NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION
PolarityTE,
Inc. (together with its subsidiaries, the “Company”) is a clinical stage biotechnology company developing regenerative tissue
products and biomaterials. The Company also operated a laboratory testing and clinical research business until the end of April 2022.
The
Company’s first regenerative tissue product is SkinTE. In July 2021, the Company submitted an investigational new drug application
(“IND”) for SkinTE to the United States Food and Drug Administration (the “FDA”) through its subsidiary, PolarityTE
MD, Inc. Prior to June 1, 2021, the Company sold SkinTE under Section 361 of the Public Health Service Act in 2020 and into 2021 and,
after the Company’s decision to file an IND under Section 351 of that Act, under an enforcement discretion position stated by the
FDA in a regenerative medicine policy framework to help facilitate regenerative medicine therapies. The FDA’s stated period of
enforcement discretion ended May 31, 2021. Consequently, the Company terminated commercial sales of SkinTE on May 31, 2021, ceased its
SkinTE commercial operations, and transitioned to a clinical stage company pursuing an IND for SkinTE. As a result, there were no product
sales from commercial SkinTE after June 2021. The only revenues recognized subsequent to June 2021 for SkinTE were nominal amounts collected
on accounts for product shipped prior to the end of May 2021 that were not previously recognized because of concerns with collectability.
No revenue for SkinTE was recognized during the three and nine months ended September 30, 2022.
At
the beginning of May 2018, the Company acquired a preclinical research and veterinary sciences business, which has been used for preclinical
studies on the Company’s regenerative tissue products and to offer preclinical research services to unrelated third parties on
a contract basis. The Company sold the business at the end of April 2022 and ceased to recognize services revenues after the sale. Consequently,
the Company is no longer engaged in any revenue generating business activity and its operations are now focused on advancing the IND
for SkinTE.
The
accompanying interim condensed consolidated financial statements of the Company are unaudited, but in the opinion of management, reflect
all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented.
Accordingly, they do not include all information and notes required by accounting principles generally accepted in the United States
of America (U.S. GAAP) for complete financial statements. The results of operations for interim periods are not necessarily indicative
of results to be expected for the entire fiscal year. The balance sheet at December 31, 2021, has been derived from the audited consolidated
financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial
statements. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended December 31, 2021, filed with the Securities and Exchange Commission on Form 10-K on
March 30, 2022.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly
owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
Use
of estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Among the more significant estimates included
in these financial statements is the extent of progress toward completion of contracts, stock-based compensation, the valuation allowance
for deferred tax assets, the valuation of common stock warrant liabilities, and the impairment of property and equipment. Actual results
could differ from those estimates.
Cash
and cash equivalents. Cash equivalents consist of highly liquid investments with original maturities of three months or less from
the date of purchase. As of September 30, 2022, the Company did not hold any cash equivalents.
Assets
and Liabilities Held for Sale. Assets and liabilities to be disposed (“disposal group”) of by sale are reclassified into
assets held for sale and liabilities held for sale on the Company’s condensed consolidated balance sheet. The reclassification
occurs when an agreement to sell exists, or management has committed to a plan to sell the assets within one year. Disposal groups are
measured at the lower of carrying value or fair value less costs to sell and are not depreciated or amortized. The fair value of a disposal
group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the
lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value of the disposal group.
Leases.
The Company determines if an arrangement is a lease at inception. Right-of-use (“ROU”) assets represent the Company’s
right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments
arising from the lease. Finance leases are reported in the condensed consolidated balance sheet in property and equipment and other current
and long-term liabilities. The current portion of operating lease obligations are included in other current liabilities. The classification
of the Company’s leases as operating or finance leases along with the initial measurement and recognition of the associated ROU
assets and lease liabilities is performed at the lease commencement date. The measurement of lease liabilities is based on the present
value of future lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its
incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future
lease payments. The ROU asset is based on the measurement of the lease liability and also includes any lease payments made prior to or
on lease commencement and excludes lease incentives and initial direct costs incurred, as applicable. The lease terms may include options
to extend or terminate the lease when it is reasonably certain the Company will exercise any such options. Rent expense for the Company’s
operating leases is recognized on a straight-line basis over the lease term. Amortization expense for the ROU asset associated with its
finance leases is recognized on a straight-line basis over the term of the lease and interest expense associated with its finance leases
is recognized on the balance of the lease liability using the effective interest method based on the estimated incremental borrowing
rate.
The
Company has lease agreements with lease and non-lease components. As allowed under ASC 842, the Company has elected not to separate lease
and non-lease components for any leases involving real estate and office equipment classes of assets and, as a result, accounts for the
lease and non-lease components as a single lease component. The Company has also elected not to apply the recognition requirement of
ASC 842 to leases with a term of 12 months or less for all classes of assets.
Impairment
of Long-Lived Assets. The Company reviews long-lived assets, including property and equipment for impairment whenever events or changes
in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers
in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant
negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is
performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result
from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would
be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows.
Revenue
Recognition. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that
reflects the consideration that the Company expects to receive in exchange for those goods or services. To determine revenue recognition
for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify
the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv)
allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies
a performance obligation.
The
Company recorded product revenues primarily from the sale of SkinTE, its regenerative tissue product. When the Company marketed its SkinTE
product, it was sold to healthcare providers (customers), primarily through direct sales representatives. Product revenues consisted
of a single performance obligation that the Company satisfied at a point in time. In general, the Company recognized product revenue
upon delivery to the customer.
In
the contract services segment, the Company recorded service revenues from the sale of its preclinical research services, which included
delivery of preclinical studies and other research services to unrelated third parties. Service revenues generally consisted of a single
performance obligation that the Company satisfied over time using an input method based on costs incurred to date relative to the total
costs expected to be required to satisfy the performance obligation. The Company believes that
this method provides an appropriate measure of the transfer of services over the term of the performance obligation based on the remaining
services needed to satisfy the obligation. This required the Company to make reasonable estimates of the extent of progress toward
completion of the contract. As a result, unbilled receivables and deferred revenue were recognized based on payment timing and work completed.
Generally, a portion of the payment was due upfront and the remainder upon completion of the contract, with most contracts completing
in less than a year. Contract services also included research and laboratory testing services to unrelated third parties on a contract
basis. Due to the short-term nature of the services, these customer contracts generally consisted of a single performance obligation
that the Company satisfied at a point in time. The Company satisfied the single performance obligation and recognized revenue upon delivery
of testing results to the customer. As of September 30, 2022 and December 31, 2021, the Company had unbilled receivables of zero and
$0.5 million, respectively, and deferred revenue of zero and $0.1 million, respectively. Revenue of $0.1 million was recognized during
the nine months ended September 30, 2022 that was included in the deferred revenue balance as of December 31, 2021.
Research
and Development Expenses. Costs incurred for research and development are expensed as incurred. Nonrefundable advance payments for
goods or services that will be used or rendered for future research and development activities pursuant to executory contractual arrangements
with third party research organizations are deferred and recognized as an expense as the related goods are delivered or the related services
are performed.
Accruals
for Clinical Trials. As part of the process of preparing its financial statements, the Company is required to estimate its expenses
resulting from its obligations under contracts with vendors, clinical research organizations and consultants and under clinical site
agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary
from contract to contract and may result in payment terms that do not match the periods over which materials or services are provided
under such contracts. The Company’s objective is to reflect the appropriate expenses in its financial statements by matching those
expenses with the period in which services are performed and efforts are expended. The Company accounts for these expenses according
to the timing of various aspects of the expenses. The Company determines accrual estimates by taking into account discussion with applicable
personnel and outside service providers as to the progress of clinical trials, or the services completed. During the course of a clinical
trial, the Company adjusts its clinical expense recognition if actual results differ from its estimates. The Company makes estimates
of its accrued expenses as of each balance sheet date based on the facts and circumstances known to it at that time. The Company’s
clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party
vendors. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding
of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result
in it reporting amounts that are too high or too low for any particular period.
Common
Stock Warrant Liability. The Company accounts for common stock warrants issued as freestanding instruments in accordance with applicable
accounting guidance as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. Under certain
change of control provisions, some warrants issued by the Company could require cash settlement which necessitates such warrants to be
recorded as liabilities. Warrants classified as liabilities are remeasured at fair value each period until settled or until classified
as equity.
Stock-Based
Compensation. The Company measures all stock-based compensation to employees and non-employees using a fair value method and records
such expense in general and administrative, research and development, and sales and marketing expenses. For stock options with graded
vesting, the Company recognizes compensation expense over the service period for each separately vesting tranche of the award as though
the award were in substance, multiple awards based on the fair value on the date of grant.
The
fair value for options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived
from the U.S. Treasury yield curve in effect at the time of the grant commensurate with the expected
term of the option. The volatility factor is determined based on the Company’s historical stock prices. Forfeitures are
recognized as they occur.
The
fair value of restricted stock grants is measured based on the fair market value of the Company’s common stock on the date of grant
and recognized as compensation expense over the vesting period of, generally, six months to three years.
Reverse
Stock Split. On May 12, 2022, the Company’s Board of Directors approved a reverse stock split in the ratio of 1-for-25 (“Reverse
Stock Split”). The Reverse Stock Split became effective as of May 16, 2022. Fractional shares resulting from the reverse stock
split were rounded up to the nearest whole share, which resulted in the issuance of a total of 17,024 shares of common stock to implement
the reverse stock split.
The
Company accounted for the reverse stock split on a retrospective basis pursuant to ASC 260, Earnings Per Share. All issued
and outstanding common stock, common stock warrants, stock option awards, exercise prices and per share data have been adjusted in these
condensed consolidated financial statements, on a retrospective basis, to reflect the reverse stock split for all periods presented.
