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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 March 31, 2023

 

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 May 9, 2023, there were 7,376,231 shares of the Registrant’s common stock outstanding.

 

 

 

 

 

 

INDEX

 

  Page
PART I - FINANCIAL INFORMATION
   
Item 1. Financial Statements: 3
Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 (unaudited) 3
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022 (unaudited) 4
Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2023 and 2022 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 29
   
PART II - OTHER INFORMATION 29
   
Item 1A. Risk Factors 29
Item 6. Exhibits 31
SIGNATURES 32

 

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. In April 2022, the business historically operated under the name “IBEX” was sold, together with the trademark IBEX, to an unrelated third party. References to the Company for periods after April 29, 2022, do not include IBEX Preclinical Research, Inc., or the business historically operated under the name “IBEX.”

 

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)

 

  

March 31,

2023

  

December 31,

2022

 
         
ASSETS          
Current assets          
Cash and cash equivalents  $6,394   $11,446 
Assets held for sale   338    700 
Prepaid expenses and other current assets   2,195    1,109 
Total current assets   8,927    13,255 
Property and equipment, net   1,627    1,775 
Operating lease right-of-use assets   6,584    6,906 
Other assets   911    911 
TOTAL ASSETS  $18,049   $22,847 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $1,714   $1,380 
Other current liabilities   458    687 
Total current liabilities   2,172    2,067 
Common stock warrant liability   961    1,489 
Operating lease liabilities   2,495    2,632 
Finance lease liabilities       41 
Total liabilities   5,628    6,229 
           
Commitments and Contingencies (Note 14)   -     -  
           
STOCKHOLDERS’ EQUITY          
Preferred stock – 25,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2023 and December 31, 2022        
Common stock – $.001 par value; 250,000,000 shares authorized; 7,325,006 and 7,258,186 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively   7    7 
Additional paid-in capital   532,888    532,842 
Accumulated deficit   (520,474)   (516,231)
Total stockholders’ equity   12,421    16,618 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $18,049   $22,847 

 

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)

 

         
   For the Three Months Ended 
   March 31, 
   2023   2022 
Net revenues          
Services  $   $741 
Total net revenues       741 
Cost of revenues          
Services       491 
Total costs of revenues       491 
Gross profit       250 
Operating costs and expenses          
Research and development   2,282    2,860 
General and administrative   2,464    6,209 
Impairment of assets held for sale   56    54 
Total operating costs and expenses   4,802    9,123 
Operating loss   (4,802)   (8,873)
Other income (expense), net          
Change in fair value of common stock warrant liability   528    5,105 
Interest expense, net   31    (15)
Other income, net       12 
Net loss and comprehensive loss  $(4,243)  $(3,771)
           
Net loss per share attributable to common stockholders          
Basic  $(0.58)  $(1.12)*
Diluted  $(0.58)  $(2.37)*
Weighted average shares outstanding          
Basic   7,320,754    3,364,535*
Diluted   7,320,754    3,575,970*

 

*   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)

 

                             
       For the Three Months Ended March 31, 2023     
   Convertible Preferred Stock   Common Stock   Additional Paid-in   Accumulated   Total Stockholders’ 
   Number   Amount   Number   Amount   Capital   Deficit   Equity 
Balance – December 31, 2022      $    7,258,186   $7   $532,842   $(516,231)  $16,618 
Stock-based compensation expense                   46        46 
Vesting of restricted stock units           66,820                 
Net loss                       (4,243)   (4,243)
Balance – March 31, 2023      $    7,325,006   $7   $532,888   $(520,474)  $12,421 

 

   For the Three Months Ended March 31, 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 

 

*   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 CASH FLOWS

(Unaudited, in thousands)

 

