UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, ~~2017~~2018

Commission File No. 000-51128

POLARITYTE, INC.

(Exact name of registrant as specified in its charter)

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

~~615 Arapeen Drive~~1960 S 4250 W

Salt Lake City, UT ~~84108~~84104

(Address of principal executive offices)

Registrant’s Telephone Number, Including Area Code:~~(732) 225-8910~~(385) 237-2279

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.4.05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

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

Large accelerated filer	[ ]		Accelerated filer	[ ]
Non-accelerated filer	[ ]	~~(Do not check if smaller reporting company)~~	Smaller reporting company	[X]
Emerging growth company	[ ]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of September 12, ~~2017,~~2018, there were ~~6,333,985~~21,475,370 shares of the Registrant’s common stock outstanding.

INDEX

		Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of July 31, ~~2017~~2018 (unaudited) and October 31, ~~2016~~2017	1	3
Condensed Consolidated Statements of Operations for the three and nine months ended July 31, 2018 and 2017 ~~and 2016~~ (unaudited)	2	4
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended July 31, ~~2017~~2018 (unaudited)	3	5
Condensed Consolidated Statements of Cash Flows for the nine months ended July 31, 2018 and 2017 ~~and 2016~~ (unaudited)	4	6
Notes to Condensed Consolidated Financial Statements (unaudited)	5	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19	23
Item 3. Quantitative and Qualitative Disclosures about Market Risk	22	26
Item 4. Controls and Procedures	22	26

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	23	27
Item 1A. Risk Factors	23	28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	23	30
Item 3. Defaults Upon Senior Securities	23	30
Item 4. Mine Safety Disclosures	24	30
Item 5. Other Information	24	30
Item 6. Exhibits	24	31
SIGNATURES	25	32

~~-i-~~

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

POLARITYTE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	July 31,2017			October 31,2016			July 31, 2018			October 31, 2017
	(Unaudited)							(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	3,027		$	6,523		$	84,827		$	17,667
Accounts receivable								329			-
Inventory								255			-
Prepaid expenses and other current assets		411			47			715			237
Receivable from Zift		60			-			30			60
Current assets related to discontinued operations		-			163
Total current assets		3,498			6,733			86,156			17,964
Non-current assets:
Property and equipment, net		2,073			18			10,307			2,173
Receivable from Zift, non-current		30			-			-			15
Security deposits								139			-
Goodwill								278			-
Intangible assets, net								1,007			-
Total non-current assets		2,103			18			11,731			2,188
TOTAL ASSETS	$	5,601		$	6,751		$	97,887		$	20,152

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued expenses	$	1,439		$	474		$	3,867		$	1,939
Warrant liability		-			70
Current liabilities related to discontinued operations		-			810
Contingent consideration								268			-
Current portion of long-term notes payable								533			-
Warrant liability and embedded derivative								-			13,502
Total current liabilities		1,439			1,354			4,668			15,441
Long-term notes payable								705			-
Other long-term liabilities								89			-
Total liabilities		1,439			1,354			5,462			15,441

Commitments and Contingencies

Redeemable convertible preferred stock - Series F - 0 and 6,455 shares authorized, issued and outstanding at July 31, 2018 and October 31, 2017; liquidation preference - $0 and $17,750.								-			4,541

STOCKHOLDERS’ EQUITY:
Convertible preferred stock - 10,000,000 shares authorized, 3,246,042 and 7,374,454 shares issued and outstanding at July 31, 2017 and October 31, 2016, aggregate liquidation preference $2,140 and $4,854, respectively		111,195			10,153
Common stock - $.001 par value; 250,000,000 shares authorized; 6,093,743 and 2,782,963 shares issued and outstanding at July 31, 2017 and October 31, 2016, respectively		6			3
Convertible preferred stock - 25,000,000 shares authorized, 0 and 3,230,655 shares issued and outstanding at July 31, 2018 and October 31, 2017, aggregate liquidation preference $0 and $2,140, respectively								-			109,995
Common stock - $.001 par value; 250,000,000 shares authorized; 21,475,370 and 6,515,524 shares issued and outstanding at July 31, 2018 and October 31, 2017, respectively								21			7
Additional paid-in capital		142,358			123,417			394,362			149,173
Accumulated deficit		(249,397	)		(128,176	)		(301,958	)		(259,005	)
Total stockholders’ equity		4,162			5,397			92,425			170
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	5,601		$	6,751		$	97,887		$	20,152

See accompanying notes to condensed consolidated financial statements.

