0001076682 false Q3 --12-31 0001076682 2022-01-01 2022-09-30 0001076682 2022-11-07 0001076682 2022-09-30 0001076682 2021-12-31 0001076682 2022-07-01 2022-09-30 0001076682 2021-07-01 2021-09-30 0001076682 2021-01-01 2021-09-30 0001076682 us-gaap:ProductMember 2022-07-01 2022-09-30 0001076682 us-gaap:ProductMember 2021-07-01 2021-09-30 0001076682 us-gaap:ProductMember 2022-01-01 2022-09-30 0001076682 us-gaap:ProductMember 2021-01-01 2021-09-30 0001076682 us-gaap:ServiceMember 2022-07-01 2022-09-30 0001076682 us-gaap:ServiceMember 2021-07-01 2021-09-30 0001076682 us-gaap:ServiceMember 2022-01-01 2022-09-30 0001076682 us-gaap:ServiceMember 2021-01-01 2021-09-30 0001076682 us-gaap:PreferredStockMember us-gaap:ConvertiblePreferredStockMember 2021-12-31 0001076682 us-gaap:CommonStockMember 2021-12-31 0001076682 us-gaap:AdditionalPaidInCapitalMember 2021-12-31 0001076682 us-gaap:RetainedEarningsMember 2021-12-31 0001076682 us-gaap:PreferredStockMember us-gaap:ConvertiblePreferredStockMember 2022-03-31 0001076682 us-gaap:CommonStockMember 2022-03-31 0001076682 us-gaap:AdditionalPaidInCapitalMember 2022-03-31 0001076682 us-gaap:RetainedEarningsMember 2022-03-31 0001076682 2022-03-31 0001076682 us-gaap:PreferredStockMember us-gaap:ConvertiblePreferredStockMember 2022-06-30 0001076682 us-gaap:CommonStockMember 2022-06-30 0001076682 us-gaap:AdditionalPaidInCapitalMember 2022-06-30 0001076682 us-gaap:RetainedEarningsMember 2022-06-30 0001076682 2022-06-30 0001076682 us-gaap:CommonStockMember 2020-12-31 0001076682 us-gaap:AdditionalPaidInCapitalMember 2020-12-31 0001076682 us-gaap:RetainedEarningsMember 2020-12-31 0001076682 2020-12-31 0001076682 us-gaap:CommonStockMember 2021-03-31 0001076682 us-gaap:AdditionalPaidInCapitalMember 2021-03-31 0001076682 us-gaap:RetainedEarningsMember 2021-03-31 0001076682 2021-03-31 0001076682 us-gaap:CommonStockMember 2021-06-30 0001076682 us-gaap:AdditionalPaidInCapitalMember 2021-06-30 0001076682 us-gaap:RetainedEarningsMember 2021-06-30 0001076682 2021-06-30 0001076682 us-gaap:PreferredStockMember us-gaap:ConvertiblePreferredStockMember 2022-01-01 2022-03-31 0001076682 us-gaap:CommonStockMember 2022-01-01 2022-03-31 0001076682 us-gaap:AdditionalPaidInCapitalMember 2022-01-01 2022-03-31 0001076682 us-gaap:RetainedEarningsMember 2022-01-01 2022-03-31 0001076682 2022-01-01 2022-03-31 0001076682 us-gaap:PreferredStockMember us-gaap:ConvertiblePreferredStockMember 2022-04-01 2022-06-30 0001076682 us-gaap:CommonStockMember 2022-04-01 2022-06-30 0001076682 us-gaap:AdditionalPaidInCapitalMember 2022-04-01 2022-06-30 0001076682 us-gaap:RetainedEarningsMember 2022-04-01 2022-06-30 0001076682 2022-04-01 2022-06-30 0001076682 us-gaap:PreferredStockMember us-gaap:ConvertiblePreferredStockMember 2022-07-01 2022-09-30 0001076682 us-gaap:CommonStockMember 2022-07-01 2022-09-30 0001076682 us-gaap:AdditionalPaidInCapitalMember 2022-07-01 2022-09-30 0001076682 us-gaap:RetainedEarningsMember 2022-07-01 2022-09-30 0001076682 us-gaap:CommonStockMember 2021-01-01 2021-03-31 0001076682 us-gaap:AdditionalPaidInCapitalMember 2021-01-01 2021-03-31 0001076682 us-gaap:RetainedEarningsMember 2021-01-01 2021-03-31 0001076682 2021-01-01 2021-03-31 0001076682 us-gaap:CommonStockMember 2021-04-01 2021-06-30 0001076682 us-gaap:AdditionalPaidInCapitalMember 2021-04-01 2021-06-30 0001076682 us-gaap:RetainedEarningsMember 2021-04-01 2021-06-30 0001076682 2021-04-01 2021-06-30 0001076682 us-gaap:CommonStockMember 2021-07-01 2021-09-30 0001076682 us-gaap:AdditionalPaidInCapitalMember 2021-07-01 2021-09-30 0001076682 us-gaap:RetainedEarningsMember 2021-07-01 2021-09-30 0001076682 us-gaap:PreferredStockMember us-gaap:ConvertiblePreferredStockMember 2022-09-30 0001076682 us-gaap:CommonStockMember 2022-09-30 0001076682 us-gaap:AdditionalPaidInCapitalMember 2022-09-30 0001076682 us-gaap:RetainedEarningsMember 2022-09-30 0001076682 us-gaap:CommonStockMember 2021-09-30 0001076682 us-gaap:AdditionalPaidInCapitalMember 2021-09-30 0001076682 us-gaap:RetainedEarningsMember 2021-09-30 0001076682 2021-09-30 0001076682 PTE:UnderwrittenOfferingMember 2022-03-31 0001076682 PTE:UnderwrittenOfferingMember 2022-06-30 0001076682 PTE:UnderwrittenOfferingMember 2021-03-31 0001076682 2022-05-11 2022-05-12 0001076682 us-gaap:FairValueInputsLevel1Member PTE:CommonStockWarrantLiabilityMember 2022-09-30 0001076682 us-gaap:FairValueInputsLevel2Member PTE:CommonStockWarrantLiabilityMember 2022-09-30 0001076682 us-gaap:FairValueInputsLevel3Member PTE:CommonStockWarrantLiabilityMember 2022-09-30 0001076682 PTE:CommonStockWarrantLiabilityMember 2022-09-30 0001076682 us-gaap:FairValueInputsLevel1Member 2022-09-30 0001076682 us-gaap:FairValueInputsLevel2Member 2022-09-30 0001076682 us-gaap:FairValueInputsLevel3Member 2022-09-30 0001076682 us-gaap:FairValueInputsLevel1Member PTE:CommonStockWarrantLiabilityMember 2021-12-31 0001076682 us-gaap:FairValueInputsLevel2Member PTE:CommonStockWarrantLiabilityMember 2021-12-31 0001076682 us-gaap:FairValueInputsLevel3Member PTE:CommonStockWarrantLiabilityMember 2021-12-31 0001076682 PTE:CommonStockWarrantLiabilityMember 2021-12-31 0001076682 us-gaap:FairValueInputsLevel1Member 2021-12-31 0001076682 us-gaap:FairValueInputsLevel2Member 2021-12-31 0001076682 us-gaap:FairValueInputsLevel3Member 2021-12-31 0001076682 PTE:FeburaryFourteenTwoThousandTwentyMember 2021-12-31 0001076682 PTE:FeburaryFourteenTwoThousandTwentyMember 2022-01-01 2022-09-30 0001076682 PTE:FeburaryFourteenTwoThousandTwentyMember 2022-09-30 0001076682 PTE:DecemberTwentyThreeTwoThousandTwentyMember 2021-12-31 0001076682 PTE:DecemberTwentyThreeTwoThousandTwentyMember 2022-01-01 2022-09-30 0001076682 PTE:DecemberTwentyThreeTwoThousandTwentyMember 2022-09-30 0001076682 PTE:JanuaryFourteenTwoThousandTwentyOneMember 2021-12-31 0001076682 PTE:JanuaryFourteenTwoThousandTwentyOneMember 2022-01-01 2022-09-30 0001076682 PTE:JanuaryFourteenTwoThousandTwentyOneMember 2022-09-30 0001076682 PTE:JanuaryTwentyFiveThousandTwentyOneMember 2021-12-31 0001076682 PTE:JanuaryTwentyFiveThousandTwentyOneMember 2022-01-01 2022-09-30 0001076682 PTE:JanuaryTwentyFiveThousandTwentyOneMember 2022-09-30 0001076682 PTE:MarchSixteenTwoThousandTwentyTwoMember 2021-12-31 0001076682 PTE:MarchSixteenTwoThousandTwentyTwoMember 2022-01-01 2022-09-30 0001076682 PTE:MarchSixteenTwoThousandTwentyTwoMember 2022-09-30 0001076682 PTE:JuneEightTwoThousandTwentyTwoMember 2021-12-31 0001076682 PTE:JuneEightTwoThousandTwentyTwoMember 2022-01-01 2022-09-30 0001076682 PTE:JuneEightTwoThousandTwentyTwoMember 2022-09-30 0001076682 PTE:FeburaryFourteenTwoThousandTwentyMember 2020-12-31 0001076682 PTE:FeburaryFourteenTwoThousandTwentyMember 2021-01-01 2021-09-30 0001076682 PTE:FeburaryFourteenTwoThousandTwentyMember 2021-09-30 0001076682 PTE:DecemberTwentyThreeTwoThousandTwentyMember 2020-12-31 0001076682 PTE:DecemberTwentyThreeTwoThousandTwentyMember 2021-01-01 2021-09-30 0001076682 PTE:DecemberTwentyThreeTwoThousandTwentyMember 2021-09-30 0001076682 PTE:JanuaryFourteenTwoThousandTwentyOneMember 2020-12-31 0001076682 PTE:JanuaryFourteenTwoThousandTwentyOneMember 2021-01-01 2021-09-30 0001076682 PTE:JanuaryFourteenTwoThousandTwentyOneMember 2021-09-30 0001076682 PTE:JanuaryTwentyFiveThousandTwentyOneMember 2020-12-31 0001076682 PTE:JanuaryTwentyFiveThousandTwentyOneMember 2021-01-01 2021-09-30 0001076682 PTE:JanuaryTwentyFiveThousandTwentyOneMember 2021-09-30 0001076682 PTE:InducementLossOnInitialFairValurMember 2020-12-31 0001076682 PTE:InducementLossOnInitialFairValurMember 2021-01-01 2021-09-30 0001076682 PTE:InducementLossOnInitialFairValurMember 2021-09-30 0001076682 srt:MinimumMember us-gaap:MeasurementInputSharePriceMember 2022-09-30 0001076682 srt:MaximumMember us-gaap:MeasurementInputSharePriceMember 2022-09-30 0001076682 srt:MinimumMember us-gaap:MeasurementInputExercisePriceMember 2022-09-30 0001076682 srt:MaximumMember us-gaap:MeasurementInputExercisePriceMember 2022-09-30 0001076682 srt:MinimumMember us-gaap:MeasurementInputRiskFreeInterestRateMember 2022-09-30 0001076682 srt:MaximumMember us-gaap:MeasurementInputRiskFreeInterestRateMember 2022-09-30 0001076682 srt:MinimumMember us-gaap:MeasurementInputOptionVolatilityMember 2022-09-30 0001076682 srt:MaximumMember us-gaap:MeasurementInputOptionVolatilityMember 2022-09-30 0001076682 srt:MinimumMember 2022-09-30 0001076682 srt:MaximumMember 2022-09-30 0001076682 srt:MinimumMember us-gaap:MeasurementInputSharePriceMember 2021-09-30 0001076682 srt:MaximumMember us-gaap:MeasurementInputSharePriceMember 2021-09-30 0001076682 srt:MinimumMember us-gaap:MeasurementInputExercisePriceMember 2021-09-30 0001076682 srt:MaximumMember us-gaap:MeasurementInputExercisePriceMember 2021-09-30 0001076682 srt:MinimumMember us-gaap:MeasurementInputRiskFreeInterestRateMember 2021-09-30 0001076682 srt:MaximumMember us-gaap:MeasurementInputRiskFreeInterestRateMember 2021-09-30 0001076682 srt:MinimumMember us-gaap:MeasurementInputOptionVolatilityMember 2021-09-30 0001076682 srt:MaximumMember us-gaap:MeasurementInputOptionVolatilityMember 2021-09-30 0001076682 srt:MinimumMember 2021-09-30 0001076682 srt:MaximumMember 2021-09-30 0001076682 PTE:IBEXPropertyLLCMember stpr:UT 2018-05-31 0001076682 PTE:StockAgreementMember 2022-04-14 0001076682 PTE:StockAgreementMember 2022-04-13 2022-04-14 0001076682 PTE:RealEstateAgreementMember 2022-04-13 2022-04-14 0001076682 PTE:StockAgreementAndRealEstateAgreementMember 2022-04-29 0001076682 PTE:StockAgreementAndRealEstateAgreementMember 2022-04-29 2022-04-29 0001076682 us-gaap:GeneralAndAdministrativeExpenseMember 2022-07-01 2022-09-30 0001076682 us-gaap:GeneralAndAdministrativeExpenseMember 2021-07-01 2021-09-30 0001076682 us-gaap:GeneralAndAdministrativeExpenseMember 2022-01-01 2022-09-30 0001076682 us-gaap:GeneralAndAdministrativeExpenseMember 2021-01-01 2021-09-30 0001076682 us-gaap:ResearchAndDevelopmentExpenseMember 2022-07-01 2022-09-30 0001076682 us-gaap:ResearchAndDevelopmentExpenseMember 2021-07-01 2021-09-30 0001076682 us-gaap:ResearchAndDevelopmentExpenseMember 2022-01-01 2022-09-30 0001076682 us-gaap:ResearchAndDevelopmentExpenseMember 2021-01-01 2021-09-30 0001076682 PTE:CommercialLeaseAgreementMember PTE:AdcompLLCMember 2017-12-27 0001076682 PTE:CommercialLeaseAgreementMember PTE:AdcompLLCMember 2017-12-26 2017-12-27 0001076682 PTE:PurchaseAgreementMember 2021-12-16 0001076682 PTE:BCGAgreementMember PTE:BCGAcquisitionsLLCMember 2021-12-14 2021-12-16 0001076682 PTE:BCGAgreementMember 2021-12-16 0001076682 2019-04-30 0001076682 2019-04-01 2019-04-30 0001076682 PTE:PacificOfficeAutomationIncMember 2021-11-30 0001076682 PTE:PacificOfficeAutomationIncMember 2021-11-01 2021-11-30 0001076682 PTE:FinancingArrangementsMember 2022-09-30 0001076682 PTE:TwoThousandAndTwentyEquityIncentivePlanMember srt:MaximumMember 2019-10-25 0001076682 PTE:TwoThousandAndTwentyEquityIncentivePlanMember 2019-10-24 2019-10-25 0001076682 PTE:TwoThousandAndTwentyEquityIncentivePlanMember 2022-01-31 0001076682 PTE:TwoThousandAndTwentyEquityIncentivePlanMember 2022-09-09 0001076682 PTE:TwoThousandAndTwentyEquityIncentivePlanMember 2022-09-30 0001076682 PTE:TwoThousandAndNineteenEquityIncentivePlanMember srt:MaximumMember 2018-10-05 0001076682 PTE:TwoThousandAndNineteenEquityIncentivePlanMember 2018-10-04 2018-10-05 0001076682 PTE:TwoThousandAndNineteenEquityIncentivePlanMember 2022-09-30 0001076682 PTE:TwoThousandAndSeventeenEquityIncentivePlanMember srt:MaximumMember 2016-12-01 0001076682 PTE:TwoThousandAndSeventeenEquityIncentivePlanMember 2016-11-30 2016-12-01 0001076682 PTE:TwoThousandAndSeventeenEquityIncentivePlanMember 2022-09-30 0001076682 PTE:EmployeeStockPurchasePlanMember 2018-05-31 0001076682 PTE:EmployeeStockPurchasePlanMember 2018-05-01 2018-05-31 0001076682 PTE:EmployeeAndNonEmployeeStockOptionMember 2021-12-31 0001076682 PTE:EmployeeAndNonEmployeeStockOptionMember 2022-01-01 2022-09-30 0001076682 PTE:EmployeeAndNonEmployeeStockOptionMember 2022-09-30 0001076682 us-gaap:RestrictedStockMember 2021-12-31 0001076682 us-gaap:RestrictedStockMember 2022-01-01 2022-09-30 0001076682 us-gaap:RestrictedStockMember 2022-09-30 0001076682 us-gaap:SellingAndMarketingExpenseMember 2022-07-01 2022-09-30 0001076682 us-gaap:SellingAndMarketingExpenseMember 2021-07-01 2021-09-30 0001076682 us-gaap:SellingAndMarketingExpenseMember 2022-01-01 2022-09-30 0001076682 us-gaap:SellingAndMarketingExpenseMember 2021-01-01 2021-09-30 0001076682 PTE:RestructuringAndOtherChargesMember 2022-07-01 2022-09-30 0001076682 PTE:RestructuringAndOtherChargesMember 2021-07-01 2021-09-30 0001076682 PTE:RestructuringAndOtherChargesMember 2022-01-01 2022-09-30 0001076682 PTE:RestructuringAndOtherChargesMember 2021-01-01 2021-09-30 0001076682 us-gaap:IPOMember 2020-12-22 2020-12-23 0001076682 us-gaap:IPOMember 2020-12-23 0001076682 PTE:PreFundedWarrantMember us-gaap:IPOMember 2020-12-23 0001076682 srt:MaximumMember us-gaap:IPOMember 2020-12-23 0001076682 PTE:CommonStockAndWarrantMember us-gaap:IPOMember 2020-12-23 0001076682 us-gaap:WarrantMember us-gaap:IPOMember 2020-12-23 0001076682 srt:MaximumMember us-gaap:PrivatePlacementMember 2020-12-23 0001076682 srt:MaximumMember us-gaap:PrivatePlacementMember 2020-12-22 2020-12-23 0001076682 us-gaap:PrivatePlacementMember 2020-12-22 2020-12-23 0001076682 PTE:ExisitngWarrantMember 2020-12-22 2020-12-23 0001076682 us-gaap:WarrantMember 2020-12-23 0001076682 us-gaap:PrivatePlacementMember 2020-12-23 0001076682 2020-12-23 0001076682 2020-12-22 2020-12-23 0001076682 us-gaap:IPOMember 2021-01-12 2021-01-14 0001076682 PTE:PreFundedWarrantMember us-gaap:IPOMember 2021-01-14 0001076682 srt:MaximumMember us-gaap:IPOMember 2021-01-14 0001076682 us-gaap:WarrantMember us-gaap:IPOMember 2021-01-14 0001076682 us-gaap:IPOMember 2021-01-14 0001076682 srt:MaximumMember us-gaap:PrivatePlacementMember 2021-01-14 0001076682 srt:MaximumMember us-gaap:PrivatePlacementMember 2021-01-12 2021-01-14 0001076682 PTE:PrefundedWarrantsMember 2021-01-14 0001076682 PTE:ExisitngWarrantMember 2021-01-12 2021-01-14 0001076682 PTE:CommonStockWarrantsMember 2021-01-12 2021-01-14 0001076682 PTE:PlacementAgentCommonStockWarrantsMember 2021-01-12 2021-01-14 0001076682 us-gaap:CommonStockMember 2021-01-12 2021-01-14 0001076682 us-gaap:AdditionalPaidInCapitalMember 2021-01-12 2021-01-14 0001076682 PTE:ClassifiedWarrantsMember 2021-01-12 2021-01-14 0001076682 srt:MaximumMember PTE:WarrantsMember PTE:LetterAgreementMember 2021-01-22 0001076682 PTE:LetterAgreementMember 2021-01-22 0001076682 srt:MaximumMember us-gaap:CommonStockMember PTE:LetterAgreementMember 2021-01-21 2021-01-22 0001076682 us-gaap:CommonStockMember PTE:LetterAgreementMember 2021-01-22 0001076682 PTE:WarrantsMember PTE:LetterAgreementMember 2021-01-21 2021-01-22 0001076682 PTE:WarrantsMember 2021-01-22 0001076682 srt:MaximumMember PTE:WarrantsOneMember PTE:LetterAgreementMember 2020-12-23 0001076682 PTE:DecemberTwoThousandTwentyMember 2021-01-21 2021-01-22 0001076682 srt:MaximumMember PTE:LetterAgreementMember 2021-01-22 0001076682 PTE:WarrantsOneMember 2021-01-21 2021-01-22 0001076682 PTE:JanuaryTwentyFiveWarrantsMember 2021-01-21 2021-01-22 0001076682 PTE:PlacementAgentCommonStockWarrantsMember 2021-01-21 2021-01-22 0001076682 PTE:SeriesAConvertiblePreferredStockMember 2022-03-16 0001076682 PTE:SeriesBConvertiblePreferredStockMember 2022-03-16 0001076682 2022-03-16 0001076682 us-gaap:CommonStockMember 2022-03-16 0001076682 PTE:WarrantsMember 2022-03-14 2022-03-16 0001076682 us-gaap:CommonStockMember PTE:LetterAgreementMember 2021-01-25 0001076682 2021-01-14 0001076682 2021-01-25 0001076682 us-gaap:SeriesBPreferredStockMember 2022-03-17 0001076682 us-gaap:SeriesAPreferredStockMember 2022-03-29 0001076682 us-gaap:WarrantMember 2022-03-01 2022-03-31 0001076682 PTE:SeriesAAndSeriesBPreferredStockMember 2022-03-31 0001076682 PTE:SeriesAAndSeriesBPreferredStockMember 2022-03-01 2022-03-31 0001076682 PTE:MonteCarloSimulationModelMember PTE:SeriesAAndSeriesBPreferredStockMember 2022-03-01 2022-03-31 0001076682 PTE:PlacementAgentCommonStockWarrantsMember PTE:SeriesAAndSeriesBPreferredStockMember 2022-03-01 2022-03-31 0001076682 PTE:SeriesAAndSeriesBPreferredStockMember 2022-03-31 0001076682 PTE:SeriesAAndSeriesBPreferredStockMember 2022-03-01 2022-03-31 0001076682 us-gaap:IPOMember 2022-06-07 2022-06-08 0001076682 us-gaap:IPOMember 2022-06-08 0001076682 PTE:CommonStockAndWarrantMember us-gaap:IPOMember 2022-06-08 0001076682 PTE:PreFundedWarrantMember us-gaap:IPOMember 2022-06-08 0001076682 PTE:PreFundedWarrantOneMember us-gaap:IPOMember 2022-06-08 0001076682 srt:MaximumMember us-gaap:PrivatePlacementMember 2022-06-08 0001076682 PTE:JuneTwoThousandTwentyTwoWarrantsMember us-gaap:IPOMember 2022-06-08 0001076682 PTE:WarrantsMember 2022-06-01 2022-06-30 0001076682 PTE:WarrantsMember PTE:LetterAgreementMember 2022-06-01 2022-06-30 0001076682 us-gaap:PrivatePlacementMember 2022-06-07 2022-06-08 0001076682 PTE:ExisitngWarrantMember 2022-06-07 2022-06-08 0001076682 us-gaap:WarrantMember 2022-06-30 0001076682 PTE:PlacementAgentMember 2022-06-30 0001076682 2022-06-01 2022-06-30 0001076682 PTE:CantorFitzeraldAndCoMember 2021-03-28 2021-03-30 0001076682 PTE:SalesAgreementMember 2022-02-26 2022-02-28 0001076682 PTE:CantorFitzeraldAndCoMember 2022-02-28 0001076682 PTE:CommonStockWarrantMember PTE:MonteCarloSimulationModelMember 2022-03-16 0001076682 PTE:CommonStockWarrantMember PTE:MonteCarloSimulationModelMember 2022-09-30 0001076682 PTE:CommonStockWarrantMember PTE:MonteCarloSimulationModelMember 2022-03-14 2022-03-16 0001076682 PTE:CommonStockWarrantMember PTE:MonteCarloSimulationModelMember 2022-01-01 2022-09-30 0001076682 PTE:CommonStockWarrantOneMember PTE:MonteCarloSimulationModelMember 2022-06-08 0001076682 PTE:CommonStockWarrantOneMember PTE:MonteCarloSimulationModelMember 2022-09-30 0001076682 PTE:CommonStockWarrantOneMember PTE:MonteCarloSimulationModelMember 2022-06-07 2022-06-08 0001076682 PTE:CommonStockWarrantOneMember PTE:MonteCarloSimulationModelMember 2022-01-01 2022-09-30 0001076682 PTE:PlacementAgentWarrantMember PTE:MonteCarloSimulationModelMember 2022-03-16 0001076682 PTE:PlacementAgentWarrantMember PTE:MonteCarloSimulationModelMember 2022-09-30 0001076682 PTE:PlacementAgentWarrantMember PTE:MonteCarloSimulationModelMember 2022-03-14 2022-03-16 0001076682 PTE:PlacementAgentWarrantMember PTE:MonteCarloSimulationModelMember 2022-01-01 2022-09-30 0001076682 PTE:PlacementAgentWarrantOneMember PTE:MonteCarloSimulationModelMember 2022-06-08 0001076682 PTE:PlacementAgentWarrantOneMember PTE:MonteCarloSimulationModelMember 2022-09-30 0001076682 PTE:PlacementAgentWarrantOneMember PTE:MonteCarloSimulationModelMember 2022-06-07 2022-06-08 0001076682 PTE:PlacementAgentWarrantOneMember PTE:MonteCarloSimulationModelMember 2022-01-01 2022-09-30 0001076682 PTE:FebruaryFourteenTwoThousandTwentyCommonWarrantsMember 2021-12-31 0001076682 PTE:FebruaryFourteenTwoThousandTwentyCommonWarrantsMember 2022-01-01 2022-09-30 0001076682 PTE:FebruaryFourteenTwoThousandTwentyCommonWarrantsMember 2022-09-30 0001076682 PTE:DecemberTwentyThreeTwoThousandTwentyPlacementAgentWarrantsMember 2021-12-31 0001076682 PTE:DecemberTwentyThreeTwoThousandTwentyPlacementAgentWarrantsMember 2022-01-01 2022-09-30 0001076682 PTE:DecemberTwentyThreeTwoThousandTwentyPlacementAgentWarrantsMember 2022-09-30 0001076682 PTE:JanuaryFourteenTwoThousandTwentyOneCommonWarrantsMember 2021-12-31 0001076682 PTE:JanuaryFourteenTwoThousandTwentyOneCommonWarrantsMember 2022-01-01 2022-09-30 0001076682 PTE:JanuaryFourteenTwoThousandTwentyOneCommonWarrantsMember 2022-09-30 0001076682 PTE:JanuaryFourteenTwoThousandTwentyOnePlacementAgentMember 2021-12-31 0001076682 PTE:JanuaryFourteenTwoThousandTwentyOnePlacementAgentMember 2022-01-01 2022-09-30 0001076682 PTE:JanuaryFourteenTwoThousandTwentyOnePlacementAgentMember 2022-09-30 0001076682 PTE:JanuaryTwentyFiveTwoThousandTwentyOneCommonWarrantsMember 2021-12-31 0001076682 PTE:JanuaryTwentyFiveTwoThousandTwentyOneCommonWarrantsMember 2022-01-01 2022-09-30 0001076682 PTE:JanuaryTwentyFiveTwoThousandTwentyOneCommonWarrantsMember 2022-09-30 0001076682 PTE:JanuaryTwentyTwoTwoThousandTwentyOnePlacementAgentMember 2021-12-31 0001076682 PTE:JanuaryTwentyTwoTwoThousandTwentyOnePlacementAgentMember 2022-01-01 2022-09-30 0001076682 PTE:JanuaryTwentyTwoTwoThousandTwentyOnePlacementAgentMember 2022-09-30 0001076682 PTE:MarchsixteenTwoThousandTwentyTwoCommonWarrantsMember 2021-12-31 0001076682 PTE:MarchsixteenTwoThousandTwentyTwoCommonWarrantsMember 2022-01-01 2022-09-30 0001076682 PTE:MarchsixteenTwoThousandTwentyTwoCommonWarrantsMember 2022-09-30 0001076682 PTE:MarchsixteenTwoThousandTwentyTwoPlacementAgentMember 2021-12-31 0001076682 PTE:MarchsixteenTwoThousandTwentyTwoPlacementAgentMember 2022-01-01 2022-09-30 0001076682 PTE:MarchsixteenTwoThousandTwentyTwoPlacementAgentMember 2022-09-30 0001076682 PTE:JuneEightTwoThousandTwentyTwoCommonWarrantsMember 2021-12-31 0001076682 PTE:JuneEightTwoThousandTwentyTwoCommonWarrantsMember 2022-01-01 2022-09-30 0001076682 PTE:JuneEightTwoThousandTwentyTwoCommonWarrantsMember 2022-09-30 0001076682 PTE:JuneEightTwoThousandTwentyTwoPlacementAgentMember 2021-12-31 0001076682 PTE:JuneEightTwoThousandTwentyTwoPlacementAgentMember 2022-01-01 2022-09-30 0001076682 PTE:JuneEightTwoThousandTwentyTwoPlacementAgentMember 2022-09-30 0001076682 2021-01-31 0001076682 2022-07-01 2022-07-31 0001076682 2022-08-01 2022-08-31 0001076682 PTE:StockOptionsMember 2022-07-01 2022-09-30 0001076682 PTE:StockOptionsMember 2021-07-01 2021-09-30 0001076682 PTE:StockOptionsMember 2022-01-01 2022-09-30 0001076682 PTE:StockOptionsMember 2021-01-01 2021-09-30 0001076682 us-gaap:RestrictedStockMember 2022-07-01 2022-09-30 0001076682 us-gaap:RestrictedStockMember 2021-07-01 2021-09-30 0001076682 us-gaap:RestrictedStockMember 2022-01-01 2022-09-30 0001076682 us-gaap:RestrictedStockMember 2021-01-01 2021-09-30 0001076682 PTE:CommonStockWarrantsMember 2022-07-01 2022-09-30 0001076682 PTE:CommonStockWarrantsMember 2021-07-01 2021-09-30 0001076682 PTE:CommonStockWarrantsMember 2022-01-01 2022-09-30 0001076682 PTE:CommonStockWarrantsMember 2021-01-01 2021-09-30 0001076682 PTE:SharesCommittedUnderESPPMember 2022-07-01 2022-09-30 0001076682 PTE:SharesCommittedUnderESPPMember 2021-07-01 2021-09-30 0001076682 PTE:SharesCommittedUnderESPPMember 2022-01-01 2022-09-30 0001076682 PTE:SharesCommittedUnderESPPMember 2021-01-01 2021-09-30 0001076682 PTE:PaycheckProtectionProgramMember 2020-04-12 0001076682 PTE:PaycheckProtectionProgramMember 2020-04-11 2020-04-12 0001076682 us-gaap:EmployeeSeveranceMember 2021-07-01 2021-09-30 0001076682 us-gaap:EmployeeSeveranceMember 2021-01-01 2021-09-30 0001076682 2020-09-01 2020-09-02 0001076682 2021-06-25 0001076682 2021-06-23 2021-06-25 0001076682 2021-07-01 2021-07-31 0001076682 PTE:DrDenverLoughMember PTE:SettlementTermsAgreementMember 2019-10-01 0001076682 PTE:DrDenverLoughMember PTE:EqualMonthlyInstallmentsBeginningNovemberOneTwoThousandNineteenAndEndingAprilOneTwoThousandTwentyOneMember PTE:SettlementTermsAgreementMember 2019-10-01 0001076682 PTE:DrDenverLoughMember 2019-09-29 2019-10-01 0001076682 PTE:DrDenverLoughMember 2022-01-01 2022-09-30 0001076682 PTE:OfficeLeaseMember 2018-10-31 0001076682 PTE:OfficeLeaseMember 2018-10-01 2018-10-31 0001076682 PTE:RegenerativeMedicineMember 2022-07-01 2022-09-30 0001076682 PTE:RegenerativeMedicineMember 2021-07-01 2021-09-30 0001076682 PTE:RegenerativeMedicineMember 2022-01-01 2022-09-30 0001076682 PTE:RegenerativeMedicineMember 2021-01-01 2021-09-30 0001076682 PTE:ContractServicesMember 2022-07-01 2022-09-30 0001076682 PTE:ContractServicesMember 2021-07-01 2021-09-30 0001076682 PTE:ContractServicesMember 2022-01-01 2022-09-30 0001076682 PTE:ContractServicesMember 2021-01-01 2021-09-30 0001076682 2017-12-26 2017-12-27 0001076682 PTE:BCGAgreementMember PTE:BCGAcquisitionsLLCMember us-gaap:SubsequentEventMember 2022-11-09 0001076682 PTE:PurchaseAgreementMember PTE:AdcompLLCMember us-gaap:SubsequentEventMember 2022-11-09 iso4217:USD xbrli:shares iso4217:USD xbrli:shares xbrli:pure utr:sqft