         
   For the Three Months Ended March 31, 
   2023   2022 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(4,243)  $(3,771)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock-based compensation expense   46    762 
Depreciation and amortization   148    455 
Impairment of assets held for sale   56    54 
Change in fair value of common stock warrant liability   (528)   (5,105)
Gain on finance lease termination   (61)    
Net (gain)/loss on sale of property and equipment and held for sale assets   31    (2)
Changes in operating assets and liabilities:          
Accounts receivable       256 
Prepaid expenses and other current assets   (1,086)   (393)
Operating lease right-of-use assets   322    292 
Accounts payable and accrued expenses   352    1,702 
Other current liabilities   1    (1)
Deferred revenue       (52)
Operating lease liabilities   (118)   (238)
Net cash used in operating activities   (5,080)   (6,041)
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of property and equipment       (31)
Proceeds from sale of property and equipment and held for sale assets   100    7 
Net cash provided by/(used in) investing activities   100    (24)
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from insurance financing arrangements       1,027 
Principal payments on term note payable and financing arrangements       (10)
Principal payments on financing leases   (72)   (116)
Net proceeds from the sale of preferred stock and warrants       4,814 
Cash paid for tax withholdings related to net share settlement       (127)
Net cash provided by/(used in) financing activities   (72)   5,588 
Net decrease in cash and cash equivalents, including cash classified within assets held for sale   (5,052)   (477)
Less: net increase in cash and cash equivalents classified within assets held for sale       175 
Net decrease in cash and cash equivalents   (5,052)   (652)
Cash and cash equivalents - beginning of period   11,446    19,375 
Cash and cash equivalents - end of period  $6,394   $18,723 
           
Supplemental cash flow information:          
Cash paid for interest  $7   $16 
           
Supplemental schedule of non-cash investing and financing activities:          
Disposal of held for sale assets in exchange for extinguishment of finance lease liabilities  $157   $ 
Fair value of placement agent warrants issued in connection with offerings  $   $144 
Conversion of Series A and Series B preferred stock into common stock  $   $16 
Allocation of proceeds to warrant liability  $   $3,129 
Deferred and accrued offering costs  $   $104 
Reclassification of assets held for sale  $   $3,163 
Reclassification of liabilities held for sale  $   $215 

 

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

 

6

 

 

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 has transitioned to a clinical stage company pursuing an IND for SkinTE. As a result, there are no product sales from commercial SkinTE after June 2021.

 

At the beginning of May 2018, the Company acquired a preclinical research and veterinary sciences business, which had 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, 2022, 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, 2022, filed with the Securities and Exchange Commission on Form 10-K on March 27, 2023.

 

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 with customers, stock-based compensation, the valuation allowance for deferred tax assets, the valuation of common stock warrant liabilities, and the impairment of assets. Actual results could differ from those estimates.

 

Concentration of Credit Risk. Balances are maintained at U.S. financial institutions and may exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000 per depositor, per insured bank for each account ownership category. Although the Company currently believes that the financial institutions with whom it does business, will be able to fulfill their commitments to the Company, there is no assurance that those institutions will be able to continue to do so. The Company has not experienced any credit losses associated with its balances in such accounts for the three months ended March 31, 2023 and 2022.

 

7

 

 

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 sheets. 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. During the three months ended March 31, 2023, the Company remeasured assets held for sale and recorded an impairment loss of $0.1 million.

 

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 sheets 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 does not currently perform any revenue generating activities. Prior to the sale of IBEX Preclinical Research, Inc. (“IBEX”) in April 2022, 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. See Note 5 for further details on the IBEX sale.

 

8

 

 

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.

 

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.

 

9

 

 

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 months ended March 31, 2023 and 2022 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.

 

Recently Adopted 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. The Company adopted this ASU using the modified-retrospective approach for the fiscal year beginning January 1, 2023. 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 March 31, 2023, the Company had an accumulated deficit of $520.5 million. As of March 31, 2023, the Company had cash and cash equivalents of $6.4 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 condensed 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.

 

10

 

 

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.

