. 7,317,072 shares of common stock and warrants to acquire up to an additional 7,317,072 shares of common stock were issued in the 2022 Rights Offering. The Company received aggregate gross proceeds from the 2022 Rights Offering of $15 million. If exercised, additional gross proceeds of up to $15 million may be received through the exercise of the 2022 Rights Offering Warrants. Each 2022 Rights Offering Warrant is exercisable for one share of the Company’s common stock at an exercise price equal to $2.05. The 2022 Rights Offering Warrants are exercisable immediately and expire on the fifth anniversary of the closing of the 2022 Rights Offering. The 2022 Rights Offering Warrants are subject to redemption by the Company for $0.01 per underlying share of common stock, on not less than 30 days written notice, if the volume weighted average price of the Company’s common stock equals or exceeds 200% of the exercise price for the warrants, subject to adjustment, per share, for 20 consecutive trading days, provided that the Company may not redeem the warrants prior to the date that is three months after the issuance date. Robert W. Duggan, the Company’s largest stockholder and Executive Chairman, purchased approximately 56% of the shares offered in the 2022 Rights Offering.

Private Placement Securities Purchase Agreement

On June 30,2021, the Company entered into a Securities Purchase Agreement with Robert W. Duggan, the Company’s largest stockholder and Executive Chairman, pursuant to which the Company issued and sold to Mr. Duggan 3,048,780 shares of the Company’s common stock, par value $0.001 per share, in a private placement (the “Private Placement”), at a price per share of $16.40, which was the market closing price on the date of the transaction. These shares were paid for through (i) the conversion of $41.0 million aggregate principal amount, together with all accrued and unpaid interest outstanding, owed to Mr. Duggan under the Loan Agreement by and between the Company and Mr. Duggan (Note 13), and (ii) additional cash in the amount of approximately $8.4 million. Upon the closing of this Private Placement and satisfaction of the outstanding debt, the Loan Agreement terminated, without any early termination fees or penalties being owed by the Company, and no additional amounts were owed to Mr. Duggan under the Loan Agreement. The cash proceeds of approximately $8.4 million were received by the Company in July 2021.

At-the-Market Equity Offering

On February 4,2021, the Company entered into a sales agreement (the “Sales Agreement”) with Stifel, Nicolaus & Company, Inc. (“Stifel”) as sales agent, pursuant to which the Company may offer and sell, from time to time, through Stifel, up to $60.0 million in shares of common stock, by any method permitted by law deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. The Company has no obligation to make any sales of its common stock pursuant to such Sales Agreement. During the year ended December 31, 2022, the Company did not issue or sell any shares of common stock under the Sales Agreement. During the year ended December 31, 2021 the Company issued and sold 288,490 shares of common stock under the Sales Agreement. The shares were sold at a weighted average price of $27.73 per share for aggregate net proceeds of approximately $7.4 million, after deducting sales commissions and offering costs payable by the Company.

Common Stock Warrants

In connection with a private placement in November 2014 of the Company’s common stock, par value $0.001 per share, the Company issued warrants as compensation to the placement agent to purchase a total of 299,625 shares of its common stock at an exercise price of $2.67 per share (the “Private Placement Warrants”). The Private Placement Warrants were exercisable for a period of seven years from issuance. In March 2021, warrants to purchase 45,638 shares of common stock were net exercised, resulting in the issuance of 40,563 shares of common stock. In November 2021, the last remaining 600 Private Placement Warrants expired unexercised, resulting in no further Private Placement Warrants outstanding.

In connection with the closing of the Company’s initial public offering in May 2016, the Company issued warrants as compensation to its underwriters, to purchase a total of 574,985 shares of its common stock at an exercise price of $5.00 per share (the “IPO Warrants”). The IPO Warrants were exercisable for a period of five years from issuance. In March 2021, warrants to purchase 85,385 shares of common stock were net exercised, resulting in the issuance of 68,958 shares of common stock. All IPO Warrants were exercised prior to their expiration in May 2021, resulting in no further IPO Warrants outstanding.

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In connection with a June 2020 rights offering, the Company issued warrants (the “2020 Rights Offering Warrants”) to purchase a total of 641,571 shares of its common stock at an exercise price of $7.01. These 2020 Rights Offering Warrants were exercisable immediately and expired on the fifth anniversary of the completion of the Rights Offering, or June 16, 2025, subject to certain redemption rights by the Company. The 2020 Rights Offering Warrants were subject to redemption by the Company, on or after December 16,2020,six months after the issuance date, for $0.01 per warrant, with not less than 30 days written notice, if the volume weighted average price of our common stock equaled or exceeded 200% of the exercise price for the 2020 Rights Offering Warrants for 10 consecutive trading days. On December 31,2020, the Company met the requirements for redemption of these warrants and delivered a notice of redemption to redeem all of the outstanding warrants that remained unexercised at February 5,2021, for the redemption price of $0.01 per warrant. Pursuant to the redemption, the Company redeemed 5,139 warrants. Prior to the February 5,2021 redemption date, 636,432 warrants were exercised, generating approximately $4.5 million of total gross proceeds to the Company. As of December 31, 2022, there were no2020 Rights Offering Warrants outstanding.