The number of authorized shares and par value of the preferred stock and common stock were not adjusted because of the reverse stock
split.
Net
Loss Per Share. Basic net loss per share of common stock is computed by dividing net loss attributable to common stockholders by
the weighted average number of shares of common stock outstanding for the period. Gains on warrant
liabilities are only considered dilutive when the average market price of the common stock during the period exceeds the exercise price
of the warrants. All common stock warrants issued participate on a one-for-one basis with common stock in the distribution of dividends,
if and when declared by the Board of Directors, on the Company’s common stock. For purposes of computing earnings per share (EPS),
outstanding warrants and preferred stock are considered to participate with common stock in earnings of the Company. Therefore, the Company
calculates basic and diluted EPS using the two-class method. Under the two-class method, net loss for the period is allocated between
common stockholders and participating securities according to dividends declared and participation rights in undistributed losses. No
loss was allocated to the warrants or preferred stock for the three and nine months ended September 30, 2022 and 2021 as the Company
incurred a loss for each period and the warrant and preferred stockholders are not required to absorb losses. The Company has issued
pre-funded warrants from time to time at an exercise price of $0.025 per share. The shares of common stock into which the pre-funded
warrants may be exercised are considered outstanding for the purposes of computing basic earnings per share because the shares may be
issued for little or no consideration, are fully vested, and are exercisable after the original issuance date.
Recent
Accounting Pronouncements
In
June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments-Credit
Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date
based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss
model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This standard was effective
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted.
In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging
(Topic 815) and Leases (Topic 842): Effective Dates, which defers the effective date of Topic 326. As a smaller reporting company,
Topic 326 will now be effective for the Company beginning January 1, 2023. As such, the Company plans to adopt this ASU beginning January
1, 2023. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related
disclosures.
Recently
Adopted Accounting Pronouncements
In
August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an
Entity’s Own Equity (ASU 2020-06). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics
of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Those instruments that do
not have a separately recognized embedded conversion feature will no longer recognize a debt issuance discount related to such a conversion
feature and would recognize less interest expense on a periodic basis. It also removes from ASC 815-40-25-10 certain conditions for equity
classification and amends certain guidance in ASC Topic 260 on the computation of EPS for convertible instruments and contracts in an
entity’s own equity. An entity can use either a full or modified retrospective approach to adopt the ASU’s guidance. The
Company early adopted this ASU for the fiscal year beginning January 1, 2022. The adoption of this ASU did not have a material impact
on the Company’s condensed consolidated financial statements and related disclosures.
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50),
Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic
815-40), which specifies that the effects of modifications or exchanges of freestanding equity-classified written call options that
remain equity after modification or exchange should be recognized depending on the substance of the transaction, whether it be a financing
transaction to raise equity (topic 340), to raise or modify debt (topic 470 and 835), or other modifications or exchanges. If the modification
or exchange does not fall under topics 340, 470, or 835, an entity may be required to account for the effects of such modifications or
exchanges as dividends which should adjust net income (or loss) in the basic EPS calculation. The Company adopted this ASU prospectively
for the fiscal year beginning January 1, 2022. The adoption of this ASU did not have a material impact on the Company’s condensed
consolidated financial statements and related disclosures.
3.
LIQUIDITY AND GOING CONCERN
The
Company is a clinical stage biotechnology company that has incurred recurring losses and negative cash flows from operations since commencing
its biotechnology business in 2017. As of September 30, 2022, the Company had an accumulated deficit of $515.6 million. As of September
30, 2022, the Company had cash and cash equivalents of $16.1 million. The Company has been funded historically through sales of equity
and debt.
These
financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and settle
its liabilities in the normal course of business. The Company’s significant operating losses raise substantial doubt regarding
the Company’s ability to continue as a going concern for at least one year from the date of issuance of these consolidated financial
statements. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset
amounts or amounts of liabilities that might result from the outcome of this uncertainty. Consequently, the future success of the Company
depends on its ability to attract additional capital and, ultimately, on its ability to successfully complete the regulatory approval
process for its product, SkinTE, and develop future profitable operations. The Company will seek additional capital through equity offerings
or debt financing. However, such financing may not be available in the future on favorable terms, if at all.
4.
FAIR VALUE
In
accordance with ASC 820, Fair Value Measurements and Disclosures, financial instruments were measured at fair value using a three-level
hierarchy which maximizes use of observable inputs and minimizes use of unobservable inputs:
| |
● |
Level
1: Observable inputs such as quoted prices in active markets for identical instruments. |
| |
|
|
| |
● |
Level
2: Quoted prices for similar instruments that are directly or indirectly observable in the market. |
| |
|
|
| |
● |
Level
3: Significant unobservable inputs supported by little or no market activity. Financial instruments whose values are determined using
pricing models, discounted cash flow methodologies, or similar techniques, for which determination of fair value requires significant
judgment or estimation. |
Financial
instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair
value measurement. There were no transfers within the hierarchy for any of the periods presented.
The
following table sets forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level
within the fair value hierarchy (in thousands):
SCHEDULE OF FAIR VALUE OF FINANCIAL INSTRUMENTS MEASURED ON RECURRING BASIS
| | |
September 30, 2022 | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| Liabilities | |
| | |
| | |
| | |
| |
| Common stock warrant liability | |
$ | – | | |
$ | – | | |
$ | 2,238 | | |
$ | 2,238 | |
| Total | |
$ | – | | |
$ | – | | |
$ | 2,238 | | |
$ | 2,238 | |
| | |
December 31, 2021 | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| Liabilities | |
| | |
| | |
| | |
| |
| Common stock warrant liability | |
$ | – | | |
$ | – | | |
$ | 6,844 | | |
$ | 6,844 | |
| Total | |
$ | – | | |
$ | – | | |
$ | 6,844 | | |
$ | 6,844 | |
The
Company assesses its assets held for sale, long-lived assets, including property, plant, and equipment and ROU assets at their estimated
fair value on a non-recurring basis. The Company reviews the carrying amounts of such assets when events indicate that their carrying
amounts may not be recoverable. Any resulting impairment would require that the asset be recorded at its fair value. During the nine
months ended September 30, 2022, the Company recognized an impairment charge of $0.2 million related to equipment classified in assets
held for sale. During the nine months ended September 30, 2021, the Company recognized an impairment charge of $0.4 million related to
property and equipment. As of each measurement date, the fair value of assets held for sale and property and equipment was determined
utilizing Level 3 inputs and were based on a market approach. See Notes 7 and Note 15 for additional details.
The
following table presents the change in fair value of the liability classified common stock warrants for the nine months ended September
30, 2022 (in thousands):
SCHEDULE OF FAIR VALUE OF LIABILITY CLASSIFIED COMMON STOCK WARRANTS
| | |
Fair Value at December 31, 2021 | | |
Initial Fair Value at Issuance | | |
(Gain) Loss Upon Change in Fair Value | | |
Liability Reduction Due to Exercises |
|
|
Fair Value at September 30, 2022 | |
| Warrant liabilities | |
| | | |
| | | |
| | | |
|
|
|
|
| | |
| February 14, 2020 issuance | |
$ | 291 | | |
$ | – | | |
$ | (278 | ) | |
|
– |
|
|
$ | 13 | |
| December 23, 2020 issuance | |
| 239 | | |
| – | | |
| (234 | ) | |
|
(8,964 |
) |
|
| 5 | |
| January 14, 2021 issuance | |
| 3,345 | | |
| – | | |
| (3,223 | ) | |
|
– |
|
|
| 122 | |
| January 25, 2021 issuance | |
| 2,969 | | |
| – | | |
| (2,860 | ) | |
|
– |
|
|
| 109 | |
| March 16, 2022 issuance | |
| – | | |
| 3,129 | | |
| (3,073 | ) | |
|
– |
|
|
| 56 | |
| June 8, 2022 issuance | |
| – | | |
| 5,984 | | |
| (4,051 | ) | |
|
– |
|
| | 1,933 |
|
| Total | |
$ | 6,844 | | |
$ | 9,113 | | |
$ | (13,719 | ) | |
|
(8,964 |
) |
|
$ | 2,238 | |
The
following table presents the change in fair value of the liability classified common stock warrants for the nine months ended September
30, 2021 (in thousands):
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
Fair Value at December 31, 2020 | | |
Initial Fair Value at Issuance | | |
(Gain) Loss Upon Change in Fair Value | | |
Liability Reduction Due to Exercises | | |
Fair Value at September 30, 2021 | |
| Warrant liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
| February 14, 2020 issuance | |
$ | 328 | | |
$ | – | | |
$ | (6 | ) | |
$ | – | | |
$ | 322 | |
| December 23, 2020 issuance | |
| 5,647 | | |
| – | | |
| 3,585 | | |
| (8,964 | ) | |
| 268 | |
| January 14, 2021 issuance | |
| – | | |
| 8,629 | | |
| (4,858 | ) | |
| – | | |
| 3,771 | |
| January 25, 2021 issuance | |
| – | | |
| 6,199 | | |
| (2,855 | ) | |
| – | | |
| 3,344 | |
| Inducement loss on initial fair value(1) | |
| – | | |
| – | | |
| 5,197 | | |
| – | | |
| – | |
| Total | |
$ | 5,975 | | |
$ | 14,828 | | |
$ | 1,063 | | |
$ | (8,964 | ) | |
$ | 7,705 | |
| |
(1) |
Concurrent
with the issuance of the January 25, 2021 warrants, upon the exercise of the December 23, 2020 warrants, an inducement loss of $5.2
million was recorded during the nine-month period ended September 30, 2021, as the fair value of the initial warrant liability for
the new warrants of $6.2 million exceeded the gross proceeds received upon sale of the new warrants of approximately $1.0 million.
|
The
Company uses the Monte Carlo simulation model to determine the fair value of the liability classified warrants. Input
assumptions used to measure the fair value of these freestanding instruments are as follows:
SCHEDULE OF FAIR VALUE ASSUMPTIONS OF WARRANTS LIABILITY
| | |
| For the Nine Months ended | |
| | |
| September 30, 2022 | |
| Stock price | |
$ | 0.87 – 8.55 | |
| Exercise price | |
$ | 2.40 – 34.50 | |
| Risk-free rate | |
| 1.95 – 4.23 | % |
| Volatility | |
| 98.4 – 123.6 | % |
| Remaining term (years) | |
| 1.46 – 5.00 | |
| | |
| For the Nine Months ended | |
| | |
| September 30, 2021 | |
| Stock price | |
$ | 16.25
– 30.25 | |
| Exercise price | |
$ | 2.50
– 34.50 | |
| Risk-free rate | |
| 0.42 – 1.13 | % |
| Volatility | |
| 99.0 – 102.8 | % |
| Remaining term (years) | |
| 4.23 – 5.87 | |
5.