POLARITYTE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

	For the three months ended						For the nine months ended						For the three months ended						For the nine months ended
	July 31,						July 31,						July 31,						July 31,
	2017			2016			2017			2016			2018			2017			2018			2017
Net revenues													$	416		$	-		$	432		$	-
Cost of sales														229			-			231			-
Gross profit														187			-			201			-
Operating costs and expenses
Research and development	$	1,641		$	-		$	3,424		$	-
Research and development – intellectual property acquired		-			-			104,693			-
Product research and development														2,339			1,641			14,563			3,424
Research and development - intellectual property acquired														-			-			-			104,693
General and administrative		3,629			1,880			12,757			3,531			15,239			3,629			32,074			12,757
		5,270			1,880			120,874			3,531			17,578			5,270			46,637			120,874
Operating loss		(5,270	)		(1,880	)		(120,874	)		(3,531	)		(17,391	)		(5,270	)		(46,436	)		(120,874	)
Other expenses (income)

Other (expenses) income
Interest income		(3	)		(5	)		(10	)		(15	)		146			3			189			10
Change in fair value of warrant liability		-			(159	)		8			(133	)
Change in fair value of derivatives														-			-			3,814			(8	)
Loss on extinguishment of warrant liability														-			-			(520	)		-
Net loss from continuing operations		(5,267	)		(1,716	)		(120,872	)		(3,383	)		(17,245	)		(5,267	)		(42,953	)		(120,872	)
Loss from discontinued operations		(33	)		(770	)		(449	)		(851	)
Gain (loss) from discontinued operations														-			(33	)		-			(449	)
Gain on sale of discontinued operations		100			-			100			-			-			100			-			100
Gain (loss) from discontinued operations, net		67			(770	)		(349	)		(851	)		-			67			-			(349	)
Net loss		(5,200	)		(2,486	)		(121,221	)		(4,234	)		(17,245	)		(5,200	)		(42,953	)		(121,221	)
Special cash dividend attributable to preferred stockholders		-			-			-			(6,002	)
Deemed dividend - accretion of discount on Series F preferred stock														-			-			(1,290	)		-
Deemed dividend - exchange of Series F preferred stock														-			-			(7,057	)		-
Cumulative dividends on Series F preferred stock														-			-			(373	)		-
Net loss attributable to common stockholders	$	(5,200	)	$	(2,486	)	$	(121,221	)	$	(10,236	)	$	(17,245	)	$	(5,200	)	$	(51,673	)	$	(121,221	)

Net loss per share, basic and diluted:
Loss from continuing operations	$	(0.94	)	$	(0.65	)	$	(26.65	)	$	(1.73	)	$	(0.86	)	$	(0.94	)	$	(3.24	)	$	(26.65	)
Gain (loss) from discontinued operations		0.01			(0.29	)		(0.08	)		(0.43	)		-			0.01			-			(0.08	)
Special cash dividend attributable to preferred stockholders		-			-			-			(3.06	)
Deemed dividend - accretion of discount on preferred stock														-			-			(0.10	)		-
Deemed dividend - exchange of Series F preferred stock														-			-			(0.53	)		-
Cumulative dividends on Series F preferred stock														-			-			(0.03	)		-
Net loss attributable to common stockholders	$	(0.93	)	$	(0.94	)	$	(26.73	)	$	(5.22	)	$	(0.86	)	$	(0.93	)	$	(3.90	)	$	(26.73	)

Weighted average shares outstanding, basic and diluted:		5,568,072			2,631,640			4,534,967			1,960,643			20,092,848			5,568,072			13,256,693			4,534,967

See accompanying notes to condensed consolidated financial statements.