In connection with the 2022 Rights Offering, the Company issued 2022 Rights Offering Warrants to purchase a total of 7,317,072 shares of its common stock at an exercise price of $2.05. The 2022 Rights Offering Warrants are exercisable immediately and expire on the fifth anniversary of the closing of the 2022 Rights Offering. The 2022 Rights Offering Warrants are subject to redemption by the Company for $0.01 per underlying share of common stock, on not less than 30 days written notice, if the volume weighted average price of the Company’s common stock equals or exceeds 200% of the exercise price for the warrants, subject to adjustment, per share, for 20 consecutive trading days, provided that the Company may not redeem the warrants prior to the date that is three months after the issuance date. In the year ended December 31, 2022, a total of 13,240 warrants were exercised. As of December 31, 2022, there were 7,303,8322022 Rights Offering Warrants outstanding.

A summary of total warrants activity for the year ended December 31, 2022 is presented below:

Weighted

Average

Weighted Remaining

Number of Average Contractual

Shares Exercise Price Life (in Years)

Warrants outstanding at December 31, 2021 — $ — —

Expired/Redeemed — —

Equity Plans

2017 Equity Incentive Plan and 2017 Inducement Equity Incentive Plan

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, RSUs, 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, 2022 and 2021, the number of shares of common stock available under the 2017 Plan increased by 1,188,657 and 1,022,002 shares, respectively, pursuant to the evergreen provision of the 2017 Plan. Under the evergreen provision of the 2017 Plan, the 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 December 31, 2022, 2,368,716 shares of common stock remained available for issuance under the 2017 Plan.

During November 2017, the Board of the Company 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 non-statutory stock options, RSUs, 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% per year 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. In May 2021, the Board approved an amendment to the Inducement Plan to reserve an additional 1,000,000 shares of the Company’s common stock for issuance pursuant to the Inducement Plan. As of December 31, 2022, 1,053,767 shares of common stock were available for issuance under the Inducement Plan.

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A summary of stock option activity under the 2015 Plan, 2017 Plan and Inducement Plan for the year ended December 31, 2022 is presented below:

Stock Options Outstanding

Options exercised — —

Time-based Options

The Company awards time-based options which vest and become exercisable, subject to the individual’s continued employment or service through the applicable vesting date. Time-based options can have various vesting schedules, most commonly new hire grants which generally vest 25% per year starting upon the first anniversary of the grant.

A summary of the time-based stock option activity under the 2015 Plan, 2017 Plan and Inducement Plan for the year ended December 31, 2022 is presented below:

Stock Options Outstanding

Options exercised — —

The intrinsic value of time-based options exercised during the years ended December 31, 2022, 2021 and 2020 was zero, $0.8 million, and $1.6 million, respectively.

The fair value of the time-based options granted to employees and directors during the years ended December 31, 2022, 2021 and 2020 was $2.3 million, $15.1 million, and $6.7 million, respectively.

Performance Options

Certain stock options awarded to the Company’s executives and other employees contain performance conditions related to certain financial measures and achievements of strategic/operational milestones. The options will vest and become exercisable once the specific performance condition is fulfilled.

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A summary of the performance option activity under the 2017 Plan and Inducement Plan for the year ended December 31, 2022 is presented below:

Stock Options Outstanding

Options exercised — —

The fair value of the performance options granted to employees during the years ended December 31, 2022, 2021 and 2020 was $0.8 million, $2.5 million, and $5.5 million, respectively.

The fair value of employee stock options was estimated using the Black-Scholes option-pricing model utilizing the following assumptions:

Year Ended December 31,

Dividend yield — — —

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. In 2020 the Board determined not to increase the number of shares of common stock available pursuant to the evergreen provision. Effective January 1,2021, pursuant to the evergreen provision of the 2017 ESPP, the number of shares of common stock available under the 2017 ESPP was increased by 383,250 shares. During the years ended December 31, 2022 and 2021, the Company issued 188,097 and 91,378 shares of common stock under the 2017 ESPP, respectively. As of December 31, 2022, 460,999 shares of common stock remained available for issuance under the 2017 ESPP.