ASSETS AND LIABILITIES HELD FOR SALE
Equipment
In
November 2021, the Company committed to a plan to sell a variety of lab equipment within the regenerative medicine products reporting
segment. The lab equipment has been designated as held for sale and is presented as such within the condensed consolidated balance sheet
as of December 31, 2021 and September 30, 2022.
In
September 2022, the Company committed to a plan to sell a variety of lab equipment within the regenerative medicine products reporting
segment. The lab equipment has been designated as held for sale and is presented as such within the condensed consolidated balance sheet
as of September 30, 2022. During the nine months ended September 30, 2022, the Company recorded an impairment of $0.2 million related
to the lab equipment designated as held for sale within the regenerative medicine products reporting segment.
IBEX Sale
At
the beginning of May 2018, the Company acquired a preclinical research and veterinary sciences business, which has been used for preclinical
studies on the Company’s regenerative tissue products and to offer preclinical research services to unrelated third parties on
a contract basis. The Company operated this business through its indirect subsidiary, IBEX Preclinical Research, Inc. (“IBEX”).
Utah CRO Services, Inc., a Nevada corporation (“Utah CRO”), is a direct subsidiary of the Company and held all the outstanding
capital stock of IBEX (the “IBEX Shares”). Utah CRO also holds all the member interest of IBEX Property LLC, a Nevada limited
liability company (“IBEX Property”), that owned two unencumbered parcels of real property in Logan, Utah, consisting of approximately
1.75 combined gross acres of land, together with the buildings, structures, fixtures, and personal property (the “Property”),
which was leased by IBEX Property to IBEX for IBEX to conduct its preclinical research and veterinary sciences business.
In
March 2022, the Company reached a nonbinding understanding with an unrelated third party that contemplated the sale of IBEX, which operates
within the contract services reporting segment, along with IBEX Property. The assets and liabilities related to IBEX were designated
as held for sale. The Company measured the assets and liabilities held for sale at the lower of their carrying value or fair value less
costs to sell. The operating results of IBEX did not qualify for reporting as discontinued operations.
On
April 14, 2022, Utah CRO entered into a Stock Purchase Agreement (the “Stock Agreement”) with an unrelated third party (“Buyer”),
pursuant to which Utah CRO agreed to sell all the outstanding IBEX Shares to Buyer in exchange for an unsecured promissory note in the
principal amount of $0.4 million bearing simple interest at the rate of 10% per annum with interest only payable on a quarterly basis
and all principal and remaining accrued interest due on the five-year anniversary of the closing of the sale of the IBEX Shares to Buyer.
Furthermore, on April 14, 2022, IBEX Property entered into a Real Estate Purchase and Sale Agreement (the “Real Estate Agreement”)
with another unrelated third party (“Purchaser”) pursuant to which IBEX Property agreed to sell to Purchaser the Property
at a gross purchase price of $2.8 million payable in cash at closing of the transaction. The Buyer and Purchaser are affiliates of each
other as a result of common ownership. On April 28, 2022, the parties to the Stock Agreement and Real Estate Agreement closed the transactions
contemplated thereby and on April 29, 2022, the Company received the promissory note described above in the principal amount of $0.4
million and net cash proceeds of $2.3 million, after deducting closing costs and advisory fees, from sale of the Property under the Real
Estate Agreement. As of a result of this transaction, the Company recorded $0.4 million as a long-term note receivable in other assets
within the accompanying condensed consolidated balance sheets as of September 30, 2022. As the sale price less cost to sell was greater
than the carrying value of these assets the Company recognized an insignificant net gain on sale in the second quarter of fiscal year
2022 in other income, net within the accompanying condensed consolidated statement of operations and comprehensive loss for the nine
months ended September 30, 2022.
6.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
The
following table presents the major components of prepaid expenses and other current assets (in thousands):
SCHEDULE
OF PREPAID EXPENSE AND OTHER CURRENT ASSETS
| | |
September 30,
2022 | | |
December 31,
2021 | |
| Other current receivable | |
$ | 97 | | |
$ | 67 | |
| Short term deposit | |
| 359 | | |
| 150 | |
| Prepaid insurance | |
| 627 | | |
| 239 | |
| Prepaid expenses | |
| 298 | | |
| 445 | |
| Deferred offering costs | |
| 98 | | |
| 694 | |
| Total prepaid expenses and other current assets | |
$ | 1,479 | | |
$ | 1,595 | |
7.
PROPERTY AND EQUIPMENT, NET
The
following table presents the components of property and equipment, net (in thousands):
SCHEDULE OF PROPERTY AND EQUIPMENT, NET
| | |
September 30, 2022 | | |
December 31, 2021 | |
| Machinery and equipment | |
$ | 5,777 | | |
$ | 8,502 | |
| Land and buildings | |
| – | | |
| 2,000 | |
| Computers and software | |
| 992 | | |
| 1,129 | |
| Leasehold improvements | |
| 2,038 | | |
| 2,107 | |
| Construction in progress | |
| – | | |
| 133 | |
| Furniture and equipment | |
| 119 | | |
| 123 | |
| Total property and equipment, gross | |
| 8,926 | | |
| 13,994 | |
| Accumulated depreciation | |
| (6,427 | ) | |
| (7,071 | ) |
| Total property and equipment, net | |
$ | 2,499 | | |
$ | 6,923 | |
The
Company sold SkinTE under Section 361 of the Public Health Service Act in 2020 and into 2021 and, after the Company’s decision
to file an IND under Section 351 of that Act, under an enforcement discretion position stated by the FDA in a regenerative medicine policy
framework to help facilitate regenerative medicine therapies. The FDA’s stated period of enforcement discretion ended May 31, 2021.
Consequently, the Company terminated commercial sales of SkinTE on May 31, 2021, and ceased its SkinTE commercial operations. As a result,
there are no product sales from commercial SkinTE after June 2021 and the Company has eliminated or reduced costs associated with commercial
sale of SkinTE.
The
Company evaluated the future use of its commercial property and equipment and recorded an impairment charge of approximately $0.2 million
during the nine months ended September 30, 2022. The impairment charge related to lab equipment designated
as held for sale within the regenerative medicine products
reporting segment.
Depreciation
and amortization expense for property and equipment, including assets acquired under financing leases was as follows (in thousands):
SCHEDULE OF DEPRECIATION AND AMORTIZATION EXPENSE
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
For the Three Months Ended | | |
For the Nine Months Ended | |
| | |
September 30, | | |
September 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| General and administrative expense | |
$ | 14 | | |
$ | 71 | | |
$ | 75 | | |
$ | 667 | |
| Research and development expense | |
| 359 | | |
| 575 | | |
| 1,156 | | |
| 1,416 | |
| Total depreciation and amortization expense | |
$ | 373 | | |
$ | 646 | | |
$ | 1,231 | | |
$ | 2,083 | |
8.
LEASES
The
Company leases facilities and certain equipment under noncancelable leases that expire at various dates through November 2024. These
leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases may
include options to extend or terminate the lease at the election of the Company. These optional periods have not been considered in the
determination of the right-of-use-assets or lease liabilities associated with these leases as the Company did not consider it reasonably
certain it would exercise the options.
Operating
Leases
On
December 27, 2017, the Company entered into a commercial lease agreement (the “Lease”) with Adcomp LLC (the “Landlord”)
pursuant to which the Company leases approximately 178,528 rentable square feet of warehouse, manufacturing, office, and lab space in
Salt Lake City, Utah (the “Property”) from the Landlord. The initial term of the Lease is five years and it expires on November
30, 2022. The Company has a one-time option to renew for an additional five years and an option to purchase the Property at a purchase
price of $17.5 million. The initial base rent under the Lease is $98,190 per month ($0.55 per sq. ft.) for the first year of the initial
lease term and increases 3.0% per annum thereafter. Because the rate implicit in the lease is not readily determinable, the Company has
used an incremental borrowing rate of 10% to determine the present value of the lease payments.