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2022

 

or

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Transition Period from __________________________________to___________________________________

 

Commission File No. 001-32404

 

POLARITYTE, INC.

(Exact name of registrant as specified in its charter)

 

delaware   06-1529524
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)

 

1960 S. 4250 West, Salt Lake City, UT 84104

(Address of principal executive offices)

 

Registrant’s Telephone Number, Including Area Code: (800) 560-3983

 

 
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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

 

Title of each class   Trading Symbol   Name of each exchange on which registered
Common Stock, Par Value $0.001   PTE   The Nasdaq Capital Market

 

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

 

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

 

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

 

Large accelerated filer   Accelerated filer
Non-accelerated filer   Smaller reporting company
      Emerging growth company

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No

 

As of November 7, 2022, there were 7,234,319 shares of the Registrant’s common stock outstanding.

 

 

 

 

 

 

INDEX

 

  Page
PART I - FINANCIAL INFORMATION 3
   
Item 1. Financial Statements: 3
Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (unaudited) 3
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2022 and 2021 (unaudited) 4
Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (unaudited) 7
Notes to Condensed Consolidated Financial Statements (unaudited) 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures about Market Risk 38
Item 4. Controls and Procedures 38
   
PART II - OTHER INFORMATION 38
   
Item 1A. Risk Factors 38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41
Item 5. Other Information 41
Item 6. Exhibits 42
   
SIGNATURES 43

 

As used in this report, the terms “we,” “us,” “our,” “the Company,” and “PolarityTE” mean PolarityTE, Inc., a Delaware corporation, and our present, and as applicable our former, wholly owned Nevada subsidiaries (direct and indirect), PolarityTE, Inc., PolarityTE MD, Inc., Arches Research, Inc., Utah CRO Services, Inc., IBEX Preclinical Research, Inc., and IBEX Property LLC., unless otherwise indicated or required by the context.

 

POLARITYTE, the PolarityTE Logo, WELCOME TO THE SHIFT, WHERE SELF REGENERATES SELF, COMPLEX SIMPLICITY, ARCHES, and SKINTE are all trademarks or registered trademarks of PolarityTE. Solely for convenience, the trademarks and trade names in this report may be referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto.