The fair value of ESPP was estimated using the Black-Scholes option-pricing model utilizing the following assumptions:

Year Ended December 31,

Expected volatility 83% 78% 70 %

Dividend yield — — —

Restricted Stock Units

The fair value of RSU 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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During the year ended December 31, 2017, the Company granted 160,974 RSUs to the Chief Executive Officer, all of which vested in June 2018. These shares were partially released in 2019, resulting in a net issuance of shares. Additional paid in capital was reduced for tax payments related to shares withheld in connection with the release. The remaining shares under this grant were released in 2021, and at December 31, 2022no shares were outstanding under this grant. There was no stock-based compensation expense related to these RSUs recorded in the years ended December 31, 2022, 2021 and 2020. As of December 31, 2022, there was no unrecognized compensation expense related to these RSUs.

During the year ended December 31, 2017, the Company granted 68,800 RSUs to certain employees, of which 50% vested on June 1, 2019 while the remaining 50% vested on June 1, 2021. The stock-based compensation expense recorded in the years ended December 31, 2022, 2021 and 2020 related to these RSUs was approximately zero million, $0.1 million, and $0.3 million, respectively. As of December 31, 2022, there was no unrecognized compensation expense related to these RSUs.

Stock-based Compensation

Total stock-based compensation expense recorded in the consolidated statements of operations and comprehensive loss was as follows (in thousands):

Year Ended December 31,

Cost of revenues $ 217 $ 129 $ —

As of December 31, 2022, not all of the performance conditions of the performance options are probable to be achieved. Compensation expense has only been recognized for those conditions that are assumed to be probable.

In February 2021, the Compensation Committee approved of a modification to certain vesting conditions of outstanding Performance Options. The Company had not recognized any compensation expense in relation to these Performance Options as the performance condition was previously deemed to be improbable. However, upon modification those specific performance conditions were deemed probable and fully vested. As such, during the year ended December 31, 2021 the full expense in relation to the amended performance conditions was recognized resulting in $4.1 million of additional stock-compensation expense.

In October 2021, the Board amended the outstanding option awards of Kenneth A. Clark upon his resignation from the Board. The requirement that Mr. Clark exercise his vested options within ninety days of his resignation was waived. Mr. Clark will have the ability to exercise his outstanding vested option awards at any time during their ten-year term from the date of each grant, subject to earlier termination as may occur under the 2017 Plan. This amendment resulted in $1.4 million of additional stock-compensation expense during the year ended December 31, 2021.

Total stock-based compensation expense by award type was as follows (in thousands):

Year Ended December 31,

At December 31, 2022, there was $5.6 million of unrecognized compensation cost related to unvested stock-based compensation arrangements, which is expected to be recognized over a weighted average period of 2.25 years.

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7. Research Grants and Agreements

Sponsored Research Agreement

The Company entered into a SRA with ODURF during 2014 pursuant to which the Company sponsors research activities performed by ODURF’s Frank Reidy Center. 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. In August 2018, we agreed to sponsor a task order for research in the amount of $0.8 million and in September 2019, we agreed to sponsor an additional task order for research in the amount of $0.8 million each to be performed during their respective subsequent 12-month periods. In March 2021, we agreed to sponsor a task order for research in the amount of $0.3 million and in May 2021 we sponsored an additional task order for $0.3 million each to be performed during their respective subsequent 12-month periods. These sponsored researches are funded through monthly payments made upon ODURF certifying, to our reasonable satisfaction, that ODURF has met its obligations pursuant to the specified task order and statement of work. The principal investigator may transfer funds within the budget as needed with our approval so long as the obligations of ODURF under the task order and statement of work remain unchanged and unimpaired. During the years ended December 31, 2022, 2021 and 2020, we incurred costs relating to the SRA equal to $0.2 million, $0.3 million and $0.6 million, respectively. As of December 31, 2022, there are no unbilled SRAs left under the task orders.

8. Controlled Launch

In February 2021, the Company received 510(k) clearance from the FDA for its proprietary CellFX System for dermatologic procedures requiring ablation and resurfacing of the skin. In January 2021, the Company received CE marking approval for the CellFX System, which allows for marketing of the system in the EU for treatment of general dermatologic conditions, including SH, SK, and cutaneous non-genital warts. Additionally, in June 2021 the Company received Health Canada approval for the CellFX System, which allows for marketing of the system in Canada for use in dermatological procedures requiring ablation and resurfacing of the skin for the reduction, removal, and/or clearance of cellular-based benign lesions. In February 2021, the Company commenced a controlled launch of the CellFX System in the United States and European Union via its CellFX Expectations Excelled Program (the “Controlled Launch”). Subsequent to receiving Health Canada approval in June 2021, the Company also commenced its Controlled Launch in Canada.