On
December 16, 2021, the Company gave written notice to the Landlord of its election to exercise the option to purchase the Property, and
on March 14, 2022, the Company and Landlord entered into a definitive purchase and sale agreement that provides for a closing of the
transaction on November 15, 2022 (the “Purchase Agreement”). In connection with exercising the option to purchase the Property,
the Company made an earnest money deposit of $150,000 that may be refunded if closing conditions or contingencies running in the Company’s
favor are not satisfied or the Landlord defaults in its obligations under the lease or the purchase agreement for the Property. On October
25, 2021, the Company signed a Purchase and Sale Agreement, the terms of which were finalized on December 10, 2021, and subsequently
amended by Amendment No. 1 thereto dated March 15, 2022 (the “BCG Agreement”), with BCG Acquisitions LLC (“BCG”).
Under the BCG Agreement the Company agreed to sell the Property to BCG or its assigns for $17.5 million after the Company’s purchase
of the Property from the Landlord. Under the BCG Agreement, BCG made an initial earnest money deposit totaling $200,000, which the parties
subsequently agreed to reduce to $150,000, that will be refunded if the Company is unable to complete the purchase of the Property from
the Landlord under the Purchase Agreement on a timely basis, closing conditions or contingencies running in favor of BCG are not satisfied,
or the Company defaults in its obligations under the BCG Agreement. Closing of the foregoing transactions are subject to a number of
risks and uncertainties including, but not limited to, satisfaction of all closing conditions, including obtaining financing for the
purchase, and closing on the purchase of the Property from the Landlord under the Purchase Agreement, and satisfaction of all closing
conditions, including obtaining financing for the purchase, and closing on the sale of the Property to BCG under the BCG Agreement.
In
April 2019, the Company entered into an operating lease to obtain 6,307 square feet of manufacturing, laboratory, and office space. The
lease provided for monthly lease payments subject to annual increases and had an expiration date in April 2024. During 2020, the Company
initiated a business analysis to determine the long-term strategy of the remote facility and cost to remain operational. It was determined
that the Company would cease operations and vacate the facility. The Company terminated the lease on June 30, 2021.
In
November 2021, the Company entered into an operating lease to obtain office equipment with Pacific Office Automation, Inc. The initial
term of the lease is three years and it expires on November 2024. The initial base rent under this lease is $3,983 per month for the
entire lease term and includes a cash incentive of $0.1 million. Because the rate implicit in the lease is not readily determinable,
the Company has used an incremental borrowing rate of 7.42% to determine the present value of the lease payments.
Financing
Leases
In
November 2018 and April 2019, the Company entered into financing leases primarily for laboratory equipment used in research and development
activities. The financing leases have remaining terms that range from less than 1 month to 19 months as of September 30, 2022 and include
options to purchase equipment at the end of the lease. Because the rate implicit in the lease is not readily determinable, the Company
has used an incremental borrowing rate of 10% to determine the present value of the lease payments for these leases.
As
of September 30, 2022, the maturities of operating and finance lease liabilities were as follows (in thousands):
SCHEDULE OF OPERATING AND FINANCE LEASE LIABILITIES
| | |
Operating leases | | |
Finance leases | |
| 2022 (excluding the nine months ended September 30, 2022) | |
$ | 233 | | |
$ | 80 | |
| 2023 | |
| 48 | | |
| 312 | |
| 2024 | |
| 41 | | |
| 42 | |
| Total lease payments | |
| 322 | | |
| 434 | |
| Less: | |
| | | |
| | |
| Imputed interest | |
| (8 | ) | |
| (29 | ) |
| Total | |
$ | 314 | | |
$ | 405 | |
Supplemental
balance sheet information related to leases was as follows (in thousands):
Finance
leases
SCHEDULE OF SUPPLEMENTAL BALANCE SHEET INFORMATION RELATED TO FINANCE AND OPERATING LEASES
| | |
September 30,
2022 | | |
December 31,
2021 | |
| Finance lease right-of-use assets included within property and equipment, net | |
$ | 305 | | |
$ | 461 | |
| | |
| | | |
| | |
| Current finance lease liabilities included within other current liabilities | |
$ | 292 | | |
$ | 329 | |
| Non-current finance lease liabilities included within other long-term liabilities | |
| 113 | | |
| 338 | |
| Total | |
$ | 405 | | |
$ | 667 | |
Operating
leases
| |
|
September
30, 2022 |
|
|
December
31, 2021 |
|
| Current
operating lease liabilities included within other current liabilities |
|
$ |
262 |
|
|
$ |
1,169 |
|
| Operating
lease liabilities – non-current |
|
|
52 |
|
|
|
43 |
|
| Total |
|
$ |
314 |
|
|
$ |
1,212 |
|
The
components of lease expense were as follows (in thousands):
SUMMARY OF COMPONENTS OF LEASE EXPENSE
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
For the Three Months Ended | | |
For the Nine Months Ended | |
| | |
September 30, | | |
September 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Operating lease costs included within operating costs and expenses | |
$ | 318 | | |
$ | 385 | | |
$ | 954 | | |
$ | 1,172 | |
| Finance lease costs: | |
| | | |
| | | |
| | | |
| | |
| Amortization of right-of-use assets | |
$ | 50 | | |
$ | 163 | | |
$ | 151 | | |
$ | 491 | |
| Interest on lease liabilities | |
| 12 | | |
| 24 | | |
| 42 | | |
| 80 | |
| Total | |
$ | 62 | | |
$ | 187 | | |
$ | 193 | | |
$ | 571 | |
Supplemental
cash flow information related to leases was as follows (in thousands):
SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO LEASES
| | |
2022 | | |
2021 | |
| | |
For the Nine Months Ended September 30, | |
| | |
2022 | | |
2021 | |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
| Operating cash out flows from operating leases | |
$ | 952 | | |
$ | 1,243 | |
| Operating cash out flows from finance leases | |
$ | 42 | | |
$ | 80 | |
| Financing cash out flows from finance leases | |
$ | 256 | | |
$ | 413 | |
| Lease liabilities arising from obtaining right-of-use assets: | |
| | | |
| | |
| Remeasurement of operating lease liability due to lease modification/termination | |
$ | – | | |
$ | 386 | |
As
of September 30, 2022 and December 31, 2021, the weighted average remaining lease term for operating leases was 0.8 and 1.0 years, respectively,
and the weighted average discount rate used for operating leases was 9.26% and 9.96%, respectively. As of September 30, 2022 and December
31, 2021, the weighted average remaining lease term for finance leases was 1.4 and 2.0 years, respectively, and the weighted average
discount rate used for finance leases was 9.65% and 9.63%, respectively.
9.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The
following table presents the major components of accounts payable and accrued expenses (in thousands):
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| | |
September 30, 2022 | | |
December 31, 2021 | |
| Accounts payable | |
$ | 351 | | |
$ | 173 | |
| Salaries and other compensation | |
| 610 | | |
| 722 | |
| Legal and accounting | |
| 117 | | |
| 1,082 | |
| Accrued severance | |
| – | | |
| 111 | |
| Benefit plan accrual | |
| 66 | | |
| 102 | |
| Clinical trials | |
| 404 | | |
| 161 | |
| Accrued offering costs | |
| – | | |
| 400 | |
| Accrued property taxes | |
| 202 | | |
| 166 | |
| Other | |
| 145 | | |
| 198 | |
| Total accounts payable and accrued expenses | |
$ | 1,895 | | |
$ | 3,115 | |
10.
OTHER CURRENT LIABILITIES
The
following table presents the major components of other current liabilities (in thousands):
SCHEDULE OF OTHER CURRENT LIABILITIES
| | |
September 30, 2022 | | |
December 31, 2021 | |
| Current finance lease liabilities | |
$ | 292 | | |
$ | 329 | |
| Current operating lease liabilities | |
| 262 | | |
| 1,169 | |
| Short-term financing arrangement | |
| 346 | | |
| – | |
| Other | |
| 4 | | |
| 22 | |
| Total other current liabilities | |
$ | 904 | | |
$ | 1,520 | |
The
short-term financing balance is related to a financing arrangement entered into during the nine months ended September 30, 2022 to fund
an insurance contract. Under the financing arrangement, the amounts will be repaid in nine equal monthly installments, with an interest
rate of 3.85%.
11.
STOCK-BASED COMPENSATION
2020,
2019 and 2017 Equity Incentive Plans
2020
Plan
On
October 25, 2019, the Company’s Board of Directors (the “Board”) approved the Company’s 2020 Stock Option and
Incentive Plan (the “2020 Plan”). The 2020 Plan became effective on December 19, 2019, the date approved by the stockholders.
The 2020 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units,
stock appreciation rights, unrestricted stock awards, dividend equivalent rights, and cash-based awards to the Company’s employees,
officers, directors, and consultants. The Board designated the Compensation Committee of the Board the administrator of the 2020 Plan,
including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and
the terms and conditions of such awards. Up to 419,549 shares of common stock are issuable pursuant to awards under the 2020 Plan. No
grants of awards may be made under the 2020 Plan after the later of December 19, 2029, or the tenth anniversary of the latest material
amendment of the 2020 Plan and no grants of incentive stock options may be made after October 25, 2029. The 2020 Plan provides that effective
on January 1 of each year the number of shares of common stock reserved and available for issuance under the 2020 Plan shall be cumulatively
increased by the lesser of 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31
or such lesser number of shares as determined by the 2020 plan administrator. Pursuant to the 2020 Plan, the number of shares of common
stock available for issuance increased by 131,872 shares during January 2022. On September 9, 2022, the Board approved an amendment to
the Company’s 2020 Stock Option and Incentive Plan to increase the number of shares available for awards by adding 1,450,000 shares
to the 2020 Plan. The increase in shares is subject to stockholder approval at the next annual or special meeting of stockholders. As
of September 30, 2022, the Company had 171,855 shares available for future issuances under the 2020 Plan.
