NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION
PolarityTE,
Inc. (together with its subsidiaries, the “Company”) is a clinical stage biotechnology company developing regenerative tissue
products and biomaterials. The Company also operated a laboratory testing and clinical research business until the end of April 2022.
The
Company’s first regenerative tissue product is SkinTE. In July 2021, the Company submitted an investigational new drug application
(“IND”) for SkinTE to the United States Food and Drug Administration (the “FDA”) through its subsidiary, PolarityTE
MD, Inc. Prior to June 1, 2021, the Company sold SkinTE under Section 361 of the Public Health Service Act in 2020 and into 2021 and,
after the Company’s decision to file an IND under Section 351 of that Act, under an enforcement discretion position stated by the
FDA in a regenerative medicine policy framework to help facilitate regenerative medicine therapies. The FDA’s stated period of
enforcement discretion ended May 31, 2021. Consequently, the Company terminated commercial sales of SkinTE on May 31, 2021, ceased its
SkinTE commercial operations, and has transitioned to a clinical stage company pursuing an IND for SkinTE. As a result, there are no
product sales from commercial SkinTE after June 2021.
At
the beginning of May 2018, the Company acquired a preclinical research and veterinary sciences business, which had been used for preclinical
studies on the Company’s regenerative tissue products and to offer preclinical research services to unrelated third parties on
a contract basis. The Company sold the business at the end of April 2022 and ceased to recognize services revenues after the sale. Consequently,
the Company is no longer engaged in any revenue generating business activity and its operations are now focused on advancing the IND
for SkinTE.
The
accompanying interim condensed consolidated financial statements of the Company are unaudited, but in the opinion of management, reflect
all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented.
Accordingly, they do not include all information and notes required by accounting principles generally accepted in the United States
of America (U.S. GAAP) for complete financial statements. The results of operations for interim periods are not necessarily indicative
of results to be expected for the entire fiscal year. The balance sheet at December 31, 2022, has been derived from the audited consolidated
financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial
statements. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended December 31, 2022, filed with the Securities and Exchange Commission on Form 10-K on
March 27, 2023.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly
owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
Use
of estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Among the more significant estimates included
in these financial statements is the extent of progress toward completion of contracts with customers, stock-based compensation, the
valuation allowance for deferred tax assets, the valuation of common stock warrant liabilities, and the impairment of assets. Actual
results could differ from those estimates.
Concentration
of Credit Risk. Balances are maintained at U.S. financial institutions and may exceed the Federal Deposit Insurance Corporation (“FDIC”)
insurance limit of $250,000 per depositor, per insured bank for each account ownership category. Although the Company currently believes
that the financial institutions with whom it does business, will be able to fulfill their commitments to the Company, there is no assurance
that those institutions will be able to continue to do so. The Company has not experienced any credit losses associated with its balances
in such accounts for the three months ended March 31, 2023 and 2022.
Assets
and Liabilities Held for Sale. Assets and liabilities to be disposed (“disposal group”) of by sale are reclassified into
assets held for sale and liabilities held for sale on the Company’s condensed consolidated balance sheets. The reclassification
occurs when an agreement to sell exists, or management has committed to a plan to sell the assets within one year. Disposal groups are
measured at the lower of carrying value or fair value less costs to sell and are not depreciated or amortized. The fair value of a disposal
group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the
lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value of the disposal group. During
the three months ended March 31, 2023, the Company remeasured assets held for sale and recorded an impairment loss of $0.1 million.
Leases.
The Company determines if an arrangement is a lease at inception. Right-of-use (“ROU”) assets represent the Company’s
right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments
arising from the lease. Finance leases are reported in the condensed consolidated balance sheets in property and equipment and other
current and long-term liabilities. The current portion of operating lease obligations are included in other current liabilities. The
classification of the Company’s leases as operating or finance leases along with the initial measurement and recognition of the
associated ROU assets and lease liabilities is performed at the lease commencement date. The measurement of lease liabilities is based
on the present value of future lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the
Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present
value of future lease payments. The ROU asset is based on the measurement of the lease liability and also includes any lease payments
made prior to or on lease commencement and excludes lease incentives and initial direct costs incurred, as applicable. The lease terms
may include options to extend or terminate the lease when it is reasonably certain the Company will exercise any such options. Rent expense
for the Company’s operating leases is recognized on a straight-line basis over the lease term. Amortization expense for the ROU
asset associated with its finance leases is recognized on a straight-line basis over the term of the lease and interest expense associated
with its finance leases is recognized on the balance of the lease liability using the effective interest method based on the estimated
incremental borrowing rate.
The
Company has lease agreements with lease and non-lease components. As allowed under ASC 842, the Company has elected not to separate lease
and non-lease components for any leases involving real estate and office equipment classes of assets and, as a result, accounts for the
lease and non-lease components as a single lease component. The Company has also elected not to apply the recognition requirement of
ASC 842 to leases with a term of 12 months or less for all classes of assets.
Impairment
of Long-Lived Assets. The Company reviews long-lived assets, including property and equipment for impairment whenever events or changes
in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers
in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant
negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is
performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result
from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would
be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows.
Revenue
Recognition. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that
reflects the consideration that the Company expects to receive in exchange for those goods or services. To determine revenue recognition
for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify
the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv)
allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies
a performance obligation.
The
Company does not currently perform any revenue generating activities. Prior to the sale of IBEX Preclinical Research, Inc. (“IBEX”)
in April 2022, the Company recorded service revenues from the sale of its preclinical research services, which included delivery of preclinical
studies and other research services to unrelated third parties. Service revenues generally consisted of a single performance obligation
that the Company satisfied over time using an input method based on costs incurred to date relative to the total costs expected to be
required to satisfy the performance obligation. See Note 5 for further details on the IBEX sale.
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 months ended March 31, 2023 and 2022 as the Company incurred a loss
for each period and the warrant and preferred stockholders are not required to absorb losses. The Company has issued pre-funded warrants
from time to time at an exercise price of $0.025 per share. The shares of common stock into which the pre-funded warrants may be exercised
are considered outstanding for the purposes of computing basic earnings per share because the shares may be issued for little or no consideration,
are fully vested, and are exercisable after the original issuance date.