 

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):

 

   March 31, 2023 
   Level 1   Level 2   Level 3   Total 
Liabilities                
Common stock warrant liability  $        $        $961   $961 
Total  $   $   $961   $961 

 

   December 31, 2022 
   Level 1   Level 2   Level 3   Total 
Liabilities                    
Common stock warrant liability  $        $        $1,489   $1,489 
Total  $   $   $1,489   $1,489 

 

The Company assesses its assets held for sale, long-lived assets, including property, 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 each of the three months ended March 31, 2023 and 2022, the Company recognized an impairment charge of $0.1 million related to equipment classified in assets held for sale. As of each measurement date, the fair value of assets held for sale was determined utilizing Level 3 inputs and were based on a market approach. See Note 5 for additional details.

 

The following table presents the change in fair value of the liability classified common stock warrants for the three months ended March 31, 2023 (in thousands):

 

  

Fair Value at

December 31, 2022

   (Gain) Loss Upon Change in Fair Value  

Fair Value at

March 31, 2023

 
Warrant liabilities               
February 14, 2020 issuance  $8   $(2)  $6 
December 23, 2020 issuance   2    (1)   1 
January 14, 2021 issuance   72    (42)   30 
January 25, 2021 issuance   64    (37)   27 
March 16, 2022 issuance   26    (25)   1 
June 8, 2022 issuance   1,317    (421)   896 
Total  $1,489   $(528)  $961 

 

11

 

 

The following table presents the change in fair value of the liability classified common stock warrants for the three months ended March 31, 2022 (in thousands):

 

  

Fair Value at

December 31, 2021

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

Fair Value at

March 31, 2022

 
Warrant liabilities                    
February 14, 2020 issuance  $291   $   $(179)  $112 
December 23, 2020 issuance   239        (166)   73 
January 14, 2021 issuance   3,345        (1,856)   1,489 
January 25, 2021 issuance   2,969        (1,649)   1,320 
March 16, 2022 issuance       3,129    (1,255)   1,874 
Total  $6,844   $3,129   $(5,105)  $4,868 

 

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:

 

    For the Three Months ended 
    March 31, 2023 
Stock price   $ 0.500.50 
Exercise price   $ 2.4034.38 
Risk-free rate   3.684.66%
Volatility   107.0113.1 %
Remaining term (years)   0.964.19 

 

    For the Three Months ended 
    March 31, 2022 
Stock price   $ 6.258.50 
Exercise price   $ 2.5034.50 
Risk-free rate   1.952.44 %
Volatility   98.4103.6 %
Remaining term (years)   1.964.87 

 

5. ASSETS AND LIABILITIES HELD FOR SALE

 

Equipment

 

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 sheets as of March 31, 2023 and December 31, 2022.

 

During each of the three months ended March 31, 2023 and 2022, the Company recorded an impairment of $0.1 million related to the lab equipment designated as held for sale.

 

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.

 

12

 

 

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 March 31, 2023 and December 31, 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.

 

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

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

 

  

March 31,

2023

  

December 31,

2022

 
Prepaid insurance  $1,249   $239 
Other current receivable   446    332 
Prepaid expenses   402    440 
Deferred offering costs   98    98 
Total prepaid expenses and other current assets  $2,195   $1,109 

 

7. PROPERTY AND EQUIPMENT, NET

 

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

 

  

March 31,

2023

  

December 31,

2022

 
Machinery and equipment  $4,436   $4,436 
Computers and software   570    570 
Leasehold improvements   1,808    1,808 
Furniture and equipment   100    100 
Total property and equipment, gross   6,914    6,914 
Accumulated depreciation   (5,287)   (5,139)
Total property and equipment, net  $1,627   $1,775 

 

13

 

 

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

 

         
   For the Three Months Ended 
   March 31, 
   2023   2022 
General and administrative expense  $3   $49 
Research and development expense   145    406 
Total depreciation and amortization expense  $148   $455 

 

8. LEASES

 

The Company leases facilities and certain equipment under noncancelable leases that expire at various dates through November 2027. 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

 

In November 2022, the Company entered into an operating lease for approximately 63,156 rentable square feet of warehouse, manufacturing, office, and lab space. The initial term of the lease is five years, and it expires on November 30, 2027. The Company has a one-time option to renew for an additional five years. The initial base rent under this lease is $59,998 per month ($0.95 per sq. ft.) for the first year of the initial lease term and increases 4.0% per annum thereafter. Because the rate implicit in the lease is not readily determinable, the Company used an incremental borrowing rate of approximately 10% to determine the present value of the lease payments.