2019
Plan
On
October 5, 2018, the Company’s Board approved the Company’s 2019 Equity Incentive Plan (the “2019 Plan”). The
2019 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock
appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors, and consultants. The
Board designated the Compensation Committee of the Board the administrator of the 2019 Plan, including determining which eligible participants
will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 120,000
shares of common stock are issuable pursuant to awards under the 2019 Plan. Unless earlier terminated by the Board, the 2019 Plan shall
terminate at the close of business on October 5, 2028. As of September 30, 2022, the Company had 7,385 shares available for future issuances
under the 2019 Plan.
2017
Plan
On
December 1, 2016, the Company’s Board approved the Company’s 2017 Equity Incentive Plan (the “2017 Plan”). The
purpose of the 2017 Plan is to promote the success of the Company and to increase stockholder value by providing an additional means
through the grant of awards to attract, motivate, retain and reward selected employees, consultants and other eligible persons. The 2017
Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation
rights and other types of stock-based awards to the Company’s employees, officers, directors, and consultants. The Board designated
the Compensation Committee of the Board the administrator of the 2017 Plan, including determining which eligible participants will receive
awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 292,000 shares
of common stock are issuable pursuant to awards under the 2017 Plan. Unless earlier terminated by the Board, the 2017 Plan shall terminate
at the close of business on December 1, 2026. As of September 30, 2022, the Company had 31,977 shares available for future issuances
under the 2017 Plan.
A
summary of the Company’s employee and non-employee stock option activity is presented below:
SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY
| | |
Number of
Shares | | |
Weighted-Average Exercise Price | |
| Outstanding – December 31, 2021 | |
| 230,912 | | |
$ | 197.75 | |
| Granted | |
| 420 | | |
$ | 12.64 | |
| Forfeited | |
| (41,878 | ) | |
$ | 257.76 | |
| Outstanding – September 30, 2022 | |
| 189,454 | | |
$ | 183.96 | |
| Options exercisable, September 30, 2022 | |
| 172,897 | | |
$ | 197.88 | |
Employee
Stock Purchase Plan (ESPP)
In
May 2018, the Company adopted the Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved 20,000 shares
of common stock for purchase under the ESPP. The initial offering period began January 1, 2019, and ended on June 30, 2019, with the
first purchase date. Subsequent offering periods will automatically commence on each January 1 and July 1 and will have a duration of
six months ending with a purchase date June 30 and December 31 of each year. On each purchase date, ESPP participants will purchase shares
of common stock at a price per share equal to 85% of the lesser of (1) the fair market value per share of the common stock on the offering
date or (2) the fair market value of the common stock on the purchase date.
Restricted
Stock
A
summary of the Company’s employee and non-employee restricted stock activity is presented below:
SCHEDULE OF SHARE-BASED COMPENSATION, RESTRICTED STOCK ACTIVITY
| | |
Number of Shares | |
| Unvested - December 31, 2021 | |
| 206,547 | |
| Granted | |
| – | |
| Vested(1) | |
| (109,516 | ) |
| Forfeited | |
| (7,384 | ) |
| Unvested – September 30, 2022 | |
| 89,647 | |
| |
(1) |
The
number of vested restricted stock units and awards includes shares that were withheld on behalf of employees to satisfy the minimum
statutory tax withholding requirements. |
Stock-Based
Compensation Expense
The
stock-based compensation expense related to stock options, restricted stock awards, and the employee stock purchase plan was as follows
(in thousands):
SCHEDULE OF SHARE-BASED COMPENSATION RELATED TO RESTRICTED STOCK AWARDS AND STOCK OPTIONS
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
For the Three Months Ended | | |
For the Nine Months Ended | |
| | |
September 30, | | |
September 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| General and administrative expense | |
$ | 226 | | |
$ | 911 | | |
$ | 1,154 | | |
$ | 3,245 | |
| Research and development expense | |
| 71 | | |
| 354 | | |
| 435 | | |
| 950 | |
| Sales and marketing expense | |
| – | | |
| – | | |
| – | | |
| 194 | |
| Restructuring and other charges | |
| – | | |
| 52 | | |
| – | | |
| 219 | |
| Total stock-based compensation expense | |
$ | 297 | | |
$ | 1,317 | | |
$ | 1,589 | | |
$ | 4,608 | |
12.
STOCKHOLDERS’ EQUITY
December
2020 Offering
On
December 23, 2020, the Company completed a registered direct offering of 218,000 shares of its common stock, par value $0.001 per share,
pre-funded warrants to purchase up to 209,522 shares of common stock and accompanying common warrants to purchase up to 427,522 shares
of common stock (the “December 2020 Warrants”). Each share of common stock and pre-funded warrant was sold together with
a warrant. The combined offering price of each common stock share and accompanying warrant was $18.7125 and for each pre-funded warrant
and accompanying warrant was $18.6875. The pre-funded warrants had an exercise price of $0.025 each and were exercised in full in January
2021. Each warrant was exercisable for one share of the Company’s common stock at an exercise price of $15.60 per share. The warrants
were immediately exercisable and expire five years from the date of issuance. The holder of the
warrants could not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common
stock immediately after exercise, which percentage could be changed at the holder’s election to a lower percentage at any time
or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the
placement agent for the registered direct offering warrants to purchase up to 6.0% of the aggregate number of common stock shares and
pre-funded warrants sold in the offering (or warrants to purchase up to 25,651 shares of common stock). The placement agent warrants
have substantially the same terms as the warrants, except that the placement agent warrants have an exercise price equal to 125% of the
purchase price per share (or $23.39 per share). The net proceeds to the Company from the offering were $7.2 million, after offering
expenses payable by the Company.
As
the common stock warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the common
stock warrants and placement agent common stock warrants were classified as liabilities upon issuance
and were initially recorded at estimated fair values of $5.2 million and $0.3 million, respectively. Since the pre-funded warrants
did not contain the same cash settlement provision, these warrants were classified as a component of stockholders’ equity within
additional paid-in-capital. The pre-funded warrants are equity classified because they meet characteristics
of the equity classification criteria. The total proceeds from the offering were first allocated to the liability classified warrants,
based on their fair values, with the residual $2.5 million allocated on a relative fair value basis to the common stock and pre-funded
common stock warrants. Issuance costs allocated to the equity classified pre-funded common stock warrants and common stock of $0.3 million
were recorded as a reduction to paid-in capital. Issuance costs allocated to the liability classified warrants of $0.5 million were recorded
as an expense.
January
2021 Offerings
On
January 14, 2021, the Company completed a registered direct offering of 266,800 shares of its common stock, par value $0.001 per share,
pre-funded warrants to purchase up to 96,836 shares of common stock and accompanying common warrants to purchase up to 363,636 shares
of common stock (the “January 14 Warrants”). Each share of common stock and pre-funded warrant was sold together with a warrant.
The combined offering price of each common stock share and accompanying warrant was $27.50 and for each pre-funded warrant and accompanying
warrant was $27.475. The pre-funded warrants had an exercise price of $0.025 each and were exercised in full in January 2021. Each January
14 Warrant is exercisable for one share of the Company’s common stock at an exercise price of $30.00 per share. The January 14
Warrants are immediately exercisable and will expire five years from the date of issuance. The holder of the January 14 Warrants may
not exercise any portion of such warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately
after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage
not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent warrants to
purchase 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up
to 21,818 shares of common stock). The placement agent warrants have substantially the same terms as the warrants, except that the placement
agent warrants have an exercise price equal to 125% of the purchase price per share (or $34.375 per share). The net proceeds to the Company
from the offering were $9.2 million, after direct offering expenses of $0.8 million payable by the Company.
As
the January 14 Warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the January
14 Warrants and placement agent common stock warrants were classified as liabilities upon issuance
and were initially recorded at estimated fair values of $8.1 million and $0.5 million, respectively. Since the pre-funded warrants
did not contain the same cash settlement provision, these warrants are classified as a component of stockholders’ equity within
additional paid-in-capital. The pre-funded warrants were equity classified because they met characteristics
of the equity classification criteria. The total proceeds from the offering were first allocated to the liability classified warrants,
based on their fair values, with the residual $1.4 million allocated on a relative fair value basis to the common stock and pre-funded
common stock warrants. Issuance costs allocated to the equity classified pre-funded common stock warrants and common stock of $0.1 million
were recorded as a reduction to paid-in capital. Issuance costs allocated to the liability classified warrants of $0.7 million were recorded
as an expense.
On
January 22, 2021, the Company entered into a letter agreement with the holder of warrants to exercise the warrants and purchase 427,522
shares of common stock at an exercise price of $15.60 per share that were issued to the holder in the registered direct offering that
closed on December 23, 2020. Under the letter agreement the holder agreed to exercise the 427,522 warrants in full and the Company agreed
to issue and sell to the holder common warrants to purchase up to 320,641 shares of the Company’s common stock, par value $0.001
per share, at a price of $3.125 (the “January 25 Warrants”) (and together with the January 14 Warrants, the “Existing
2021 Warrants”). Each January 25 Warrant is exercisable for one share of Common Stock at an exercise price of $30.00 per share.
The January 25 Warrants are immediately exercisable and will expire five years from the date of issuance. A holder may not exercise any
portion of the January 25 Warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately
after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage
not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent, warrants
to purchase 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase
up to 19,238 shares of common stock). The placement agent warrants have substantially the same terms as the new warrants. The 427,522
warrants issued on December 23, 2020, were exercised on January 22, 2021, and closing of the offering occurred on January 25, 2021. The
Company received gross proceeds of approximately $6.7 million from the exercise of the December 2020 Warrants and gross proceeds of approximately
$1.0 million from the sale of the new warrants.