POLARITYTE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

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

	Preferred Stock						Common Stock				Additional Paid-in			Accumulated			Total Stockholders’
	Number			Amount			Number		Amount		Capital			Deficit			Equity
Balance as of October 31, 2017		3,230,655		$	109,995			6,515,524	$	7	$	149,173		$	(259,005	)	$	170
Issuance of common stock in connection with:
Conversion of Series A preferred stock to common stock		(3,146,671	)		(769	)		713,036		1		768			-			-
Conversion of Series B preferred stock to common stock		(47,689	)		(4,020	)		794,820		1		4,019			-			-
Conversion of Series C preferred stock to common stock		(2,578	)		(201	)		59,950		-		201			-			-
Conversion of Series D preferred stock to common stock		(26,667	)		(312	)		44,445		-		312			-			-
Conversion of Series E preferred stock to common stock		(7,050	)		(104,693	)		7,050,000		7		104,686			-			-
Exchange of Series F preferred stock and dividends to common stock		-			-			1,003,391		1		13,060			-			13,061
Extinguishment of warrant liability		-			-			151,871		-		3,045			-			3,045
Option exercises		-			-			30,417		-		109			-			109
Proceeds received from issuance of common stock, net of issuance costs of $556		-			-			4,791,819		4		92,672			-			92,676
Stock-based compensation expense		-			-			308,387		-		27,674			-			27,674
Deemed dividend - accretion of discount on Series F preferred stock		-			-			-		-		(1,290	)		-			(1,290	)
Cumulative dividends on Series F preferred stock		-			-			-		-		(373	)		-			(373	)
Series F preferred stock dividends paid in common stock		-			-			11,710		-		306			-			306
Net loss		-			-			-		-		-			(42,953	)		(42,953	)
Balance as of July 31, 2018		-		$	-			21,475,370	$	21	$	394,362		$	(301,958	)	$	92,425

See accompanying notes to condensed consolidated financial statements.

POLARITYTE, INC.

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF ~~CHANGES IN STOCKHOLDERS’ EQUITY~~CASH FLOWS

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

Preferred Stock Common Stock Additional Paid-in Accumulated Total Stockholders’
Number Amount Number Amount Capital Deficit Equity
Balance as of October 31, 2016 7,374,454 $ 10,153 2,782,963 $ 3 $ 123,417 $ (128,176 ) $ 5,397
Issuance of common stock in connection with:
Conversion of Series A preferred stock to common stock (3,991,487 ) (976 ) 761,798 1 975 - -
Conversion of Series B preferred stock to common stock (6,512 ) (549 ) 108,543 - 549 - -
Conversion of Series C preferred stock to common stock (7,798 ) (609 ) 146,346 - 609 - -
Conversion of Series D preferred stock to common stock (129,665 ) (1,517 ) 216,106 - 1,517 - -
Issuance of Series E preferred stock for research and development intellectual property 7,050 104,693 - - - - 104,693
Proceeds from option exercises - - 231,404 - 1,123 - 1,123
Warrant exchange to common stock - - 56,250 - 78 - 78
Stock-based compensation expense - - 1,031,000 1 11,813 - 11,814
Shares issued for cash - - 759,333 1 2,277 - 2,278
Net loss - - - - - (121,221 ) (121,221 )
Balance as of July 31, 2017 3,246,042 $ 111,195 6,093,743 $ 6 $ 142,358 $ (249,397 ) $ 4,162

	For the nine months ended July 31,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(42,953	)	$	(121,221	)
Loss from discontinued operations		-			(349	)
Loss from continuing operations		(42,953	)		(120,872	)
Adjustments to reconcile net loss from continuing operations to net cash used in continuing operating activities:
Loss on extinguishment of warrant liability		520			-
Depreciation and amortization		1,052			295
Stock based compensation expense		27,674			10,696
Amortization of debt discount		18			-
Change in fair value of contingent consideration		20			-
Research and development - intellectual property acquired		-			104,693
Change in fair value of derivatives		(3,814	)		8
Changes in operating assets and liabilities:
Accounts receivable		(329	)		-
Inventory		(255	)		-
Prepaid expenses and other current assets		(478	)		-
Security deposits		(139	)		(364	)
Accounts payable and accrued expenses		1,575			857
Other long-term liabilities		89			-
Net cash used in continuing operating activities		(17,020	)		(4,687	)
Net cash provided by discontinued operating activities		-			33
Net cash used in operating activities		(17,020	)		(4,654	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(6,392	)		(2,253	)
Acquisition of IBEX		(2,258	)		-
Net cash used in continuing investing activities		(8,650	)		(2,253	)
Net cash provided by discontinued investing activities		45			10
Net cash used in investing activities		(8,605	)		(2,243	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock options exercised		109			1,123
Net proceeds from the sale of common stock		92,676			2,278
Net cash provided by financing activities		92,785			3,401

Net increase (decrease) in cash and cash equivalents		67,160			(3,496	)
Cash and cash equivalents - beginning of period		17,667			6,523
Cash and cash equivalents - end of period	$	84,827		$	3,027

Supplemental schedule of non-cash investing and financing activities:
Conversion of Series A preferred stock to common stock	$	769		$	976
Conversion of Series B preferred stock to common stock	$	4,020		$	549
Conversion of Series C preferred stock to common stock	$	201		$	609
Conversion of Series D preferred stock to common stock	$	312		$	1,517
Conversion of Series E preferred stock to common stock	$	104,693		$	-
Exchange of Series F preferred stock for common stock	$	13,061		$	-
Extinguishment of warrant liability	$	2,525		$	-
Unpaid liability for acquisition of property and equipment	$	368		$	108
Warrant exchange for common stock shares	$	-		$	78
Deemed dividend - accretion of discount on preferred stock	$	1,290		$	-
Cumulative dividends on Series F preferred stock	$	373		$	-
Series F preferred stock dividends paid in common stock	$	306		$	-
Contingent consideration for IBEX acquisition	$	278		$	-
Contingent consideration earned and recorded in accounts payable	$	30		$	-
Note payable issued as partial consideration for IBEX acquisition	$	1,220		$

See accompanying notes to condensed consolidated financial statements.

~~POLARITYTE, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(Unaudited, in thousands)~~

For the nine months ended July 31,
2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (121,221 ) $ (4,234 )
Loss from discontinued operations 349 851
Loss from continuing operations (120,872 ) (3,383 )
Adjustments to reconcile net loss from continuing operations to net cash used in continuing operating activities:
Depreciation and amortization 295 -
Stock based compensation expense 10,696 1,845
Research and development - intellectual property acquired 104,693 -
Change in fair value of warrant liability 8 (133 )
Offering costs expensed - 21
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (364 ) (20 )
Accounts payable and accrued expenses 857 (46 )
Net cash used in continuing operating activities (4,687 ) (1,716 )
Net cash provided by discontinued operating activities 33 163
Net cash used in operating activities (4,654 ) (1,553 )

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,253 ) -
Net cash used in continuing investing activities (2,253 ) -
Net cash provided by discontinued investing activities 10 -
Net cash used in investing activities (2,243 )

CASH FLOWS FROM FINANCING ACTIVITIES
Special cash dividend - (10,000 )
Proceeds from stock options exercised 1,123 129
Net proceeds from the sale of common stock and warrants - 1,406
Proceeds from the sale of common stock 2,278 -
Payments to Zift - (299 )
Net cash provided by (used in) financing activities 3,401 (8,764 )

Net decrease in cash and cash equivalents (3,496 ) (10,317 )
Cash and cash equivalents - beginning of period 6,523 17,053
Cash and cash equivalents - end of period $ 3,027 $ 6,736

Supplemental schedule of non-cash investing and financing activities:
Conversion of Series A preferred stock to common stock $ 976 $ 401
Conversion of Series B preferred stock to common stock $ 549 $ -
Conversion of Series C preferred stock to common stock $ 609 $ -
Conversion of Series D preferred stock to common stock $ 1,517 $ 140
Unpaid liability for acquisition of property and equipment $ 108 $ -
Warrant exchange for common stock shares $ 78 $ -
Common stock shares and warrants issued for offering costs $ - $ 75

~~See accompanying notes to condensed consolidated financial statements.~~

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION

~~Asset Acquisition and Name Change.~~ ~~On December 1, 2016~~, ~~Majesco Entertainment Company (~~~~n/k/a~~PolarityTE, Inc.~~), a Delaware corporation~~ (the “Company”) ~~entered into an agreement to acquire~~is a commercial-stage biotechnology and regenerative biomaterials company focused on transforming the ~~assets~~lives of ~~Polarity NV (as defined below),~~patients by discovering, designing and developing a range of regenerative ~~medicine company. The asset acquisition was subject to shareholder approval, which was received on March 10, 2017~~tissue products and ~~the transaction closed on April 7, 2017, as more fully described below. In January, 2017, the Company changed its name to “PolarityTE, Inc.”~~

On December 1, 2016, the Company appointed Dr. Denver Lough as Chief Executive Officer, Chief Scientific Officer and Chairman of our Board of Directors and Dr. Ned Swanson as Chief Operating Officer of the Company. Until their respective appointments, both doctors were associated with Johns Hopkins University, Baltimore, Maryland, as full-time residents. On December 1, 2016, Dr. Lough assigned the patent application as well as all related intellectual property to a newly-formed Nevada corporation, Polarityte, Inc. (“Polarity NV”), and the Company entered into an Agreement and Plan of Reorganization (the “Agreement”) with Polarity NV and Dr. Lough. As a result, at closing, the patent application would be owned by the Company without the need for further assignments or recordation with the Patent Trademark Office.

On April 7, 2017, the Company issued 7,050 shares of its newly authorized Series E Preferred Stock (the “Series E Preferred Shares”) convertible into an aggregate of 7,050,000 shares of the Company’s common stock with a fair value of approximately $104.7 million which is equal to 7,050,000 common shares times $14.85 (the closing price of the Company’s common stock as of April 7, 2017) to Dr. Loughbiomaterials for the ~~purchase~~fields of the Polarity NV’s assets. Since the assets purchased were in-process research and development assets, the total purchase price was immediately expensed as research and development - intellectual property acquired since they have no alternative future use.

Drs. Lough and Swanson lead the Company’s current efforts focused on scientific research and development and in this regard on December 1, 2016, the Company leased laboratory space and purchased laboratory equipment in Salt Lake City, Utah. Subsequent expenditures include the purchase of medical equipment, including microscopes for high end real-time imaging of cells and tissues required for tissuemedicine, biomedical engineering and regenerative medicine research. The Company has added additional facilities, and established university and scientific relationships and collaborations in order to pursue its business. None of these activities were performed by Dr. Lough or Dr. Swanson prior to December 1, 2016 in connection with their university positions or privately.

Dr. Lough is the named inventor under a pending patent application for a novel regenerative medicine and tissue engineering platform filed in the United States and elsewhere. The Company believes that its future success depends significantly on its ability to protect its inventions and technology. Prior to December 1, 2016, no employees, consultants or partners engaged in any business activity related to the patent application and no licenses or contracts were granted related to the patent application, other than professional services related to preparation and filing of the patent.

There was never any intent to acquire an ongoing business and no ongoing business was acquired. The asset is preserved in a stand-alone entity merely as a vehicle to provide the Company a seamless means to acquire the asset (a patent application) without undue cost, expense and time. Polarity NV has never had employees and, therefore, no employees were acquired in the transaction.

~~The Company adopted ASU 2017-01,~~~~Business Combinations (Topic 805), Clarifying the Definition of a Business~~~~, during the first quarter of fiscal 2017. In accordance with ASU 2017-01 we analyzed the above transaction as follows:~~

Step 1 - Is substantially all the fair value of the gross assets acquired concentrated in a single or (group of similar) identifiable asset(s)? - The Company has a proposal to acquire a single intellectual property asset and no employees on the acquisition date.

Step 2 - Evaluate whether an input and a substantive process exists? Does the set have outputs? - The set does not yet have outputs, as Polarity NV’s intellectual property does not generate any revenue. Without outputs, the set requires employees that form an organized workforce with skills, knowledge, or experience to perform an acquired process that is critical to the ability to create outputs to qualify as a business. Polarity NV never had any employees or workforce. On December 1, 2016, prior to any Polarity NV acquisition, the Company hired Denver Lough as its Chief Executive and Chief Scientific Officer and Edward Swanson as Chief Operating Officer. Both of these executives were employed full-time by Johns Hopkins University and were not employed by Polarity NV. In December 2016, the Company established a clinical advisory board and added three members in December 2016 and three more in January 2017. Establishing the clinical advisory board and hiring a COO are critical to establishing at the Company for the first time a workforce that has the knowledge and experience to obtain regulatory approval of the Company’s intellectual property. Therefore, the acquisition of an intellectual property asset and no employees from Polarity NV on April 7, 2017 did not represent the acquisition of an organized workforce with the necessary skills and experience to create outputs.