Recently
Adopted Accounting Pronouncements
In
June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments-Credit
Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date
based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss
model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This standard was effective
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted.
In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments–Credit Losses (Topic 326), Derivatives and Hedging
(Topic 815) and Leases (Topic 842): Effective Dates, which defers the effective date of Topic 326. The Company adopted this ASU using
the modified-retrospective approach for the fiscal year beginning January 1, 2023. The adoption of this ASU did not have a material impact
on the Company’s condensed consolidated financial statements and related disclosures.
3.
LIQUIDITY AND GOING CONCERN
The
Company is a clinical stage biotechnology company that has incurred recurring losses and negative cash flows from operations since commencing
its biotechnology business in 2017. As of March 31, 2023, the Company had an accumulated deficit of $520.5 million. As of March 31, 2023,
the Company had cash and cash equivalents of $6.4 million. The Company has been funded historically through sales of equity and debt.
These
financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and settle
its liabilities in the normal course of business. The Company’s significant operating losses raise substantial doubt regarding
the Company’s ability to continue as a going concern for at least one year from the date of issuance of these condensed consolidated
financial statements. The financial statements do not include any adjustments relating to the recoverability and classification of recorded
asset amounts or amounts of liabilities that might result from the outcome of this uncertainty. Consequently, the future success of the
Company depends on its ability to attract additional capital and, ultimately, on its ability to successfully complete the regulatory
approval process for its product, SkinTE, and develop future profitable operations. The Company will seek additional capital through
equity offerings or debt financing. However, such financing may not be available in the future on favorable terms, if at all.
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 ASSETS AND LIABILITIES MEASURES ON RECURRING BASIS
| | |
March
31, 2023 | |
| | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
| Liabilities | |
| | |
| | |
| | |
| |
| Common
stock warrant liability | |
$ | – | | |
$ | – | | |
$ | 961 | | |
$ | 961 | |
| Total | |
$ | – | | |
$ | – | | |
$ | 961 | | |
$ | 961 | |
| | |
December
31, 2022 | |
| | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
| Liabilities | |
| | | |
| | | |
| | | |
| | |
| Common
stock warrant liability | |
$ | – | | |
$ | – | | |
$ | 1,489 | | |
$ | 1,489 | |
| Total | |
$ | – | | |
$ | – | | |
$ | 1,489 | | |
$ | 1,489 | |
The
Company assesses its assets held for sale, long-lived assets, including property, equipment, and ROU assets at their estimated fair value
on a non-recurring basis. The Company reviews the carrying amounts of such assets when events indicate that their carrying amounts may
not be recoverable. Any resulting impairment would require that the asset be recorded at its fair value. During each of the three months
ended March 31, 2023 and 2022, the Company recognized an impairment charge of $0.1 million related to equipment classified in assets
held for sale. As of each measurement date, the fair value of assets held for sale was determined utilizing Level 3 inputs and were based
on a market approach. See Note 5 for additional details.
The
following table presents the change in fair value of the liability classified common stock warrants for the three months ended March
31, 2023 (in thousands):
SCHEDULE
OF FAIR VALUE OF LIABILITY CLASSIFIED COMMON STOCK WARRANTS
| | |
Fair
Value at December
31, 2022 | | |
(Gain)
Loss Upon Change in Fair Value | | |
Fair
Value at March
31, 2023 | |
| Warrant
liabilities | |
| | | |
| | | |
| | |
| February
14, 2020 issuance | |
$ | 8 | | |
$ | (2 | ) | |
$ | 6 | |
| December
23, 2020 issuance | |
| 2 | | |
| (1 | ) | |
| 1 | |
| January
14, 2021 issuance | |
| 72 | | |
| (42 | ) | |
| 30 | |
| January
25, 2021 issuance | |
| 64 | | |
| (37 | ) | |
| 27 | |
| March
16, 2022 issuance | |
| 26 | | |
| (25 | ) | |
| 1 | |
| June
8, 2022 issuance | |
| 1,317 | | |
| (421 | ) | |
| 896 | |
| Total | |
$ | 1,489 | | |
$ | (528 | ) | |
$ | 961 | |
The
following table presents the change in fair value of the liability classified common stock warrants for the three months ended March
31, 2022 (in thousands):
| | |
Fair
Value at December
31, 2021 | | |
Initial
Fair Value at Issuance | | |
(Gain)
Loss Upon Change in Fair Value | | |
Fair
Value at March
31, 2022 | |
| Warrant
liabilities | |
| | | |
| | | |
| | | |
| | |
| February
14, 2020 issuance | |
$ | 291 | | |
$ | – | | |
$ | (179 | ) | |
$ | 112 | |
| December
23, 2020 issuance | |
| 239 | | |
| – | | |
| (166 | ) | |
| 73 | |
| January
14, 2021 issuance | |
| 3,345 | | |
| – | | |
| (1,856 | ) | |
| 1,489 | |
| January
25, 2021 issuance | |
| 2,969 | | |
| – | | |
| (1,649 | ) | |
| 1,320 | |
| March
16, 2022 issuance | |
| – | | |
| 3,129 | | |
| (1,255 | ) | |
| 1,874 | |
| Total | |
$ | 6,844 | | |
$ | 3,129 | | |
$ | (5,105 | ) | |
$ | 4,868 | |
The
Company uses the Monte Carlo simulation model to determine the fair value of the liability classified warrants. Input
assumptions used to measure the fair value of these freestanding instruments are as follows:
SCHEDULE
OF FAIR VALUE ASSUMPTIONS OF WARRANTS LIABILITY
| | |
| For
the Three Months ended | |
| | |
| March
31, 2023 | |
| Stock
price | |
| $
0.50 – 0.50 | |
| Exercise price | |
| $
2.40 – 34.38 | |
| Risk-free
rate | |
| 3.68
– 4.66 | % |
| Volatility | |
| 107.0
– 113.1 | % |
| Remaining
term (years) | |
| 0.96
– 4.19 | |
| | |
| For
the Three Months ended | |
| | |
| March
31, 2022 | |
| Stock
price | |
| $
6.25 – 8.50 | |
| Exercise price | |
| $
2.50 – 34.50 | |
| Risk-free
rate | |
| 1.95
– 2.44 | % |
| Volatility | |
| 98.4
– 103.6 | % |
| Remaining
term (years) | |
| 1.96
– 4.87 | |
5.