Immediately
prior to the exercise of the existing 427,522 liability classified December 2020 Warrants in January 2021, a remeasurement loss of $3.6
million was recorded.
As
the new January 25 Warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the new
January 25 Warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded
at estimated fair values of $5.8 million and $0.4 million, respectively. Cash issuance costs of $0.1 million were recorded as an expense.
March
2022 Offering
On
March 16, 2022, the Company completed a registered direct offering of 3,000.000435 shares of Series A convertible preferred stock, 2,000.00029
shares of Series B convertible preferred stock and 655,738 warrants to purchase 655,738 shares of common stock (the “March 2022
Warrants”). Gross proceeds generated by the offering were $5.0 million. The exercise price of each warrant is $8.75 per share,
the warrants become exercisable six months after the date of the offering and will expire two years from the offering date.
Concurrent
with the closing of the offering on March 16, 2022, the Company modified the exercise price of the Existing 2021 Warrants. 363,636 warrants
issued on January 14, 2021, and 320,641 warrants issued on January 25, 2021 were modified to reduce the exercise price from $30 to $8.75
per share. The exercise price of the placement agent warrants was not modified. The Existing 2021 Warrants remain outstanding and unexercised
as of September 30, 2022.
The
holders of Series A and Series B convertible preferred stock were entitled to receive dividend payments in the same form as dividends
paid on shares of the common stock when, as and if such dividends were paid on shares of the common stock, on an if converted basis.
In the event of a liquidation event, the holders of each series of convertible preferred stock were entitled to receive out of the assets,
whether capital or surplus, of the Company the same amount that a holder of common stock would receive if the preferred stock were fully
converted. Each share of preferred stock was convertible at any time after the offering at the option of the holder into a number of
shares of the Company’s common stock, equal to $1,000 stated value per share, divided by the conversion price of $7.625. On March
17, 2022 all shares of Series B preferred stock were converted into 262,295 shares of common stock. On March 29, 2022, all shares of
Series A preferred stock were converted into 393,443 shares of common stock.
The
holder of the March 2022 Warrants may not exercise any portion of such warrants to the extent that the holder would own more than 4.99%
of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower
percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company.
The
Company also issued to designees of the placement agent warrants to purchase 5.0% of the aggregate number of March
2022 Warrants sold in the offering, or 32,787 warrants to purchase common stock. The placement
agent warrants have substantially the same terms as the March 2022 Warrants, except that
the placement agent warrants have an exercise price $9.525 per share, which is 125% of the price at which each share of preferred stock
sold in the offering is convertible to common stock.
As
the March 2022 Warrants and placement agent warrants could each require cash settlement in certain scenarios, the common stock warrants
and placement agent warrants were classified as liabilities upon issuance and were initially recorded
at estimated fair values of $3.0 million and $0.1 million, respectively. The Series A and Series B preferred stock were equity classified
because they met characteristics of the equity classification criteria. The total proceeds from the offering were first allocated
to the liability classified warrants, based on their fair values, with the residual $1.9 million allocated to the preferred stock. The
net proceeds to the Company from the offering were $4.5 million, after direct offering expenses of $0.2 attributable to equity classified
preferred stock, which were recorded as a reduction to paid-in capital, and $0.3 million attributable to the liability classified March
2022 Warrants and private placement common stock warrants, which are included in general
and administrative within the accompanying condensed consolidated statement of operations and comprehensive loss for the nine months
ended September 30, 2022.
June
2022 Offering
On
June 5, 2022, the Company entered into a securities purchase agreement with a single healthcare-focused institutional investor for the
purchase and sale of shares of its common stock (or pre-funded warrants in lieu thereof) in a registered direct offering. In a concurrent
private placement (together with the registered direct offering, the “Offerings”), the Company entered into a separate securities
purchase agreement with the same investor for the unregistered purchase and sale of shares of common stock (or pre-funded warrants in
lieu thereof).
On
June 8, 2022, the Company completed the registered direct offering of 445,500 shares of its common stock, par value $0.001 per share
at a purchase price of $2.525 per share and 1,138,659 pre-funded warrants at a purchase price of $2.524 per warrant. The Company also
sold 1,584,159 pre-funded warrants at a purchase price of $2.524 per warrant in the private placement offering. Each pre-funded warrant
sold in the registered direct offering and private placement offering is exercisable for one share
of common stock at an exercise price of $0.001 per share, is immediately exercisable, and will not expire until fully exercised. Under
the securities purchase agreements for the Offerings, the Company agreed to issue to the investor in the Offerings unregistered preferred
investment options (the “June 2022 Warrants”) to purchase up to an aggregate of 3,168,318 shares of common stock, which were
issued at the closing of the Offerings. The June 2022 Warrants are exercisable for one share immediately upon issuance at an exercise
price of $2.40 per share and will expire five years from the date of issuance. The holder of the pre-funded warrants sold in the registered
direct offering has exercised 488,659, 545,000, and 1,689,159 of such warrants in June 2022, July 2022, and August 2022, respectively,
leaving 3,168,318 June 2022 Warrants that remain outstanding and unexercised as of September 30, 2022. The holder of the warrants may
not exercise any portion of such warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately
after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage
not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent, warrants
to purchase 5.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase
up to 158,416 shares of common stock). The placement agent warrants have substantially the same terms as the warrants, except that the
placement agent warrants have an exercise price equal to 125% of the purchase price per share (or $3.156 per share). None of the placement
agent warrants have been exercised as of September 30, 2022. The net proceeds to the Company from the offering were $7.3 million, after
direct offering expenses of $0.7 million payable by the Company.
As
the June 2022 Warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the warrants
and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair
values of $5.7 million and $0.3 million, respectively. Since the pre-funded warrants did not contain the same cash settlement provision,
these warrants are classified as a component of stockholders’ equity within additional paid-in-capital. The pre-funded warrants
were equity classified because they met characteristics of the equity classification criteria. The total proceeds from the offering were
first allocated to the liability classified warrants, based on their fair values, with the residual $2.0 million allocated on a relative
fair value basis to the common stock and pre-funded common stock warrants. Issuance costs allocated to the equity classified pre-funded
common stock warrants and common stock of $0.2 million were recorded as a reduction to paid-in capital. Issuance costs allocated to the
liability classified warrants of $0.5 million were recorded as an expense.
The
Company measured the fair value of the common warrants and placement agent warrants using the Monte Carlo simulation model at issuance
and again on September 30, 2022 using the following inputs:
Common
warrants:
SCHEDULE
FOR MEASUREMENT OF FAIR VALUE OF WARRANTS
| | |
March 16,
2022 | | |
September 30,
2022 | |
| Stock price | |
$ | 8.55 | | |
$ | 0.87 | |
| Exercise price | |
$ | 8.75 | | |
$ | 8.75 | |
| Risk-free rate | |
| 1.95 | % | |
| 4.13 | % |
| Volatility | |
| 101.5 | % | |
| 119.4 | % |
| Remaining term (years) | |
| 2.0 | | |
| 1.46 | |
| | |
June 8,
2022 | | |
September 30,
2022 | |
| Stock price | |
$ | 2.30 | | |
$ | 0.87 | |
| Exercise price | |
$ | 2.40 | | |
$ | 2.40 | |
| Risk-free rate | |
| 3.03 | % | |
| 4.09 | % |
| Volatility | |
| 107.1 | % | |
| 111.7 | % |
| Remaining term (years) | |
| 5.0 | | |
| 4.69 | |
Placement
agent warrants:
| | |
March 16,
2022 | | |
September 30,
2022 | |
| Stock price | |
$ | 8.55 | | |
$ | 0.87 | |
| Exercise price | |
$ | 9.53 | | |
$ | 9.53 | |
| Risk-free rate | |
| 1.95 | % | |
| 4.13 | % |
| Volatility | |
| 101.5 | % | |
| 119.4 | % |
| Remaining term (years) | |
| 2.0 | | |
| 1.46 | |
| | |
June 8,
2022 | | |
September 30,
2022 | |
| Stock price | |
$ | 2.30 | | |
$ | 0.87 | |
| Exercise price | |
$ | 3.16 | | |
$ | 3.16 | |
| Risk-free rate | |
| 3.03 | % | |
| 4.09 | % |
| Volatility | |
| 107.1 | % | |
| 111.7 | % |
| Remaining term (years) | |
| 5.0 | | |
| 4.69 | |
The
following table summarizes warrant activity for the nine months ended September 30, 2022:
SUMMARY
OF WARRANT ACTIVITY
| | |
Outstanding December 31, 2021 | | |
Warrants Issued | | |
Warrants Exercised | | |
Outstanding September 30, 2022 | |
| Transaction | |
| | | |
| | | |
| | | |
| | |
| February 14, 2020 common warrants | |
| 21,580 | | |
| – | | |
| – | | |
| 21,580 | |
| December 23, 2020 placement agent warrants | |
| 25,651 | | |
| – | | |
| – | | |
| 25,651 | |
| January 14, 2021 common warrants | |
| 363,636 | | |
| – | | |
| – | | |
| 363,636 | |
| January 14, 2021 placement agent warrants | |
| 21,818 | | |
| – | | |
| – | | |
| 21,818 | |
| January 25, 2021 common warrants | |
| 320,641 | | |
| – | | |
| – | | |
| 320,641 | |
| January 22, 2021 placement agent warrants | |
| 19,238 | | |
| – | | |
| – | | |
| 19,238 | |
| March 16, 2022 common warrants | |
| – | | |
| 655,738 | | |
| – | | |
| 655,738 | |
| March 16, 2022 placement agent warrants | |
| – | | |
| 32,787 | | |
| – | | |
| 32,787 | |
| June 8, 2022 common warrants | |
| – | | |
| 3,168,318 | | |
| – | | |
| 3,168,318 | |
| June 8, 2022 placement agent warrants | |
| – | | |
| 158,416 | | |
| – | | |
| 158,416 | |
| Total | |
| 772,564 | | |
| 4,015,259 | | |
| – | | |
| 4,787,823 | |
On
March 30, 2021, the Company entered into a sales agreement (“Sales Agreement”) with an investment banking firm to sell shares
of common stock having aggregate sales proceeds of up to $50.0 million, from time to time, through an “at the market” equity
offering program under which the investment banking firm would act as sales agent. On February 28, 2022, the Company exercised its right
to terminate the Sales Agreement and was obligated to make a one-time payment to the investment banking firm of $0.4 million. As a result
of the termination of the Sales Agreement, the Company expensed previously capitalized deferred offering costs of $0.7 million which
are included in general and administrative expense within the accompanying condensed consolidated statement of operations and comprehensive
loss for the nine months ended September 30, 2022. No common stock was sold under the Sales Agreement.