 

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 3 to 8 months as of March 31, 2023 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.

 

In March 2023, the Company negotiated a buyout of a financing lease liability of $0.2 million in exchange for the leased equipment and some additional lab equipment. As the leased equipment ROU asset had previously been impaired to zero, the buyout resulted in the Company recording a gain on termination of the lease of $0.1 million, that has been recorded in general and administrative expenses on the condensed consolidated income statement for the period ended March 31, 2023.

 

As of March 31, 2023, the maturities of operating and finance lease liabilities were as follows (in thousands):

 

   Operating leases*   Finance leases 
2023 (excluding the three months ended March 31, 2023)  $478   $45 
2024   793     
2025   781     
2026   813     
2027   772     
Total lease payments   3,637    45 
Less:          
Imputed interest   (729)   (1)
Total  $2,908   $44 

 

*2023 amounts shown above are net of cash inflows for tenant improvement allowances expected to be received during the year.

 

14

 

 

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

 

Finance leases

 

  

March 31,

2023

  

December 31,

2022

 
Finance lease right-of-use assets included within property and equipment, net  $     4   $     4 
           
Current finance lease liabilities included within other current liabilities  $45   $293 
Non-current finance lease liabilities included within other long-term liabilities       41 
Total  $45   $334 

 

Operating leases

 

  

March 31,

2023

  

December 31,

2022

 
Current operating lease liabilities included within other current liabilities  $413   $394 
Operating lease liabilities – non-current   2,495    2,632 
Total  $2,908   $3,026 

 

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

 

   2023   2022 
   For the Three Months Ended March 31, 
   2023   2022 
Operating lease costs included within operating costs and expenses  $395   $318 
Finance lease costs:          
Amortization of right-of-use assets  $   $51 
Interest on lease liabilities   7    16 
Total  $7   $67 

 

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

 

   2023   2022 
   For the Three Months Ended March 31, 
   2023   2022 
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash out flows from operating leases  $192   $264 
Operating cash out flows from finance leases  $7   $16 
Financing cash out flows from finance leases  $72   $116 

 

15

 

 

As of March 31, 2023 and December 31, 2022, the weighted average remaining lease term for operating leases was 4.6 and 4.8 years, respectively, and the weighted average discount rate used for operating leases was 9.70% and 9.69%, respectively. As of March 31, 2023 and December 31, 2022, the weighted average remaining lease term for finance leases was 0.7 and 1.2 years, respectively, and the weighted average discount rate used for finance leases was 8.25% and 9.67%, respectively.

 

9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

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

 

  

March 31,

2023

  

December 31,

2022

 
Accounts payable  $244   $459 
Salaries and other compensation   517    463 
Legal and accounting   264    71 
Accrued severance   63    16 
Benefit plan accrual   66    66 
Clinical trials   369    131 
Other   191    174 
Total accounts payable and accrued expenses  $1,714   $1,380 

 

10. OTHER CURRENT LIABILITIES

 

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

 

  

March 31,

2023

  

December 31,

2022

 
Current finance lease liabilities  $45   $293 
Current operating lease liabilities   413    394 
Total other current liabilities  $458   $687 

 

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 March 31, 2023, the Company had 6,357 shares available for future issuances under the 2020 Plan.

 

16

 

 

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 March 31, 2023, the Company had 10,920 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 March 31, 2023, the Company had 14,246 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:

 

   Number of Shares   Weighted-Average Exercise Price 
Outstanding – December 31, 2022   182,311   $188.50 
Granted      $ 
Forfeited   (21,653)  $163.66 
Outstanding – March 31, 2023   160,658   $191.85 
Options exercisable, March 31, 2023   158,459   $193.22 

 

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. As of March 31, 2023, the Company had 5,584 shares available for future issuances under the ESPP.