As part of the Controlled Launch, the Company selected 70 physicians and their practices to be the first physician consultants to launch the CellFX System and the associated CellFX commercial procedures into their respective markets and geographies. In the Controlled Launch program, the Company provided and set up a CellFX System at each physician site and provided the physician with the necessary related products and components, free of charge, to complete the requirements of the Controlled Launch program. Each CellFX System and any unused component products remained the property of the Company throughout the Controlled Launch program. Under the Controlled Launch program, each physician was to identify and recruit up to 40 or 50 patients, depending on the contract, for participation in the Controlled Launch, performing a CellFX procedure on each of the appropriately selected patients. The physician and their patients complete evaluation surveys about their experiences with the CellFX System and provided other information helpful to the Company. Upon completion of the procedures and the survey feedback, the physician earned credits to be used towards the future purchase of the CellFX System or, in some jurisdictions, fair payment for their time and effort completing the paperwork required under the Controlled Launch program. Credits earned and, if applicable, any other payments earned were limited to a maximum amount dependent on the number of surveys received by the Company. Upon completion of the Controlled Launch program requirements, each physician could choose to enter into a purchase agreement with the Company, under which the physician could use the credits earned (or other payments earned, as applicable) towards the purchase of the already-delivered CellFX System, or the physician could return the CellFX System to the Company.

As patient procedures and surveys were completed under the Controlled Launch program, the Company accrued the value of the credits earned, which were recorded in accrued expenses, with a corresponding charge to sales and marketing expense. During the years ended December 31, 2022 and 2021 the Company recorded $0.1 million and $1.8 million, respectively, of net sales and marketing expense in relation to the Controlled Launch.

During the year ended December 31,2022, certain consultants completed the Controlled Launch and entered into purchase agreements with the Company, whereby they used their credits or other earned payments towards the purchase of a CellFX System. Accordingly, approximately $0.4 million of the accrued liability related to the Controlled Launch was relieved and recognized as revenue on a non-cash basis as a result of the purchase. See Note 9 for additional detail of revenue transactions.

In September 2022, the Company concluded the Controlled Launch program and notified all remaining program participants. In accordance with the Controlled Launch program, physicians having completed the program requirements could elect to purchase their already delivered CellFX System, applying credits earned, or return the CellFX System to the Company. The Company concluded these efforts in the fourth quarter of 2022 and has discontinued sales of the CellFX System, although the Company continues to offer its disposable treatment tips to dermatologists who have chosen to retain their existing CellFX consoles.

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9. Revenue

The Company recognizes revenue at a point in time when it satisfies performance obligations by transferring control of promised goods to its customers. The amount of revenue recognized is equal to the consideration which the Company is entitled to in exchange for the promised goods, excluding any amounts assessed by government authorities for taxes which might be collected from a customer. This consideration may include non-cash services performed, as is the case with revenue recognized in connection with the Controlled Launch program. On September 20, 2022, the Company announced its shift in focus to advance its core NPS technology outside of dermatology and concluded its Controlled Launch program. Total revenue recognized for the years ended December 31, 2022 and 2021 was $0.7 million and $1.4 million, respectively, of which approximately $0.4 million and $1.1 million, respectively, was driven by the redemption of non-cash credits earned as part of the Controlled Launch, with the balances driven by cash purchases of cycle units (“CUs”) and CellFX commercial consoles sold.

Sales contracts often involve the sale and delivery of multiple performance obligations in the contract.

Performance Obligations

Systems consist of the CellFX console and its embedded software, handpieces, and disposable tips. The console is a physical piece of hardware used by the customer to perform patient procedures. Individually the console and software are not distinct, therefore the Company combines the console and embedded software to form one distinct system performance obligation. Payment for systems is generally due prior to shipment, and the system performance obligation is satisfied upon shipment of the system to the customer.

Handpieces are attached to the console and used in conjunction with tips to perform patient procedures. Generally, upon initial sale of a system to a customer, the Company will include two handpieces. The handpiece has a shorter expected useful life than the console, and a customer can purchase additional handpieces when needed, as they are available for sale on a stand-alone basis. Payment for handpieces is generally due prior to shipment, and handpieces represent a distinct performance obligation which is satisfied either upon shipment, or upon delivery of the handpiece to the customer, depending on the specific contract.

Disposable treatment tips are single-patient multiple-use products that come in different sizes, each of which are to be used for specific procedures. Tips are attached to the handpiece for use in patient procedures and, upon detachment from the handpiece, a tip cannot be reused, and it must be disposed of. Tips represent a distinct performance obligation which is satisfied either upon shipment, or upon delivery of the tips to the customer, depending on the specific contract.