13.
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
The
following tables present reconciliations for the numerators and denominators of basic and diluted net loss per share:
SCHEDULE
OF EARNINGS PER SHARE, BASIC AND DILUTED
| | |
| | |
| | |
| | |
| |
| | |
For the Three Months Ended | | |
For the Nine Months Ended | |
| | |
September 30, | | |
September 30, | | |
September 30, | | |
September 30, | |
| Numerator: | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Net loss, primary | |
$ | (3,400 | ) | |
$ | (1,021 | ) | |
$ | (7,239 | ) | |
$ | (21,619 | ) |
| Less: gain from change in fair value of warrant liabilities | |
| – | | |
| (174 | ) | |
| (4,329 | ) | |
| (27 | ) |
| Net loss, diluted | |
$ | (3,400 | ) | |
$ | (1,195 | ) | |
$ | (11,568 | ) | |
$ | (21,646 | ) |
| | |
| | |
| | |
| | |
| |
| | |
For the Three Months Ended | | |
For the Nine Months Ended | |
| | |
September 30, | | |
September 30, | | |
September 30, | | |
September 30, | |
| Denominator: | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Basic weighted average number of common shares(1) | |
| 7,215,898 | | |
| 3,251,387 | | |
| 6,724,876 | | |
| 3,174,697 | |
| Potentially dilutive effect of warrants | |
| – | | |
| 18,801 | | |
| 780,252 | | |
| 2,090 | |
| Diluted weighted average number of common shares | |
| 7,215,898 | | |
| 3,270,188 | | |
| 7,505,128 | | |
| 3,176,787 | |
| |
(1) |
In
December 2020, January 2021, and June 2022, the Company sold pre-funded warrants to purchase up to 209,522, 96,836, and 2,722,818
shares of common stock, respectively. The shares of common stock associated with the pre-funded warrants are considered outstanding
for the purposes of computing earnings per share prior to exercise because the shares may be issued for little or no consideration,
are fully vested, and are exercisable after the original issuance date. The pre-funded warrants sold in December 2020 and January
2021 were exercised in January 2021 and 488,659, 545,000, and 1,689,159 of the pre-funded warrants sold in June 2022 were exercised
in June 2022, July 2022, and August 2022, respectively, and included in the denominator for the period of time the warrants were
outstanding. |
The
following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share for the periods
presented due to their anti-dilutive effect:
SCHEDULE
OF ANTI-DILUTIVE POTENTIAL SHARES OUTSTANDING ACTIVITY
| | |
| | |
| | |
| | |
| |
| | |
For the Three Months Ended | | |
For the Nine Months Ended | |
| | |
September 30, | | |
September 30, | | |
September 30, | | |
September 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Stock options | |
| 189,454 | | |
| 235,949 | | |
| 189,454 | | |
| 235,949 | |
| Restricted stock | |
| 89,647 | | |
| 185,264 | | |
| 89,647 | | |
| 185,264 | |
| Common stock warrants | |
| 4,787,823 | | |
| 750,986 | | |
| 1,439,510 | | |
| 746,914 | |
| Shares committed under ESPP | |
| 10,308 | | |
| 1,088 | | |
| 10,308 | | |
| 1,088 | |
14.
DEBT
PPP
Loan
On
April 12, 2020, our subsidiary PolarityTE MD, Inc. (the “Borrower”) entered into a promissory note evidencing an unsecured
loan in the amount of $3,576,145 made to it under the Paycheck Protection Program (the “Loan”). The Paycheck Protection Program
(or “PPP”) was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and
is administered by the U.S. Small Business Administration. The Loan to the Borrower was made through KeyBank, N.A., a national banking
association (the “Lender”). The interest rate on the Loan is 1.00%. Beginning seven months from the date of the Loan the
Borrower is required to make 24 monthly payments of principal and interest in the amount of $150,563. The promissory note evidencing
the Loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading
representations to the SBA or Lender, or breaching the terms of the Loan documents. The occurrence of an event of default may result
in the repayment of all amounts outstanding, collection of all amounts owing from the Borrower, or filing suit and obtaining judgment
against the Borrower. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion
of a loan granted under the PPP. On October 15, 2020, the Borrower applied to the Lender for forgiveness of the PPP Loan in its entirety
based on the Borrower’s use of the PPP Loan for payroll costs, rent, and utilities. In June of 2021, the Company received notice
of forgiveness of the PPP Loan in whole and the Lender was paid by the SBA, including all accrued unpaid interest. The Company recorded
the forgiveness of $3.6 million of principal and accrued interest, which were included in gain on extinguishment of debt on the consolidated
statement of operations and comprehensive loss for the nine months ended September 30, 2021. The SBA may audit any PPP loan at its discretion up to six years after the date the SBA forgave the PPP loan.
15.
RESTRUCTURING
As
discussed in Note 7, the Company decided to file an IND in the second half of 2021, cease commercial sales of SkinTE by May 31, 2021,
and wind down its SkinTE commercial operations. As a result, management approved several actions as part of a restructuring plan. During
the first quarter of 2021, the Company recorded $0.4 million of restructuring charges related to property and equipment impairment. The
Company recognized $0.2 and $0.4 million of expense related to employee severance and benefit arrangements for the three and nine months
ended September 30, 2021. The Company also recognized incremental expense of $0.2 million for the three and nine months ended September
30, 2021 related to the remeasurement of employee stock options that were modified due to restructuring. Further, during the second quarter
of 2021 and effective June 30, 2021, the Company terminated a lease which included manufacturing, laboratory, and office space and recorded
a net gain on termination of $0.3 million. During the three months ended September 30, 2022, the Company did not recognize any restructuring
expense. During the nine months ended September 30, 2022, the Company recognized nominal expense related to employee severance due to
a reduction of headcount in the Company’s research and development department.
16.
COMMITMENTS AND CONTINGENCIES
Contingencies
Securities
Class Action and Derivative Lawsuits
On
September 24, 2021, a class action complaint alleging violations of the Federal securities laws was filed in the United States District
Court, District of Utah, by Marc Richfield against the Company and certain officers of the Company, Case No. 2:21-cv-00561-BSJ. The Court
subsequently appointed a Lead Plaintiff and ordered the Lead Plaintiff to file an amended Complaint by February 7, 2022, which was extended
to February 21, 2022. The Lead Plaintiff filed an amended complaint on February 21, 2022, against the Company, two current officers of
the Company, and three former officers of the Company (the “Complaint”). The Complaint alleges that during the period from
January 30, 2018, through November 9, 2021, the defendants made or were responsible for, disseminating information to the public through
reports filed with the Securities and Exchange Commission and other channels that contained material misstatements or omissions in violation
of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 adopted thereunder. Specifically,
the Complaint alleges that the defendants misrepresented or failed to disclose that: (i) the Company’s product, SkinTE, was improperly
registered as a 361 HCT/P under Section 361 of the Public Health Service Act and that, as a result, the Company’s ability to commercialize
SkinTE as a 361 HCT/P was not sustainable because it was inevitable SkinTE would need to be registered under Section 351 of the Public
Health Service Act; (ii) the Company characterized itself as a commercial stage company when it knew sales of SkinTE as a 361 HCT/P were
unsustainable and that, as a result, it would need to file an IND and become a development stage company; (iii) issues arising from an
FDA inspection of the Company’s facility in July 2018, were not resolved even though the Company stated they were resolved; and
(iv) the IND for SkinTE was deficient with respect to certain chemistry, manufacturing, and control items, including items identified
by the FDA in July 2018, and as a result it was unlikely that the FDA would approve the IND in the form it was originally filed. The
Company filed a motion to dismiss the complaint for failure to state a claim, on April 22, 2022. The Lead Plaintiff filed its memorandum
in opposition to the Company’s motion to dismiss on July 18, 2022. The Company filed its reply memorandum to the Lead Plaintiff’s
opposition memorandum on August 11, 2022, and oral argument on the motion to dismiss was held September 8, 2022. At the hearing the judge
issued a ruling from the bench dismissing the Complaint without prejudice and granting the Lead Plaintiff leave to file an amended complaint.
The Lead Plaintiff filed an amended complaint (the “Amended Complaint”) on October 3, 2022, alleging additional facts. The
Company filed a motion to dismiss the Amended Complaint for failure to state a claim on November 2, 2022, and Lead Plaintiff is required
to file its brief in opposition to the Company’s motion by December 2, 2022. The Company believes the allegations in the Amended
Complaint are without merit, and intends to defend the litigation vigorously. At this early stage of the proceedings, we are unable to
make any prediction regarding the outcome of the litigation.