ASSETS AND LIABILITIES HELD FOR SALE
Equipment
The
Company committed to a plan to sell a variety of lab equipment within the regenerative medicine products reporting segment. The lab equipment
has been designated as held for sale and is presented as such within the condensed consolidated balance sheets as of March 31, 2023 and
December 31, 2022.
During
each of the three months ended March 31, 2023 and 2022, the Company recorded an impairment of $0.1 million related to the lab equipment
designated as held for sale.
IBEX
Sale
At
the beginning of May 2018, the Company acquired a preclinical research and veterinary sciences business, which has been used for preclinical
studies on the Company’s regenerative tissue products and to offer preclinical research services to unrelated third parties on
a contract basis. The Company operated this business through its indirect subsidiary, IBEX Preclinical Research, Inc. (“IBEX”).
Utah CRO Services, Inc., a Nevada corporation (“Utah CRO”), is a direct subsidiary of the Company and held all the outstanding
capital stock of IBEX (the “IBEX Shares”). Utah CRO also holds all the member interest of IBEX Property LLC, a Nevada limited
liability company (“IBEX Property”), that owned two unencumbered parcels of real property in Logan, Utah, consisting of approximately
1.75 combined gross acres of land, together with the buildings, structures, fixtures, and personal property (the “Property”),
which was leased by IBEX Property to IBEX for IBEX to conduct its preclinical research and veterinary sciences business.
In
March 2022, the Company reached a nonbinding understanding with an unrelated third party that contemplated the sale of IBEX, which operates
within the contract services reporting segment, along with IBEX Property. The assets and liabilities related to IBEX were designated
as held for sale. The Company measured the assets and liabilities held for sale at the lower of their carrying value or fair value less
costs to sell. The operating results of IBEX did not qualify for reporting as discontinued operations.
On
April 14, 2022, Utah CRO entered into a Stock Purchase Agreement (the “Stock Agreement”) with an unrelated third party (“Buyer”),
pursuant to which Utah CRO agreed to sell all the outstanding IBEX Shares to Buyer in exchange for an unsecured promissory note in the
principal amount of $0.4 million bearing simple interest at the rate of 10% per annum with interest only payable on a quarterly basis
and all principal and remaining accrued interest due on the five-year anniversary of the closing of the sale of the IBEX Shares to Buyer.
Furthermore, on April 14, 2022, IBEX Property entered into a Real Estate Purchase and Sale Agreement (the “Real Estate Agreement”)
with another unrelated third party (“Purchaser”) pursuant to which IBEX Property agreed to sell to Purchaser the Property
at a gross purchase price of $2.8 million payable in cash at closing of the transaction. The Buyer and Purchaser are affiliates of each
other as a result of common ownership. On April 28, 2022, the parties to the Stock Agreement and Real Estate Agreement closed the transactions
contemplated thereby and on April 29, 2022, the Company received the promissory note described above in the principal amount of $0.4
million and net cash proceeds of $2.3 million, after deducting closing costs and advisory fees, from sale of the Property under the Real
Estate Agreement. As of a result of this transaction, the Company recorded $0.4 million as a long-term note receivable in other assets
within the accompanying condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022. As the sale price less cost
to sell was greater than the carrying value of these assets the Company recognized an insignificant net gain on sale in the second quarter
of fiscal year 2022 in other income, net.
6.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
The
following table presents the major components of prepaid expenses and other current assets (in thousands):
SCHEDULE
OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| | |
March
31, 2023 | | |
December
31,
2022 | |
| Prepaid
insurance | |
$ | 1,249 | | |
$ | 239 | |
| Other
current receivable | |
| 446 | | |
| 332 | |
| Prepaid
expenses | |
| 402 | | |
| 440 | |
| Deferred
offering costs | |
| 98 | | |
| 98 | |
| Total
prepaid expenses and other current assets | |
$ | 2,195 | | |
$ | 1,109 | |
7.
PROPERTY AND EQUIPMENT, NET
The
following table presents the components of property and equipment, net (in thousands):
SCHEDULE
OF PROPERTY AND EQUIPMENT, NET
| | |
March
31, 2023 | | |
December
31,
2022 | |
| Machinery
and equipment | |
$ | 4,436 | | |
$ | 4,436 | |
| Computers
and software | |
| 570 | | |
| 570 | |
| Leasehold
improvements | |
| 1,808 | | |
| 1,808 | |
| Furniture
and equipment | |
| 100 | | |
| 100 | |
| Total
property and equipment, gross | |
| 6,914 | | |
| 6,914 | |
| Accumulated
depreciation | |
| (5,287 | ) | |
| (5,139 | ) |
| Total
property and equipment, net | |
$ | 1,627 | | |
$ | 1,775 | |
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
| | |
| | |
| |
| | |
For
the Three Months Ended | |
| | |
March
31, | |
| | |
2023 | | |
2022 | |
| General
and administrative expense | |
$ | 3 | | |
$ | 49 | |
| Research
and development expense | |
| 145 | | |
| 406 | |
| Total
depreciation and amortization expense | |
$ | 148 | | |
$ | 455 | |
8.
LEASES
The
Company leases facilities and certain equipment under noncancelable leases that expire at various dates through November 2027. These
leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases may
include options to extend or terminate the lease at the election of the Company. These optional periods have not been considered in the
determination of the right-of-use-assets or lease liabilities associated with these leases as the Company did not consider it reasonably
certain it would exercise the options.