CUs are credits that authorize the customer to perform a procedure, or cycle. Each procedure requires a specific number of CUs, dependent upon type of tip used and procedure level selected. As the procedure is performed, the applicable number of CUs are decremented. When the customer’s balance of CUs on a specific system is depleted, the system will no longer function until the customer purchases additional CUs. Customers can purchase additional CUs via the Company’s CellFX Marketplace which is an online marketplace accessible directly from the CellFX System. Payment for CUs is due upon order placement and the CUs are immediately available for download to the console via CellFX CloudConnect. CUs represent a distinct performance obligation which is satisfied when CUs are made available for customers to download from the Company’s CellFX CloudConnect, as customers can use purchased CUs at any time at their discretion, and the Company does not provide any ongoing service or other forms of involvement after the sale occurs.

Shipping and handling activities are not considered to be a separate performance obligation. The Company’s standard commercial agreements generally include FOB shipping point terms. The Company has made an accounting policy election to account for shipping and handling costs as fulfillment costs because the shipping and handling activities occur after the customer obtains control of the product.

Transaction Price

The transaction price is the consideration to which the Company expects to be entitled to in exchange for providing the promised goods to customers. Customer orders placed for cash contemplate a fixed amount of consideration. Customer orders placed by physicians participating in the Controlled Launch when they elected to purchase the CellFX System were paid for via conversion of accumulated earned credits for prior services provided by the physicians under the terms of their participation in the Controlled Launch. For these transactions, the transaction price included noncash consideration. The services rendered by the physicians in the Controlled Launch were accounted for separately from the subsequent sales of the CellFX Systems because they were distinct from the system sales. They were distinct because they provided the Company with treatment data that could also be procured, and historically had been procured by the Company, without the corresponding system sales. This data was used by the Company to enhance marketing and promotion of its products.

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The Company evaluates the possible impact of variable consideration in determining the transaction price, in particular the possibility of future returns or credits. Sales agreements allow for a right of return only if the product does not conform to the agreed upon quality standards or if the product was shipped due to Company error. The Company anticipates such returns will be minimal and has made no adjustments to the transaction price for any estimated returns. The transaction price is determined at the time of the initial revenue recognition and updated each quarter for any changes in circumstances (e.g., changes in estimated return or credit rates).

The Company has made an accounting policy election to exclude from the measurement of the transaction price all taxes which are imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer.

When there are multiple performance obligations present, the total transaction price shall be allocated to each of the performance obligations based upon the relative SSPs of those performance obligations. The Company establishes SSPs based on multiple factors including, prices charged by the Company for similar offerings, product-specific business objectives, and the estimated cost to provide the performance obligation. However, upon the sale of a new CellFX System, all performance obligations are delivered concurrently and therefore there is no impact to revenue recognition timing, and the Company has determined allocations are not necessary. Should the customer purchase additional CUs, handpieces, or tips at a later time, those purchases will be made under separate purchase agreements, with all promised goods generally transferred at the same time, therefore no price allocation is necessary in that scenario either.

Controlled Launch Agreements

In August 2021 the Company began to recognize revenue in relation to the conversion of Controlled Launch Program participants into sales agreements (Note 8). These customers were already in possession of the system, handpiece, and tips. As such, upon execution of these purchase agreements, the Company recognized revenue on the agreements because control of all performance obligations were transferred at that time. These customers separately purchased CUs in order to operate the CellFX System and the revenue for these CUs was recognized upon delivery of the CUs to CellFX CloudConnect.

10. Segment Reporting

The Company operates and manages the business as one reportable and operating segment. The Company’s Chief Executive Officer acts as the chief operating decision maker ("CODM") of the Company. The CODM reviews the results of the Company on a consolidated basis, however in making certain operating decisions and assessing performance, the CODM will additionally review the disaggregated revenue results by product and geography. All of the Company’s long-lived assets are based in the United States.

Revenue by product consisted of the following (in thousands):

Year Ended December 31,

Total consolidated revenue $ 700 $ 1,418 $ —

Revenue by geography consisted of the following (in thousands):

Year Ended December 31,

Total consolidated revenue $ 700 $ 1,418 $ —

11. Income Taxes

Income (loss) before income taxes (in thousands):

Year Ended December 31,

Foreign — — —

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The components of the provision for income taxes are as follows (in thousands):

December 31,

Current

Federal $ — $ — $ —

Foreign — — —

Total current 3 3 3

Deferred

Federal — — —

State — — —

Foreign — — —

Total deferred — — —

Total provision for income taxes $ 3 $ 3 $ 3

State income taxes are immaterial in amount and therefore have not been recorded in the Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2022, 2021 and 2020.