 

17

 

 

Restricted Stock

 

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

 

   Number of Shares 
Unvested - December 31, 2022   256,435 
Granted   42,986 
Vested   (66,820)
Forfeited   (38,483)
Unvested – March 31, 2023   194,118 

 

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):

 

   2023   2022 
   For the Three Months Ended 
   March 31, 
   2023   2022 
General and administrative expense  $31   $546 
Research and development expense   15    216 
Total stock-based compensation expense  $46   $762 

 

12. STOCKHOLDERS’ EQUITY

 

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 March 31, 2023.

 

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.

 

18

 

 

As the March 2022 Warrants and placement agent warrants could each require cash settlement in certain scenarios, the March 2022 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 expenses within the accompanying condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 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).

 

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 March 31, 2023. 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 March 31, 2023. 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 June 2022 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.

 

19

 

 

The following table summarizes warrant activity for the three months ended March 31, 2023:

 

  

Outstanding

December 31, 2022

  

Warrants

Issued

   Warrants Exercised  

Outstanding

March 31, 2023

 
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   4,787,823            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 three months ended March 31, 2022. No common stock was sold under the Sales Agreement.

 

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:

 

Numerator:  2023   2022 
   For the Three Months Ended 
   March 31,   March 31, 
Numerator:  2023   2022 
Net loss, primary  $(4,243)  $(3,771)
Less: gain from change in fair value of warrant liabilities       (4,694)
Net loss, diluted  $(4,243)  $(8,465)

 

Denominator:  2023   2022 
   For the Three Months Ended 
   March 31,   March 31, 
Denominator:  2023   2022 
Basic weighted average number of common shares   7,320,754    3,364,535 
Potentially dilutive effect of warrants       211,435 
Diluted weighted average number of common shares   7,320,754    3,575,970 

 

20

 

 

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:

 

   2023   2022 
   For the Three Months Ended 
   March 31,   March 31, 
   2023   2022 
Stock options   160,658    212,428 
Restricted stock   194,118    174,054 
Common stock warrants   4,787,823    66,708 
Shares committed under ESPP   5,584    1,923 

 

14. 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, Lead Plaintiff filed its brief in opposition to the Company’s motion on December 2, 2022, and the Company filed its reply brief to the Lead Plaintiff brief in opposition on December 23, 2022. Oral argument on the Company’s motion to dismiss the Amended Complaint was held March 6, 2023. Following oral argument, the judge ruled that the Amended Complaint be dismissed with prejudice and requested that the Company, through its counsel, submit a proposed opinion and order. The Company and Lead Plaintiff subsequently reached an agreement stipulating to the form of the opinion and order, waiving the Lead Plaintiff’s right to appeal, and waiving the Company’s right to seek sanctions under Rule 11 of the Federal Rules of Civil Procedure. The final opinion and order dismissing the Amended Complaint with prejudice was issued by the judge on April 19, 2023.

 

21

 

 

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. After the order of dismissal with prejudice of the class action lawsuit described above and exhaustion of all appeals by the Lead Plaintiff, the stay of the Stockholder Derivative Complaint will expire. The Company believes the allegations in the Stockholder Derivative Complaint are without merit and intends to defend the litigation vigorously after the stay expires. 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 March 31, 2023, 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 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 months ended March 31, 2023 and 2022, the Company incurred expenses totaling $0.4 million and $0.2 million, respectively. Either party may terminate the agreement without cause on 60 days’ notice to the other party.

 

15. 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. 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):

 

   2023   2022 
   For the Three Months Ended 
   March 31, 
   2023   2022 
Net revenues:          
Reportable segments:          
Regenerative medicine  $   $ 
Contract services       741 
Total net revenues  $   $741 
           
Net (loss)/income:          
Reportable segments:          
Regenerative medicine  $

(4,243

)  $(3,545)
Contract services       (226)
Total net loss  $(4,243)  $(3,771)

 

 

22

 

 

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, 2022, 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.