 

2
 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements:

 

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share and per share amounts)

 

   September 30, 2022   December 31, 2021 
         
ASSETS          
Current assets          
Cash and cash equivalents  $16,094   $19,375 
Accounts receivable, net       978 
Assets held for sale   916    441 
Prepaid expenses and other current assets   1,479    1,595 
Total current assets   18,489    22,389 
Property and equipment, net   2,499    6,923 
Operating lease right-of-use assets   246    1,146 
Other assets   911    720 
TOTAL ASSETS  $22,145   $31,178 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $1,895   $3,115 
Other current liabilities   904    1,520 
Deferred revenue       74 
Total current liabilities   2,799    4,709 
Common stock warrant liability   2,238    6,844 
Operating lease liabilities   52    43 
Other long-term liabilities   113    338 
Total liabilities   5,202    11,934 
           
Commitments and Contingencies (Note 16)   -    - 
           
STOCKHOLDERS’ EQUITY          
Preferred stock – 25,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2022 and December 31, 2021        
Common stock - $.001 par value; 250,000,000 shares authorized; 7,219,974 and 3,299,379 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively*   7    3 
Additional paid-in capital   532,573    527,639 
Accumulated deficit   (515,637)   (508,398)
Total stockholders’ equity   16,943    19,244 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $22,145   $31,178 

 

* Giving retroactive effect to the 1-for-25 reverse stock split effectuated on May 16, 2022

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

3
 

 

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited, in thousands, except share and per share amounts)

 

   2022   2021   2022   2021 
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
Net revenues                    
Products  $   $   $   $2,924 
Services       1,116    814    5,438 
Total net revenues       1,116    814    8,362 
Cost of revenues                    
Products               448 
Services       634    616    3,275 
Total costs of revenues       634    616    3,723 
Gross profit       482    198    4,639 
Operating costs and expenses                    
Research and development   2,551    3,870    8,489    10,491 
General and administrative   2,685    3,687    12,456    14,999 
Sales and marketing       93        2,718 
Restructuring and other charges       242    38    678 
Impairment of assets held for sale   169        223     
Total operating costs and expenses   5,405    7,892    21,206    28,886 
Operating loss   (5,405)   (7,410)   (21,008)   (24,247)
Other income (expense), net                    
Gain on extinguishment of debt               3,612 
Change in fair value of common stock warrant liability   1,984    6,354    13,719    4,134 
Inducement loss on sale of liability classified warrants               (5,197)
Interest expense, net   (4)   (29)   (33)   (106)
Other income, net   25    64    83    185 
Net loss and comprehensive loss  $(3,400)  $(1,021)  $(7,239)  $(21,619)
                     
Net loss per share attributable to common stockholders                    
Basic* $(0.47)  $(0.31)  $(1.08)  $(6.81)
Diluted* $(0.47)  $(0.37)  $(1.54)  $(6.81)
Weighted average shares outstanding                    
Basic*  7,215,898    3,251,387    6,724,876    3,174,697 
Diluted*  7,215,898    3,270,188    7,505,128    3,176,787 

 

* Giving retroactive effect to the 1-for-25 reverse stock split effectuated on May 16, 2022

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

4
 

 

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except share and per share amounts)

 

   Number   Amount   Number   Amount   Capital   Deficit   Equity 
   For the Three and Nine Months Ended September 30, 2022 
   Convertible Preferred Stock   Common Stock*   Additional Paid-in   Accumulated   Total Stockholders’ 
   Number   Amount   Number   Amount   Capital   Deficit   Equity 
Balance – December 31, 2021      $    3,299,379   $3   $527,639   $(508,398)  $19,244 
Issuance of preferred stock and warrants through underwritten offering, net of issuance costs of $184   5,000                1,685        1,685 
Issuance of common stock upon conversion of preferred stock   (5,000)       655,738    1    (1)        
Stock-based compensation expense                   762        762 
Vesting of restricted stock units           25,676                 
Shares withheld for tax withholding           (7,402)       (127)       (127)
Net loss                       (3,771)   (3,771)
Balance – March 31, 2022           3,973,391    4    529,958    (512,169)   17,793 
Issuance of common stock and pre-funded warrants through underwritten offering, net of issuance costs of $173           445,500        1,840        1,840 
Issuance of common stock upon exercise of pre-funded warrants           488,659    1            1 
Fractional shares issued for reverse stock split           17,024                 
Stock-based compensation expense                   530        530 
Purchase of ESPP Shares           1,800        2        2 
Vesting of restricted stock units           58,738                 
Shares withheld for tax withholding           (13,876)       (52)       (52)
Net loss                       (68)   (68)
Balance – June 30, 2022           4,971,236    5    532,278    (512,237)   20,046 
Issuance of common stock upon exercise of prefunded warrants           2,234,159    2            2 
Stock-based compensation expense                   297        297 
Vesting of restricted stock units           16,033                 
Shares withheld for tax withholding           (1,454)       (2)       (2)
Net loss                            (3,400)   (3,400)
Balance – September 30, 2022      $    7,219,974   $      7   $532,573   $(515,637)  $16,943 

 

* Giving retroactive effect to the 1-for-25 reverse stock split effectuated on May 16, 2022

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

5
 

 

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except share and per share amounts)

 

   Number   Amount   Capital   Deficit   Equity 
   For the Three and Nine Months Ended September 30, 2021 
   Common Stock*   Additional
Paid-in
   Accumulated   Total Stockholders’ 
   Number   Amount   Capital   Deficit   Equity 
Balance – December 31, 2020   2,194,284   $2   $505,547   $(478,211)  $27,338 
Issuance of common stock and pre-funded warrants through underwritten offering, net of issuance costs of $114   266,800        1,255        1,255 
Issuance of common stock upon exercise of warrants   428,542    1    6,670        6,671 
Reclassification of warrant liability upon exercise           8,964        8,964 
Issuance of common stock upon exercise of pre-funded warrants   306,358        8        8 
Stock-based compensation expense           1,651        1,651 
Stock option exercises   100        3        3 
Vesting of restricted stock units   22,617                 
Shares withheld for tax withholding   (4,664)       (139)       (139)
Forfeiture of restricted stock awards   (1,385)                
Net loss               (17,410)   (17,410)
Balance – March 31, 2021   3,212,652    3    523,959    (495,621)   28,341 
                          
Stock-based compensation expense           1,640        1,640 
Purchase of ESPP shares   1,970        28        28 
Vesting of restricted stock units   17,366                 
Shares withheld for tax withholding   (2,290)       (53)       (53)
Net loss               (3,188)   (3,188)
Balance – June 30, 2021   3,229,698    3    525,574    (498,809)   26,768 
Stock-based compensation expense           1,317        1,317 
Vesting of restricted stock units   41,035                 
Shares withheld for tax withholding   (8,201)       (163)       (163)
Net loss               (1,021)   (1,021)
Balance – September 30, 2021   3,262,532   $3   $526,728   $(499,830)  $26,901 

 

* Giving retroactive effect to the 1-for-25 reverse stock split effectuated on May 16, 2022

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

6
 

 

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

   2022   2021 
   For the Nine Months Ended
September 30,
 
   2022   2021 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(7,239)  $(21,619)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock-based compensation expense   1,589    4,389 
Depreciation and amortization   1,231    2,083 
Impairment of assets held for sale   223     
Amortization of intangible assets       142 
Bad debt expense       99 
Inventory write-off       747 
Gain on extinguishment of debt – PPP loan       (3,612)
Change in fair value of common stock warrant liability   (13,719)   (4,134)
Inducement loss on sale of liability classified warrants       5,197 
Loss on restructuring and other charges       321 
Loss on sale of property and equipment   37    7 
Gain on sale of subsidiary and property   (32)    
Loss on disposal of property and equipment   3     
Changes in operating assets and liabilities:          
Accounts receivable   396    2,534 
Inventory       136 
Prepaid expenses and other current assets   326    (1,392)
Operating lease right-of-use assets   900    1,011 
Other assets/liabilities, net   (1)   247 
Accounts payable and accrued expenses   (1,064)   (456)
Other current liabilities       (29)
Deferred revenue   (51)   87 
Operating lease liabilities   (898)   (1,082)
Net cash used in operating activities   (18,299)   (15,324)
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of property and equipment   (37)   (18)
Proceeds from sale of property and equipment   195    23 
Proceeds from sale of subsidiary and property, net of selling expenses and cash sold   2,327     
Net cash provided by investing activities   2,485    5 
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from insurance financing arrangements   1,027    1,028 
Principal payments on term note payable and financing arrangements   (699)   (708)
Principal payments on financing leases   (256)   (413)
Net proceeds from the sale of common stock, warrants and pre-funded warrants   7,823    9,884 
Proceeds from the sale of warrants       1,002 
Proceeds from warrants exercised       6,671 
Proceeds from pre-funded warrants exercised   3    8 
Net proceeds from the sale of preferred stock and warrants   4,814     
Cash paid for tax withholdings related to net share settlement   (181)   (355)
Proceeds from stock options exercised       3 
Proceeds from ESPP purchase   2    28 
Net cash provided by financing activities   12,533    17,148 
Net (decrease) increase in cash and cash equivalents   (3,281)   1,829 
Cash and cash equivalents - beginning of period   19,375    25,522 
Cash and cash equivalents - end of period  $16,094   $27,351 
           
Supplemental cash flow information:          
Cash paid for interest  $56   $96 
           
Supplemental schedule of non-cash investing and financing activities:          
Fair value of placement agent warrants issued in connection with offerings  $417   $838 
Reclassification of warrant liability to stockholders’ equity upon exercise of warrant  $   $8,964 
Conversion of Series A and Series B preferred stock into common stock  $16   $ 
Allocation of proceeds to warrant liability  $9,113   $8,629 
Deferred and accrued offering costs  $98   $400 
Sale of assets held for sale in exchange for a note receivable  $400   $ 
Reclassification of lease deposit to short term  $210   $ 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

7
 

 

POLARITYTE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1. PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION

 

PolarityTE, Inc. (together with its subsidiaries, the “Company”) is a clinical stage biotechnology company developing regenerative tissue products and biomaterials. The Company also operated a laboratory testing and clinical research business until the end of April 2022.

 

The Company’s first regenerative tissue product is SkinTE. In July 2021, the Company submitted an investigational new drug application (“IND”) for SkinTE to the United States Food and Drug Administration (the “FDA”) through its subsidiary, PolarityTE MD, Inc. Prior to June 1, 2021, the Company sold SkinTE under Section 361 of the Public Health Service Act in 2020 and into 2021 and, after the Company’s decision to file an IND under Section 351 of that Act, under an enforcement discretion position stated by the FDA in a regenerative medicine policy framework to help facilitate regenerative medicine therapies. The FDA’s stated period of enforcement discretion ended May 31, 2021. Consequently, the Company terminated commercial sales of SkinTE on May 31, 2021, ceased its SkinTE commercial operations, and transitioned to a clinical stage company pursuing an IND for SkinTE. As a result, there were no product sales from commercial SkinTE after June 2021. The only revenues recognized subsequent to June 2021 for SkinTE were nominal amounts collected on accounts for product shipped prior to the end of May 2021 that were not previously recognized because of concerns with collectability. No revenue for SkinTE was recognized during the three and nine months ended September 30, 2022.

 

At the beginning of May 2018, the Company acquired a preclinical research and veterinary sciences business, which has been used for preclinical studies on the Company’s regenerative tissue products and to offer preclinical research services to unrelated third parties on a contract basis. The Company sold the business at the end of April 2022 and ceased to recognize services revenues after the sale. Consequently, the Company is no longer engaged in any revenue generating business activity and its operations are now focused on advancing the IND for SkinTE.

 

The accompanying interim condensed consolidated financial statements of the Company are unaudited, but in the opinion of management, reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented. Accordingly, they do not include all information and notes required by accounting principles generally accepted in the United States of America (U.S. GAAP) for complete financial statements. The results of operations for interim periods are not necessarily indicative of results to be expected for the entire fiscal year. The balance sheet at December 31, 2021, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2021, filed with the Securities and Exchange Commission on Form 10-K on March 30, 2022.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Among the more significant estimates included in these financial statements is the extent of progress toward completion of contracts, stock-based compensation, the valuation allowance for deferred tax assets, the valuation of common stock warrant liabilities, and the impairment of property and equipment. Actual results could differ from those estimates.

 

Cash and cash equivalents. Cash equivalents consist of highly liquid investments with original maturities of three months or less from the date of purchase. As of September 30, 2022, the Company did not hold any cash equivalents.

 

8
 

 

Assets and Liabilities Held for Sale. Assets and liabilities to be disposed (“disposal group”) of by sale are reclassified into assets held for sale and liabilities held for sale on the Company’s condensed consolidated balance sheet. The reclassification occurs when an agreement to sell exists, or management has committed to a plan to sell the assets within one year. Disposal groups are measured at the lower of carrying value or fair value less costs to sell and are not depreciated or amortized. The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value of the disposal group.

 

Leases. The Company determines if an arrangement is a lease at inception. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Finance leases are reported in the condensed consolidated balance sheet in property and equipment and other current and long-term liabilities. The current portion of operating lease obligations are included in other current liabilities. The classification of the Company’s leases as operating or finance leases along with the initial measurement and recognition of the associated ROU assets and lease liabilities is performed at the lease commencement date. The measurement of lease liabilities is based on the present value of future lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The ROU asset is based on the measurement of the lease liability and also includes any lease payments made prior to or on lease commencement and excludes lease incentives and initial direct costs incurred, as applicable. The lease terms may include options to extend or terminate the lease when it is reasonably certain the Company will exercise any such options. Rent expense for the Company’s operating leases is recognized on a straight-line basis over the lease term. Amortization expense for the ROU asset associated with its finance leases is recognized on a straight-line basis over the term of the lease and interest expense associated with its finance leases is recognized on the balance of the lease liability using the effective interest method based on the estimated incremental borrowing rate.

 

The Company has lease agreements with lease and non-lease components. As allowed under ASC 842, the Company has elected not to separate lease and non-lease components for any leases involving real estate and office equipment classes of assets and, as a result, accounts for the lease and non-lease components as a single lease component. The Company has also elected not to apply the recognition requirement of ASC 842 to leases with a term of 12 months or less for all classes of assets.

 

Impairment of Long-Lived Assets. The Company reviews long-lived assets, including property and equipment for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows.

 

Revenue Recognition. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

 

The Company recorded product revenues primarily from the sale of SkinTE, its regenerative tissue product. When the Company marketed its SkinTE product, it was sold to healthcare providers (customers), primarily through direct sales representatives. Product revenues consisted of a single performance obligation that the Company satisfied at a point in time. In general, the Company recognized product revenue upon delivery to the customer.

 

9
 

 

In the contract services segment, the Company recorded service revenues from the sale of its preclinical research services, which included delivery of preclinical studies and other research services to unrelated third parties. Service revenues generally consisted of a single performance obligation that the Company satisfied over time using an input method based on costs incurred to date relative to the total costs expected to be required to satisfy the performance obligation. The Company believes that this method provides an appropriate measure of the transfer of services over the term of the performance obligation based on the remaining services needed to satisfy the obligation. This required the Company to make reasonable estimates of the extent of progress toward completion of the contract. As a result, unbilled receivables and deferred revenue were recognized based on payment timing and work completed. Generally, a portion of the payment was due upfront and the remainder upon completion of the contract, with most contracts completing in less than a year. Contract services also included research and laboratory testing services to unrelated third parties on a contract basis. Due to the short-term nature of the services, these customer contracts generally consisted of a single performance obligation that the Company satisfied at a point in time. The Company satisfied the single performance obligation and recognized revenue upon delivery of testing results to the customer. As of September 30, 2022 and December 31, 2021, the Company had unbilled receivables of zero and $0.5 million, respectively, and deferred revenue of zero and $0.1 million, respectively. Revenue of $0.1 million was recognized during the nine months ended September 30, 2022 that was included in the deferred revenue balance as of December 31, 2021.

 

Research and Development Expenses. Costs incurred for research and development are expensed as incurred. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities pursuant to executory contractual arrangements with third party research organizations are deferred and recognized as an expense as the related goods are delivered or the related services are performed.

 

Accruals for Clinical Trials. As part of the process of preparing its financial statements, the Company is required to estimate its expenses resulting from its obligations under contracts with vendors, clinical research organizations and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment terms that do not match the periods over which materials or services are provided under such contracts. The Company’s objective is to reflect the appropriate expenses in its financial statements by matching those expenses with the period in which services are performed and efforts are expended. The Company accounts for these expenses according to the timing of various aspects of the expenses. The Company determines accrual estimates by taking into account discussion with applicable personnel and outside service providers as to the progress of clinical trials, or the services completed. During the course of a clinical trial, the Company adjusts its clinical expense recognition if actual results differ from its estimates. The Company makes estimates of its accrued expenses as of each balance sheet date based on the facts and circumstances known to it at that time. The Company’s clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in it reporting amounts that are too high or too low for any particular period.

 

Common Stock Warrant Liability. The Company accounts for common stock warrants issued as freestanding instruments in accordance with applicable accounting guidance as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. Under certain change of control provisions, some warrants issued by the Company could require cash settlement which necessitates such warrants to be recorded as liabilities. Warrants classified as liabilities are remeasured at fair value each period until settled or until classified as equity.

 

Stock-Based Compensation. The Company measures all stock-based compensation to employees and non-employees using a fair value method and records such expense in general and administrative, research and development, and sales and marketing expenses. For stock options with graded vesting, the Company recognizes compensation expense over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards based on the fair value on the date of grant.

 

The fair value for options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the grant commensurate with the expected term of the option. The volatility factor is determined based on the Company’s historical stock prices. Forfeitures are recognized as they occur.

 

10
 

 

The fair value of restricted stock grants is measured based on the fair market value of the Company’s common stock on the date of grant and recognized as compensation expense over the vesting period of, generally, six months to three years.

 

Reverse Stock Split. On May 12, 2022, the Company’s Board of Directors approved a reverse stock split in the ratio of 1-for-25 (“Reverse Stock Split”). The Reverse Stock Split became effective as of May 16, 2022. Fractional shares resulting from the reverse stock split were rounded up to the nearest whole share, which resulted in the issuance of a total of 17,024 shares of common stock to implement the reverse stock split.

 

The Company accounted for the reverse stock split on a retrospective basis pursuant to ASC 260, Earnings Per Share. All issued and outstanding common stock, common stock warrants, stock option awards, exercise prices and per share data have been adjusted in these condensed consolidated financial statements, on a retrospective basis, to reflect the reverse stock split for all periods presented. The number of authorized shares and par value of the preferred stock and common stock were not adjusted because of the reverse stock split.

 

Net Loss Per Share. Basic net loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Gains on warrant liabilities are only considered dilutive when the average market price of the common stock during the period exceeds the exercise price of the warrants. All common stock warrants issued participate on a one-for-one basis with common stock in the distribution of dividends, if and when declared by the Board of Directors, on the Company’s common stock. For purposes of computing earnings per share (EPS), outstanding warrants and preferred stock are considered to participate with common stock in earnings of the Company. Therefore, the Company calculates basic and diluted EPS using the two-class method. Under the two-class method, net loss for the period is allocated between common stockholders and participating securities according to dividends declared and participation rights in undistributed losses. No loss was allocated to the warrants or preferred stock for the three and nine months ended September 30, 2022 and 2021 as the Company incurred a loss for each period and the warrant and preferred stockholders are not required to absorb losses. The Company has issued pre-funded warrants from time to time at an exercise price of $0.025 per share. The shares of common stock into which the pre-funded warrants may be exercised are considered outstanding for the purposes of computing basic earnings per share because the shares may be issued for little or no consideration, are fully vested, and are exercisable after the original issuance date.

 

Recent Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This standard was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which defers the effective date of Topic 326. As a smaller reporting company, Topic 326 will now be effective for the Company beginning January 1, 2023. As such, the Company plans to adopt this ASU beginning January 1, 2023. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.

