Investors may soon find themselves checking the pulse of Pulse Biosciences (NASDAQ:PLSE)... and getting nothing.
But right now the Burlingame, California company is managing to pull in unwary investors.
The company is working on a device that uses pulsed electric fields to possibly treat solid tumors and skin problems such as warts. Stock in the zero-revenue company began trading on the Nasdaq in May 2016.
*1. Around The Corner: Cheap Stock Sales
When the company IPOd last May, some stock was locked up but has been freely tradable since November.
However, a massive 4.5 million shares of stock is looming, waiting to be unlocked.
"Of the 12,565,451 shares of our common stock expected to be outstanding following completion of the offering, 2,996,253 shares will be freely tradable without restriction pursuant to Rule 144 following the expiration of the 180-day lock-up previously agreed to by those stockholders and 4,539,637 will be freely tradable without restriction pursuant to Rule 144 following the expiration of the 12-month lock-up agreed by those stockholders."
Especially if sold en masse, those millions of shares have the potential to significantly water down shares owned by existing stockholders.
The lock-release date is just around the corner and some cheap warrants are attached (worth 299,625 shares) that can be exchanged for stock for as little as $2.67 apiece ... so why wouldn't those investors sell off if the stock on the release date is anywhere near current levels? The stock is set to be unlocked for sale the first week of May 2017.
The company recently sold $5 million worth of stock to private investors in a Band-Aid measure, bringing cash to around $5.7 million. But considering the $5.7 million three-quarter cash burn ...
...or ~$1.9 million per quarter ... while the company is just striding in place, that money will quickly vanish if Pulse intends to move forward.
So we expect many more stock sales in the future...and more potential for existing shares to get watered down.
*2. Bad News: MDB Capital Special
MDB Capital Group was the company's underwriter ... and the company has paid through the nose to get its stock before the public.
1. The underwriter got $1.8 million in discounts. 2. MDB installed its own director as Pulse chairman of the board. 3. The underwriter also got $1.4 million worth of cheap stock warrants.
(Source: Company SEC filing)
But does MDB's track record justify the high cost to Pulse and its investors?
Well, things have turned out poorly before for many stocks with strong MDB participation. Just a few examples include:
The firm handled Second Sight Medical Product's (NASDAQ:EYES) initial public offering three years ago at a stunning $17 per share. TheStreetSweeper warned investors of Second Sight's risks here, when the stock traded at ~$6.93.
The chart below shows what has happened to the stock. Since MDB's handling of its IPO, shares have declined ~90%!
(Source: Yahoo Finance)
Interestingly, a Pulse director, Dr. Robert J. Greenberg, M.D., worked as Second Sight's president, CEO and director from 1998 through August 2015. The doctor continues his involvement with MDB-underwritten Second Sight, working as chairman of the board in August 2015 as the stock began spiraling toward penny stock land.
But now that stock in the radio frequency filter maker costs half the price it fetched in the IPO.
(Source: Yahoo Finance)
There are many more examples but let's consider just one more, Turtle Beach (NASDAQ:HEAR).
MDB underwrote Parametric Sound just before Turtle Beach became publicly traded in 2012 via a reverse merger stock swap. The stock came out at about $4.50 per share.
(Source: Yahoo Finance)
But now the stock costs just $1.11 per share ... handing early investors a 75% decline in their investment.
So MDB's interest in Pulse may be a red hot warning bell. The firm has clearly taken on risk-filled companies and ultimately delivered losses of 50% to 90% to many early investors.
*3. RSI: Pulse Poised To Plummet
Beginning Feb. 9, Pulse stock suddenly went airborne by 83%. But what goes up must fall down. And in this case, the stars have aligned so the stock is poised for a swift reversal.
Pulse can thank the relative strength index or RSI for finding its stock in this situation. When the RSI is at least 70, a stock's price is generally considered risky and ready to drop.
But Pulse's RSI has hit the red zone ...
(Source: Yahoo, TheStreetSweeper)
With a relative strength index of 90, Pulse looks poised to drop.
*4. Institutions Run The Other Way
Indeed, Pulse investors are denied the comfort of seeing big investment banks own the company stock.
Institutional ownership is measly:
Unfortunately, the few well-known institutions are selling out or chopping their ownership ... at a little less than twice the rate of those buying stock.
This company is pulsing with issues including:
*Looming stock dilution.
*Underwriter's ominous track record.
*Anticipated higher cash burn.
*Need for more potentially dilutive convertible debt or stock sales.
Until Pulse proves itself to any degree, in our view, the stock is not even worth half of today's price.
Disclosure: I am/we are short PLSE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.