Operating
Leases
In
November 2022, the Company entered into an operating lease for approximately 63,156 rentable square feet of warehouse, manufacturing,
office, and lab space. The initial term of the lease is five years, and it expires on November 30, 2027. The Company has a one-time option
to renew for an additional five years. The initial base rent under this lease is $59,998 per month ($0.95 per sq. ft.) for the first
year of the initial lease term and increases 4.0% per annum thereafter. Because the rate implicit in the lease is not readily determinable,
the Company used an incremental borrowing rate of approximately 10% to determine the present value of the lease payments.
In
November 2021, the Company entered into an operating lease to obtain office equipment with Pacific Office Automation, Inc. The initial
term of the lease is three years and it expires on November 2024. The initial base rent under this lease is $3,983 per month for the
entire lease term and includes a cash incentive of $0.1 million. Because the rate implicit in the lease is not readily determinable,
the Company has used an incremental borrowing rate of 7.42% to determine the present value of the lease payments.
Financing
Leases
In
November 2018 and April 2019, the Company entered into financing leases primarily for laboratory equipment used in research and development
activities. The financing leases have remaining terms that range from 3 to 8 months as of March 31, 2023 and include options to purchase
equipment at the end of the lease. Because the rate implicit in the lease is not readily determinable, the Company has used an incremental
borrowing rate of 10% to determine the present value of the lease payments for these leases.
In
March 2023, the Company negotiated a buyout of a financing lease liability of $0.2 million in exchange for the leased equipment and some
additional lab equipment. As the leased equipment ROU asset had previously been impaired to zero, the buyout resulted in the Company
recording a gain on termination of the lease of $0.1 million, that has been recorded in general and administrative expenses on the condensed
consolidated income statement for the period ended March 31, 2023.
As
of March 31, 2023, the maturities of operating and finance lease liabilities were as follows (in thousands):
SCHEDULE
OF OPERATING AND FINANCE LEASE LIABILITIES
| | |
Operating
leases* | | |
Finance
leases | |
| 2023
(excluding the three months ended March 31, 2023) | |
$ | 478 | | |
$ | 45 | |
| 2024 | |
| 793 | | |
| – | |
| 2025 | |
| 781 | | |
| – | |
| 2026 | |
| 813 | | |
| – | |
| 2027 | |
| 772 | | |
| – | |
| Total
lease payments | |
| 3,637 | | |
| 45 | |
| Less: | |
| | | |
| | |
| Imputed
interest | |
| (729 | ) | |
| (1 | ) |
| Total | |
$ | 2,908 | | |
$ | 44 | |
| * | 2023 amounts shown
above are net of cash inflows for tenant improvement allowances expected to be received during the year. |
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
| | |
March
31,
2023 | | |
December
31,
2022 | |
| Finance
lease right-of-use assets included within property and equipment, net | |
$ | 4 | | |
$ | 4 | |
| | |
| | | |
| | |
| Current
finance lease liabilities included within other current liabilities | |
$ | 45 | | |
$ | 293 | |
| Non-current
finance lease liabilities included within other long-term liabilities | |
| – | | |
| 41 | |
| Total | |
$ | 45 | | |
$ | 334 | |
Operating
leases
| | |
March
31, 2023 | | |
December
31,
2022 | |
| Current
operating lease liabilities included within other current liabilities | |
$ | 413 | | |
$ | 394 | |
| Operating
lease liabilities – non-current | |
| 2,495 | | |
| 2,632 | |
| Total | |
$ | 2,908 | | |
$ | 3,026 | |
The
components of lease expense were as follows (in thousands):
SUMMARY
OF COMPONENT OF LEASE EXPENSE
| | |
2023 | | |
2022 | |
| | |
For
the Three Months Ended March 31, | |
| | |
2023 | | |
2022 | |
| Operating
lease costs included within operating costs and expenses | |
$ | 395 | | |
$ | 318 | |
| Finance
lease costs: | |
| | | |
| | |
| Amortization
of right-of-use assets | |
$ | – | | |
$ | 51 | |
| Interest
on lease liabilities | |
| 7 | | |
| 16 | |
| Total | |
$ | 7 | | |
$ | 67 | |
Supplemental
cash flow information related to leases was as follows (in thousands):
SCHEDULE
OF SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO LEASES
| | |
2023 | | |
2022 | |
| | |
For
the Three Months Ended March 31, | |
| | |
2023 | | |
2022 | |
| Cash paid for amounts
included in the measurement of lease liabilities: | |
| | |
| |
| Operating
cash out flows from operating leases | |
$ | 192 | | |
$ | 264 | |
| Operating
cash out flows from finance leases | |
$ | 7 | | |
$ | 16 | |
| Financing
cash out flows from finance leases | |
$ | 72 | | |
$ | 116 | |
As
of March 31, 2023 and December 31, 2022, the weighted average remaining lease term for operating leases was 4.6 and 4.8 years, respectively,
and the weighted average discount rate used for operating leases was 9.70% and 9.69%, respectively. As of March 31, 2023 and December
31, 2022, the weighted average remaining lease term for finance leases was 0.7 and 1.2 years, respectively, and the weighted average
discount rate used for finance leases was 8.25% and 9.67%, respectively.
9.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The
following table presents the major components of accounts payable and accrued expenses (in thousands):
SCHEDULE
OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| | |
March
31,
2023 | | |
December
31,
2022 | |
| Accounts
payable | |
$ | 244 | | |
$ | 459 | |
| Salaries
and other compensation | |
| 517 | | |
| 463 | |
| Legal
and accounting | |
| 264 | | |
| 71 | |
| Accrued
severance | |
| 63 | | |
| 16 | |
| Benefit
plan accrual | |
| 66 | | |
| 66 | |
| Clinical
trials | |
| 369 | | |
| 131 | |
| Other | |
| 191 | | |
| 174 | |
| Total
accounts payable and accrued expenses | |
$ | 1,714 | | |
$ | 1,380 | |
10.