The provision for income taxes differs from the amount estimated by applying the statutory federal income tax rate to income (loss) before taxes as follows:

Year Ended December 31,

Federal tax at statutory rate 21.0 % 21.0 % 21.0 %

State tax at statutory rate 8.4 8.4 8.4

Research and development credits 0.9 1.9 2.1

Change in valuation allowance (18.4 ) (26.8 ) (43.3 )

Deferred adjustment (5.3 ) — 8.5

Change in tax rate — — 4.2

Uncertain Tax Position (5.7 ) (2.3 ) —

Provision for income taxes — % — % — %

Deferred income taxes reflect the impact of carryforwards and temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. The carryforwards and temporary differences, which give rise to a significant portion of the Company’s deferred tax asset (liability) as of December 31, 2022 and 2021, are as follows (in thousands):

December 31,

Deferred tax assets

R&D Capitalization 3,810 —

Deferred tax liabilities

Fixed assets (15 ) (28 )

Total deferred tax liabilities (2,725 ) (3,255 )

Net deferred tax assets/(liabilities) $ — $ —

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The Company’s unrecognized tax benefits as of December 31, 2022, 2021 and 2020 were $8.9 million, $5.1 million, and $2.5 million, respectively. If recognized, none of the unrecognized tax benefits would impact income tax expense to the extent that the Company continues to maintain a full valuation allowance against its deferred tax assets.

A reconciliation of the beginning and ending amounts of unrecognized tax benefit is as follows (in thousands):

December 31,

Unrecognized tax benefits at beginning of year $ 5,140 $ 2,491 $ 1,470

Increases related to current year tax positions 2,055 2,649 1,021

Increases related to prior year tax positions 1,730 — —

Unrecognized tax benefits at end of year $ 8,925 $ 5,140 $ 2,491

The Company’s policy is to recognize interest and penalties related to income taxes as components of interest expense and other expense, respectively. The Company did not accrue interest and penalties related to unrecognized tax benefits as of December 31, 2022 and does not anticipate any significant change within twelve months of this reporting date.

The Company’s valuation allowance increased by $10.8 million in the year ended December 31, 2022 and increased by $17.0 million in the year ended December 31, 2021.

As of December 31, 2022, the Company had federal and state net operating loss (“NOL”) carryforwards of $199.9 million and $204.6 million, respectively, which begin to expire in 2034. Of the total federal NOL carryforward of $199.9 million, approximately $174.3 million is carried forward indefinitely but is limited to 80% of the taxable income.

As of December 31, 2022, the Company had approximately $5.8 million and $5.5 million of U.S. federal and California research and development (“R&D”) credits, respectively. The federal R&D credits begin to expire in 2035 and the California R&D credits have an indefinite carryforward period.

The Company is subject to taxation in the United States for Federal and for State, within various states in which the Company operates. All jurisdictions and tax years currently remain open for IRS and state taxing authorities’ examination. As of December 31, 2022, the Company was not under examination by the Internal Revenue Service or any state tax jurisdiction.

Internal Revenue Code Section 382 ownership change generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. The Company is not aware of any ownership changes in this financial period ending on December 31, 2022.

12. Related Party Transactions

On March 11,2021, the Company and Robert W. Duggan, majority stockholder and Executive Chairman, entered into the 2021 Loan Agreement in connection with Mr. Duggan lending the principal sum of $41.0 million to the Company (Note 13).

On June 30,2021, the Company and Mr. Duggan entered into a Securities Purchase Agreement (Note 6), pursuant to which the Company issued and sold to Mr. Duggan 3,048,780 shares of the Company’s common stock, par value $0.001 per share, in a Private Placement, at a price per share of $16.40, for an aggregate investment in the amount of $50.0 million. The shares were paid for through (i) the conversion of the $41 million aggregate principal amount under the Loan Agreement, together with all accrued and unpaid interest outstanding, owed to Mr. Duggan under the Loan Agreement by and between the Company and Mr. Duggan (Note 13), and (ii) additional cash in the amount of approximately $8.4 million. Upon the closing of this Private Placement and satisfaction of the outstanding debt, the Loan Agreement terminated, without any early termination fees or penalties being owed by the Company, and no additional amounts were owed to Mr. Duggan under the Loan Agreement.

In May 2022, the Company determined not to renew its annual director and officer liability insurance policy due to disproportionately high premiums quoted by insurance companies. Instead, on May 31, 2022, the Company and Robert W. Duggan, the Executive Chairman, entered into a letter agreement (the “Letter Agreement”) pursuant to which Mr. Duggan has agreed with the Company to personally provide indemnity coverage for a one-year period, and he has agreed to deposit cash and/or marketable securities into a third-party escrow, as security for these obligations, if requested by the Company. The Company will pay a fee of $1.0 million to Mr. Duggan that shall be due on May 31, 2023, the last day of the one-year period, in consideration of the obligations set forth in the Letter Agreement. As of December 31,2022, the amount owed to Mr. Duggan under the Letter Agreement was $0.6 million, recorded on the balance sheet under accrued expenses.