 

PolarityTE is a clinical stage biotechnology company developing regenerative tissue products and biomaterials. Until the end of April 2022, PolarityTE also operated a pre-clinical research business. 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, we have incurred substantial operating losses and our 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 our costs in the foreseeable future, we expect we will continue to incur substantial operating losses as we pursue an investigational new drug application (“IND”) and a biologics license application (“BLA”). As described in further detail below, we will need to seek financing from external sources over the foreseeable future to fund our operations.

 

On December 27, 2022, we issued a press release announcing that we signed a non-binding letter of intent (the “LOI”) with Michael Brauser (“Brauser”) for him to make an offer to acquire 100% of our outstanding equity interests at a proposed offering price of $1.03 per common share, which would be paid entirely in cash. Completion of the transaction was subject to Brauser conducting due diligence investigations, the negotiation and execution of definitive transaction documents, Brauser successfully acquiring a majority of the outstanding common stock of the Company, and other customary closing conditions. The LOI provided that Brauser would pursue due diligence and the parties would endeavor to negotiate the terms of the definitive transaction documents during the period ending March 15, 2023. We and Brauser were unable to complete negotiation and drafting of definitive documents by March 15, 2023, and the LOI terminated on that date. Even though the LOI terminated, new proposals for a potential transaction between us and Mr. Brauser are under discussion, and we are also pursuing a process of evaluating our financial resources, product opportunities, and business plan with a view to advancing the interests of our stockholders.

 

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. FDA approval of the IND was given in January 2022, which allowed us to commence the first of two pivotal studies needed to support a BLA. Our first 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 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 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 March 31, 2023, we had $6.4 million in cash and cash equivalents and working capital of approximately $6.8 million. For the three-month period ended March 31, 2023, cash used in operating activities was $5.1 million, or an average of $1.7 million per month, compared to $6.0 million of cash used in operating activities, or an average of $2.0 million per month, for the three-month period ended March 31, 2022.

 

As of the date of this quarterly report we do not expect that our cash and cash equivalents of $6.4 million as of March 31, 2023, will be sufficient to fund our current business plan including related operating expenses and capital expenditure requirements into the third 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.

 

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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. In the event we determine that additional sources of liquidity will not be available to us or will not allow us to meet our obligations as they become due, we may need to file a voluntary petition for relief under the United States Bankruptcy Code in order to implement a restructuring plan or liquidation.

 

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 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, Subject to the availability of working capital we believe we may be able to complete enrollment of 100 subjects sometime in the second or third calendar quarters of 2024. As enrollment increases, we expect our monthly CRO and related costs of conducting the trial will ramp up.

 

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, 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. 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. In the first quarter of 2023 we recognized $0.3 million of one-time costs for professional services associated with negotiation and due diligence activities related to the December 27, 2022 non-binding letter of intent with Michael Brauser for him to make an offer to acquire 100% of the outstanding equity interest of the Company.

 

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.

 

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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. In addition, in the event we determine that additional sources of liquidity will not be available to us or will not allow us to meet our obligations as they become due, we may need to file a voluntary petition for relief under the United States Bankruptcy Code in order to implement a restructuring plan or liquidation.

 

Results of Operations

 

Changes in Polarity’s Operations

 

There have been significant changes in our operations affecting our results of operations for the three-month period ended March 31, 2023, compared to three-month period ended March 31, 2022.

 

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 2022 prior to the sale. 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.