OTHER CURRENT LIABILITIES
The
following table presents the major components of other current liabilities (in thousands):
SCHEDULE
OF OTHER CURRENT LIABILITIES
| | |
March
31,
2023 | | |
December
31,
2022 | |
| Current
finance lease liabilities | |
$ | 45 | | |
$ | 293 | |
| Current
operating lease liabilities | |
| 413 | | |
| 394 | |
| Total
other current liabilities | |
$ | 458 | | |
$ | 687 | |
11.
STOCK-BASED COMPENSATION
2020,
2019 and 2017 Equity Incentive Plans
2020
Plan
On
October 25, 2019, the Company’s Board of Directors (the “Board”) approved the Company’s 2020 Stock Option and
Incentive Plan (the “2020 Plan”). The 2020 Plan became effective on December 19, 2019, the date approved by the stockholders.
The 2020 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units,
stock appreciation rights, unrestricted stock awards, dividend equivalent rights, and cash-based awards to the Company’s employees,
officers, directors, and consultants. The Board designated the Compensation Committee of the Board the administrator of the 2020 Plan,
including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and
the terms and conditions of such awards. Up to 419,549 shares of common stock are issuable pursuant to awards under the 2020 Plan. No
grants of awards may be made under the 2020 Plan after the later of December 19, 2029, or the tenth anniversary of the latest material
amendment of the 2020 Plan and no grants of incentive stock options may be made after October 25, 2029. The 2020 Plan provides that effective
on January 1 of each year the number of shares of common stock reserved and available for issuance under the 2020 Plan shall be cumulatively
increased by the lesser of 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31
or such lesser number of shares as determined by the 2020 plan administrator. Pursuant to the 2020 Plan, the number of shares of common
stock available for issuance increased by 131,872 shares during January 2022. On September 9, 2022, the Board approved an amendment to
the Company’s 2020 Stock Option and Incentive Plan to increase the number of shares available for awards by adding 1,450,000 shares
to the 2020 Plan. The increase in shares is subject to stockholder approval at the next annual or special meeting of stockholders. As
of March 31, 2023, the Company had 6,357 shares available for future issuances under the 2020 Plan.
2019
Plan
On
October 5, 2018, the Company’s Board approved the Company’s 2019 Equity Incentive Plan (the “2019 Plan”). The
2019 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock
appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors, and consultants. The
Board designated the Compensation Committee of the Board the administrator of the 2019 Plan, including determining which eligible participants
will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 120,000
shares of common stock are issuable pursuant to awards under the 2019 Plan. Unless earlier terminated by the Board, the 2019 Plan shall
terminate at the close of business on October 5, 2028. As of March 31, 2023, the Company had 10,920 shares available for future issuances
under the 2019 Plan.
2017
Plan
On
December 1, 2016, the Company’s Board approved the Company’s 2017 Equity Incentive Plan (the “2017 Plan”). The
purpose of the 2017 Plan is to promote the success of the Company and to increase stockholder value by providing an additional means
through the grant of awards to attract, motivate, retain and reward selected employees, consultants and other eligible persons. The 2017
Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation
rights and other types of stock-based awards to the Company’s employees, officers, directors, and consultants. The Board designated
the Compensation Committee of the Board the administrator of the 2017 Plan, including determining which eligible participants will receive
awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 292,000 shares
of common stock are issuable pursuant to awards under the 2017 Plan. Unless earlier terminated by the Board, the 2017 Plan shall terminate
at the close of business on December 1, 2026. As of March 31, 2023, the Company had 14,246 shares available for future issuances under
the 2017 Plan.
A
summary of the Company’s employee and non-employee stock option activity is presented below:
SCHEDULE
OF SHARE-BASED COMPENSATION, STOCK OPTIONS,ACTIVITY
| | |
Number
of Shares | | |
Weighted-Average
Exercise Price | |
| Outstanding
– December 31, 2022 | |
| 182,311 | | |
$ | 188.50 | |
| Granted | |
| – | | |
$ | – | |
| Forfeited | |
| (21,653 | ) | |
$ | 163.66 | |
| Outstanding
– March 31, 2023 | |
| 160,658 | | |
$ | 191.85 | |
| Options
exercisable, March 31, 2023 | |
| 158,459 | | |
$ | 193.22 | |
Employee
Stock Purchase Plan (ESPP)
In
May 2018, the Company adopted the Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved 20,000 shares
of common stock for purchase under the ESPP. The initial offering period began January 1, 2019, and ended on June 30, 2019, with the
first purchase date. Subsequent offering periods will automatically commence on each January 1 and July 1 and will have a duration of
six months ending with a purchase date June 30 and December 31 of each year. On each purchase date, ESPP participants will purchase shares
of common stock at a price per share equal to 85% of the lesser of (1) the fair market value per share of the common stock on the offering
date or (2) the fair market value of the common stock on the purchase date. As of March 31, 2023, the Company had 5,584 shares available
for future issuances under the ESPP.
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, 2022 | |
| 256,435 | |
| Granted | |
| 42,986 | |
| Vested | |
| (66,820 | ) |
| Forfeited | |
| (38,483 | ) |
| Unvested
– March 31, 2023 | |
| 194,118 | |
Stock-Based
Compensation Expense
The
stock-based compensation expense related to stock options, restricted stock awards, and the employee stock purchase plan was as follows
(in thousands):
SCHEDULE
OF SHARE-BASED COMPENSATION RELATED TO RESTRICTED STOCK AWARDS AND STOCK OPTIONS
| | |
2023 | | |
2022 | |
| | |
For
the Three Months Ended | |
| | |
March
31, | |
| | |
2023 | | |
2022 | |
| General
and administrative expense | |
$ | 31 | | |
$ | 546 | |
| Research
and development expense | |
| 15 | | |
| 216 | |
| Total
stock-based compensation expense | |
$ | 46 | | |
$ | 762 | |
12.
STOCKHOLDERS’ EQUITY
March
2022 Offering
On
March 16, 2022, the Company completed a registered direct offering of 3,000.000435 shares of Series A convertible preferred stock, 2,000.00029
shares of Series B convertible preferred stock and 655,738 warrants to purchase 655,738 shares of common stock (the “March 2022
Warrants”). Gross proceeds generated by the offering were $5.0 million. The exercise price of each warrant is $8.75 per share,
the warrants become exercisable six months after the date of the offering and will expire two years from the offering date.
Concurrent
with the closing of the offering on March 16, 2022, the Company modified the exercise price of the Existing 2021 Warrants. 363,636 warrants
issued on January 14, 2021, and 320,641 warrants issued on January 25, 2021 were modified to reduce the exercise price from $30 to $8.75
per share. The exercise price of the placement agent warrants was not modified. The Existing 2021 Warrants remain outstanding and unexercised
as of March 31, 2023.
The
holders of Series A and Series B convertible preferred stock were entitled to receive dividend payments in the same form as dividends
paid on shares of the common stock when, as and if such dividends were paid on shares of the common stock, on an if converted basis.
In the event of a liquidation event, the holders of each series of convertible preferred stock were entitled to receive out of the assets,
whether capital or surplus, of the Company the same amount that a holder of common stock would receive if the preferred stock were fully
converted. Each share of preferred stock was convertible at any time after the offering at the option of the holder into a number of
shares of the Company’s common stock, equal to $1,000 stated value per share, divided by the conversion price of $7.625. On March
17, 2022 all shares of Series B preferred stock were converted into 262,295 shares of common stock. On March 29, 2022, all shares of
Series A preferred stock were converted into 393,443 shares of common stock.
The
holder of the March 2022 Warrants may not exercise any portion of such warrants to the extent that the holder would own more than 4.99%
of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower
percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company.
The
Company also issued to designees of the placement agent warrants to purchase 5.0% of the aggregate number of March
2022 Warrants sold in the offering, or 32,787 warrants to purchase common stock. The placement
agent warrants have substantially the same terms as the March 2022 Warrants, except that
the placement agent warrants have an exercise price $9.525 per share, which is 125% of the price at which each share of preferred stock
sold in the offering is convertible to common stock.
As
the March 2022 Warrants and placement agent warrants could each require cash settlement in certain scenarios, the March 2022 Warrants
and placement agent warrants were classified as liabilities upon issuance and were initially recorded
at estimated fair values of $3.0 million and $0.1 million, respectively. The Series A and Series B preferred stock were equity classified
because they met characteristics of the equity classification criteria. The total proceeds from the offering were first allocated
to the liability classified warrants, based on their fair values, with the residual $1.9 million allocated to the preferred stock. The
net proceeds to the Company from the offering were $4.5 million, after direct offering expenses of $0.2 attributable to equity classified
preferred stock, which were recorded as a reduction to paid-in capital, and $0.3 million attributable to the liability classified March
2022 Warrants and private placement common stock warrants, which are included in general
and administrative expenses within the accompanying condensed consolidated statement of operations and comprehensive loss for the three
months ended March 31, 2022.
June
2022 Offering
On
June 5, 2022, the Company entered into a securities purchase agreement with a single healthcare-focused institutional investor for the
purchase and sale of shares of its common stock (or pre-funded warrants in lieu thereof) in a registered direct offering. In a concurrent
private placement (together with the registered direct offering, the “Offerings”), the Company entered into a separate securities
purchase agreement with the same investor for the unregistered purchase and sale of shares of common stock (or pre-funded warrants in
lieu thereof).
On
June 8, 2022, the Company completed the registered direct offering of 445,500 shares of its common stock, par value $0.001 per share
at a purchase price of $2.525 per share and 1,138,659 pre-funded warrants at a purchase price of $2.524 per warrant. The Company also
sold 1,584,159 pre-funded warrants at a purchase price of $2.524 per warrant in the private placement offering. Each pre-funded warrant
sold in the registered direct offering and private placement offering is exercisable for one share
of common stock at an exercise price of $0.001 per share, is immediately exercisable, and will not expire until fully exercised. Under
the securities purchase agreements for the Offerings, the Company agreed to issue to the investor in the Offerings unregistered preferred
investment options (the “June 2022 Warrants”) to purchase up to an aggregate of 3,168,318 shares of common stock, which were
issued at the closing of the Offerings. The June 2022 Warrants are exercisable for one share immediately upon issuance at an exercise
price of $2.40 per share and will expire five years from the date of issuance. The holder of the pre-funded warrants sold in the registered
direct offering has exercised 488,659, 545,000, and 1,689,159 of such warrants in June 2022, July 2022, and August 2022, respectively,
leaving 3,168,318 June 2022 Warrants that remain outstanding and unexercised as of March 31, 2023. The holder of the warrants may not
exercise any portion of such warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately
after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage
not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent, warrants
to purchase 5.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase
up to 158,416 shares of common stock). The placement agent warrants have substantially the same terms as the warrants, except that the
placement agent warrants have an exercise price equal to 125% of the purchase price per share (or $3.156 per share). None of the placement
agent warrants have been exercised as of March 31, 2023. The net proceeds to the Company from the offering were $7.3 million, after direct
offering expenses of $0.7 million payable by the Company.
As
the June 2022 Warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the June 2022
Warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated
fair values of $5.7 million and $0.3 million, respectively. Since the pre-funded warrants did not contain the same cash settlement provision,
these warrants are classified as a component of stockholders’ equity within additional paid-in-capital. The pre-funded warrants
were equity classified because they met characteristics of the equity classification criteria. The total proceeds from the offering were
first allocated to the liability classified warrants, based on their fair values, with the residual $2.0 million allocated on a relative
fair value basis to the common stock and pre-funded common stock warrants. Issuance costs allocated to the equity classified pre-funded
common stock warrants and common stock of $0.2 million were recorded as a reduction to paid-in capital. Issuance costs allocated to the
liability classified warrants of $0.5 million were recorded as an expense.
The
following table summarizes warrant activity for the three months ended March 31, 2023:
SUMMARY
OF WARRANT ACTIVITY
| | |
Outstanding December
31, 2022 | | |
Warrants Issued | | |
Warrants
Exercised | | |
Outstanding March
31, 2023 | |
| Transaction | |
| | | |
| | | |
| | | |
| | |
| February
14, 2020 common warrants | |
| 21,580 | | |
| – | | |
| – | | |
| 21,580 | |
| December
23, 2020 placement agent warrants | |
| 25,651 | | |
| – | | |
| – | | |
| 25,651 | |
| January
14, 2021 common warrants | |
| 363,636 | | |
| – | | |
| – | | |
| 363,636 | |
| January
14, 2021 placement agent warrants | |
| 21,818 | | |
| – | | |
| – | | |
| 21,818 | |
| January
25, 2021 common warrants | |
| 320,641 | | |
| – | | |
| – | | |
| 320,641 | |
| January
22, 2021 placement agent warrants | |
| 19,238 | | |
| – | | |
| – | | |
| 19,238 | |
| March
16, 2022 common warrants | |
| 655,738 | | |
| – | | |
| – | | |
| 655,738 | |
| March
16, 2022 placement agent warrants | |
| 32,787 | | |
| – | | |
| – | | |
| 32,787 | |
| June
8, 2022 common warrants | |
| 3,168,318 | | |
| – | | |
| – | | |
| 3,168,318 | |
| June
8, 2022 placement agent warrants | |
| 158,416 | | |
| – | | |
| – | | |
| 158,416 | |
| Total | |
| 4,787,823 | | |
| – | | |
| – | | |
| 4,787,823 | |
On
March 30, 2021, the Company entered into a sales agreement (“Sales Agreement”) with an investment banking firm to sell shares
of common stock having aggregate sales proceeds of up to $50.0 million, from time to time, through an “at the market” equity
offering program under which the investment banking firm would act as sales agent. On February 28, 2022, the Company exercised its right
to terminate the Sales Agreement and was obligated to make a one-time payment to the investment banking firm of $0.4 million. As a result
of the termination of the Sales Agreement, the Company expensed previously capitalized deferred offering costs of $0.7 million which
are included in general and administrative expense within the accompanying condensed consolidated statement of operations and comprehensive
loss for the three months ended March 31, 2022. No common stock was sold under the Sales Agreement.
13.
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
The
following tables present reconciliations for the numerators and denominators of basic and diluted net loss per share:
SCHEDULE
OF EARNINGS PER SHARE , BASIC AND DILUTED
| Numerator: | |
2023 | | |
2022 | |
| | |
For
the Three Months Ended | |
| | |
March
31, | | |
March
31, | |
| Numerator: | |
2023 | | |
2022 | |
| Net
loss, primary | |
$ | (4,243 | ) | |
$ | (3,771 | ) |
| Less:
gain from change in fair value of warrant liabilities | |
| – | | |
| (4,694 | ) |
| Net
loss, diluted | |
$ | (4,243 | ) | |
$ | (8,465 | ) |
| Denominator: | |
2023 | | |
2022 | |
| | |
For
the Three Months Ended | |
| | |
March
31, | | |
March
31, | |
| Denominator: | |
2023 | | |
2022 | |
| Basic
weighted average number of common shares | |
| 7,320,754 | | |
| 3,364,535 | |
| Potentially
dilutive effect of warrants | |
| – | | |
| 211,435 | |
| Diluted
weighted average number of common shares | |
| 7,320,754 | | |
| 3,575,970 | |
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
| | |
2023 | | |
2022 | |
| | |
For
the Three Months Ended | |
| | |
March
31, | | |
March
31, | |
| | |
2023 | | |
2022 | |
| Stock
options | |
| 160,658 | | |
| 212,428 | |
| Restricted
stock | |
| 194,118 | | |
| 174,054 | |
| Common
stock warrants | |
| 4,787,823 | | |
| 66,708 | |
| Shares
committed under ESPP | |
| 5,584 | | |
| 1,923 | |
| Outstanding
potentially dilutive securities | |
| 5,584 | | |
| 1,923 | |
14.
COMMITMENTS AND CONTINGENCIES
Contingencies
Securities
Class Action and Derivative Lawsuits
On
September 24, 2021, a class action complaint alleging violations of the Federal securities laws was filed in the United States District
Court, District of Utah, by Marc Richfield against the Company and certain officers of the Company, Case No. 2:21-cv-00561-BSJ. The Court
subsequently appointed a Lead Plaintiff and ordered the Lead Plaintiff to file an amended Complaint by February 7, 2022, which was extended
to February 21, 2022. The Lead Plaintiff filed an amended complaint on February 21, 2022, against the Company, two current officers of
the Company, and three former officers of the Company (the “Complaint”). The Complaint alleges that during the period from
January 30, 2018, through November 9, 2021, the defendants made or were responsible for, disseminating information to the public through
reports filed with the Securities and Exchange Commission and other channels that contained material misstatements or omissions in violation
of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 adopted thereunder. Specifically,
the Complaint alleges that the defendants misrepresented or failed to disclose that: (i) the Company’s product, SkinTE, was improperly
registered as a 361 HCT/P under Section 361 of the Public Health Service Act and that, as a result, the Company’s ability to commercialize
SkinTE as a 361 HCT/P was not sustainable because it was inevitable SkinTE would need to be registered under Section 351 of the Public
Health Service Act; (ii) the Company characterized itself as a commercial stage company when it knew sales of SkinTE as a 361 HCT/P were
unsustainable and that, as a result, it would need to file an IND and become a development stage company; (iii) issues arising from an
FDA inspection of the Company’s facility in July 2018, were not resolved even though the Company stated they were resolved; and
(iv) the IND for SkinTE was deficient with respect to certain chemistry, manufacturing, and control items, including items identified
by the FDA in July 2018, and as a result it was unlikely that the FDA would approve the IND in the form it was originally filed. The
Company filed a motion to dismiss the complaint for failure to state a claim, on April 22, 2022. The Lead Plaintiff filed its memorandum
in opposition to the Company’s motion to dismiss on July 18, 2022. The Company filed its reply memorandum to the Lead Plaintiff’s
opposition memorandum on August 11, 2022, and oral argument on the motion to dismiss was held September 8, 2022. At the hearing the judge
issued a ruling from the bench dismissing the Complaint without prejudice and granting the Lead Plaintiff leave to file an amended complaint.
The Lead Plaintiff filed an amended complaint (the “Amended Complaint”) on October 3, 2022, alleging additional facts. The
Company filed a motion to dismiss the Amended Complaint for failure to state a claim on November 2, 2022, Lead Plaintiff filed its brief
in opposition to the Company’s motion on December 2, 2022, and the Company filed its reply brief to the Lead Plaintiff brief in
opposition on December 23, 2022. Oral argument on the Company’s motion to dismiss the Amended Complaint was held March 6, 2023.
Following oral argument, the judge ruled that the Amended Complaint be dismissed with prejudice and requested that the Company, through
its counsel, submit a proposed opinion and order. The Company and Lead Plaintiff subsequently reached an agreement stipulating to the
form of the opinion and order, waiving the Lead Plaintiff’s right to appeal, and waiving the Company’s right to seek sanctions
under Rule 11 of the Federal Rules of Civil Procedure. The final opinion and order dismissing the Amended Complaint with prejudice was
issued by the judge on April 19, 2023.
On
October 25, 2021, a stockholder derivative complaint alleging violations of the Federal securities laws was filed in the United States
District Court, District of Utah, by Steven Battams against the Company, each member of the Board of directors, and two officers of the
Company, Case No. 2:21-cv-00632-DBB (the “Stockholder Derivative Complaint”). The Stockholder Derivative Complaint alleges
that the defendants made, or were responsible for, disseminating information to the public through reports filed with the Securities
and Exchange Commission and other channels that contained material misstatements or omissions in violation of Sections 10(b) and 20(a)
of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 adopted thereunder. Specifically, the Stockholder Derivative Complaint
alleges that the defendants misrepresented or failed to disclose that: (i) the IND for the Company’s product, SkinTE, filed with
the FDA was deficient with respect to certain chemistry, manufacturing, and control items; (ii) as a result, it was unlikely that the
FDA would approve the IND in its current form; (iii) accordingly, the Company had materially overstated the likelihood that the SkinTE
IND would obtain FDA approval; and (iv) as a result, the public statements regarding the IND were materially false and misleading. The
parties have stipulated to stay the Stockholder Derivative Complaint until (1) the dismissal of the Complaint described above, (2) denial
of a motion to dismiss the Complaint, or (3) notice is given that any party is withdrawing its consent to the stipulated stay of the
Stockholder Derivative Complaint proceeding. After the order of dismissal with prejudice of the class action lawsuit described above
and exhaustion of all appeals by the Lead Plaintiff, the stay of the Stockholder Derivative Complaint will expire. The Company believes
the allegations in the Stockholder Derivative Complaint are without merit and intends to defend the litigation vigorously after the stay
expires. At this early stage of the proceedings the Company is unable to make any prediction regarding the outcome of the litigation.
Other
Matters
In
the ordinary course of business, the Company may become involved in lawsuits, claims, investigations, proceedings, and threats of litigation
relating to intellectual property, commercial arrangements, employment, regulatory compliance, and other matters. Except as noted above,
at March 31, 2023, the Company was not party to any legal or arbitration proceedings that may have significant effects on its financial
position or results of operations. No governmental proceedings are pending or, to the Company’s knowledge, contemplated against
the Company. The Company is not a party to any material proceedings in which any director, member of senior management or affiliate of
the Company’s is either a party adverse to the Company or its subsidiaries or has a material interest adverse to the Company or
its subsidiaries.
Commitments
The
Company has entered into employment agreements with key executives that contain severance terms and change of control provisions.
On
June 25, 2021, the Company entered into a statement of work with a contract research organization to provide services for a proposed
clinical trial described as a multi-center, prospective, randomized controlled trial evaluating the effects of SkinTE in the treatment
of full-thickness diabetic foot ulcers at a cost of approximately $6.5 million consisting of $3.1 million of service fees and $3.4 million
of estimated costs. In July 2021 the Company prepaid 10% of the total cost recited in the original work order, or $0.5 million, which
will be applied to payment of the final invoice under the work order. Over the approximately three-year term of the clinical trial the
service provider shall submit to the Company for payment invoices on a monthly basis for units of work stated in the work order that
are completed and billable expenses incurred. During the three months ended March 31, 2023 and 2022, the Company incurred expenses totaling
$0.4 million and $0.2 million, respectively. Either party may terminate the agreement without cause on 60 days’ notice to the other
party.
15.
SEGMENT REPORTING
Reportable
segments are presented in a manner consistent with the internal reporting provided to the chief operating decision maker (CODM), the
Chief Executive Officer of the Company. The CODM allocates resources to and assesses the performance of each segment using information
about its revenue and operating income (loss). The Company’s operations involve products and services which are managed separately.
Accordingly, it operates in two segments: 1) regenerative medicine products and 2) contract services. In April 2022, the Company sold
IBEX and IBEX Property, the Company’s subsidiaries which operate within the contract services reporting segment. Contract services
ceased to be a reportable segment upon disposal of IBEX and historical information from prior to the disposal date is reported here.
See Note 5 for detail on management’s disposal of IBEX.
Certain
information concerning the Company’s segments is presented in the following tables (in thousands):
SCHEDULE
OF SEGMENT INFORMATION
| | |
2023 | | |
2022 | |
| | |
For
the Three Months Ended | |
| | |
March
31, | |
| | |
2023 | | |
2022 | |
| Net
revenues: | |
| | | |
| | |
| Reportable
segments: | |
| | | |
| | |
| Regenerative
medicine | |
$ | — | | |
$ | — | |
| Contract
services | |
| — | | |
| 741 | |
| Total
net revenues | |
$ | — | | |
$ | 741 | |
| | |
| | | |
| | |
| Net
(loss)/income: | |
| | | |
| | |
| Reportable
segments: | |
| | | |
| | |
| Regenerative
medicine | |
$ | (4,243 | ) | |
$ | (3,545 | ) |
| Contract
services | |
| — | | |
| (226 | ) |
| Total
net loss | |
$ | (4,243 | ) | |
$ | (3,771 | ) |