On September 20,2022, the Company and Robert W. Duggan, majority stockholder and Executive Chairman, entered into the 2022 Loan Agreement in connection with Mr. Duggan lending the principal sum of $65.0 million to the Company (Note 13).

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13. Commitments and Contingencies

2021 Loan Agreement

On March 11,2021, the Company and Robert W. Duggan, the Executive Chairman, entered into a Loan Agreement in connection with Mr. Duggan lending the principal sum of $41.0 million to the Company. The Loan Agreement bore interest at a rate per annum equal to 5.0%, payable quarterly commencing on July 1,2021. During the year ended December 31, 2021, the Company recorded $0.6 million of interest expense in relation to this Loan Agreement. In June 2021, the Loan Agreement was terminated and $41.0 million principal, together with approximately $0.6 million of accrued and unpaid interest, was fully settled via issuance of the Company’s common stock at a price per share of $16.40. Refer to Note 6 for additional details of the private placement sale.

2022 Loan Agreement

On September 20,2022, the Company and Robert W. Duggan, the Executive Chairman, entered into a Loan Agreement (“2022 Loan Agreement”) in connection with Mr. Duggan lending the principal sum of $65.0 million to the Company. The Loan Agreement bears interest at a rate per annum equal to 5.0%, payable quarterly commencing on January 1,2023, with the principal sum payable on March 20, 2024. On March 17, 2023, the Company and Mr. Duggan agreed to amend certain terms of the Loan Agreement. There were no changes to the interest rate, but the principal sum is now due and payable on September 30, 2024. During the year ended December 31, 2022, the Company recorded $0.9 million of interest expense in relation to the 2022 Loan Agreement.

Insurance Loan Agreement

On May 13,2021, the Company secured its annual director and officer liability insurance policy. The total premiums for the policy were approximately $2.6 million, of which the Company made a down payment of $0.7 million and financed the balance of $1.9 million via an Insurance Loan Agreement. The Insurance Loan Agreement had an annual interest rate of 3.69% and required monthly payments through February 2022, upon which the Insurance Loan Agreement was paid in full. During the year ended December 31, 2022, the Company recorded $1.0 thousand of interest expense in relation to the Insurance Loan Agreement.

Operating Leases

In 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 lease commenced during July 2017.

In May 2019, the Company entered into Lease Amendment 1 (the “Lease Amendment”) in relation to the Existing Lease and added the lease of new premises of approximately 13,300 square feet and 21,300 square feet, (“Expansion Premises 1” and “Expansion Premises 2,” respectively). Additionally, the term of the Existing Lease was extended to October 2029 to be coterminous with Expansion Premises 1 and Expansion Premises 2.

The Company evaluated the lease amendment under the provisions of ASC 842. It concluded that the Lease Amendment would be accounted for as a single contract with the Existing Lease because the additional lease payments due to the Lease Amendment was not commensurate with the right-of-use asset granted to the Company. Though the Lease Amendment was accounted for as a single contract, the Existing Premises, Expansion Premises 1 (occupied in November 2019) and Expansion Premises 2 (occupied in May 2020) 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 reassessed and calculated the lease liability and right-of-use asset for the respective component. As a result, at the modification date, the Company remeasured its existing lease liability and recorded an additional right-of-use asset and lease liability of $2.0 million. The Company also recorded an additional right-of-use asset and lease liability of $3.0 million and $4.8 million at the commencement of Expansion Premises 1 in November 2019 and Expansion Premises 2 in May 2020, respectively. At December 31, 2022, total right-of-use assets and lease lability was approximately $8.1 million and $10.0 million, respectively.

During the years ended December 31, 2022, 2021 and 2020, rent expense, including common area maintenance charges, was $2.1 million, $1.9 million and $1.7 million, respectively.

Supplemental balance sheet information related to leases (in thousands):

Year Ended December 31,

Current operating lease liabilities $ 896 $ 774

Non-current operating lease liabilities 9,144 10,040

Total cash paid for operating lease liabilities (in thousands):

Year Ended December 31,

Cash paid for operating lease liabilities $ 1,806 $ 1,643 $ 1,045

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Maturities of operating lease liabilities were as follows (in thousands):

Year ending December 31:

Total lease payments 13,969

Less imputed interest (3,929 )

Total lease liabilities $ 10,040

Weighted-average remaining lease term and discount rate, as of December 31,2022, were as follows:

Weighted-average remaining lease term 6.83

Weighted-average discount rate 10 %

Legal Proceedings

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, including the matter described below. The outcome of any legal proceedings is unpredictable but, regardless of outcome, they can have an adverse impact on us because of defense and settlement costs, diversion of management resources, negative publicity, reputational harm, and other factors. We maintain insurance that may provide coverage for such matters, including customary employment practices liability insurance.