 

11
 

 

Recently Adopted Accounting Pronouncements

 

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Those instruments that do not have a separately recognized embedded conversion feature will no longer recognize a debt issuance discount related to such a conversion feature and would recognize less interest expense on a periodic basis. It also removes from ASC 815-40-25-10 certain conditions for equity classification and amends certain guidance in ASC Topic 260 on the computation of EPS for convertible instruments and contracts in an entity’s own equity. An entity can use either a full or modified retrospective approach to adopt the ASU’s guidance. The Company early adopted this ASU for the fiscal year beginning January 1, 2022. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

 

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40), which specifies that the effects of modifications or exchanges of freestanding equity-classified written call options that remain equity after modification or exchange should be recognized depending on the substance of the transaction, whether it be a financing transaction to raise equity (topic 340), to raise or modify debt (topic 470 and 835), or other modifications or exchanges. If the modification or exchange does not fall under topics 340, 470, or 835, an entity may be required to account for the effects of such modifications or exchanges as dividends which should adjust net income (or loss) in the basic EPS calculation. The Company adopted this ASU prospectively for the fiscal year beginning January 1, 2022. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

 

3. LIQUIDITY AND GOING CONCERN

 

The Company is a clinical stage biotechnology company that has incurred recurring losses and negative cash flows from operations since commencing its biotechnology business in 2017. As of September 30, 2022, the Company had an accumulated deficit of $515.6 million. As of September 30, 2022, the Company had cash and cash equivalents of $16.1 million. The Company has been funded historically through sales of equity and debt.

 

These financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and settle its liabilities in the normal course of business. The Company’s significant operating losses raise substantial doubt regarding the Company’s ability to continue as a going concern for at least one year from the date of issuance of these consolidated financial statements. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might result from the outcome of this uncertainty. Consequently, the future success of the Company depends on its ability to attract additional capital and, ultimately, on its ability to successfully complete the regulatory approval process for its product, SkinTE, and develop future profitable operations. The Company will seek additional capital through equity offerings or debt financing. However, such financing may not be available in the future on favorable terms, if at all.

 

4. FAIR VALUE

 

In accordance with ASC 820, Fair Value Measurements and Disclosures, financial instruments were measured at fair value using a three-level hierarchy which maximizes use of observable inputs and minimizes use of unobservable inputs:

 

  Level 1: Observable inputs such as quoted prices in active markets for identical instruments.
     
  Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the market.
     
  Level 3: Significant unobservable inputs supported by little or no market activity. Financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, for which determination of fair value requires significant judgment or estimation.

 

12
 

 

Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. There were no transfers within the hierarchy for any of the periods presented.

 

The following table sets forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy (in thousands):

 SCHEDULE OF FAIR VALUE OF FINANCIAL INSTRUMENTS MEASURED ON RECURRING BASIS

   September 30, 2022 
   Level 1   Level 2   Level 3   Total 
Liabilities                
Common stock warrant liability  $   $   $2,238   $2,238 
Total  $       $       $2,238   $2,238 

 

   December 31, 2021 
   Level 1   Level 2   Level 3   Total 
Liabilities                
Common stock warrant liability  $   $   $6,844   $6,844 
Total  $       $       $6,844   $6,844 

 

The Company assesses its assets held for sale, long-lived assets, including property, plant, and equipment and ROU assets at their estimated fair value on a non-recurring basis. The Company reviews the carrying amounts of such assets when events indicate that their carrying amounts may not be recoverable. Any resulting impairment would require that the asset be recorded at its fair value. During the nine months ended September 30, 2022, the Company recognized an impairment charge of $0.2 million related to equipment classified in assets held for sale. During the nine months ended September 30, 2021, the Company recognized an impairment charge of $0.4 million related to property and equipment. As of each measurement date, the fair value of assets held for sale and property and equipment was determined utilizing Level 3 inputs and were based on a market approach. See Notes 7 and Note 15 for additional details.

 

The following table presents the change in fair value of the liability classified common stock warrants for the nine months ended September 30, 2022 (in thousands):

 SCHEDULE OF FAIR VALUE OF LIABILITY CLASSIFIED COMMON STOCK WARRANTS

  

Fair Value at

December 31, 2021

   Initial Fair Value at Issuance   (Gain) Loss Upon Change in Fair Value      

Fair Value at

September 30, 2022

 
Warrant liabilities                            
February 14, 2020 issuance  $291   $   $(278)      $13 
December 23, 2020 issuance   239        (234)    (8,964 )    5 
January 14, 2021 issuance   3,345        (3,223)         122 
January 25, 2021 issuance   2,969        (2,860)         109 
March 16, 2022 issuance       3,129    (3,073)         56 
June 8, 2022 issuance       5,984    (4,051)       1,933  
Total  $6,844   $9,113   $(13,719)  )   $2,238 

 

13
 

 

The following table presents the change in fair value of the liability classified common stock warrants for the nine months ended September 30, 2021 (in thousands):

 

                          
  

Fair Value at

December 31, 2020

   Initial Fair Value at Issuance   (Gain) Loss Upon Change in Fair Value   Liability Reduction Due to Exercises  

Fair Value at

September 30, 2021

 
Warrant liabilities                         
February 14, 2020 issuance  $328   $   $(6)  $   $322 
December 23, 2020 issuance   5,647        3,585    (8,964)   268 
January 14, 2021 issuance       8,629    (4,858)       3,771 
January 25, 2021 issuance       6,199    (2,855)       3,344 
Inducement loss on initial fair value(1)           5,197         
Total  $5,975   $14,828   $1,063   $(8,964)  $7,705 

 

  (1) Concurrent with the issuance of the January 25, 2021 warrants, upon the exercise of the December 23, 2020 warrants, an inducement loss of $5.2 million was recorded during the nine-month period ended September 30, 2021, as the fair value of the initial warrant liability for the new warrants of $6.2 million exceeded the gross proceeds received upon sale of the new warrants of approximately $1.0 million.

 

The Company uses the Monte Carlo simulation model to determine the fair value of the liability classified warrants. Input assumptions used to measure the fair value of these freestanding instruments are as follows:

 SCHEDULE OF FAIR VALUE ASSUMPTIONS OF WARRANTS LIABILITY

    For the Nine Months ended 
    September 30, 2022 
Stock price  $ 0.878.55 
Exercise price  $ 2.4034.50 
Risk-free rate   1.954.23%
Volatility   98.4123.6%
Remaining term (years)   1.465.00 

 

    For the Nine Months ended 
    September 30, 2021 
Stock price  $16.2530.25 
Exercise price  $2.5034.50 
Risk-free rate   0.421.13%
Volatility   99.0102.8%
Remaining term (years)   4.235.87 

 

5. ASSETS AND LIABILITIES HELD FOR SALE

 

Equipment

 

In November 2021, the Company committed to a plan to sell a variety of lab equipment within the regenerative medicine products reporting segment. The lab equipment has been designated as held for sale and is presented as such within the condensed consolidated balance sheet as of December 31, 2021 and September 30, 2022.

 

In September 2022, the Company committed to a plan to sell a variety of lab equipment within the regenerative medicine products reporting segment. The lab equipment has been designated as held for sale and is presented as such within the condensed consolidated balance sheet as of September 30, 2022. During the nine months ended September 30, 2022, the Company recorded an impairment of $0.2 million related to the lab equipment designated as held for sale within the regenerative medicine products reporting segment.

 

14
 

 

IBEX Sale

 

At the beginning of May 2018, the Company acquired a preclinical research and veterinary sciences business, which has been used for preclinical studies on the Company’s regenerative tissue products and to offer preclinical research services to unrelated third parties on a contract basis. The Company operated this business through its indirect subsidiary, IBEX Preclinical Research, Inc. (“IBEX”). Utah CRO Services, Inc., a Nevada corporation (“Utah CRO”), is a direct subsidiary of the Company and held all the outstanding capital stock of IBEX (the “IBEX Shares”). Utah CRO also holds all the member interest of IBEX Property LLC, a Nevada limited liability company (“IBEX Property”), that owned two unencumbered parcels of real property in Logan, Utah, consisting of approximately 1.75 combined gross acres of land, together with the buildings, structures, fixtures, and personal property (the “Property”), which was leased by IBEX Property to IBEX for IBEX to conduct its preclinical research and veterinary sciences business.

 

In March 2022, the Company reached a nonbinding understanding with an unrelated third party that contemplated the sale of IBEX, which operates within the contract services reporting segment, along with IBEX Property. The assets and liabilities related to IBEX were designated as held for sale. The Company measured the assets and liabilities held for sale at the lower of their carrying value or fair value less costs to sell. The operating results of IBEX did not qualify for reporting as discontinued operations.

 

On April 14, 2022, Utah CRO entered into a Stock Purchase Agreement (the “Stock Agreement”) with an unrelated third party (“Buyer”), pursuant to which Utah CRO agreed to sell all the outstanding IBEX Shares to Buyer in exchange for an unsecured promissory note in the principal amount of $0.4 million bearing simple interest at the rate of 10% per annum with interest only payable on a quarterly basis and all principal and remaining accrued interest due on the five-year anniversary of the closing of the sale of the IBEX Shares to Buyer. Furthermore, on April 14, 2022, IBEX Property entered into a Real Estate Purchase and Sale Agreement (the “Real Estate Agreement”) with another unrelated third party (“Purchaser”) pursuant to which IBEX Property agreed to sell to Purchaser the Property at a gross purchase price of $2.8 million payable in cash at closing of the transaction. The Buyer and Purchaser are affiliates of each other as a result of common ownership. On April 28, 2022, the parties to the Stock Agreement and Real Estate Agreement closed the transactions contemplated thereby and on April 29, 2022, the Company received the promissory note described above in the principal amount of $0.4 million and net cash proceeds of $2.3 million, after deducting closing costs and advisory fees, from sale of the Property under the Real Estate Agreement. As of a result of this transaction, the Company recorded $0.4 million as a long-term note receivable in other assets within the accompanying condensed consolidated balance sheets as of September 30, 2022. As the sale price less cost to sell was greater than the carrying value of these assets the Company recognized an insignificant net gain on sale in the second quarter of fiscal year 2022 in other income, net within the accompanying condensed consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2022.

 

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

The following table presents the major components of prepaid expenses and other current assets (in thousands):

 SCHEDULE OF PREPAID EXPENSE AND OTHER CURRENT ASSETS

  

September 30,

2022

  

December 31,

2021

 
Other current receivable  $97   $67 
Short term deposit   359    150 
Prepaid insurance   627    239 
Prepaid expenses   298    445 
Deferred offering costs   98    694 
Total prepaid expenses and other current assets  $1,479   $1,595 

 

15
 

 

7. PROPERTY AND EQUIPMENT, NET

 

The following table presents the components of property and equipment, net (in thousands):

 SCHEDULE OF PROPERTY AND EQUIPMENT, NET

   September 30, 2022   December 31, 2021 
Machinery and equipment  $5,777   $8,502 
Land and buildings       2,000 
Computers and software   992    1,129 
Leasehold improvements   2,038    2,107 
Construction in progress       133 
Furniture and equipment   119    123 
Total property and equipment, gross   8,926    13,994 
Accumulated depreciation   (6,427)   (7,071)
Total property and equipment, net  $2,499   $6,923 

 

The Company sold SkinTE under Section 361 of the Public Health Service Act in 2020 and into 2021 and, after the Company’s decision to file an IND under Section 351 of that Act, under an enforcement discretion position stated by the FDA in a regenerative medicine policy framework to help facilitate regenerative medicine therapies. The FDA’s stated period of enforcement discretion ended May 31, 2021. Consequently, the Company terminated commercial sales of SkinTE on May 31, 2021, and ceased its SkinTE commercial operations. As a result, there are no product sales from commercial SkinTE after June 2021 and the Company has eliminated or reduced costs associated with commercial sale of SkinTE.

 

The Company evaluated the future use of its commercial property and equipment and recorded an impairment charge of approximately $0.2 million during the nine months ended September 30, 2022. The impairment charge related to lab equipment designated as held for sale within the regenerative medicine products reporting segment.

 

Depreciation and amortization expense for property and equipment, including assets acquired under financing leases was as follows (in thousands):

 SCHEDULE OF DEPRECIATION AND AMORTIZATION EXPENSE

   2022   2021   2022   2021 
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
General and administrative expense  $14   $71   $75   $667 
Research and development expense   359    575    1,156    1,416 
Total depreciation and amortization expense  $373   $646   $1,231   $2,083 

 

8. LEASES

 

The Company leases facilities and certain equipment under noncancelable leases that expire at various dates through November 2024. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases may include options to extend or terminate the lease at the election of the Company. These optional periods have not been considered in the determination of the right-of-use-assets or lease liabilities associated with these leases as the Company did not consider it reasonably certain it would exercise the options.

 

Operating Leases

 

On December 27, 2017, the Company entered into a commercial lease agreement (the “Lease”) with Adcomp LLC (the “Landlord”) pursuant to which the Company leases approximately 178,528 rentable square feet of warehouse, manufacturing, office, and lab space in Salt Lake City, Utah (the “Property”) from the Landlord. The initial term of the Lease is five years and it expires on November 30, 2022. The Company has a one-time option to renew for an additional five years and an option to purchase the Property at a purchase price of $17.5 million. The initial base rent under the Lease is $98,190 per month ($0.55 per sq. ft.) for the first year of the initial lease term and increases 3.0% per annum thereafter. Because the rate implicit in the lease is not readily determinable, the Company has used an incremental borrowing rate of 10% to determine the present value of the lease payments.

 

16
 

 

On December 16, 2021, the Company gave written notice to the Landlord of its election to exercise the option to purchase the Property, and on March 14, 2022, the Company and Landlord entered into a definitive purchase and sale agreement that provides for a closing of the transaction on November 15, 2022 (the “Purchase Agreement”). In connection with exercising the option to purchase the Property, the Company made an earnest money deposit of $150,000 that may be refunded if closing conditions or contingencies running in the Company’s favor are not satisfied or the Landlord defaults in its obligations under the lease or the purchase agreement for the Property. On October 25, 2021, the Company signed a Purchase and Sale Agreement, the terms of which were finalized on December 10, 2021, and subsequently amended by Amendment No. 1 thereto dated March 15, 2022 (the “BCG Agreement”), with BCG Acquisitions LLC (“BCG”). Under the BCG Agreement the Company agreed to sell the Property to BCG or its assigns for $17.5 million after the Company’s purchase of the Property from the Landlord. Under the BCG Agreement, BCG made an initial earnest money deposit totaling $200,000, which the parties subsequently agreed to reduce to $150,000, that will be refunded if the Company is unable to complete the purchase of the Property from the Landlord under the Purchase Agreement on a timely basis, closing conditions or contingencies running in favor of BCG are not satisfied, or the Company defaults in its obligations under the BCG Agreement. Closing of the foregoing transactions are subject to a number of risks and uncertainties including, but not limited to, satisfaction of all closing conditions, including obtaining financing for the purchase, and closing on the purchase of the Property from the Landlord under the Purchase Agreement, and satisfaction of all closing conditions, including obtaining financing for the purchase, and closing on the sale of the Property to BCG under the BCG Agreement.

 

In April 2019, the Company entered into an operating lease to obtain 6,307 square feet of manufacturing, laboratory, and office space. The lease provided for monthly lease payments subject to annual increases and had an expiration date in April 2024. During 2020, the Company initiated a business analysis to determine the long-term strategy of the remote facility and cost to remain operational. It was determined that the Company would cease operations and vacate the facility. The Company terminated the lease on June 30, 2021.

 

In November 2021, the Company entered into an operating lease to obtain office equipment with Pacific Office Automation, Inc. The initial term of the lease is three years and it expires on November 2024. The initial base rent under this lease is $3,983 per month for the entire lease term and includes a cash incentive of $0.1 million. Because the rate implicit in the lease is not readily determinable, the Company has used an incremental borrowing rate of 7.42% to determine the present value of the lease payments.

 

Financing Leases

 

In November 2018 and April 2019, the Company entered into financing leases primarily for laboratory equipment used in research and development activities. The financing leases have remaining terms that range from less than 1 month to 19 months as of September 30, 2022 and include options to purchase equipment at the end of the lease. Because the rate implicit in the lease is not readily determinable, the Company has used an incremental borrowing rate of 10% to determine the present value of the lease payments for these leases.

 

As of September 30, 2022, the maturities of operating and finance lease liabilities were as follows (in thousands):

 SCHEDULE OF OPERATING AND FINANCE LEASE LIABILITIES

   Operating leases   Finance leases 
2022 (excluding the nine months ended September 30, 2022)  $233   $80 
2023   48    312 
2024   41    42 
Total lease payments   322    434 
Less:          
Imputed interest   (8)   (29)
Total  $     314   $405 

 

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

 

17
 

 

Finance leases

 SCHEDULE OF SUPPLEMENTAL BALANCE SHEET INFORMATION RELATED TO FINANCE AND OPERATING LEASES

  

September 30,

2022

  

December 31,

2021

 
Finance lease right-of-use assets included within property and equipment, net  $305   $461 
           
Current finance lease liabilities included within other current liabilities  $292   $329 
Non-current finance lease liabilities included within other long-term liabilities   113    338 
Total  $405   $667 

 

Operating leases

 

    September 30, 2022     December 31, 2021  
Current operating lease liabilities included within other current liabilities   $ 262     $ 1,169  
Operating lease liabilities – non-current     52       43  
Total   $ 314     $ 1,212  

 

The components of lease expense were as follows (in thousands):

 SUMMARY OF COMPONENTS OF LEASE EXPENSE

   2022   2021   2022   2021 
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
Operating lease costs included within operating costs and expenses  $318   $385   $954   $1,172 
Finance lease costs:                    
Amortization of right-of-use assets  $50   $163   $151   $491 
Interest on lease liabilities   12    24    42    80 
Total  $62   $187   $193   $571 

 

Supplemental cash flow information related to leases was as follows (in thousands):

 SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO LEASES

   2022   2021 
   For the Nine Months Ended September 30, 
   2022   2021 
Cash paid for amounts included in the measurement of lease liabilities:          
Operating cash out flows from operating leases  $952   $1,243 
Operating cash out flows from finance leases  $42   $80 
Financing cash out flows from finance leases  $256   $413 
Lease liabilities arising from obtaining right-of-use assets:          
Remeasurement of operating lease liability due to lease modification/termination  $   $386 

 

As of September 30, 2022 and December 31, 2021, the weighted average remaining lease term for operating leases was 0.8 and 1.0 years, respectively, and the weighted average discount rate used for operating leases was 9.26% and 9.96%, respectively. As of September 30, 2022 and December 31, 2021, the weighted average remaining lease term for finance leases was 1.4 and 2.0 years, respectively, and the weighted average discount rate used for finance leases was 9.65% and 9.63%, respectively.

 

18
 

 

9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

The following table presents the major components of accounts payable and accrued expenses (in thousands):

 SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES

   September 30, 2022   December 31, 2021 
Accounts payable  $351   $173 
Salaries and other compensation   610    722 
Legal and accounting   117    1,082 
Accrued severance       111 
Benefit plan accrual   66    102 
Clinical trials   404    161 
Accrued offering costs       400 
Accrued property taxes   202    166 
Other   145    198 
Total accounts payable and accrued expenses  $1,895   $3,115 

 

10. OTHER CURRENT LIABILITIES

 

The following table presents the major components of other current liabilities (in thousands):

 SCHEDULE OF OTHER CURRENT LIABILITIES

   September 30, 2022   December 31, 2021 
Current finance lease liabilities  $292   $329 
Current operating lease liabilities   262    1,169 
Short-term financing arrangement   346     
Other   4    22 
Total other current liabilities  $904   $1,520 

 

The short-term financing balance is related to a financing arrangement entered into during the nine months ended September 30, 2022 to fund an insurance contract. Under the financing arrangement, the amounts will be repaid in nine equal monthly installments, with an interest rate of 3.85%.

 

11. STOCK-BASED COMPENSATION

 

2020, 2019 and 2017 Equity Incentive Plans

 

2020 Plan

 

On October 25, 2019, the Company’s Board of Directors (the “Board”) approved the Company’s 2020 Stock Option and Incentive Plan (the “2020 Plan”). The 2020 Plan became effective on December 19, 2019, the date approved by the stockholders. The 2020 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, unrestricted stock awards, dividend equivalent rights, and cash-based awards to the Company’s employees, officers, directors, and consultants. The Board designated the Compensation Committee of the Board the administrator of the 2020 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 419,549 shares of common stock are issuable pursuant to awards under the 2020 Plan. No grants of awards may be made under the 2020 Plan after the later of December 19, 2029, or the tenth anniversary of the latest material amendment of the 2020 Plan and no grants of incentive stock options may be made after October 25, 2029. The 2020 Plan provides that effective on January 1 of each year the number of shares of common stock reserved and available for issuance under the 2020 Plan shall be cumulatively increased by the lesser of 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the 2020 plan administrator. Pursuant to the 2020 Plan, the number of shares of common stock available for issuance increased by 131,872 shares during January 2022. On September 9, 2022, the Board approved an amendment to the Company’s 2020 Stock Option and Incentive Plan to increase the number of shares available for awards by adding 1,450,000 shares to the 2020 Plan. The increase in shares is subject to stockholder approval at the next annual or special meeting of stockholders. As of September 30, 2022, the Company had 171,855 shares available for future issuances under the 2020 Plan.

 

19
 

 

2019 Plan

 

On October 5, 2018, the Company’s Board approved the Company’s 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors, and consultants. The Board designated the Compensation Committee of the Board the administrator of the 2019 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 120,000 shares of common stock are issuable pursuant to awards under the 2019 Plan. Unless earlier terminated by the Board, the 2019 Plan shall terminate at the close of business on October 5, 2028. As of September 30, 2022, the Company had 7,385 shares available for future issuances under the 2019 Plan.

 

2017 Plan

 

On December 1, 2016, the Company’s Board approved the Company’s 2017 Equity Incentive Plan (the “2017 Plan”). The purpose of the 2017 Plan is to promote the success of the Company and to increase stockholder value by providing an additional means through the grant of awards to attract, motivate, retain and reward selected employees, consultants and other eligible persons. The 2017 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors, and consultants. The Board designated the Compensation Committee of the Board the administrator of the 2017 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 292,000 shares of common stock are issuable pursuant to awards under the 2017 Plan. Unless earlier terminated by the Board, the 2017 Plan shall terminate at the close of business on December 1, 2026. As of September 30, 2022, the Company had 31,977 shares available for future issuances under the 2017 Plan.

 

A summary of the Company’s employee and non-employee stock option activity is presented below:

 SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY

  

Number of

Shares

   Weighted-Average Exercise Price 
Outstanding – December 31, 2021   230,912   $197.75 
Granted   420   $12.64 
Forfeited   (41,878)  $257.76 
Outstanding – September 30, 2022   189,454   $183.96 
Options exercisable, September 30, 2022   172,897   $197.88 

 

Employee Stock Purchase Plan (ESPP)

 

In May 2018, the Company adopted the Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved 20,000 shares of common stock for purchase under the ESPP. The initial offering period began January 1, 2019, and ended on June 30, 2019, with the first purchase date. Subsequent offering periods will automatically commence on each January 1 and July 1 and will have a duration of six months ending with a purchase date June 30 and December 31 of each year. On each purchase date, ESPP participants will purchase shares of common stock at a price per share equal to 85% of the lesser of (1) the fair market value per share of the common stock on the offering date or (2) the fair market value of the common stock on the purchase date.

 

Restricted Stock

 

A summary of the Company’s employee and non-employee restricted stock activity is presented below:

 SCHEDULE OF SHARE-BASED COMPENSATION, RESTRICTED STOCK ACTIVITY

   Number of Shares 
Unvested - December 31, 2021   206,547 
Granted    
Vested(1)   (109,516)
Forfeited   (7,384)
Unvested – September 30, 2022   89,647 

 

  (1) The number of vested restricted stock units and awards includes shares that were withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements.

 

20
 

 

Stock-Based Compensation Expense

 

The stock-based compensation expense related to stock options, restricted stock awards, and the employee stock purchase plan was as follows (in thousands):

 SCHEDULE OF SHARE-BASED COMPENSATION RELATED TO RESTRICTED STOCK AWARDS AND STOCK OPTIONS

   2022   2021   2022   2021 
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
General and administrative expense  $226   $911   $1,154   $3,245 
Research and development expense   71    354    435    950 
Sales and marketing expense               194 
Restructuring and other charges       52        219 
Total stock-based compensation expense  $297   $1,317   $1,589   $4,608 

 

12. STOCKHOLDERS’ EQUITY

 

December 2020 Offering

 

On December 23, 2020, the Company completed a registered direct offering of 218,000 shares of its common stock, par value $0.001 per share, pre-funded warrants to purchase up to 209,522 shares of common stock and accompanying common warrants to purchase up to 427,522 shares of common stock (the “December 2020 Warrants”). Each share of common stock and pre-funded warrant was sold together with a warrant. The combined offering price of each common stock share and accompanying warrant was $18.7125 and for each pre-funded warrant and accompanying warrant was $18.6875. The pre-funded warrants had an exercise price of $0.025 each and were exercised in full in January 2021. Each warrant was exercisable for one share of the Company’s common stock at an exercise price of $15.60 per share. The warrants were immediately exercisable and expire five years from the date of issuance. The holder of the warrants could not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage could be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent for the registered direct offering warrants to purchase up to 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 25,651 shares of common stock). The placement agent warrants have substantially the same terms as the warrants, except that the placement agent warrants have an exercise price equal to 125% of the purchase price per share (or $23.39 per share). The net proceeds to the Company from the offering were $7.2 million, after offering expenses payable by the Company.

 

As the common stock warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the common stock warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $5.2 million and $0.3 million, respectively. Since the pre-funded warrants did not contain the same cash settlement provision, these warrants were classified as a component of stockholders’ equity within additional paid-in-capital. The pre-funded warrants are equity classified because they meet characteristics of the equity classification criteria. The total proceeds from the offering were first allocated to the liability classified warrants, based on their fair values, with the residual $2.5 million allocated on a relative fair value basis to the common stock and pre-funded common stock warrants. Issuance costs allocated to the equity classified pre-funded common stock warrants and common stock of $0.3 million were recorded as a reduction to paid-in capital. Issuance costs allocated to the liability classified warrants of $0.5 million were recorded as an expense.

 

21
 

 

January 2021 Offerings

 

On January 14, 2021, the Company completed a registered direct offering of 266,800 shares of its common stock, par value $0.001 per share, pre-funded warrants to purchase up to 96,836 shares of common stock and accompanying common warrants to purchase up to 363,636 shares of common stock (the “January 14 Warrants”). Each share of common stock and pre-funded warrant was sold together with a warrant. The combined offering price of each common stock share and accompanying warrant was $27.50 and for each pre-funded warrant and accompanying warrant was $27.475. The pre-funded warrants had an exercise price of $0.025 each and were exercised in full in January 2021. Each January 14 Warrant is exercisable for one share of the Company’s common stock at an exercise price of $30.00 per share. The January 14 Warrants are immediately exercisable and will expire five years from the date of issuance. The holder of the January 14 Warrants may not exercise any portion of such warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent warrants to purchase 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 21,818 shares of common stock). The placement agent warrants have substantially the same terms as the warrants, except that the placement agent warrants have an exercise price equal to 125% of the purchase price per share (or $34.375 per share). The net proceeds to the Company from the offering were $9.2 million, after direct offering expenses of $0.8 million payable by the Company.

 

As the January 14 Warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the January 14 Warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $8.1 million and $0.5 million, respectively. Since the pre-funded warrants did not contain the same cash settlement provision, these warrants are classified as a component of stockholders’ equity within additional paid-in-capital. The pre-funded warrants were equity classified because they met characteristics of the equity classification criteria. The total proceeds from the offering were first allocated to the liability classified warrants, based on their fair values, with the residual $1.4 million allocated on a relative fair value basis to the common stock and pre-funded common stock warrants. Issuance costs allocated to the equity classified pre-funded common stock warrants and common stock of $0.1 million were recorded as a reduction to paid-in capital. Issuance costs allocated to the liability classified warrants of $0.7 million were recorded as an expense.

 

On January 22, 2021, the Company entered into a letter agreement with the holder of warrants to exercise the warrants and purchase 427,522 shares of common stock at an exercise price of $15.60 per share that were issued to the holder in the registered direct offering that closed on December 23, 2020. Under the letter agreement the holder agreed to exercise the 427,522 warrants in full and the Company agreed to issue and sell to the holder common warrants to purchase up to 320,641 shares of the Company’s common stock, par value $0.001 per share, at a price of $3.125 (the “January 25 Warrants”) (and together with the January 14 Warrants, the “Existing 2021 Warrants”). Each January 25 Warrant is exercisable for one share of Common Stock at an exercise price of $30.00 per share. The January 25 Warrants are immediately exercisable and will expire five years from the date of issuance. A holder may not exercise any portion of the January 25 Warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent, warrants to purchase 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 19,238 shares of common stock). The placement agent warrants have substantially the same terms as the new warrants. The 427,522 warrants issued on December 23, 2020, were exercised on January 22, 2021, and closing of the offering occurred on January 25, 2021. The Company received gross proceeds of approximately $6.7 million from the exercise of the December 2020 Warrants and gross proceeds of approximately $1.0 million from the sale of the new warrants.

 

Immediately prior to the exercise of the existing 427,522 liability classified December 2020 Warrants in January 2021, a remeasurement loss of $3.6 million was recorded.

 

As the new January 25 Warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the new January 25 Warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $5.8 million and $0.4 million, respectively. Cash issuance costs of $0.1 million were recorded as an expense.

 

22
 

 

March 2022 Offering

 

On March 16, 2022, the Company completed a registered direct offering of 3,000.000435 shares of Series A convertible preferred stock, 2,000.00029 shares of Series B convertible preferred stock and 655,738 warrants to purchase 655,738 shares of common stock (the “March 2022 Warrants”). Gross proceeds generated by the offering were $5.0 million. The exercise price of each warrant is $8.75 per share, the warrants become exercisable six months after the date of the offering and will expire two years from the offering date.

 

Concurrent with the closing of the offering on March 16, 2022, the Company modified the exercise price of the Existing 2021 Warrants. 363,636 warrants issued on January 14, 2021, and 320,641 warrants issued on January 25, 2021 were modified to reduce the exercise price from $30 to $8.75 per share. The exercise price of the placement agent warrants was not modified. The Existing 2021 Warrants remain outstanding and unexercised as of September 30, 2022.

 

The holders of Series A and Series B convertible preferred stock were entitled to receive dividend payments in the same form as dividends paid on shares of the common stock when, as and if such dividends were paid on shares of the common stock, on an if converted basis. In the event of a liquidation event, the holders of each series of convertible preferred stock were entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder of common stock would receive if the preferred stock were fully converted. Each share of preferred stock was convertible at any time after the offering at the option of the holder into a number of shares of the Company’s common stock, equal to $1,000 stated value per share, divided by the conversion price of $7.625. On March 17, 2022 all shares of Series B preferred stock were converted into 262,295 shares of common stock. On March 29, 2022, all shares of Series A preferred stock were converted into 393,443 shares of common stock.

 

The holder of the March 2022 Warrants may not exercise any portion of such warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company.

 

The Company also issued to designees of the placement agent warrants to purchase 5.0% of the aggregate number of March 2022 Warrants sold in the offering, or 32,787 warrants to purchase common stock. The placement agent warrants have substantially the same terms as the March 2022 Warrants, except that the placement agent warrants have an exercise price $9.525 per share, which is 125% of the price at which each share of preferred stock sold in the offering is convertible to common stock.

 

As the March 2022 Warrants and placement agent warrants could each require cash settlement in certain scenarios, the common stock warrants and placement agent warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $3.0 million and $0.1 million, respectively. The Series A and Series B preferred stock were equity classified because they met characteristics of the equity classification criteria. The total proceeds from the offering were first allocated to the liability classified warrants, based on their fair values, with the residual $1.9 million allocated to the preferred stock. The net proceeds to the Company from the offering were $4.5 million, after direct offering expenses of $0.2 attributable to equity classified preferred stock, which were recorded as a reduction to paid-in capital, and $0.3 million attributable to the liability classified March 2022 Warrants and private placement common stock warrants, which are included in general and administrative within the accompanying condensed consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2022.

 

June 2022 Offering

 

On June 5, 2022, the Company entered into a securities purchase agreement with a single healthcare-focused institutional investor for the purchase and sale of shares of its common stock (or pre-funded warrants in lieu thereof) in a registered direct offering. In a concurrent private placement (together with the registered direct offering, the “Offerings”), the Company entered into a separate securities purchase agreement with the same investor for the unregistered purchase and sale of shares of common stock (or pre-funded warrants in lieu thereof).

 

23
 

 

On June 8, 2022, the Company completed the registered direct offering of 445,500 shares of its common stock, par value $0.001 per share at a purchase price of $2.525 per share and 1,138,659 pre-funded warrants at a purchase price of $2.524 per warrant. The Company also sold 1,584,159 pre-funded warrants at a purchase price of $2.524 per warrant in the private placement offering. Each pre-funded warrant sold in the registered direct offering and private placement offering is exercisable for one share of common stock at an exercise price of $0.001 per share, is immediately exercisable, and will not expire until fully exercised. Under the securities purchase agreements for the Offerings, the Company agreed to issue to the investor in the Offerings unregistered preferred investment options (the “June 2022 Warrants”) to purchase up to an aggregate of 3,168,318 shares of common stock, which were issued at the closing of the Offerings. The June 2022 Warrants are exercisable for one share immediately upon issuance at an exercise price of $2.40 per share and will expire five years from the date of issuance. The holder of the pre-funded warrants sold in the registered direct offering has exercised 488,659, 545,000, and 1,689,159 of such warrants in June 2022, July 2022, and August 2022, respectively, leaving 3,168,318 June 2022 Warrants that remain outstanding and unexercised as of September 30, 2022. The holder of the warrants may not exercise any portion of such warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent, warrants to purchase 5.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 158,416 shares of common stock). The placement agent warrants have substantially the same terms as the warrants, except that the placement agent warrants have an exercise price equal to 125% of the purchase price per share (or $3.156 per share). None of the placement agent warrants have been exercised as of September 30, 2022. The net proceeds to the Company from the offering were $7.3 million, after direct offering expenses of $0.7 million payable by the Company.

 

As the June 2022 Warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $5.7 million and $0.3 million, respectively. Since the pre-funded warrants did not contain the same cash settlement provision, these warrants are classified as a component of stockholders’ equity within additional paid-in-capital. The pre-funded warrants were equity classified because they met characteristics of the equity classification criteria. The total proceeds from the offering were first allocated to the liability classified warrants, based on their fair values, with the residual $2.0 million allocated on a relative fair value basis to the common stock and pre-funded common stock warrants. Issuance costs allocated to the equity classified pre-funded common stock warrants and common stock of $0.2 million were recorded as a reduction to paid-in capital. Issuance costs allocated to the liability classified warrants of $0.5 million were recorded as an expense.

 

The Company measured the fair value of the common warrants and placement agent warrants using the Monte Carlo simulation model at issuance and again on September 30, 2022 using the following inputs:

 

Common warrants:

SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF WARRANTS

  

March 16,

2022

   September 30,
2022
 
Stock price  $8.55   $0.87 
Exercise price  $8.75   $8.75 
Risk-free rate   1.95%   4.13%
Volatility   101.5%   119.4%
Remaining term (years)   2.0    1.46 

 

  

June 8,

2022

   September 30,
2022
 
Stock price  $2.30   $0.87 
Exercise price  $2.40   $2.40 
Risk-free rate   3.03%   4.09%
Volatility   107.1%   111.7%
Remaining term (years)   5.0    4.69 

 

24
 

 

Placement agent warrants:

 

  

March 16,

2022

   September 30,
2022
 
Stock price  $8.55   $0.87 
Exercise price  $9.53   $9.53 
Risk-free rate   1.95%   4.13%
Volatility   101.5%   119.4%
Remaining term (years)   2.0    1.46 

 

  

June 8,

2022

   September 30,
2022
 
Stock price  $2.30   $0.87 
Exercise price  $3.16   $3.16 
Risk-free rate   3.03%   4.09%
Volatility   107.1%   111.7%
Remaining term (years)   5.0    4.69 

 

The following table summarizes warrant activity for the nine months ended September 30, 2022:

SUMMARY OF WARRANT ACTIVITY

  

Outstanding

December 31, 2021

  

Warrants

Issued

   Warrants Exercised  

Outstanding

September 30, 2022

 
Transaction                    
February 14, 2020 common warrants   21,580            21,580 
December 23, 2020 placement agent warrants   25,651            25,651 
January 14, 2021 common warrants   363,636            363,636 
January 14, 2021 placement agent warrants   21,818            21,818 
January 25, 2021 common warrants   320,641            320,641 
January 22, 2021 placement agent warrants   19,238            19,238 
March 16, 2022 common warrants       655,738        655,738 
March 16, 2022 placement agent warrants       32,787        32,787 
June 8, 2022 common warrants       3,168,318        3,168,318 
June 8, 2022 placement agent warrants       158,416        158,416 
Total   772,564    4,015,259              4,787,823 

 

On March 30, 2021, the Company entered into a sales agreement (“Sales Agreement”) with an investment banking firm to sell shares of common stock having aggregate sales proceeds of up to $50.0 million, from time to time, through an “at the market” equity offering program under which the investment banking firm would act as sales agent. On February 28, 2022, the Company exercised its right to terminate the Sales Agreement and was obligated to make a one-time payment to the investment banking firm of $0.4 million. As a result of the termination of the Sales Agreement, the Company expensed previously capitalized deferred offering costs of $0.7 million which are included in general and administrative expense within the accompanying condensed consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2022. No common stock was sold under the Sales Agreement.

 

25
 

 

13. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

The following tables present reconciliations for the numerators and denominators of basic and diluted net loss per share:

 SCHEDULE OF EARNINGS PER SHARE, BASIC AND DILUTED

                 
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30,   September 30,   September 30, 
Numerator:  2022   2021   2022   2021 
Net loss, primary  $(3,400)  $(1,021)  $(7,239)  $(21,619)
Less: gain from change in fair value of warrant liabilities       (174)   (4,329)   (27)
Net loss, diluted  $(3,400)  $(1,195)  $(11,568)  $(21,646)

 

                 
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30,   September 30,   September 30, 
Denominator:  2022   2021   2022   2021 
Basic weighted average number of common shares(1)   7,215,898    3,251,387    6,724,876    3,174,697 
Potentially dilutive effect of warrants       18,801    780,252    2,090 
Diluted weighted average number of common shares   7,215,898    3,270,188    7,505,128    3,176,787 

 

  (1) In December 2020, January 2021, and June 2022, the Company sold pre-funded warrants to purchase up to 209,522, 96,836, and 2,722,818 shares of common stock, respectively. The shares of common stock associated with the pre-funded warrants are considered outstanding for the purposes of computing earnings per share prior to exercise because the shares may be issued for little or no consideration, are fully vested, and are exercisable after the original issuance date. The pre-funded warrants sold in December 2020 and January 2021 were exercised in January 2021 and 488,659, 545,000, and 1,689,159 of the pre-funded warrants sold in June 2022 were exercised in June 2022, July 2022, and August 2022, respectively, and included in the denominator for the period of time the warrants were outstanding.

 

The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect:

 SCHEDULE OF ANTI-DILUTIVE POTENTIAL SHARES OUTSTANDING ACTIVITY

                 
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30,   September 30,   September 30, 
   2022   2021   2022   2021 
Stock options   189,454    235,949    189,454    235,949 
Restricted stock   89,647    185,264    89,647    185,264 
Common stock warrants   4,787,823    750,986    1,439,510    746,914 
Shares committed under ESPP   10,308    1,088    10,308    1,088 

 

26
 

 

14. DEBT

 

PPP Loan

 

On April 12, 2020, our subsidiary PolarityTE MD, Inc. (the “Borrower”) entered into a promissory note evidencing an unsecured loan in the amount of $3,576,145 made to it under the Paycheck Protection Program (the “Loan”). The Paycheck Protection Program (or “PPP”) was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The Loan to the Borrower was made through KeyBank, N.A., a national banking association (the “Lender”). The interest rate on the Loan is 1.00%. Beginning seven months from the date of the Loan the Borrower is required to make 24 monthly payments of principal and interest in the amount of $150,563. The promissory note evidencing the Loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or Lender, or breaching the terms of the Loan documents. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Borrower, or filing suit and obtaining judgment against the Borrower. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of a loan granted under the PPP. On October 15, 2020, the Borrower applied to the Lender for forgiveness of the PPP Loan in its entirety based on the Borrower’s use of the PPP Loan for payroll costs, rent, and utilities. In June of 2021, the Company received notice of forgiveness of the PPP Loan in whole and the Lender was paid by the SBA, including all accrued unpaid interest. The Company recorded the forgiveness of $3.6 million of principal and accrued interest, which were included in gain on extinguishment of debt on the consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2021. The SBA may audit any PPP loan at its discretion up to six years after the date the SBA forgave the PPP loan.

 

15. RESTRUCTURING

 

As discussed in Note 7, the Company decided to file an IND in the second half of 2021, cease commercial sales of SkinTE by May 31, 2021, and wind down its SkinTE commercial operations. As a result, management approved several actions as part of a restructuring plan. During the first quarter of 2021, the Company recorded $0.4 million of restructuring charges related to property and equipment impairment. The Company recognized $0.2 and $0.4 million of expense related to employee severance and benefit arrangements for the three and nine months ended September 30, 2021. The Company also recognized incremental expense of $0.2 million for the three and nine months ended September 30, 2021 related to the remeasurement of employee stock options that were modified due to restructuring. Further, during the second quarter of 2021 and effective June 30, 2021, the Company terminated a lease which included manufacturing, laboratory, and office space and recorded a net gain on termination of $0.3 million. During the three months ended September 30, 2022, the Company did not recognize any restructuring expense. During the nine months ended September 30, 2022, the Company recognized nominal expense related to employee severance due to a reduction of headcount in the Company’s research and development department.

 

16. COMMITMENTS AND CONTINGENCIES

 

Contingencies

 

Securities Class Action and Derivative Lawsuits

 

On September 24, 2021, a class action complaint alleging violations of the Federal securities laws was filed in the United States District Court, District of Utah, by Marc Richfield against the Company and certain officers of the Company, Case No. 2:21-cv-00561-BSJ. The Court subsequently appointed a Lead Plaintiff and ordered the Lead Plaintiff to file an amended Complaint by February 7, 2022, which was extended to February 21, 2022. The Lead Plaintiff filed an amended complaint on February 21, 2022, against the Company, two current officers of the Company, and three former officers of the Company (the “Complaint”). The Complaint alleges that during the period from January 30, 2018, through November 9, 2021, the defendants made or were responsible for, disseminating information to the public through reports filed with the Securities and Exchange Commission and other channels that contained material misstatements or omissions in violation of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 adopted thereunder. Specifically, the Complaint alleges that the defendants misrepresented or failed to disclose that: (i) the Company’s product, SkinTE, was improperly registered as a 361 HCT/P under Section 361 of the Public Health Service Act and that, as a result, the Company’s ability to commercialize SkinTE as a 361 HCT/P was not sustainable because it was inevitable SkinTE would need to be registered under Section 351 of the Public Health Service Act; (ii) the Company characterized itself as a commercial stage company when it knew sales of SkinTE as a 361 HCT/P were unsustainable and that, as a result, it would need to file an IND and become a development stage company; (iii) issues arising from an FDA inspection of the Company’s facility in July 2018, were not resolved even though the Company stated they were resolved; and (iv) the IND for SkinTE was deficient with respect to certain chemistry, manufacturing, and control items, including items identified by the FDA in July 2018, and as a result it was unlikely that the FDA would approve the IND in the form it was originally filed. The Company filed a motion to dismiss the complaint for failure to state a claim, on April 22, 2022. The Lead Plaintiff filed its memorandum in opposition to the Company’s motion to dismiss on July 18, 2022. The Company filed its reply memorandum to the Lead Plaintiff’s opposition memorandum on August 11, 2022, and oral argument on the motion to dismiss was held September 8, 2022. At the hearing the judge issued a ruling from the bench dismissing the Complaint without prejudice and granting the Lead Plaintiff leave to file an amended complaint. The Lead Plaintiff filed an amended complaint (the “Amended Complaint”) on October 3, 2022, alleging additional facts. The Company filed a motion to dismiss the Amended Complaint for failure to state a claim on November 2, 2022, and Lead Plaintiff is required to file its brief in opposition to the Company’s motion by December 2, 2022. The Company believes the allegations in the Amended Complaint are without merit, and intends to defend the litigation vigorously. At this early stage of the proceedings, we are unable to make any prediction regarding the outcome of the litigation.

 

27
 

 

On October 25, 2021, a stockholder derivative complaint alleging violations of the Federal securities laws was filed in the United States District Court, District of Utah, by Steven Battams against the Company, each member of the Board of directors, and two officers of the Company, Case No. 2:21-cv-00632-DBB (the “Stockholder Derivative Complaint”). The Stockholder Derivative Complaint alleges that the defendants made, or were responsible for, disseminating information to the public through reports filed with the Securities and Exchange Commission and other channels that contained material misstatements or omissions in violation of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 adopted thereunder. Specifically, the Stockholder Derivative Complaint alleges that the defendants misrepresented or failed to disclose that: (i) the IND for the Company’s product, SkinTE, filed with the FDA was deficient with respect to certain chemistry, manufacturing, and control items; (ii) as a result, it was unlikely that the FDA would approve the IND in its current form; (iii) accordingly, the Company had materially overstated the likelihood that the SkinTE IND would obtain FDA approval; and (Iv) as a result, the public statements regarding the IND were materially false and misleading. The parties have stipulated to stay the Stockholder Derivative Complaint until (1) the dismissal of the Complaint described above, (2) denial of a motion to dismiss the Complaint, or (3) notice is given that any party is withdrawing its consent to the stipulated stay of the Stockholder Derivative Complaint proceeding. At this early stage of the proceedings the Company is unable to make any prediction regarding the outcome of the litigation.

 

Other Matters

 

In the ordinary course of business, the Company may become involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements, employment, regulatory compliance, and other matters. Except as noted above, at September 30, 2022, the Company was not party to any legal or arbitration proceedings that may have significant effects on its financial position or results of operations. No governmental proceedings are pending or, to the Company’s knowledge, contemplated against the Company. The Company is not a party to any material proceedings in which any director, member of senior management or affiliate of the Company’s is either a party adverse to the Company or its subsidiaries or has a material interest adverse to the Company or its subsidiaries.

 

Commitments

 

The Company has entered into employment agreements with key executives that contain severance terms and change of control provisions.

 

On September 2, 2020, Arches Research, Inc., a subsidiary of PolarityTE, Inc. (“Arches”) entered into two agreements with Co-Diagnostics, Inc. (“Co-Diagnostics”). The COVID-19 Laboratory Services Agreement between the parties provided that Arches would perform specimen testing services for customers referred by Co-Diagnostics to Arches. Co-Diagnostics would arrange all logistics for delivering specimens to Arches for COVID-19 testing for those customers of Co-Diagnostics electing to use the service. Arches would bill Co-Diagnostics for the testing services and Co-Diagnostics would manage all customer billing. The Rental Agreement for LGC Genomics Oktopure Extraction Machine between Arches and Co-Diagnostics provided that Co-Diagnostics would make available to Arches the Oktopure high throughput extraction machine that Arches will use to perform COVID-19 testing. The term of the rental agreement was 12 months and required Arches to use Co-Diagnostics tests exclusively in the machine. In the second quarter of 2021, the rental agreement was amended to remove the minimum monthly purchase obligation of reagents and was replaced by a $3,300 monthly rental fee. The COVID-19 Laboratory Services Agreement could be canceled by the Company at any time by providing 60 days written notice, and the Rental Agreement could be canceled at any time by written notice given within 60 days after termination of the Laboratory Services Agreement. On May 27, 2021, the Company gave written notice to Co-Diagnostics of termination of the COVID-19 Laboratory Services Agreement, so the last day of that agreement was July 26, 2021, and no longer in effect on July 27, 2021. On July 27, 2021, the Company gave written notice to Co-Diagnostics of termination of the Rental Agreement, so the last day of that agreement was July 29, 2021.

 

28
 

 

On June 25, 2021, the Company entered into a statement of work with a contract research organization to provide services for a proposed clinical trial described as a multi-center, prospective, randomized controlled trial evaluating the effects of SkinTE in the treatment of full-thickness diabetic foot ulcers at a cost of approximately $6.5 million consisting of $3.1 million of service fees and $3.4 million of estimated costs. In July 2021 the Company prepaid 10% of the total cost recited in the original work order, or $0.5 million, which will be applied to payment of the final invoice under the work order. Over the approximately three-year term of the clinical trial the service provider shall submit to the Company for payment invoices on a monthly basis for units of work stated in the work order that are completed and billable expenses incurred. During the three and nine months ended September 30, 2022, the Company received invoices for work performed and expenses incurred totaling $0.3 and $0.9 million, respectively. Either party may terminate the agreement without cause on 60 days’ notice to the other party.

 

17. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

On August 21, 2019, the Company and Dr. Denver Lough, a principal shareholder and former officer and director, signed a settlement terms agreement that provides, in part, that the Company pay to Dr. Lough $1,500,000 in cash on October 1, 2019 and an additional $1,500,000 in cash in equal monthly installments beginning November 1, 2019 and ending April 1, 2021. In addition, the Company agreed to award to Dr. Lough 200,000 restricted stock units that vest in 18 equal monthly installments beginning October 1, 2019. As of September 30, 2022, the Company has no remaining liability related to future cash payments under the agreement. The fair value of the restricted stock units was $0.8 million and was fully expensed upon Dr. Lough’s termination.

 

In October 2018, the Company entered into an office lease covering approximately 7,250 square feet of rental space in the building located at 40 West 57th Street in New York City. The lease is for a term of three years. The annual lease rate is $60 per square foot. Initially the Company would occupy and pay for only 3,275 square feet of space, and the Company was not obligated under the lease to pay for the remaining 3,975 square feet covered by the lease unless it elected to occupy that additional space. The Company believes the terms of the lease were very favorable to it, and the Company obtained the favorable terms through the assistance of Peter A. Cohen, a director, which he provided so that the company he owns, Peter A. Cohen, LLC (“Cohen LLC”), could sublease a portion of the office space. The lease expired on October 31, 2021. The Company recognized $0 and $55,000 of sublease income for the three months ended September 30, 2022 and 2021, respectively, and $0 and $165,000 for the nine months ended September 30, 2022 and 2021, respectively. The sublease income is included in other income, net in the condensed consolidated statement of operations and comprehensive loss.

 

18. SEGMENT REPORTING

 

Reportable segments are presented in a manner consistent with the internal reporting provided to the chief operating decision maker (CODM), the Chief Executive Officer of the Company. The CODM allocates resources to and assesses the performance of each segment using information about its revenue and operating income (loss). The Company’s operations involve products and services which are managed separately. Accordingly, it operates in two segments: 1) regenerative medicine products and 2) contract services. In April 2022, the Company sold IBEX and IBEX Property, the Company’s subsidiaries which operate within the contract services reporting segment. The remaining contract services business is no longer a reportable segment due to immateriality. Contract services ceased to be a reportable segment upon disposal of IBEX and historical information from prior to the disposal date is reported here. See Note 5 for detail on management’s disposal of IBEX.

 

Certain information concerning the Company’s segments is presented in the following tables (in thousands):

 SCHEDULE OF SEGMENT INFORMATION

   2022   2021   2022   2021 
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
Net revenues:                    
Reportable segments:                    
Regenerative medicine  $   $   $   $2,924 
Contract services       1,116    814    5,438 
Total net revenues  $   $1,116   $814   $8,362 
                     
Net (loss)/income:                    
Reportable segments:                    
Regenerative medicine  $(3,413)  $(972)  $(6,836)  $(21,903)
Contract services   13    (49)   (403)   284 
Total net loss  $(3,400)  $(1,021)  $(7,239)  $(21,619)

 

19. SUBSEQUENT EVENT

 

As described in Note 8 the Company exercised its option to purchase the Property the Company occupies for offices, manufacturing, and lab activities for $17.5 million. The Company also entered into an agreement with BCG to sell the Property to BCG for $17.5 million and then lease a portion of the building on the Property back to the Company to house the Company’s operations. The transactions provide for closing on November 15, 2022, and included a right to extend the closing to November 30, 2022. On November 9, 2022, the Company entered into an Addendum to the BCG Agreement providing, in part, for BCG exercising its right to extend the closing to November 30, 2022, in consideration of making an extension deposit with the escrow holder of $50,000, and the Company exercising its right under the Purchase Agreement with the Landlord to extend the closing to November 30, 2022, in consideration of making an extension deposit with the escrow holder of $50,000. The Addendum also provides for the Company’s formation of a single member limited liability company owned by the Company, which will be used as the vehicle to effectuate purchase of the Property from the Landlord at closing, effectuate a change in ownership of the Property to BCG or its assigns, and lease a portion of the building on the Property back to the Company to house its operations.

 

29
 

 

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

 

The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, as described in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Annual Report”), and in this Quarterly Report on Form 10-Q that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and periods that follow to differ materially from those expressed in or implied by those forward-looking statements. Readers are cautioned that forward-looking statements contained in this Quarterly Report on Form 10-Q should be read in conjunction with risk factors disclosed in our reports and disclosure under the heading “Disclosure Regarding Forward-Looking Statements” below.

 

Overview

 

PolarityTE is a clinical stage biotechnology company developing regenerative tissue products and biomaterials. PolarityTE’s first regenerative tissue product is SkinTE, which is intended for the repair, reconstruction, replacement, and supplementation of skin in patients who have a need for treatment of acute or chronic wounds, burns, surgical reconstruction events, scar revision, or removal of dysfunctional skin grafts.

 

Since the beginning of 2017, PolarityTE has incurred substantial operating losses and its operations have been financed primarily by public equity financings. The clinical trials for SkinTE and the regulatory process will likely result in an increase in PolarityTE’s expenses. PolarityTE will continue to incur substantial operating losses as we pursue an investigational new drug application (“IND”) and biologics license application (“BLA”), and PolarityTE expects to seek financing from external sources over the foreseeable future to fund its operations.

 

Regenerative Tissue Product

 

Our first regenerative tissue product is SkinTE. On July 23, 2021, we submitted an IND for SkinTE to the U.S. Food and Drug Administration (the “FDA”) through our subsidiary, PolarityTE MD, Inc. (“PTE-MD”), as the first step in the regulatory process for obtaining licensure for SkinTE under Section 351 of the Public Health Service Act. The FDA subsequently issued clinical hold correspondence to us identifying certain issues that needed to be addressed before the IND could be approved. We provided responses to the FDA, and on January 14, 2022, the FDA notified us that the clinical hold had been removed. Our first planned pivotal study under our IND is a multi-center, randomized controlled trial evaluating SkinTE in the treatment of diabetic foot ulcers (“DFUs”) classified as Grade 2 in the Wagner classification system entitled “Closure Obtained with Vascularized Epithelial Regeneration for DFUs with SkinTE,” or “COVER DFUs Trial.” We plan to enroll up to 100 subjects at up to 20 sites in the U.S. in the COVER DFUs Trial, which will compare treatment with SkinTE plus the standard-of-care to the standard-of-care alone. The primary endpoint is the incidence of DFUs closed at 24 weeks. Secondary endpoints include percent area reduction (“PAR”) at 4, 8, 12, 16, and 24 weeks, improved quality of life, and new onset of infection of the DFU being evaluated. We have been enrolling subjects in the COVER DFUs Trial since the end of April 2022, and we expect the study will be fully enrolled sometime in the first six months of 2024. Additionally, there is an interim analysis planned for the first 50 patients and we believe that data will be available in the fourth calendar quarter of 2023.

 

In March 2022, we submitted to the FDA a request for a Regenerative Medicine Advanced Therapy (“RMAT”) designation for SkinTE under our IND. Established under the 21st Century Cures Act, RMAT designation is a dedicated program designed to expedite the drug development and review processes for promising regenerative medicine products, including human cellular and tissue-based therapies. A regenerative medicine therapy is eligible for RMAT designation if it is intended to treat, modify, reverse, or cure a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug or therapy has the potential to address unmet medical needs for such disease or condition. RMAT designation provides the benefits of intensive FDA guidance on efficient drug development, including the ability for early interactions with the FDA to discuss potential ways to support accelerated approval and satisfy post-approval requirements, potential priority review of a BLA, and other opportunities to expedite development and review. By letter dated May 11, 2022, we were advised by the FDA that it concluded SkinTE meets the criteria for RMAT designation for the treatment of DFUs and venous leg ulcers (“VLUs”).

 

30
 

 

As a result of the RMAT designation we were able to engage in an expedited dialogue with the FDA on the tasks that are likely to be necessary to support a BLA submission for SkinTE as a treatment of DFUs and VLUs, which were identified in the RMAT designation. Based on that dialogue we plan to run a second multi-center, randomized controlled trial under our current IND to support approval of a broad DFU indication for SkinTE in a BLA, and we plan to engage in discussions with the FDA regarding the design and implementation of the second clinical trial. We believe this strategy will be the fastest and least costly approach to achieving our first BLA submission for SkinTE, with DFUs representing the largest market opportunity within the category of chronic cutaneous ulcers. We plan to further engage with the FDA to fully define our development plan for other wound indications.

 

We expect to incur significant operating costs in the next three to four years as we pursue the regulatory process for SkinTE with the FDA, conduct clinical trials and studies, and pursue product research, all while operating our business and incurring continuing fixed costs related to the maintenance of our assets and business. We expect to incur significant losses in the future, and those losses could be more severe as a result of unforeseen expenses, difficulties, complications, delays, and other unknown events. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending upon the timing, progress, and outcomes of our clinical trials and our expenditures for satisfying all the conditions of obtaining FDA licensure for SkinTE.

 

Liquidity and Capital Resources

 

Available Capital Resources and Potential Sources of Liquidity

 

As of September 30, 2022, we had $16.1 million in cash and cash equivalents and working capital of approximately $15.7 million. For the nine-month period ended September 30, 2022, cash used in operating activities was $18.3 million, or an average of $2.0 million per month, compared to $15.3 million of cash used in operating activities, or an average of $1.7 million per month, for the nine-month period ended September 30, 2021. For the three-month period ended September 30, 2022, cash used in operating activities was $4.0 million, or an average of $1.3 million per month, compared to $4.6 million of cash used in operating activities, or an average of $1.5 million per month, for the three-month period ended September 30, 2021.

 

As of the date of this quarterly report we do not expect that our cash and cash equivalents of $16.1 million as of September 30, 2022, will be sufficient to fund our current business plan including related operating expenses and capital expenditure requirements beyond the second calendar quarter of 2023. Accordingly, there is substantial doubt about our ability to continue as a going concern, as we do not believe that our cash and cash equivalents will be sufficient to fund our business plan for at least twelve months from the date of issuance of our quarterly financial statements in this report. We plan to address this condition by raising additional capital to finance our operations.

 

After April 2022 we have not engaged in any business activity that generates cash flows from operations, which in the past contributed to defraying our operating costs, and we do not expect we will be engaged in any operating business activity that would generate cash flow in the foreseeable future. Accordingly, we expect we will be dependent on obtaining capital from external sources to fund our operations over the next three to four years. Although we have been successful in raising capital in the past, financing may not be available on terms favorable to us, if at all, so we may not be successful in obtaining additional financing. Therefore, it is not considered probable, as defined in applicable accounting standards, that our plan to raise additional capital will alleviate the substantial doubt regarding our ability to continue as a going concern.

 

Anticipated Uses of Capital Resources

 

As noted above, we are focused primarily on the advancement of our IND and subsequent BLA to attain a license to manufacture and distribute SkinTE. To that end, in June 2021 we engaged a contract research organization (“CRO”) to provide services for the COVER DFUs Trial at a cost of approximately $6.5 million consisting of $3.1 million of service fees and $3.4 million of estimated costs. In 2021 we prepaid $0.5 million, which will be applied to payment of the final invoice under the work order. Over the approximately three-year term of the COVER DFUs Trial the service provider will submit to us for payment monthly invoices for units of work stated in the work order that are completed and billable expenses incurred. We began enrolling subjects in our COVER DFUs at the end of April 2022, and we believe we may be able to complete enrollment of 100 subjects sometime in the first six months of 2024. As enrollment increases, we expect our monthly CRO and related costs of conducting the trial will ramp up.

 

31
 

 

Our expectation is that the second DFU clinical trial under the IND for SkinTE will be similar to the COVER DFUs Trial with respect to size, length of time to complete, and cost. To the extent we decide to pursue additional indications for the application of SkinTE, such as VLUs, we expect we will need to submit separate IND applications for those indications and conduct additional clinical trials to support BLAs for those indications.

 

Clinical trials are the major expense we see in the near and long term, and while we are pursuing clinical trials, we will continue to incur the costs of maintaining our business. In addition to clinical trials, our most significant uses of cash to maintain our business going forward are expected to be compensation, costs of occupying, operating, and maintaining our facilities, and the costs associated with maintaining our status as a publicly traded company listed on Nasdaq. During the 12-month period following the filing of this report our plan is to preserve the facilities, equipment, and staff we need to advance the COVER DFUs Trial and other work necessary for advancing the process for obtaining regulatory approval of SkinTE.

 

With the acceptance of our IND for SkinTE and the beginning of the COVER DFUs Trial, we do not expect to have the same need for research and development staff associated with product development and, as a result, we reduced research and development staff in April 2022.

 

During the latter part of 2021 and into February 2022, we engaged in discussions with certain third parties regarding potential M&A transactions and strategic initiatives. In the first quarter of 2022 we recognized $1.2 million of one-time costs for professional services associated with such M&A and strategic initiatives, which is in addition to $1.2 million of such costs recognized in the fourth quarter of 2021.

 

Our actual capital requirements will depend on many factors, including the cost and timing of advancing our IND and subsequent BLA for the use of SkinTE on DFUs, the cost and timing of additional INDs and BLAs for other indications where SkinTE may be used, the cost and timing of clinical trials, the cost of establishing and maintaining our facilities in compliance with current good tissue practices and current good manufacturing practice requirements, and the cost and timing of advancing our product development initiatives related to SkinTE. Our projection of the period of time for which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

 

We will need to raise additional capital in the future to fund our effort to obtain FDA approval of SkinTE and maintain our operations. Any additional equity financing including financings involving convertible securities, if able to be obtained, may be highly dilutive, on unfavorable terms, or otherwise disadvantageous, to existing stockholders. Debt financing, if available, may involve restrictive covenants or require us to grant a security interest in our assets. If we elect to pursue collaborative arrangements, the terms of such arrangements may require us to relinquish rights to certain of our technologies, products, or marketing territories. Our failure to raise additional capital when needed, and on acceptable terms, would require us to reduce our operating expenses and would limit our ability to continue operations, any of which would have a material adverse effect on our business, financial condition, results of operation, and prospects.

 

Results of Operations

 

Changes in Polarity’s Operations

 

There have been significant changes in our operations affecting our results of operations for the nine-month period ended September 30, 2022, compared to nine-month period ended September 30, 2021.

 

On July 23, 2021, we submitted an IND for SkinTE to the FDA through our subsidiary, PTE-MD, as the first step in the regulatory process for obtaining licensure for SkinTE under Section 351 of the Public Health Service Act. The FDA subsequently issued clinical hold correspondence to us identifying certain issues that needed to be addressed before the IND could be approved. We provided responses to the FDA, and on January 14, 2022, the FDA sent correspondence informing us that the clinical hold had been removed. Acceptance of the IND by the FDA enables us to commence the first of two expected pivotal studies needed to support a BLA for SkinTE. We ceased selling SkinTE at the end of May 2021, when the period of enforcement discretion previously announced by the FDA with respect to its IND and premarket approval requirements for regenerative medicine therapies, such as SkinTE, came to an end, and we do not expect to be able to commercialize SkinTE until our BLA is approved, which we believe will take at least three to four years. Consequently, we recognized products net revenues in the nine months of 2021, and did not have any such revenues in the first nine months of 2022.

 

32
 

 

Our subsidiary, Arches Research, Inc. (“Arches”) began offering COVID-19 testing services in May 2020 under 30-day renewable testing agreements with multiple nursing home and pharmacy facilities in the state of New York controlled by a single company, which substantially added to our services net revenues in the first three months of 2021. When the New York nursing homes and pharmacies adopted on-site employee testing at the end of March 2021, our COVID-19 testing revenues declined substantially, and in August 2021, we decided to cease COVID-19 testing. Arches focused its research and development resources on supporting our IND and clinical trial efforts for the remainder of 2021 and continued in that role in 2022. However, we do not expect we will have the same need for research and development staff associated with product development and, as a result, we reduced research and development staff in April 2022, and began to eliminate or sell certain items of equipment that had been leased or purchased for our research and development activity.

 

At the beginning of May 2018, we acquired a preclinical research and veterinary sciences business, which we operated through our indirect subsidiary, IBEX Preclinical Research, Inc. (“IBEX”). Utah CRO Services, Inc., a Nevada corporation (“Utah CRO”), is our direct subsidiary and held all of the outstanding capital stock of IBEX (the “IBEX Shares”). Utah CRO also held all the member interest of IBEX Property LLC, a Nevada limited liability company (“IBEX Property”), that owned two unencumbered parcels of real property in Logan, Utah, consisting of approximately 1.75 combined gross acres of land, together with the buildings, structures, fixtures, and personal property (the “Property”), which was leased by IBEX Property to IBEX for IBEX to conduct its preclinical research and veterinary sciences business. On April 28, 2022, Utah CRO sold all the IBEX Shares to an unrelated third party in exchange for a promissory note in the principal amount of $0.4 million bearing simple interest at the rate of 10% per annum payable interest only on a quarterly basis and all principal and remaining accrued interest due on the five-year anniversary of the closing of the sale of the IBEX Shares. On the same day IBEX Property closed the sale of the Property to an affiliate of the same party that purchased the IBEX Shares and we realized net cash proceeds of $2.3 million, after deducting closing costs and advisory fees. Prior to April 2022, while we were exploring the opportunities for selling IBEX and IBEX Property, IBEX assumed a more passive approach to marketing its services, which resulted in a decline in IBEX services revenues in the first nine months of 2022 compared to the first nine months of 2021. Accordingly, our services net revenues were nominal from the beginning of 2022 through the sale of IBEX and the Property completed at the end of April 2022, and services net revenues generated by IBEX ended permanently after the sale.

 

As a result of the foregoing developments, we made a number of changes to our operations that impacted our results of operations. These included reductions in our work force and reducing the services and infrastructure needed to support a larger work force and commercial sales effort.

 

Comparison of the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

 

  

For the Nine

Months Ended

  

Increase

(Decrease)

 
(in thousands)  September 30, 2022   September 30, 2021   Amount   % 
   (Unaudited)         
Net revenues                    
Products  $   $2,924   $(2,924)   (100)%
Services   814    5,438    (4,624)   (85)%
Total net revenues   814    8,362    (7,548)   (90)%
Cost of sales                    
Products       448    (448)   (100)%
Services   616    3,275    (2,659)   (81)%
Total costs of revenues   616    3,723    (3,107)   (83)%
Gross profit   198    4,639    (4,441)   (96)%
                     
Operating costs and expenses                    
Research and development   8,489    10,491    (2,002)   (19)%
General and administrative   12,456    14,999    (2,543)   (17)%
Sales and marketing       2,718    (2,718)   (100)%
Restructuring and other charges   38    678    (640)   (94)%
Impairment of assets held for sale   223        223    100%
Total operating costs and expenses   21,206    28,886    (7,680)   (27)%
Operating loss   (21,008)   (24,247)   3,239    (13)%
Other income (expense), net                    
Gain on extinguishment of debt       3,612    (3,612)   (100)%
Change in fair value of common stock warrant liability   13,719    4,134    9,585    232%
Inducement loss on sale of liability classified warrants       (5,197)   5,197    100%
Interest income (expense), net   (33)   (106)   73    69%
Other income, net   83    185    (102)   (55)%
Net loss  $(7,239)  $(21,619)  $14,380    (67)%

 

33
 

 

Comparison of the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

 

  

For the Three Months

Ended

  

Increase

(Decrease)

 
(in thousands)  September 30, 2022   September 30, 2021   Amount   % 
   (Unaudited)         
Net revenues                    
Services  $   $1,116   $(1,116)   (100)%
Total net revenues       1,116    (1,116)   (100)%
Cost of sales                    
Services       634    (634)   (100)%
Total costs of revenues       634    (634)   (100)%
Gross profit       482    (482)   (100)%
                     
Operating costs and expenses                    
Research and development   2,551    3,870    (1,319)   (34)%
General and administrative   2,685    3,687    (1,002)   (27)%
Sales and marketing       93    (93)   (100)%
Restructuring and other charges       242    (242)   (100)%
Impairment of assets held for sale   169        169    100%
Total operating costs and expenses   5,405    7,892    (2,487)   (32)%
Operating loss   (5,405)   (7,410)   2,005    27%
Other income (expense), net                    
Change in fair value of common stock warrant liability   1,984    6,354    (4,370)   (69)%
Interest income (expense), net   (4)   (29)   25    86%
Other income, net   25    64    (39)   (61)%
Net loss  $(3,400)  $(1,021)  $(2,379)   233%

 

Net Revenues and Gross Profit. We ceased commercial sales of SkinTE in the second calendar quarter of 2021 and sold the IBEX services business at the end of April 2022, so we were not engaged in any revenue generating business activity at September 30, 2022, and do not expect to generate operating revenues from any business activity for the foreseeable future. The decreases in revenues, cost of revenues, and gross profit for the nine-month and three-month periods ended September 30, 2022, compared to the same periods in 2021 are consistent with our cessation of revenue-generating business activity.

 

34
 

 

Operating Costs and Expenses. Operating costs and expenses decreased $7.7 million, or 27%, for the nine-month period ended September 30, 2022, compared to the nine-month period ended September 30, 2021, and decreased $2.5 million, or 32%, for the three-month period ended September 30, 2022, compared to the three-month period ended September 30, 2021.

 

Research and development expenses decreased 19% for the nine-month period ended September 30, 2022, compared to the nine-month period ended September 30, 2021, and decreased 34% for the three-month period ended September 30, 2022, compared to the three-month period ended September 30, 2021. The decrease is primarily attributable to costs incurred in the nine-month period ended September 30, 2021, for completing our pre-IND diabetic foot ulcers trial, lab supplies for work on preparing the technical items for our IND, and consulting services for preparing our IND that did not recur in the nine-month period ended September 30, 2022, which was partially offset by an increase primarily attributable to SkinTE manufacturing and overhead personnel redirecting their efforts following the cessation of SkinTE sales to research and development activities, manufacturing costs for SkinTE produced for use in the COVER DFUs Trial, and increased costs related to quality control supplies and infrastructure implemented for the COVER DFUs Trial.

 

The amount of general and administrative expenses decreased 17% for the nine-month period ended September 30, 2022, compared to the nine-month period ended September 30, 2021, and decreased 27%, for the three-month period ended September 30, 2022, compared to the three-month period ended September 30, 2021. We effectuated a reduction in force for our commercial operations in the second quarter of 2021. Consequently, there were reductions in cash compensation, stock compensation, consulting fees, and travel expense. Furthermore, with the cessation of SkinTE sales we re-allocated manufacturing supplies and compensation from general and administrative expenses to research and development costs. These reductions were offset by professional fees incurred in connection with our pursuit of a strategic transaction that did not materialize, and investment banking fees paid in connection with an at-the-market offering we terminated in the first quarter of 2022.

 

In the first nine months of 2021, we incurred sales and marketing costs related to our commercial sales effort that did not recur in the first nine months of 2022. In connection with terminating commercial sales of SkinTE, we realized as a restructuring charge a loss on impairment of property and equipment in the amount of $0.4 million and a charge of $0.6 million for employee severance and revaluing of equity awards related to severance, which was offset by a gain of $0.3 million from early termination of an office/ laboratory lease in Augusta, Georgia. In the first nine months of 2022 we realized a charge of $0.2 million from impairment of equipment to be sold and a nominal amount of restructuring charges on employee severance.

 

Operating Loss and Net Loss. Operating loss decreased $3.2 million, or 13%, for the nine-month period ended September 30, 2022, compared to the nine-month period ended September 30, 2021, and decreased $2.0 million, or 27%, for the three-month period ended September 30, 2022, compared to the three-month period ended September 30, 2021.

 

Net loss decreased $14.4 million, or 67%, for the nine-month period ended September 30, 2022, compared to the nine-month period ended September 30, 2021, and increased $2.4 million, or 233%, for the three-month period ended September 30, 2022, compared to the three-month period ended September 30, 2021. Warrants issued in connection with financings we completed in 2022, 2021 and 2020 are classified as liabilities and remeasured each period until settled, classified as equity, or expiration. As a result of the periodic remeasurement, we recorded a gain for change in fair value of common stock warrant liability of $13.7 million for the nine-month period ended September 30, 2022, compared to a gain of $4.1 million for the nine-month period ended September 30, 2021, and a gain for change in fair value of common stock warrant liability of $2.0 million for the three-month period ended September 30, 2022, compared to a gain of $6.4 million for the three-month period ended September 30, 2021. For additional information on the change in fair value of common stock warrant liability please see Note 4 to the condensed consolidated financial statements included in this report. We issued common stock purchase warrants in January 2021, as an inducement to holders of warrants issued in December 2020 to exercise those December warrants. As a result, we recognized an inducement loss of $5.2 million for the nine-month period ended September 30, 2021. There was no similar inducement loss in the first nine months of 2022.

 

35
 

 

Non-GAAP Financial Measure

 

The table below provides a reconciliation of adjusted net loss, which is a non-GAAP measure that shows net loss before fair value adjustments relating to our common stock warrant liability and warrant inducement loss, to GAAP net loss. We believe adjusted net loss is useful to investors because it eliminates the effect of non-operating items that can significantly fluctuate from period to period due to fair value remeasurements. For purposes of calculating non-GAAP per share metrics, the same denominator is used as that which was used in calculating net loss per share under GAAP. Other companies may calculate adjusted net loss differently than we do. Adjusted net loss has limitations as an analytical tool and you should not consider adjusted net loss in isolation or as a substitute for our financial results prepared in accordance with GAAP.

 

Adjusted Net Loss Attributable to Common Stockholders

(in thousands - unaudited non-GAAP measure)

 

  

For the Three Months Ended

September 30,

  

For the Nine Months Ended

September 30,

 
   2022   2021   2022   2021 
GAAP Net Loss  $(3,400)  $(1,021)  $(7,239)  $(21,619)
Change in fair value of common stock warrant liability   (1,984)   (6,354)   (13,719)   (4,134)
Inducement loss on sale of liability classified warrants               5,197 
Non-GAAP adjusted net loss attributable to common stockholders – basic & diluted  $(5,384)  $(7,375)  $(20,958)  $(20,556)
                     
GAAP net loss per share attributable to common stockholders                    
Basic*  $(0.47)  $(0.31)  $(1.08)  $(6.81)
Diluted*  $(0.47)  $(0.37)  $(1.54)  $(6.81)
                     
Non-GAAP adjusted net loss per share attributable to common stockholders                    
Basic and diluted*  $(0.75)  $(2.27)  $(3.12)  $(6.47)

 

* Giving retroactive effect to the 1-for-25 reverse stock split effectuated on May 16, 2022

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in accordance with GAAP requires both the use of estimates and judgment relative to the application of appropriate accounting policies. We are required to make estimates and assumptions in certain circumstances that affect amounts reported in the Unaudited Condensed Consolidated Financial Statements and related footnotes. We evaluate these estimates and assumptions on an ongoing basis based on historical developments, market conditions, industry trends, and other information that we believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to these estimates and assumptions or that reported results of operations will not be materially and adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. Our critical accounting policies are more fully described in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our 2021 Annual Report. There have been no changes in our critical accounting policies from December 31, 2021.

 

36
 

 

Disclosure Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements. Risks and uncertainties are inherent in forward-looking statements. Furthermore, such statements may be based on assumptions that fail to materialize or prove incorrect. Consequently, our business development, operations, and results could differ materially from those expressed in forward-looking statements made in this Quarterly Report. We make such forward-looking statements pursuant to the safe harbor provisions in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

our ability to raise capital to fund our operations;
the timing or success of obtaining regulatory licenses or approvals for initiating clinical trials or marketing our products;
the initiation, timing, progress, cost, and results of clinical trials under our open IND for DFUs;
the initiation, timing, progress, cost, and results of other INDs for SkinTE in additional indications and the clinical trials that may be required under those INDs;
sufficiency of our working capital to fund our operations in the near and long term, which raises doubt about our ability to continue as a going concern;
infrastructure required to support operations in future periods, including the expected costs thereof;
estimates associated with revenue recognition, asset impairments, and cash flows;
variance in our estimates of future operating costs;
future vesting and forfeitures of compensatory equity awards;
the effectiveness of our disclosure controls and our internal control over financial reporting;
the impact of new accounting pronouncements;
size and growth of our target markets; and
the initiation, timing, progress, and results of our research and development programs.

 

Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, without limitation:

 

the need for, and ability to obtain, additional financing in the future;
the ability to comply with regulations applicable to the development, production, and distribution of SkinTE;
the timing and requirements associated with obtaining FDA acceptance of our second clinical trial;
the ability to obtain subject enrollment in our trials at a pace that allows the trials to progress on the schedules we have established with our CRO;
unexpected developments or delays in the progress of our clinical trials;
the scope of protection we can establish and maintain for intellectual property rights covering our product candidates and technology;
the ability to gain adoption by healthcare providers of our products for patient care;
developments relating to our competitors and industry;
new discoveries or the development of new therapies or technologies that render our products or services obsolete or unviable;
the ability to find and retain skilled personnel;
outbreaks of disease, including the COVID-19 pandemic, and related stay-at-home orders, quarantine policies and restrictions on travel, trade, and business operations;
political and economic instability, whether resulting from natural disasters, wars (such as the conflict between Russia and Ukraine), terrorism, pandemics, or other sources;
changes in economic conditions, including inflation, rising interest rates, lower consumer confidence, and volatile equity capital markets;
inaccuracies in estimates of our expenses, future revenues, and capital requirements;
future accounting pronouncements; and
unauthorized access to confidential information and data on our information technology systems and security and data breaches.

 

37
 

 

Forward-looking statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. Any forward-looking statement in this Quarterly Report on Form 10-Q reflects our current view with respect to future events and is subject to these and other risks, uncertainties, and assumptions relating to our operations, results of operations, industry, and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

This Quarterly Report on Form 10-Q may also contain estimates, projections, and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources.

 

Item 3. Quantitative and Qualitative Disclosure about Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Our management, with the participation of our principal executive and financial officers, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on the evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2022, our principal executive and financial officers concluded that, as of such date, our disclosure controls and procedures were effective. There were no changes in our internal control over financial reporting during the three-month period ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

For a description of our material pending legal proceedings, see Note 16, “Commitments and Contingencies—Contingencies” in the condensed consolidated financial statements included in this report.

 

Item 1A. Risk Factors

 

You should carefully consider the factors discussed below and in Part I, “Item 1A. Risk Factors” in our 2021 Annual Report, which could materially affect our business, financial position, or future results of operations. The risks described below and in our 2021 Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially, adversely affect our business, financial position, future results of operations, and prospects.

 

38
 

 

Risks Related to Our Financial Condition

 

We will need additional funding to pursue the regulatory process for SkinTE and sustain our operations, and we may be unable to raise capital when needed, which would force us to delay, reduce, eliminate, or abandon our product development program.

 

We reported an operating loss of $21.0 million for the nine-month period ended September 30, 2022, and on that date we had an accumulated deficit of $515.6 million. We believe our cash and cash equivalents at September 30, 2022, will fund our current business plan including related operating expenses and capital expenditure requirements into the second calendar quarter of 2023. Accordingly, there is substantial doubt about our ability to continue as a going concern beyond that time unless we can raise additional capital from external sources.

 

We expect to incur significant operating costs in the near term as we pursue the regulatory process for SkinTE with the FDA, conduct clinical trials and studies, and pursue product research, all while operating our business and incurring continuing fixed costs related to the maintenance of our assets and business. We expect to incur significant losses in the future, and those losses could be more severe as a result of unforeseen expenses, difficulties, complications, delays, and other unknown events. As a result of the disposition of IBEX in April 2022, we are no longer engaged in any revenue generating activity that would contribute to defraying our operating costs in future periods, which will make us entirely dependent on capital obtained from external sources to fund our operations. The impact of COVID-19, inflation, and other macroeconomic issues have and may continue to adversely affect capital markets and could limit our ability to obtain the capital we need to operate our business.

 

We may not be able to obtain necessary capital in sufficient amounts, on terms favorable to us, or at all. If adequate funds are not available for our business in the future, we may be required to delay, reduce the scope of, or eliminate the plans for obtaining regulatory licensure or approval for SkinTE or be unable to continue operations over a longer term, any of which would have a material adverse effect on our business, financial condition, results of operation, and prospects.

 

General risks

 

The trading price of the shares of our common stock has declined and may continue to be volatile, which could adversely affect an investment in our stock and our ability to raise capital.

 

Investors should consider an investment in our securities as risky and invest only if they can withstand a significant loss and wide fluctuations in the market value of their investment. Holders of our stock may be unable to sell their shares of common stock at or above the price paid for the shares due to fluctuations in the market price of our common stock arising. Our stock price has been highly volatile during the 12-month period ended September 30, 2022, with closing stock prices ranging from a high of $18.25 per share to a low of $0.65 per share. The stock market in general, and the market for biotech company stocks in particular, have experienced extreme volatility that, at times, has been unrelated to the operating performance of particular companies. Some of the factors that may cause the market price of our common stock to fluctuate include:

 

the timing or success of obtaining regulatory licenses or approvals for marketing our products;
the initiation, timing, progress, and results of our pre-clinical or clinical trials;
sufficiency of our working capital to fund our operations over the next 12-month period and beyond;
infrastructure required to support operations in future periods, including the expected costs thereof;
estimates associated with revenue recognition, asset impairments, and cash flows;
variance in our estimates of future operating costs;
the impact of new accounting pronouncements;
size and growth of our target markets;
the initiation, timing, progress, and results of our research and development programs;
issues in manufacturing our product candidates or future approved products;
regulatory developments or enforcement in the United States and foreign countries with respect to our product candidates or our competitors’ products;
competition from existing products or new products that may emerge;
developments or disputes concerning patents, patent applications, or other proprietary rights;
introduction of technological innovations or new commercial products by us or our competitors;
announcements by us, our collaborators, or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations, or capital commitments;
changes in estimates or recommendations by securities analysts, if any, who cover our common stock;
fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

39
 

 

public concern over our product candidates or any future approved products;
threatened or actual litigation;
future or anticipated sales of our common stock;
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
additions or departures of key personnel;
changes in the structure of health care payment systems in the United States or overseas;
failure of any of our products or product candidates to perform safely or effectively or achieve commercial success;
economic and other external factors or other disasters or crises;
period-to-period fluctuations in our financial condition and results of operations;
general market conditions and market conditions for biopharmaceutical stocks; and
overall fluctuations in U.S. equity markets.

 

In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. Defending such litigation could result in substantial defense costs and divert the time and attention of our management, which could seriously harm our business.

 

In the event that we fail to satisfy any of the listing requirements of The Nasdaq Capital Market, our common stock may be delisted, which could affect our market price and liquidity.

 

Our common stock is listed on The Nasdaq Capital Market (“Nasdaq”). For continued listing on Nasdaq, we will be required to comply with the continued listing requirements, including the minimum market capitalization standard, the minimum stockholders’ equity requirement, the corporate governance requirements, and the minimum closing bid price requirement, among other requirements. In the event that we fail to satisfy any of the listing requirements of Nasdaq our common stock may be delisted. If our securities are delisted from trading on Nasdaq, and we are not able to list our securities on another exchange or to have them quoted on Nasdaq, our common stock could be quoted on the OTC Markets or on the Pink Open Market. As a result, we could face significant adverse consequences including:

 

a limited availability of market quotations for our securities;
a determination that our common stock is a “penny stock,” which would require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;
a limited amount of news and analyst coverage;
a decreased ability to obtain additional financing because we would be limited to seeking capital from investors willing to invest in securities not listed on a national exchange; and
the inability to use short-form registration statements on Form S-3, including the registration statement on Form S-3 we filed in February 2022, to facilitate offerings of our securities.

 

The minimum closing bid price requirement for continued inclusion on Nasdaq under Nasdaq Listing Rule 5550(a)(2) is that we maintain a minimum closing bid price of $1.00 for 30 consecutive business days. On October 26, 2022, we received a deficiency letter from the Listing Qualifications Department (the “Staff”) of Nasdaq notifying us that, for the preceding 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on Nasdaq pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A) (the “Compliance Period Rule”), we have an initial period of 180 calendar days to regain compliance with the Minimum Bid Price Requirement, which ends April 24, 2023 (the “Compliance Date”). If, at any time before the Compliance Date, the bid price for our common stock closes at $1.00 or more for a minimum of 10 consecutive business days as required under the Compliance Period Rule, we expect the Staff will notify us we are in compliance with the Minimum Bid Price Requirement, unless the Staff exercises its discretion to extend the 10-business day period pursuant to Nasdaq Listing Rule 5810(c)(3)(H).

 

40
 

 

As of the date of this Quarterly Report on Form 10-Q, we have not yet regained compliance with the Minimum Bid Price Requirement. We intend to monitor the closing bid price of our common stock, however, there is no assurance we will be able to regain compliance within 180 calendar days following the Nasdaq notice. There are many factors that may adversely affect our minimum bid price. Many of these factors are outside of our control. As a result, we may not be able to sustain compliance with the Minimum Bid Price Requirement in the long term. Any potential delisting of our common stock from Nasdaq would likely result in the adverse consequences described above.

 

Unfavorable global economic or political conditions could adversely affect our business or financial condition.

 

Our business and our ability to raise capital are susceptible to general conditions in the global economy and in the global financial markets. Further, the impacts of political unrest, including as a result geopolitical tension, such as a deterioration in the relationship between the U.S. and China or escalation in conflict between Russia and Ukraine, including any additional sanctions, export controls, or other restrictive actions that may be imposed by the U.S. or other countries against governmental or other entities in, for example, Russia, also could lead to disruption, instability, and volatility in the global markets, which may have an adverse impact on our business or ability to access the capital markets. Inflation rates have increased and may continue to rise. A severe or prolonged economic downturn, including a recession or depression resulting from the ongoing COVID-19 pandemic, political disruption, or inflation could result in a variety of risks to our business and our ability to raise additional capital when needed on acceptable terms, if at all. Any of the foregoing could materially and adversely affect our business, financial condition, results of operation, and prospects, and we cannot anticipate all of the ways in which the political, economic, or financial market conditions could adversely impact our business.

 

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

 

During the three-month period ended September 30, 2022, we withheld or acquired from employees shares of common stock to satisfy statutory withholding tax liability upon the vesting of share-based awards. The following table sets forth information on our acquisition of these shares for each month during the period in which an acquisition occurred.

 

Issuer Purchases of Equity Securities

 

   (a)   (b)   (c)  (d)
Period  Total number of
shares (or units)
purchased
   Average price
paid per share (or
unit)
   Total number of
shares (or units)
purchased as
part of publicly
announced plans
or programs
  Maximum
number (or
approximate
dollar value) of
shares (or units)
that may yet be
purchased under
the plans or
programs
July 2022   1,454   $1.47   N/A  N/A
August 2022      $   N/A  N/A
September 2022      $   N/A  N/A
Total   1,454   $1.47       

 

Item 5. Other Information

 

On December 27, 2017, we entered into a commercial lease agreement (the “Lease”) with Adcomp LLC (the “Landlord”) pursuant to which we lease approximately 178,528 rentable square feet of warehouse, manufacturing, office, and lab space in Salt Lake City, Utah (the “Property”) from the Landlord. The initial term of the Lease is five years and it expires on November 30, 2022. We have a one-time option to renew for an additional five years and an option to purchase the Property at a purchase price of $17.5 million. On December 16, 2021, we gave written notice to the Landlord of our election to exercise the option to purchase the Property, and on March 14, 2022, we entered into a definitive purchase and sale agreement with the Landlord that provides for a closing of the transaction on November 15, 2022 (the “Purchase Agreement”). In connection with exercising the option to purchase the Property, we made an earnest money deposit of $150,000. On October 25, 2021, we signed a Purchase and Sale Agreement, the terms of which were finalized on December 10, 2021, and subsequently amended by Amendment No. 1 thereto dated March 15, 2022 (the “BCG Agreement”), with BCG Acquisitions LLC (“BCG”). Under the BCG Agreement we agreed to sell the Property to BCG or its assigns for $17.5 million after we purchase the Property from the Landlord. Under the BCG Agreement, BCG made an earnest money deposit totaling $150,000. Concurrently with the sale of the Property to BCG and its assigns, we will enter into a new lease agreement pursuant to which we will lease a portion of the building located on the Property to house our operations.

 

The Purchase Agreement and BCG Agreement provide for closing of the transactions described above on November 15, 2022, and also provide an option for extending the closing to November 30, 2022. On November 9, 2022, we entered into an Addendum to the BCG Agreement providing, in part, for BCG exercising its right to extend the closing to November 30, 2022, in consideration of making an extension deposit with the escrow holder of $50,000, and the exercise of our right under the Purchase Agreement with the Landlord to extend the closing to November 30, 2022, in consideration of making an extension deposit with the escrow holder of $50,000. The Addendum also provides for our formation of a single member limited liability company owned by us, which will be used as the vehicle to effectuate purchase of the Property from the Landlord at closing, effectuate a change in ownership of the Property to BCG or its assigns, and lease a portion of the building on the Property back to us to house our operations.

 

41
 

 

Closing of the foregoing transactions are subject to a number of risks and uncertainties including, but not limited to, satisfaction of all closing conditions, including obtaining financing for the purchase, and closing on the purchase of the Property from the Landlord under the Purchase Agreement, and satisfaction of all closing conditions, including obtaining financing for the purchase, and closing on the sale of the Property to BCG under the BCG Agreement.

 

Item 6. Exhibits

 

Except as otherwise noted, the following exhibits are included in this filing:

 

10.1 Employment Agreement Amendment No. 1 with Cameron Hoyler dated August 11, 2022 (incorporated by reference to Exhibit 10.8 to our Form 10-Q filed with the SEC on August 11, 2022)
31.1 Certification Pursuant to Rule 13a-14(a)
31.2 Certification Pursuant to Rule 13a-14(a)
32.1 Certification Pursuant to Rule 13a-14(b) and Section 1350, Chapter 63 of Title 18, United States Code
101.INS Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document
101.SCH Inline XBRL Schema Document
101.CAL Inline XBRL Calculation Linkbase Document
101.DEF Inline XBRL Definition Linkbase Document
101.LAB Inline XBRL Label Linkbase Document
101.PRE Inline XBRL Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

42
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  POLARITYTE, INC.
   
Date: November 10, 2022 /s/ Richard Hague
  Richard Hague
  Chief Executive Officer
  Duly Authorized Officer
   
Date: November 10, 2022 /s/ Jacob Patterson
  Jacob Patterson
  Chief Financial Officer
  Chief Accounting Officer

 

43

 

 

PolarityTE (NASDAQ:PTE)
Historical Stock Chart
From Mar 2024 to Apr 2024 Click Here for more PolarityTE Charts.
PolarityTE (NASDAQ:PTE)
Historical Stock Chart
From Apr 2023 to Apr 2024 Click Here for more PolarityTE Charts.