 

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Comparison of the three months ended March 31, 2023, compared to the three months ended March 31, 2022

 

   For the Three Months Ended  

Increase

(Decrease)

 
(in thousands)  March 31, 2023   March 31, 2022   Amount   % 
   (Unaudited)         
Net revenues                    
Services  $-   $741   $(741)   (100)%
Total net revenues   -    741    (741)   (100)%
Cost of revenues                    
Services   -    491    (491)   (100)%
Total costs of revenues   -    491    (491)   (100)%
Gross profit   -    250    (250)   (100)%
                     
Operating costs and expenses                    
Research and development   2,282    2,860    (578)   (20)%
General and administrative   2,464    6,209    (3,745)   (60)%
Impairment of assets held for sale   56    54    2    4%
Total operating costs and expenses   4,802    9,123    (4,321)   (47)%
Operating loss   (4,802)   (8,873)   4,071    (46)%
Other income (expense), net                    
Change in fair value of common stock warrant liability   528    5,105    (4,577)   (90)%
Interest income (expense), net   31    (15)   46    (307)%
Other income, net   -    12    (12)   (100)%
Net loss  $(4,243)  $(3,771)  $(472)   13%

 

Net Revenues and Gross Profit. Net revenues decreased $0.7 million, or 100%, for the three-month period ended March 31, 2023, compared to the three-month period ended March 31, 2022, due to the sale of IBEX in April 2022. With the decrease in revenues, cost of revenues also decreased by $0.5 million, or 100%. As a result of these changes gross profit decreased by $0.3 million, or 100%, for the three-month period ended March 31, 2023, compared to the three-month period ended March 31, 2022.

 

Operating Costs and Expenses. Operating costs and expenses decreased $4.3 million, or 47%, for the three-month period ended March 31, 2023, compared to the three-month period ended March 31, 2022.

 

Research and development expenses decreased 20% for the three-month period ended March 31, 2023, compared to the three-month period ended March 31, 2022. The decrease is primarily attributable to the reduction of research and development costs and personnel as the Company focuses on the COVER FDUs Trial. This reduction of costs was offset by higher clinical trial costs related to the COVER FDUs Trial.

 

The amount of general and administrative expenses for the three-month period ended March 31, 2023, decreased $3.7 million compared to the three-month period ended March 31, 2022. We reduced our workforce throughout 2022. Consequently, there were reductions in cash compensation, stock compensation, consulting fees, and travel expense. We incurred professional fees related to a proposed tender offer in the first quarter of 2023, which were lower than the 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.

 

Operating Loss and Net Loss. Operating loss decreased $4.1 million, or 46%, for the three-month period ended March 31, 2023, compared to the three-month period ended March 31, 2022. The decrease in operating loss is due to the reduction in operating expenses for the three-month period ended March 31, 2023, compared to the three-month period ended March 31, 2022, which was only partially offset by the decrease in gross profit due to the sale of IBEX and end of services revenue in 2022.

 

Net loss increased $0.5 million, or 13%, for the three-month period ended March 31, 2023, compared to the three-month period ended March 31, 2022. 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 $0.5 million for the three-month period ended March 31, 2023, compared to gain for change in fair value of common stock warrant liability of $5.1 million for the three-month period ended March 31, 2022. 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.

 

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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

March 31,

 
   2023   2022 
GAAP net loss  $(4,243)  $(3,771)
Change in fair value of common stock warrant liability   (528)   (5,105)
Non-GAAP adjusted net loss attributable to common stockholders – basic & diluted  $(4,771)  $(8,876)
           
GAAP net loss per share attributable to common stockholders          
Basic  $(0.58)  $(1.12)*
Diluted  $(0.58)  $(2.37)*
           
Non-GAAP adjusted net loss per share attributable to common stockholders          
Basic & Diluted  $(0.65)  $(2.64)*

 

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

 

Critical Accounting Policies and Estimates

 

Stock-Based Compensation. We measure all stock-based compensation to employees and non-employees using a fair value method. For stock options with graded vesting, we recognize 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 our historical stock prices. Forfeitures are recognized as they occur. The fair value of restricted stock grants is measured based on the fair market value of our common stock on the date of grant and amortized to compensation expense over the vesting period of, generally, six months to three years.

 

Common Stock Warrant Liability. The fair value of the common stock warrant liability is estimated using the Monte Carlo simulation model, which involves simulated future stock price amounts over the remaining life of the commitment. The fair value estimate is affected by our stock price as well as estimated change of control considerations.

 

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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: