NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION
Asset
Acquisition and Name Change.
On December 1, 2016
,
Majesco Entertainment Company (
n/k/a
PolarityTE, Inc.), a
Delaware corporation (the “Company”) entered into an agreement to acquire the assets of Polarity NV (as defined below),
a regenerative medicine company. The asset acquisition was subject to shareholder approval, which was received on March 10, 2017
and the transaction closed on April 7, 2017, as more fully described below. In January, 2017, the Company changed its name to
“PolarityTE, Inc.”
On
December 1, 2016, the Company appointed Dr. Denver Lough as Chief Executive Officer, Chief Scientific Officer and Chairman of
our Board of Directors and Dr. Ned Swanson as Chief Operating Officer of the Company. Until their respective appointments, both
doctors were associated with Johns Hopkins University, Baltimore, Maryland, as full-time residents. On December 1, 2016, Dr. Lough
assigned the patent application as well as all related intellectual property to a newly-formed Nevada corporation, Polarityte,
Inc. (“Polarity NV”), and the Company entered into an Agreement and Plan of Reorganization (the “Agreement”)
with Polarity NV and Dr. Lough. As a result, at closing, the patent application would be owned by the Company without the need
for further assignments or recordation with the Patent Trademark Office.
On
April 7, 2017, the Company issued 7,050 shares of its newly authorized Series E Preferred Stock (the “Series E Preferred
Shares”) convertible into an aggregate of 7,050,000 shares of the Company’s common stock with a fair value of approximately
$104.7 million which is equal to 7,050,000 common shares times $14.85 (the closing price of the Company’s common stock as
of April 7, 2017) to Dr. Lough for the purchase of the Polarity NV’s assets. Since the assets purchased were in-process
research and development assets, the total purchase price was immediately expensed as research and development - intellectual
property acquired since they have no alternative future use.
Drs.
Lough and Swanson lead the Company’s current efforts focused on scientific research and development and in this regard on
December 1, 2016, the Company leased laboratory space and purchased laboratory equipment in Salt Lake City, Utah. Subsequent expenditures
include the purchase of medical equipment, including microscopes for high end real-time imaging of cells and tissues required
for tissue engineering and regenerative medicine research. The Company has added additional facilities, and established university
and scientific relationships and collaborations in order to pursue its business. None of these activities were performed by Dr.
Lough or Dr. Swanson prior to December 1, 2016 in connection with their university positions or privately.
Dr.
Lough is the named inventor under a pending patent application for a novel regenerative medicine and tissue engineering platform
filed in the United States and elsewhere. The Company believes that its future success depends significantly on its ability to
protect its inventions and technology. Prior to December 1, 2016, no employees, consultants or partners engaged in any business
activity related to the patent application and no licenses or contracts were granted related to the patent application, other
than professional services related to preparation and filing of the patent.
There
was never any intent to acquire an ongoing business and no ongoing business was acquired. The asset is preserved in a stand-alone
entity merely as a vehicle to provide the Company a seamless means to acquire the asset (a patent application) without undue cost,
expense and time. Polarity NV has never had employees and, therefore, no employees were acquired in the transaction.
The
Company adopted ASU 2017-01,
Business Combinations (Topic 805), Clarifying the Definition of a Business
, during the first
quarter of fiscal 2017. In accordance with ASU 2017-01 we analyzed the above transaction as follows:
Step
1 - Is substantially all the fair value of the gross assets acquired concentrated in a single or (group of similar) identifiable
asset(s)? - The Company has a proposal to acquire a single intellectual property asset and no employees on the acquisition date.
Step
2 - Evaluate whether an input and a substantive process exists? Does the set have outputs? - The set does not yet have outputs,
as Polarity NV’s intellectual property does not generate any revenue. Without outputs, the set requires employees that form
an organized workforce with skills, knowledge, or experience to perform an acquired process that is critical to the ability to
create outputs to qualify as a business. Polarity NV never had any employees or workforce. On December 1, 2016, prior to any Polarity
NV acquisition, the Company hired Denver Lough as its Chief Executive and Chief Scientific Officer and Edward Swanson as Chief
Operating Officer. Both of these executives were employed full-time by Johns Hopkins University and were not employed by Polarity
NV. In December 2016, the Company established a clinical advisory board and added three members in December 2016 and three more
in January 2017. Establishing the clinical advisory board and hiring a COO are critical to establishing at the Company for the
first time a workforce that has the knowledge and experience to obtain regulatory approval of the Company’s intellectual
property. Therefore, the acquisition of an intellectual property asset and no employees from Polarity NV on April 7, 2017 did
not represent the acquisition of an organized workforce with the necessary skills and experience to create outputs.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Discontinued
Operations.
On June 23, 2017, the Company sold Majesco Entertainment Company, a Nevada corporation and wholly-owned subsidiary
of the Company (“Majesco Sub”) to Zift Interactive LLC, a Nevada limited liability company pursuant to a purchase
agreement. Pursuant to the terms of the agreement, the Company sold 100% of the issued and outstanding shares of common stock
of Majesco to Zift, including all of the right, title and interest in and to Majesco Sub’s business of developing, publishing
and distributing video game products through mobile and online digital downloading. Pursuant to the terms of the agreement, the
Company will receive total cash consideration of approximately $100,000 ($5,000 upon signing the agreement and 19 additional monthly
payments of $5,000) plus contingent consideration based on net revenues valued at $0. As of July 31, 2017, the Company received
$10,000 in cash consideration.
As
a result of transactions contemplated above, the Company disposed entirely of its gaming business assets and intends to devote
its resources and attention to its regenerative medicine efforts going forward.
General.
The accompanying condensed consolidated financial statements present the financial results of PolarityTE, Inc. and its wholly
owned subsidiaries; Polarity NV, Majesco Sub and Majesco Europe Limited. Majesco Europe Limited was dissolved during the year
ended October 31, 2016 and Majesco Sub was sold on June 23, 2017.
Segments.
With the sale of Majesco Sub on June 23, 2017, the Company now solely operates in its Regenerative Medicine segment.
Regenerative
Medicine
Through
its regenerative medicine efforts, the Company is developing the proprietary tissue engineering platform invented by Dr. Denver
Lough to translate regenerative products into clinical application. Preliminarily, the technological platform has demonstrated
the potential capacity to grow fully functional tissue across the entire spectrum of the musculoskeletal and integumentary systems,
including skin, muscle, bone, cartilage, peripheral nerve, fat, and fascia. Preliminary results indicate it has applications across
solid organ and specialty tissue regeneration as well, including bowel, liver, kidney, and urethra. The product furthest in the
development pipeline is an autologous (tissue from the patient themselves) skin regeneration construct, SkinTE
TM
,
to regenerate fully functional skin with all of its layers, including epidermis, dermis, hypodermis, and all appendages including
hair and glands. The Company is preparing SkinTE
TM
for clinical testing and market entry. The platform provides a
pipeline of products to follow in parallel, with plans for serial clinical and market entry, and each addressing separate and
similarly sized potential markets. The Company’s approach seeks to benefit from fewer regulatory and capital barriers to
market entry, avoiding the long timelines associated with three phase trials and their associated costs seen with other competing
technologies and therapeutics. The regenerative medicine business model being pursued takes advantage of the smaller regulatory
hurdles, with streamlined product development from cell/tissue in vitro and ex vivo testing, to small and large animal preclinical
models, manufacturing technology transfer, and ultimately clinical application and market entry occurring in a mapped out stepwise
fashion for each product.
NASDAQ
listing.
On January 6, 2017, PolarityTE, Inc., was notified by The NASDAQ Stock Market, LLC of failure to comply with Nasdaq
Listing Rule 5605(b)(1) which requires that a majority of the directors comprising the Company’s Board of Directors be considered
“independent”, as defined under the Rule. The notice had no immediate effect on the listing or trading of the Company’s
common stock on The NASDAQ Capital Market and the common stock continued to trade on The NASDAQ Capital Market under the symbol
“COOL”.
On
February 22, 2017, the Company regained compliance with Listing Rule 5605(b)(1), the independent director requirement for continued
listing on The NASDAQ Stock Market, with the appointment of Mr. Steve Gorlin and Dr. Jon Mogford, and the matter is now closed.
PolarityTE’s common stock will continue to be listed on The NASDAQ Capital Market.
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
period. Accordingly, they do not include all information and notes required by generally accepted accounting principles for complete
financial statements. The Company’s financial results are impacted by the seasonality of the retail selling season and the
timing of the release of new titles. 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 October 31, 2016 has been derived from the audited financial statements
at that date but does not include all of the information and footnotes required by accounting principles generally accepted in
the United States of America for complete financial statements. These interim condensed consolidated financial statements should
be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended October
31, 2016 filed with the Securities and Exchange Commission on Form 10-K on December 30, 2016.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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; Polarity NV, Majesco Sub and Majesco Europe Limited. Majesco Europe Limited was dissolved during the
year ended October 31, 2016 and Majesco Sub was sold on June 23, 2017. Significant intercompany accounts and transactions have
been eliminated in consolidation.
Cash
and cash equivalents.
Cash equivalents consist of highly liquid investments with original maturities of three months or less
at the date of purchase. At various times, the Company has deposits in excess of the Federal Deposit Insurance Corporation limit.
The Company has not experienced any losses on these accounts.
Accounts
Payable and Accrued Expenses.
The carrying amounts of accounts payable and accrued expenses approximate fair value as these
accounts are largely current and short term in nature.
Property
and Equipment.
Property and equipment is stated at cost. Depreciation and amortization is being provided for by the straight-line
method over the estimated useful lives of the assets, generally five years. Amortization of leasehold improvements is provided
for over the shorter of the term of the lease or the life of the asset.
Income
Taxes.
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. The Company evaluates the potential for realization of deferred tax
assets at each quarterly balance sheet date and records a valuation allowance for assets for which realization is not more likely
than not.
Stock
Based Compensation.
The Company measures all stock-based compensation to employees using a fair value method and records such
expense in general and administrative and research and development expenses. Compensation expense for stock options with cliff
vesting is recognized on a straight-line basis over the vesting period of the award, based on the fair value of the option on
the date of grant. 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.
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. The volatility factor is determined based on
the Company’s historical stock prices.
The
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 amortized over the vesting period of, generally, six months to three years.
Loss
Per Share.
Basic 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. Diluted loss per share excludes the potential impact
of common stock options, unvested shares of restricted stock and outstanding common stock purchase warrants because their effect
would be anti-dilutive due to our net loss.
Commitments
and Contingencies.
We are subject to claims and litigation in the ordinary course of our business. We record a liability for
contingencies when the amount is both probable and reasonably estimable. We record associated legal fees as incurred.
Accounting
for Warrants
. The Company accounts for the issuance of common stock purchase warrants issued in connection with the equity
offerings in accordance with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies
as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash
settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or
liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an
event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement
or settlement in shares (physical settlement or net-share settlement). In addition, under ASC 815, registered common stock warrants
that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement
are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the condensed consolidated
balance sheet as a current liability.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Change
in Fair Value of Warrant Liability.
The Company assessed the classification of common stock purchase warrants as of the date
of each offering and determined that certain instruments met the criteria for liability classification. Accordingly, the Company
classified the warrants as a liability at their fair value and adjusts the instruments to fair value at each reporting period.
This liability is subject to re-measurement at each balance sheet date until the warrants are exercised or expired, and any change
in fair value is recognized as “change in fair value of warrant liability” in the condensed consolidated statements
of operations. The fair value of the warrants has been estimated using a Black-Scholes valuation model (see Note 7).
Reverse
stock-split
. On July 27, 2016, Majesco Entertainment Company (the “Company”) filed a certificate of amendment
(the “Amendment”) to its Restated Certificate of Incorporation with the Secretary of State of the State of Delaware
in order to effectuate a reverse stock split of the Company’s issued and outstanding common stock, par value $0.001 per
share on a one (1) for six (6) basis, effective on July 29, 2016 (the “Reverse Stock Split”).
The
Reverse Stock Split was effective with The NASDAQ Capital Market (“NASDAQ”) at the open of business on August 1, 2016.
The par value and other terms of Company’s common stock were not affected by the Reverse Stock Split. The Company’s
post-Reverse Stock Split common stock has a new CUSIP number, 560690 406. The Company’s transfer agent, Equity Stock Transfer
LLC, acted as exchange agent for the Reverse Stock Split.
As
a result of the Reverse Stock Split, every six shares of the Company’s pre-Reverse Stock Split common stock was combined
and reclassified into one share of the Company’s common stock. No fractional shares of common stock were issued as a result
of the Reverse Stock Split. Stockholders who otherwise would be entitled to a fractional share shall receive a cash payment in
an amount equal to the product obtained by multiplying (i) the closing sale price of our common stock on the business day immediately
preceding the effective date of the Reverse Stock Split as reported on NASDAQ by (ii) the number of shares of our common stock
held by the stockholder that would otherwise have been exchanged for the fractional share interest.
All
common share and per share amounts have been restated to show the effect of the Reverse Stock Split.
Reclassifications.
Certain previously reported amounts have been reclassified to conform with the current financial statement presentation. One
reclassification relates to discontinued operations. Another represents a reclassification of approximately $1.8 million from
general and administrative expenses to research and development expenses for the six months ended April 30, 2017.
Estimates.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America 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 are the recoverability
of advance payments for capitalized software development costs and intellectual property licenses, the valuation of warrant liability,
stock based compensation and the valuation allowances for deferred tax benefits. Actual results could differ from those estimates.
Recently
Adopted Accounting Pronouncements
In
August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(“ASU No.
2014-15”) that requires management to evaluate whether there are conditions and events that raise substantial doubt about
the Company’s ability to continue as a going concern within one year after the financial statements are issued on both an
interim and annual basis. Management is required to provide certain footnote disclosures if it concludes that substantial doubt
exists or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern. The Company
adopted ASU No. 2014-15 on November 1, 2016 and its adoption did not have a material impact on the Company’s financial statements.
In
January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805) Clarifying the Definition of a Business
. The
amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business
affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for
annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted this guidance
effective November 1, 2016.
Recent
Accounting Pronouncements.
In
February 2016, FASB issued ASU No. 2016-02,
Leases (Topic 842),
which supersedes FASB ASC Topic 840,
Leases (Topic 840)
and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors.
The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on
the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine
whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease,
respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater
than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to
existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15,
2018, with early adoption permitted upon issuance. When adopted, the Company does not expect this guidance to have a material
impact on our financial statements.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based
Payment Accounting
. Under ASU No. 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies
in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as
income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates
the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies
to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore,
ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception
to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer
with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of
taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a
company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding
obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash
flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments
by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting
the estimate when it is likely to change, as is currently required. The amendments of this ASU are effective for reporting periods
beginning after December 15, 2016, with early adoption permitted but all of the guidance must be adopted in the same period. The
Company is currently assessing the impact that ASU No. 2016-09 will have on its condensed consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480)
and Derivatives and Hedging (Topic 815)
:
I. Accounting for Certain Financial Instruments with Down Round Features; II.
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception,
(ASU 2017-11). Part I of this update addresses the
complexity of accounting for certain financial instruments with down round features. Down round features are features of certain
equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of
future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments
(such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument
or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from
Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content
is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain
nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not
have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December
15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related
disclosures.
3.
GOING CONCERN
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The Company has experienced net losses and negative cash flows
from operations since its inception. The Company has sustained cumulative losses of approximately $249.4 million as of July 31,
2017, has negative working capital and has not generated positive cash flows from operations. The continuation of the Company
as a going concern is dependent upon continued financial support from its shareholders, potential collaborations, the ability
of the Company to obtain necessary equity and/or debt financing to continue operations, and the attainment of profitable operations.
These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company cannot
make any assurances that additional financings will be available to it and, if available, completed on a timely basis, on acceptable
terms or at all. If the Company is unable to complete a debt or equity offering, execute a collaboration arrangement or otherwise
obtain sufficient financing when and if needed, it would negatively impact its business and operations and could also lead to
the reduction or suspension of the Company’s operations and ultimately force the Company to cease operations. These financial
statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary should the Company be unable to continue as a going concern.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets consist of the following (in thousands):
|
|
July 31, 2017
|
|
|
October 31, 2016
|
|
Legal retainer
|
|
$
|
60
|
|
|
$
|
-
|
|
Prepaid insurance
|
|
|
86
|
|
|
|
22
|
|
Tax receivable
|
|
|
-
|
|
|
|
18
|
|
Trade show deposit
|
|
|
160
|
|
|
|
-
|
|
Other prepaids
|
|
|
71
|
|
|
|
-
|
|
Deposits
|
|
|
32
|
|
|
|
-
|
|
Other assets
|
|
|
2
|
|
|
|
7
|
|
Total prepaid expenses and other current assets
|
|
$
|
411
|
|
|
$
|
47
|
|
5.
PROPERTY AND EQUIPMENT, NET
Property
and equipment, net, consist of the following (in thousands):
|
|
July 31, 2017
|
|
|
October 31, 2016
|
|
Medical equipment
|
|
$
|
2,193
|
|
|
$
|
-
|
|
Computers and software
|
|
|
198
|
|
|
|
61
|
|
Furniture and equipment
|
|
|
109
|
|
|
|
78
|
|
Total property and equipment, gross
|
|
|
2,500
|
|
|
|
139
|
|
Accumulated depreciation
|
|
|
(427
|
)
|
|
|
(121
|
)
|
Total property and equipment, net
|
|
$
|
2,073
|
|
|
$
|
18
|
|
6.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consist of the following (in thousands):
|
|
July 31, 2017
|
|
|
October 31, 2016
|
|
Accounts payable
|
|
$
|
56
|
|
|
$
|
-
|
|
Due to Zift
|
|
|
66
|
|
|
|
-
|
|
Medical equipment purchase
|
|
|
108
|
|
|
|
-
|
|
Salaries and other compensation
|
|
|
662
|
|
|
|
463
|
|
Legal and accounting
|
|
|
454
|
|
|
|
-
|
|
Other accruals
|
|
|
93
|
|
|
|
11
|
|
Total accounts payable and accrued expenses
|
|
$
|
1,439
|
|
|
$
|
474
|
|
Salaries
and other compensation include accrued payroll expense and employer 401K plan contributions.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7.
STOCKHOLDERS’ EQUITY
Convertible
preferred stock as of July 31, 2017 consisted of the following (in thousands, except share amounts):
|
|
Shares
Authorized
|
|
|
Shares Issued and
Outstanding
|
|
|
Net
Carrying
Value
|
|
|
Aggregate
Liquidation
Preference
|
|
|
Common Shares
Issuable Upon
Conversion
|
|
Series A
|
|
|
8,830,000
|
|
|
|
3,146,671
|
|
|
$
|
769
|
|
|
$
|
2,140
|
|
|
|
713,245
|
|
Series B
|
|
|
54,250
|
|
|
|
47,689
|
|
|
|
4,020
|
|
|
|
-
|
|
|
|
794,806
|
|
Series C
|
|
|
26,000
|
|
|
|
17,965
|
|
|
|
1,401
|
|
|
|
-
|
|
|
|
417,791
|
|
Series D
|
|
|
170,000
|
|
|
|
26,667
|
|
|
|
312
|
|
|
|
-
|
|
|
|
44,445
|
|
Series E
|
|
|
7,050
|
|
|
|
7,050
|
|
|
|
104,693
|
|
|
|
-
|
|
|
|
7,050,000
|
|
Other
authorized, unissued
|
|
|
912,700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
10,000,000
|
|
|
|
3,246,042
|
|
|
$
|
111,195
|
|
|
$
|
2,140
|
|
|
|
9,020,287
|
|
Convertible
preferred stock as of October 31, 2016 consisted of the following (in thousands, except share amounts):
|
|
Shares
Authorized
|
|
|
Shares Issued and
Outstanding
|
|
|
Net
Carrying
Value
|
|
|
Aggregate
Liquidation
Preference
|
|
|
Common Shares
Issuable Upon
Conversion
|
|
Series A
|
|
|
8,830,000
|
|
|
|
7,138,158
|
|
|
$
|
1,745
|
|
|
$
|
4,854
|
|
|
|
1,189,693
|
|
Series B
|
|
|
54,250
|
|
|
|
54,201
|
|
|
|
4,569
|
|
|
|
-
|
|
|
|
903,362
|
|
Series C
|
|
|
26,000
|
|
|
|
25,763
|
|
|
|
2,010
|
|
|
|
-
|
|
|
|
429,392
|
|
Series D
|
|
|
170,000
|
|
|
|
156,332
|
|
|
|
1,829
|
|
|
|
-
|
|
|
|
260,553
|
|
Other
authorized, unissued
|
|
|
919,750
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
10,000,000
|
|
|
|
7,374,454
|
|
|
$
|
10,153
|
|
|
$
|
4,854
|
|
|
|
2,783,000
|
|
Series
A Preferred Shares
The
Series A Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value
of such Series A Preferred Share, plus all accrued and unpaid dividends, if any, on such Series A Preferred Share, as of such
date of determination, divided by the conversion price. The stated value of each Preferred Share is $0.68 and the initial conversion
price is $4.08 (current conversion price is $3.00) per share, each subject to adjustment for stock splits, stock dividends, recapitalizations,
combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells, or is deemed to issue
or sell, shares of its common stock at a per share price that is less than the conversion price then in effect, the conversion
price shall be reduced to such lower price, subject to certain exceptions. Pursuant to the Certificate of Designations, Preferences
and Rights of the 0% Series A Convertible Preferred Stock of PolarityTE, Inc., the Company is prohibited from incurring debt or
liens, or entering into new financing transactions without the consent of the lead investor (as defined in the December Subscription
Agreements) as long as any of the Series A Preferred Shares are outstanding. The Series A Preferred Shares bear no dividends.
The
holders of Series A Preferred Shares shall vote together with the holders of common stock on all matters on an as if converted
basis, subject to certain conversion and ownership limitations, and shall not vote as a separate class. Notwithstanding the foregoing,
the conversion price for purposes of calculating voting power shall in no event be lower than $3.54 per share. At no time may
all or a portion of the Series A Preferred Shares be converted if the number of shares of common stock to be issued pursuant to
such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number
of shares of common stock which would result in such Holder beneficially owning (as determined in accordance with Section 13(d)
of the 1934 Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time; provided, however,
that the holder may waive the 4.99% limitation at which time he may not own beneficially own more than 9.99% of all the common
stock outstanding at such time.
The
Series A Preferred Shares do not represent an unconditional obligation to be settled in a variable number of shares of common
stock, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly,
the Series A Preferred Shares are considered equity hosts and recorded in stockholders’ equity.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
Company entered into separate Registration Rights Agreements with each Series A Preferred Shares Investor, (as amended on January
30, 2015 and March 31, 2015, the “December Registration Rights Agreement”). The Company agreed to use its best efforts
to file by March 31, 2015 a registration statement covering the resale of the shares of common stock issuable upon exercise or
conversion of the Series A Preferred Shares and to maintain its effectiveness until all such securities have been sold or may
be sold without restriction under Rule 144 of the Securities Act. In the event the Company fails to satisfy its obligations under
the December Registration Rights Agreements, the Company is required to pay to the Investors on a monthly basis an amount equal
to 1% of the investors’ investment, up to a maximum of 12%. On March 31, 2015, the Company and the required holders of Series
A Preferred Shares amended the registration rights agreement to extend the filing deadline for the registration statement to June
30, 2015.
Series
B Preferred Shares
The
Series B Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value
of such Series B Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series B Preferred Shares, as of such
date of determination, divided by the conversion price. The stated value of each Preferred Share is $140.00 and the initial conversion
price is $8.40 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions
or other similar events. The Company is prohibited from effecting a conversion of the Series B Preferred Shares to the extent
that, as a result of such conversion, such holder would beneficially own more than 4.99% of the number of shares of common stock
outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series B Preferred
Shares, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Subject to such
beneficial ownership limitations, each holder is entitled to vote on all matters submitted to stockholders of the Company on an
as converted basis, based on a conversion price of $8.40 per shares. The Series B Preferred Shares rank junior to the Series A
Preferred Shares and bear no dividends. All of the convertible preferred shares do not represent an unconditional obligation to
be settled in a variable number of shares, are not redeemable and do not contain fixed or indexed conversion provisions similar
to debt instruments. Accordingly, the convertible preferred shares are considered equity hosts and recorded in stockholders’
equity.
Series
C Preferred Shares
The
Series C Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value
of such Series C Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series C Preferred Shares, as of such
date of determination, divided by the conversion price. The stated value of each Series C Preferred Share is $120.00 per share,
and the initial conversion price is $7.20 (current conversion price is $5.16) per share, each subject to adjustment for stock
splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the
Company issues or sells, or is deemed to issue or sell, shares of common stock at a per share price that is less than the conversion
price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions and provided that
the conversion price may not be reduced to less than $5.16, unless and until such time as the Company obtains shareholder approval
to allow for a lower conversion price. The Company is prohibited from effecting a conversion of the Series C Preferred Shares
to the extent that, as a result of such conversion, such May Investor would beneficially own more than 4.99% of the number of
shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of
the Series C Preferred Shares, which beneficial ownership limitation may be increased by the holder up to, but not exceeding,
9.99%. Subject to the beneficial ownership limitations discussed previously, each holder is entitled to vote on all matters submitted
to stockholders of the Company, and shall have the number of votes equal to the number of shares of common stock issuable upon
conversion of such holder’s Series C Preferred Shares, based on a conversion price of $7.80 per share. The Series C Preferred
Shares bear no dividends and shall rank junior to the Company’s Series A Preferred Shares but senior to the Company’s
Series B Preferred Shares.
In
connection with the sale of the Series C Preferred Shares, the Company also entered into separate registration rights agreements
(the “May Registration Rights Agreement”) with each Investor. The Company agreed to use its best efforts to file a
registration statement to register the Shares and the common stock issuable upon the conversion of the Series C Preferred Shares,
within thirty days following the Closing Date, to cause such registration statement to be declared effective within ninety days
of the filing day and to maintain the effectiveness of the registration statement until all of such shares of common stock have
been sold or are otherwise able to be sold pursuant to Rule 144 without restriction. In the event the Company fails to satisfy
its obligations under the Registration Rights Agreement, the Company is obligated to pay to the Investors on a monthly basis,
an amount equal to 1% of the Investor’s investment, up to a maximum of 12%. Effective as of the original filing deadline
of the registration statement, the Company obtained the requisite approval from the Investors for the waiver of its obligations
under the May Registration Rights Agreement.
The
Company evaluated the guidance ASC 480-10
Distinguishing Liabilities from Equity and
ASC 815-40
Contracts in an Entity’s
Own Equity
to determine the appropriate classification of the instruments. The Series C Preferred Shares do not represent
an unconditional obligation to be settled in a variable number of shares of common stock, are not redeemable and do not contain
fixed or indexed conversion provisions similar to debt instruments. Accordingly, the Series C Preferred Shares are considered
equity hosts and recorded in stockholders’ equity.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Series
D Preferred Shares
The
Preferred D Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of
such Preferred D Shares, plus all accrued and unpaid dividends, if any, on such Preferred D Share, as of such date of determination,
divided by the conversion price. The stated value Preferred D Shares is $1,000 per share and the initial conversion price is $600
per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other
similar events. The Company is prohibited from effecting a conversion of the Preferred D Shares to the extent that, as a result
of such conversion, such investor would beneficially own more than 4.99% of the number of shares of Common Stock outstanding immediately
after giving effect to the issuance of shares of Common Stock upon conversion of the Preferred D Shares. Upon 61 days written
notice, the beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Except as otherwise
required by law, holders of Series D Preferred Shares shall not have any voting rights. Pursuant to the Certificate of Designations,
Preferences and Rights of the 0% Series D Convertible Preferred Stock, the Preferred D Shares bear no dividends and shall rank
senior to the Company’s other classes of capital stock.
Series
E Preferred Shares
The
Preferred E Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of
such Preferred E Shares, plus all accrued and unpaid dividends, if any as of such date of determination, divided by the conversion
price. The stated value of each Preferred E Share is $1,000 and the initial conversion price is $1.00 per share, each subject
to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Preferred
E Shares, with respect to dividend rights and rights on liquidation, winding-up and dissolution, in each case will rank senior
to the Company’s common stock and all other securities of the Company that do not expressly provide that such securities
rank on parity with or senior to the Preferred E Shares. Until converted, each Preferred E Share is entitled to two votes for
every share of common stock into which it is convertible on any matter submitted for a vote of stockholders. The Preferred E Shares
participate on an “as converted” basis with all dividends declared on the Company’s common stock.
April
2016 Registered Common Stock and Warrant Offering
On
April 13, 2016, the Company entered into a Securities Purchase Agreement with certain institutional investors providing for the
issuance and sale by the Company of 250,000 shares of the Company’s common stock, par value $0.001 per share at an offering
price of $6.00 per share, for net proceeds of $1.4 million after deducting placement agent fees and expenses. In addition, the
Company sold to purchasers of common stock in this offering, warrants to purchase 187,500 shares of its common stock. The common
shares and the Warrant Shares were offered by the Company pursuant to an effective shelf registration statement on Form S-3, which
was initially filed with the Securities and Exchange Commission on October 22, 2015 and declared effective on December 7, 2015.
The closing of the offering occurred on April 19, 2016.
Each
Warrant is immediately exercisable for two years, but not thereafter, at an exercise price of $6.90 per share. Subject to limited
exceptions, a holder of warrants will not have the right to exercise any portion of its warrants if the holder, together with
its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately
after giving effect to such exercise. The exercise price and number of warrants are subject to adjustment in the event of any
stock dividends and splits, reverse stock split, stock dividend, recapitalization, reorganization or similar transaction. The
Warrants were classified as liabilities and measured at fair value, with changes in fair value recognized in the Condensed Consolidated
Statements of Operations in other expenses (income) until they were exchanged for shares of common stock on January 18, 2017.
The initial recognition of the Warrants resulted in an allocation of the net proceeds from the offering to a warrant liability
of approximately $318,000, with the remainder being attributable to the common stock sold in the offering.
Preferred
Share Conversion Activity
During
the nine months ended July 31, 2017, 3,991,487 shares of Convertible Preferred Stock Series A, 6,512 shares of Convertible Preferred
Stock Series B, 7,798 shares of Convertible Preferred Stock Series C and 129,665 shares of Convertible Preferred Stock Series
D were converted into 1,232,793 shares of common stock.
During
the nine months ended July 31, 2016, 1,638,810 shares of Convertible Preferred Stock Series A and 12,001 shares of Convertible
Preferred Stock Series D were converted into 293,137 shares of common stock.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Common
Stock
On
January 4, 2016, the Company declared a special cash dividend of an aggregate of $10.0 million to holders of record on January
14, 2016 of its outstanding shares of: (i) common stock (ii) Series A Convertible Preferred Stock; (iii) Series B Convertible
Preferred Stock; (iv) Series C Convertible Preferred Stock and (v) Series D Convertible Preferred Stock. The holders of record
of the Company’s outstanding preferred stock participated in the dividend on an “as converted” basis. Approximately
$6.0 million of the special cash dividend relates to preferred stock shares.
On
January 6, 2016, certain employees exercised their options at $4.08 in exchange for the Company’s common stock for an aggregated
amount of 31,656 shares.
On
December 16, 2016, the Company sold an aggregate of 759,333 shares of its common stock to certain accredited investors pursuant
to separate subscription agreements at a price of $3.00 per share for gross proceeds of $2.3 million.
On
January 18, 2017, the Company entered into separate exchange agreements (each an “Exchange Agreement”) with certain
accredited investors (the “Investors”) who purchased warrants to purchase shares of the Company’s common stock
(the “Warrants”) pursuant to the prospectus dated April 13, 2016. In 2016, the Company issued 250,000 shares of the
Company’s common stock and Warrants to purchase 187,500 shares of common stock (taking into account the reverse split of
the Company’s common stock on a 1 for 6 basis effective with The NASDAQ Stock Market LLC on August 1, 2016). The common
stock and Warrants were offered by the Company pursuant to an effective shelf registration statement. Under the terms of the Exchange
Agreement, each Investor exchanged each Warrant it purchased in the Offering for 0.3 shares of common stock. Accordingly, the
Company issued an aggregate of 56,250 shares of common stock in exchange for the return and cancellation of 187,500 Warrants.
During
the nine months ended July 31, 2017, certain employees exercised their options at a weighted-average exercise price of $4.85 in
exchange for the Company’s common stock for an aggregated amount of 231,404 shares. The Company received approximately $1.1
million from the exercise of stock options.
8.
FAIR VALUE MEASUREMENTS
In
accordance with ASC 820, Fair Value Measurements, 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.
|
In
connection with the April 19, 2016 common stock offering, the Company issued warrants to purchase an aggregate of 187,500 shares
of common stock. These warrants were exercisable at $6.90 per share and expire on April 19, 2018. These warrants were analyzed
and it was determined that they require liability treatment. Under ASC 815, registered common stock warrants that require the
issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for
as derivative liabilities. The Company classifies these derivative warrant liabilities on the condensed consolidated balance sheet
as a current liability.
The
fair value of these warrants at January 18, 2017 and October 31, 2016 was determined to be approximately $78,000 and $70,000,
respectively, as calculated using Black-Scholes with the following assumptions: (1) stock price of $3.62 and $3.58, respectively;
(2) a risk-free rate of 0.97% and 0.75%, respectively; and (3) an expected volatility of 68% and 61%, respectively.
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. At July 31, 2017, there was no warrant liability balance.
The
following table sets forth the changes in the estimated fair value for our Level 3 classified derivative warrant liability (in
thousands):
|
|
Warrant Liability
|
|
Fair value - October 31, 2016
|
|
$
|
70
|
|
Change in fair value
|
|
|
8
|
|
Exchanged - January 18, 2017 (see Note 7)
|
|
|
(78
|
)
|
Fair value - July 31, 2017
|
|
$
|
-
|
|
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9.
STOCK BASED COMPENSATION ARRANGEMENTS
Stock-based
compensation expense during the three months ended July 31, 2017 and 2016 amounted to approximately $3.7 million and $1.6 million,
respectively. Stock-based compensation expense (including stock based compensation recorded in discontinued operations) during
the nine months ended July 31, 2017 and 2016 amounted to approximately $11.8 million and $2.8 million, respectively. Stock-based
compensation expense is recorded in general and administrative and research and development expenses in the accompanying consolidated
statements of operations.
On
February 8, 2017, the Board appointed Steve Gorlin as a Class II director with a term expiring in 2019 and Dr. Jon Mogford as
a Class III director with a term expiring in 2017 to fill vacancies created upon the resignations of Messrs. Brauser and Honig.
In addition, Mr. Gorlin was appointed as a member of each of the Board’s Audit, Compensation and Nominating and Corporate
Governance Committees. Each of Mr. Gorlin and Dr. Mogford are deemed an “independent” director as such term is defined
by the rules of The NASDAQ Stock Market LLC. There are no family relationships between either of Mr. Gorlin and Dr. Mogford and
any of our other officers and directors. Mr. Gorlin and Dr. Mogford were each granted (i) an option to purchase up to 50,000 shares
of the Company’s common stock at an exercise price equal to $4.72 per share (the “Options”) which Options will
vest in 24 equal monthly installments commencing on the one month anniversary of the grant date and (ii) a restricted stock award
of 50,000 shares of common stock that will vest in 24 equal monthly installments commencing on the one month anniversary of the
grant date (the “RSUs”). The Options and the RSUs were granted pursuant to the Company’s 2017 Equity Incentive
Plan (the “2017 Plan”). The 2017 Plan, the vesting and the exercise of the Options and the vesting of the RSUs are
subject to stockholder approval (which was considered perfunctory given management’s high level of ownership interest).
A
summary of the Company’s employee stock option activity in the nine months ended July 31, 2017 is presented below:
|
|
Number
of
shares
|
|
|
Weighted-Average
Exercise
Price
|
|
Outstanding - October 31, 2016
|
|
|
383,210
|
|
|
$
|
5.74
|
|
Granted
|
|
|
2,715,000
|
|
|
$
|
3.49
|
|
Exercised
|
|
|
(231,404
|
)
|
|
$
|
4.85
|
|
Outstanding - July 31, 2017
|
|
|
2,866,806
|
|
|
$
|
3.68
|
|
Options exercisable - July 31, 2017
|
|
|
997,008
|
|
|
$
|
3.88
|
|
Weighted-average fair value of options granted during the period
|
|
|
|
|
|
$
|
2.37
|
|
A
summary of the Company’s non-employee stock option activity in the nine months ended July 31, 2017 is presented below:
|
|
Number
of
shares
|
|
|
Weighted-Average
Exercise
Price
|
|
Outstanding - October 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
52,000
|
|
|
$
|
4.71
|
|
Outstanding - July 31, 2017
|
|
|
52,000
|
|
|
$
|
4.71
|
|
Options exercisable - July 31, 2017
|
|
|
10,833
|
|
|
$
|
4.71
|
|
The
value of employee and non-employee stock option grants is amortized over the vesting period of, generally, one to three years.
As of July 31, 2017, there was approximately $2.8 million of unrecognized compensation cost related to non-vested employee and
non-employee stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 0.7 years.
The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the nine months ended July 31, 2017:
Risk
free annual interest rate
|
|
|
1.78-2.28
|
%
|
Expected
volatility
|
|
|
71.65-86.34
|
%
|
Expected
life
|
|
|
5.04-6.00
|
|
Assumed
dividends
|
|
None
|
|
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A
summary of the Company’s restricted stock activity in the nine months ended July 31, 2017 is presented below:
|
|
Number
of
shares
|
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Unvested - October 31, 2016
|
|
|
274,829
|
|
|
$
|
6.00
|
|
Granted
|
|
|
1,031,000
|
|
|
$
|
4.56
|
|
Vested
|
|
|
(1,011,466
|
)
|
|
$
|
4.22
|
|
Unvested - July 31, 2017
|
|
|
294,363
|
|
|
$
|
7.07
|
|
During
the nine months ended July 31, 2017, the Company granted 1,031,000 restricted shares to employees and non-employees.
The
weighted-average fair value of restricted shares granted during the nine months ended July 31, 2017 was $4.56. The total fair
value of restricted stock granted during the nine months ended July 31, 2017 was approximately $4.7 million.
The
value of restricted stock grants is measured based on its fair value on the date of grant and amortized over the vesting period
of, generally, six months to three years. As of July 31, 2017, there was approximately $2.0 million of unrecognized compensation
cost related to unvested restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting
period of 0.6 years.
10.
INCOME TAXES
Due
to the Company’s history of losses and uncertainty of future taxable income, a valuation allowance sufficient to fully offset
net operating losses and other deferred tax assets has been established. The valuation allowance will be maintained until sufficient
positive evidence exists to support a conclusion that a valuation allowance is not necessary. The Company’s effective tax
rate for the nine months ended July 31, 2017 and 2016 differed from the expected U.S. federal statutory rate primarily due to
the change in the valuation allowance. The issuance of Preferred Stock in connection with the Polarity acquisition will likely
result in limitations on the utilization of the Company’s net operating loss carryforwards under IRS section 382.
11.
LOSS PER SHARE
Shares
of common stock issuable under convertible preferred stock, warrants and options and shares subject to restricted stock grants
were not included in the calculation of diluted earnings per common share for the three months and nine months ended July 31,
2017 and 2016, as the effect of their inclusion would be anti-dilutive.
The
table below provides total potential shares outstanding, including those that are anti-dilutive, on July 31, 2017 and 2016:
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
Shares issuable upon exercise of warrants
|
|
|
-
|
|
|
|
187,500
|
|
Shares issuable upon conversion of preferred stock
|
|
|
9,020,287
|
|
|
|
2,783,000
|
|
Shares issuable upon exercise of stock options
|
|
|
2,918,806
|
|
|
|
394,278
|
|
Non-vested shares under restricted stock grants
|
|
|
294,363
|
|
|
|
303,477
|
|
12.
COMMITMENTS AND CONTINGENCIES
Contingencies
On
February 26, 2015, a complaint for patent infringement was filed in the United States District Court for the Eastern District
of Texas by Richard Baker, an individual residing in Australia, against Microsoft, Nintendo, the Company and a number of other
game publisher defendants. The complaint alleges that the Company’s Zumba Fitness Kinect game infringed plaintiff’s
patents in motion tracking technology. The plaintiff is representing himself pro se in the litigation and is seeking monetary
damages in the amount of $1.3 million. The Company, in conjunction with Microsoft, is defending itself against the claim and has
certain third-party indemnity rights from developers for costs incurred in the litigation. In August 2015, the defendants jointly
moved to transfer the case to the Western District of Washington. On May 17, 2016, the Washington Court issued a scheduling order
that provides that defendants leave to jointly file an early motion for summary judgement in June 2016. On June 17, 2016, the
defendants jointly filed a motion for summary judgment that stated that none of the defendants, including the Company, infringed
upon the asserted patent. On July 9, 2016, Mr. Baker opposed the motion. On July 15, 2016, the defendants jointly filed a reply.
The briefing on the motion is now closed. The Court has not yet issued a decision or indicated if or when there will be oral argument
on the motion.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Intelligent
Verification Systems, LLC (“IVS”), filed a patent infringement complaint on September 20, 2012, in the United States
District Court for the Eastern District against the Company and Microsoft Corporation. In March 2015, the court issued an order
excluding the evidence proffered by IVS in support of its alleged damages, including the opinion of its damages expert. IVS appealed
that decision. On January 19, 2016, the Federal Circuit denied IVS’ appeal and affirmed the district court’s orders
that excluded the plaintiff’s damages expert and dismissed the case.
In
addition to the item above, the Company at times may be a party to claims and suits in the ordinary course of business. We record
a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably
estimated. The Company has not recorded a liability with respect to the matter above. While the Company believes that it has valid
defenses with respect to the legal matter pending and intends to vigorously defend the matter above, given the uncertainty surrounding
litigation and our inability to assess the likelihood of a favorable or unfavorable outcome, it is possible that the resolution
of the matter could have a material adverse effect on our consolidated financial position, cash flows or results of operations.
Commitments
The
Company leases office space in Hazlet, New Jersey at a cost of approximately $1,100 per month under a lease agreement that expires
on March 31, 2018.
The
Company also leases space in Salt Lake City, Utah at a cost of approximately $24,044 per month under a lease agreement that expires
on March 31 2018.
The
Company has entered into employment agreements with key executives that contain severance terms and change of control provisions.
13.
RELATED PARTIES
In
January 2015, the Company entered into an agreement with Equity Stock Transfer for transfer agent services. A former Board member
of the Company is a co-founder and chief executive officer of Equity Stock Transfer. Fees under the agreement were approximately
$2,000 and $0, in the nine months ended July 31, 2017 and 2016, respectively.
14.
DISCONTINUED OPERATIONS
On
July 31, 2015, the Company transferred to Zift Interactive LLC (“Zift”), a newly-formed subsidiary, certain rights
under certain of its publishing licenses related to developing, publishing and distributing video game products through retail
distribution for a term of one year. The Company transferred Zift to its former chief executive officer, Jesse Sutton. In exchange,
the Company received Mr. Sutton’s resignation from the position of chief executive officer of the Company, including waiver
of any severance payments and the execution of a separation agreement, together with his agreement to serve as a consultant to
the Company. In addition, Zift will pay the Company a specified percent of its net revenue from retail sales on a quarterly basis.
In
addition, the Company entered into a conveyance agreement with Zift under which it assigned to Zift certain assets used in the
retail business and Zift agreed to assume and indemnify the Company for liabilities and claims related to the retail business,
including customer claims for price protection and promotional allowances. The assets transferred to Zift included cash in an
amount of $800,000, of which $400,000 was transferred immediately and the remaining $400,000 was payable by the Company in twelve
equal consecutive monthly installments of $33,000 commencing August 1, 2015, and certain accounts receivable and inventory with
an aggregate carrying value of approximately $87,000.
On
June 23, 2017, the Company sold Majesco Entertainment Company, a Nevada corporation and wholly-owned subsidiary of the Company
(“Majesco”) to Zift (the “Purchaser”) pursuant to a purchase agreement (the “Purchase Agreement”).
Pursuant to the terms of the Purchase Agreement, the Company sold to the Purchaser 100% of the issued and outstanding shares of
common stock of Majesco, including all of the right, title and interest in and to Majesco’s business of developing, publishing
and distributing video game products through mobile and online digital downloading. Pursuant to the terms of the Purchase Agreement,
the Company will receive total cash consideration of $100,000 ($5,000 upon signing the Purchase Agreement and 19 additional monthly
payments of $5,000) plus contingent consideration based on net revenues valued at $0. The Company received $10,000 in cash consideration
as of July 31, 2017. Subsequent to July 31, 2017, the Company received another $5,000.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
Company recorded a gain of $100,000 on the sale of Majesco Entertainment Company, calculated as the difference between the $100,000
in non-contingent consideration and the net carrying amount of Majesco Entertainment Company, which was $0. The gain on the sale
of Majesco Entertainment Company may be adjusted in future periods by the contingent consideration, based upon the achievement
of pre-determined revenue milestones of more than $50,000 per month.
The
sale of Majesco Entertainment Company, classified in the Company’s video games segment, qualifies as a discontinued operation
as the sale represents a strategic shift that has (or will have) a major effect on operations and financial results.
The
results of operations from the discontinued business for the three and nine months ended July 31, 2017 and 2016 are as follows
(in thousands):
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
143
|
|
|
$
|
315
|
|
|
$
|
558
|
|
|
$
|
1,318
|
|
Expenses
|
|
|
176
|
|
|
|
1,085
|
|
|
|
1,007
|
|
|
|
2,169
|
|
Loss from discontinued operations
|
|
$
|
(33
|
)
|
|
$
|
(770
|
)
|
|
$
|
(449
|
)
|
|
$
|
(851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations
|
|
$
|
100
|
|
|
$
|
-
|
|
|
$
|
100
|
|
|
$
|
-
|
|
The
assets and liabilities related to the discontinued operations as of July 31, 2017 and October 31, 2016 are as follows (in thousands):
|
|
July 31, 2017
|
|
|
October 31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Current assets related to discontinued operations
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
-
|
|
|
$
|
113
|
|
Capitalized software development costs and license fees
|
|
|
-
|
|
|
|
50
|
|
|
|
$
|
-
|
|
|
$
|
163
|
|
|
|
|
|
|
|
|
|
|
Current liabilities related to discontinued operations
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
-
|
|
|
$
|
810
|
|
|
|
$
|
-
|
|
|
$
|
810
|
|
The
cash flows from the discontinued business for the nine months ended July 31, 2017 and 2016 are as follows (in thousands):
|
|
For the nine months ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
|
(349
|
)
|
|
|
(851
|
)
|
Adjustments to reconcile net loss from discontinued operations to net cash used in discontinued operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
11
|
|
|
|
21
|
|
Stock based compensation expense
|
|
|
1,118
|
|
|
|
994
|
|
Amortization of capitalized software development costs and license fees
|
|
|
50
|
|
|
|
150
|
|
Gain on sale of Majesco Sub
|
|
|
(100
|
)
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
113
|
|
|
|
107
|
|
Capitalized software development costs and license fees
|
|
|
-
|
|
|
|
(21
|
)
|
Accounts payable and accrued expenses
|
|
|
(810
|
)
|
|
|
(218
|
)
|
Payable to Zift
|
|
|
-
|
|
|
|
(19
|
)
|
Net cash provided by discontinued operating activities
|
|
|
33
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Cash received from sale of Majesco Sub
|
|
|
10
|
|
|
|
-
|
|
Net cash provided by discontinued investing activities
|
|
|
10
|
|
|
|
-
|
|
15.
SUBSEQUENT EVENTS
On
September 14, 2017, the Company announced that it has entered into securities purchase agreements with investors for the sale
of $15.2 million of Series F Convertible Preferred Stock. The Investor will also receive 276,364 Warrants exercisable at $30.00
per share of common stock.
The Series F Convertible Preferred stock converts at $27.50 per share into a total of
552,727 shares of common stock, upon conversion.