In November 2022, the employment of our former Chief Financial Officer, Sandra Gardiner, terminated. Ms. Gardiner’s departure was not the result of any disagreement with the Company on any matter relating to its operations, accounting policies or practices, although the Company determined that she was not eligible to receive any severance benefits under the terms and conditions of her then existing employment agreement. In March 2023, Ms. Gardiner filed an arbitration demand with JAMS seeking severance benefits and other remedies, alleging breach of contract and unlawful termination in violation of public policy, among other things. We believe that Ms. Gardiner’s claims are without merit and we intend to vigorously defend ourselves against them. Because of the difficulty in predicting the outcome of any legal proceeding, particularly one that is in its early stages, the Company cannot predict what the final outcome of Ms. Gardiner’s arbitration proceeding will likely be. However, at this time, we believe that the final resolution of this matter will not adversely affect our consolidated position, results of operation, or cash flows.

14. Restructuring Charges

On March 31, 2022, the Company initiated a plan to reduce its operating expenses, preserve financial resources, and focus its sales and marketing efforts on increasing utilization of CellFX Systems. The Company’s Board of Directors approved changes to the Company’s commercial leadership, restructuring of its commercial field organization and reductions in other personnel and expenses across the Company. The Company announced a reduction in force effective as of March 31, 2022. The affected employees were offered separation benefits, including severance payments along with temporary healthcare coverage assistance. The Company incurred a discrete restructuring related charge of $0.7 million which was fully recorded in March 2022 and the related expenses are included within total cost and expenses on the consolidated statement of operations for the year ended December 31, 2022. This charge represents the total amount to be incurred in connection with the activity. During the year ended December 31, 2022, the Company paid the entire $0.7 million.

On September 20, 2022, the Company initiated an additional reduction in force to align its workforce with its shift in strategic direction to advance its core NPS technology outside of dermatology. The reduction primarily impacted dermatological sales, marketing and other related support personnel. The affected employees were offered separation benefits, including severance payments along with temporary healthcare coverage assistance. The Company incurred a discrete restructuring related charge of $0.2 million which was fully recorded in September 2022 and the related expenses are included within total cost and expenses on the consolidated statement of operations for the year ended December 31, 2022. During the year ended December 31, 2022, the Company paid the entire $0.2 million.

15. Employee Benefit Plans

The Company sponsors a defined contribution plan under which it may make discretionary contributions. The Company did not make any employer matching contributions to this plan during the years ended December 31, 2022, 2021 and 2020.

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16. Supplementary Financial Information

There are no retrospective changes to the statements of comprehensive income for any of the quarters within the two most recent fiscal years that individually or in the aggregate are material.

Item9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer, our principal executive and principal financial officer 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 Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer has concluded that 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 to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of senior management, including our Chief Executive Officer and Corporate Controller, we evaluated the effectiveness of our internal control over financial reporting based on the framework in InternalControl - IntegratedFramework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation under that framework and applicable SEC rules, our management concluded that our internal control over financial reporting was effective as of December 31, 2022.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during the year ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.

Item9B.Other Information

None.

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Item9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not Applicable.

Part III

Item10. Directors, Executive Officers and Corporate Governance

Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

Item11. Executive Compensation

Item12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item13. Certain Relationships and Related Transactions, and Director Independence

Item14. Principal Accounting Fees and Services

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PLSE US Equity

PLSE · 10-K · period ended 2022-12-31

Item7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item7A.Quantitative and Qualitative Disclosures About Market Risk

Item8. Financial Statements and Supplementary Data

Item9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item9B.Other Information

Item9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Item10. Directors, Executive Officers and Corporate Governance

Item11. Executive Compensation

Item12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item13. Certain Relationships and Related Transactions, and Director Independence

Item14. Principal Accounting Fees and Services

PLSE US Equity☆

PLSE · 10-K · period ended 2022-12-31

Item7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item7A.Quantitative and Qualitative Disclosures About Market Risk

Item8. Financial Statements and Supplementary Data

Item9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item9B.Other Information

Item9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Item10. Directors, Executive Officers and Corporate Governance

Item11. Executive Compensation

Item12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item13. Certain Relationships and Related Transactions, and Director Independence

Item14. Principal Accounting Fees and Services

PLSE US Equity