On
October 25, 2021, a stockholder derivative complaint alleging violations of the Federal securities laws was filed in the United States
District Court, District of Utah, by Steven Battams against the Company, each member of the Board of directors, and two officers of the
Company, Case No. 2:21-cv-00632-DBB (the “Stockholder Derivative Complaint”). The Stockholder Derivative Complaint alleges
that the defendants made, or were responsible for, disseminating information to the public through reports filed with the Securities
and Exchange Commission and other channels that contained material misstatements or omissions in violation of Sections 10(b) and 20(a)
of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 adopted thereunder. Specifically, the Stockholder Derivative Complaint
alleges that the defendants misrepresented or failed to disclose that: (i) the IND for the Company’s product, SkinTE, filed with
the FDA was deficient with respect to certain chemistry, manufacturing, and control items; (ii) as a result, it was unlikely that the
FDA would approve the IND in its current form; (iii) accordingly, the Company had materially overstated the likelihood that the SkinTE
IND would obtain FDA approval; and (Iv) as a result, the public statements regarding the IND were materially false and misleading. The
parties have stipulated to stay the Stockholder Derivative Complaint until (1) the dismissal of the Complaint described above, (2) denial
of a motion to dismiss the Complaint, or (3) notice is given that any party is withdrawing its consent to the stipulated stay of the
Stockholder Derivative Complaint proceeding. At this early stage of the proceedings the Company is unable to make any prediction regarding
the outcome of the litigation.
Other
Matters
In
the ordinary course of business, the Company may become involved in lawsuits, claims, investigations, proceedings, and threats of litigation
relating to intellectual property, commercial arrangements, employment, regulatory compliance, and other matters. Except as noted above,
at September 30, 2022, the Company was not party to any legal or arbitration proceedings that may have significant effects on its financial
position or results of operations. No governmental proceedings are pending or, to the Company’s knowledge, contemplated against
the Company. The Company is not a party to any material proceedings in which any director, member of senior management or affiliate of
the Company’s is either a party adverse to the Company or its subsidiaries or has a material interest adverse to the Company or
its subsidiaries.
Commitments
The
Company has entered into employment agreements with key executives that contain severance terms and change of control provisions.
On
September 2, 2020, Arches Research, Inc., a subsidiary of PolarityTE, Inc. (“Arches”) entered into two agreements with Co-Diagnostics,
Inc. (“Co-Diagnostics”). The COVID-19 Laboratory Services Agreement between the parties provided that Arches would perform
specimen testing services for customers referred by Co-Diagnostics to Arches. Co-Diagnostics would arrange all logistics for delivering
specimens to Arches for COVID-19 testing for those customers of Co-Diagnostics electing to use the service. Arches would bill Co-Diagnostics
for the testing services and Co-Diagnostics would manage all customer billing. The Rental Agreement for LGC Genomics Oktopure Extraction
Machine between Arches and Co-Diagnostics provided that Co-Diagnostics would make available to Arches the Oktopure high throughput extraction
machine that Arches will use to perform COVID-19 testing. The term of the rental agreement was 12 months and required Arches to use Co-Diagnostics
tests exclusively in the machine. In the second quarter of 2021, the rental agreement was amended to remove the minimum monthly purchase
obligation of reagents and was replaced by a $3,300 monthly rental fee. The COVID-19 Laboratory Services Agreement could be canceled
by the Company at any time by providing 60 days written notice, and the Rental Agreement could be canceled at any time by written notice
given within 60 days after termination of the Laboratory Services Agreement. On May 27, 2021, the Company gave written notice to Co-Diagnostics
of termination of the COVID-19 Laboratory Services Agreement, so the last day of that agreement was July 26, 2021, and no longer in effect
on July 27, 2021. On July 27, 2021, the Company gave written notice to Co-Diagnostics of termination of the Rental Agreement, so the
last day of that agreement was July 29, 2021.
On
June 25, 2021, the Company entered into a statement of work with a contract research organization to provide services for a proposed
clinical trial described as a multi-center, prospective, randomized controlled trial evaluating the effects of SkinTE in the treatment
of full-thickness diabetic foot ulcers at a cost of approximately $6.5 million consisting of $3.1 million of service fees and $3.4 million
of estimated costs. In July 2021 the Company prepaid 10% of the total cost recited in the original work order, or $0.5 million, which
will be applied to payment of the final invoice under the work order. Over the approximately three-year term of the clinical trial the
service provider shall submit to the Company for payment invoices on a monthly basis for units of work stated in the work order that
are completed and billable expenses incurred. During the three and nine months ended September 30, 2022, the Company received invoices
for work performed and expenses incurred totaling $0.3 and $0.9 million, respectively. Either party may terminate the agreement without
cause on 60 days’ notice to the other party.
17.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On
August 21, 2019, the Company and Dr. Denver Lough, a principal shareholder and former officer and director, signed a settlement terms
agreement that provides, in part, that the Company pay to Dr. Lough $1,500,000 in cash on October 1, 2019 and an additional $1,500,000
in cash in equal monthly installments beginning November 1, 2019 and ending April 1, 2021. In addition, the Company agreed to award to
Dr. Lough 200,000 restricted stock units that vest in 18 equal monthly installments beginning October 1, 2019. As of September 30, 2022,
the Company has no remaining liability related to future cash payments under the agreement. The fair value of the restricted stock units
was $0.8 million and was fully expensed upon Dr. Lough’s termination.
In
October 2018, the Company entered into an office lease covering approximately 7,250 square feet of rental space in the building located
at 40 West 57th Street in New York City. The lease is for a term of three years. The annual lease rate is $60 per square foot.
Initially the Company would occupy and pay for only 3,275 square feet of space, and the Company was not obligated under the lease to
pay for the remaining 3,975 square feet covered by the lease unless it elected to occupy that additional space. The Company believes
the terms of the lease were very favorable to it, and the Company obtained the favorable terms through the assistance of Peter A. Cohen,
a director, which he provided so that the company he owns, Peter A. Cohen, LLC (“Cohen LLC”), could sublease a portion of
the office space. The lease expired on October 31, 2021. The Company recognized $0 and $55,000 of sublease income for the three months
ended September 30, 2022 and 2021, respectively, and $0 and $165,000 for the nine months ended September 30, 2022 and 2021, respectively.
The sublease income is included in other income, net in the condensed consolidated statement of operations and comprehensive loss.
18.
SEGMENT REPORTING
Reportable
segments are presented in a manner consistent with the internal reporting provided to the chief operating decision maker (CODM), the
Chief Executive Officer of the Company. The CODM allocates resources to and assesses the performance of each segment using information
about its revenue and operating income (loss). The Company’s operations involve products and services which are managed separately.
Accordingly, it operates in two segments: 1) regenerative medicine products and 2) contract services. In April 2022, the Company sold
IBEX and IBEX Property, the Company’s subsidiaries which operate within the contract services reporting segment. The remaining
contract services business is no longer a reportable segment due to immateriality. Contract services ceased to be a reportable segment
upon disposal of IBEX and historical information from prior to the disposal date is reported here. See Note 5 for detail on management’s
disposal of IBEX.
Certain
information concerning the Company’s segments is presented in the following tables (in thousands):
SCHEDULE
OF SEGMENT INFORMATION
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
For the Three Months Ended | | |
For the Nine Months Ended | |
| | |
September 30, | | |
September 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Net revenues: | |
| | | |
| | | |
| | | |
| | |
| Reportable segments: | |
| | | |
| | | |
| | | |
| | |
| Regenerative medicine | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | 2,924 | |
| Contract services | |
| – | | |
| 1,116 | | |
| 814 | | |
| 5,438 | |
| Total net revenues | |
$ | – | | |
$ | 1,116 | | |
$ | 814 | | |
$ | 8,362 | |
| | |
| | | |
| | | |
| | | |
| | |
| Net (loss)/income: | |
| | | |
| | | |
| | | |
| | |
| Reportable segments: | |
| | | |
| | | |
| | | |
| | |
| Regenerative medicine | |
$ | (3,413 | ) | |
$ | (972 | ) | |
$ | (6,836 | ) | |
$ | (21,903 | ) |
| Contract services | |
| 13 | | |
| (49 | ) | |
| (403 | ) | |
| 284 | |
| Total net loss | |
$ | (3,400 | ) | |
$ | (1,021 | ) | |
$ | (7,239 | ) | |
$ | (21,619 | ) |
19.
SUBSEQUENT EVENT
As
described in Note 8 the Company exercised its option to purchase the Property the Company occupies for offices, manufacturing, and lab
activities for $17.5 million. The Company also entered into an agreement with BCG to sell the Property to BCG for $17.5 million and then
lease a portion of the building on the Property back to the Company to house the Company’s operations. The transactions provide
for closing on November 15, 2022, and included a right to extend the closing to November 30, 2022. On November 9, 2022, the Company entered
into an Addendum to the BCG Agreement providing, in part, for BCG exercising its right to extend the closing to November 30, 2022, in
consideration of making an extension deposit with the escrow holder of $50,000, and the Company exercising its right under the Purchase
Agreement with the Landlord to extend the closing to November 30, 2022, in consideration of making an extension deposit with the escrow
holder of $50,000. The Addendum also provides for the Company’s formation of a single member limited liability company owned by
the Company, which will be used as the vehicle to effectuate purchase of the Property from the Landlord at closing, effectuate a change
in ownership of the Property to BCG or its assigns, and lease a portion of the building on the Property back to the Company to house
its operations.