~~POLARITYTE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~material sciences.

Discontinued ~~Operations.~~Operations. On June 23, 2017, the Company sold Majesco Entertainment Company, a Nevada corporation and wholly-owned subsidiary of the Company (“Majesco Sub”), to Zift Interactive LLC, a Nevada limited liability company (“Zift”), pursuant to a purchase agreement. Pursuant to the terms of the agreement, the Company sold 100% of the issued and outstanding shares of common stock of Majesco to Zift, including all of the right, title and interest in and to Majesco Sub’s business of developing, publishing and distributing video game products through mobile and online digital downloading. Pursuant to the terms of the agreement, the Company will receive total cash consideration of approximately $100,000 ($5,000 upon signing the agreement and 19 additional monthly payments of $5,000) plus contingent consideration based on net revenues ~~valued at~~with a fair value of $0. As of July 31, ~~2017,~~2018, the Company received ~~$10,000~~$70,000 in cash ~~consideration.~~

~~As a result of transactions contemplated above, the Company disposed entirely of its gaming business assets~~consideration and ~~intends to devote its resources and attention to its regenerative medicine efforts going forward.~~

~~General.~~The accompanying condensed consolidated financial statements present the financial results of PolarityTE, Inc. and its wholly owned subsidiaries; Polarity NV, Majesco Sub and Majesco Europe Limited. Majesco Europe Limited was dissolved during the year ended October 31, 2016 and Majesco Sub was sold on June 23, 2017.$30,000 remains receivable.

~~Segments.~~Segments~~With the sale of Majesco Sub on June 23, 2017, the Company now solely~~. The Company’s operations involve dissimilar products which are managed separately. Accordingly, it operates in ~~its Regenerative Medicine segment.~~

~~Regenerative Medicine~~

~~Through its~~two segments: 1) regenerative medicine efforts, the Company is developing the proprietary tissue engineering platform invented by Dr. Denver Lough to translate regenerative products into clinical application. Preliminarily, the technological platform has demonstrated the potential capacity to grow fully functional tissue across the entire spectrum of the musculoskeletal and integumentary systems, including skin, muscle, bone, cartilage, peripheral nerve, fat, and fascia. Preliminary results indicate it has applications across solid organ and specialty tissue regeneration as well, including bowel, liver, kidney, and urethra. The product furthest in the development pipeline is an autologous (tissue from the patient themselves) skin regeneration construct, SkinTE^TM~~, to regenerate fully functional skin with all of its layers, including epidermis, dermis, hypodermis, and all appendages including hair and glands. The Company is preparing SkinTE~~^TM for clinical testing and market entry. The platform provides a pipeline of products to follow in parallel, with plans for serial clinical and market entry, and each addressing separate and similarly sized potential markets. The Company’s approach seeks to benefit from fewer regulatory and capital barriers to market entry, avoiding the long timelines associated with three phase trials and their associated costs seen with other competing technologies and therapeutics. The regenerative medicine business model being pursued takes advantage of the smaller regulatory hurdles, with streamlined product development from cell/tissue in vitro and ex vivo testing, to small and large animal preclinical models, manufacturing technology transfer, and ultimately clinical application and market entry occurring in a mapped out stepwise fashion for each product.

~~NASDAQ listing.~~ On January 6, 2017, PolarityTE, Inc., was notified by The NASDAQ Stock Market, LLC of failure to comply with Nasdaq Listing Rule 5605(b)(1) which requires that a majority of the directors comprising the Company’s Board of Directors be considered “independent”, as defined under the Rule. The notice had no immediate effect on the listing or trading of the Company’s common stock on The NASDAQ Capital Market and the common stock continued to trade on The NASDAQ Capital Market under the symbol “COOL”2) veterinary sciences (“IBEX”).

On February 22, 2017, the Company regained compliance with Listing Rule 5605(b)(1), the independent director requirement for continued listing on The NASDAQ Stock Market, with the appointment of Mr. Steve Gorlin and Dr. Jon Mogford, and the matter is now closed. PolarityTE’s common stock will continue to be listed on The NASDAQ Capital Market.

The accompanying interim condensed consolidated financial statements of the Company are unaudited, but in the opinion of management, reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim period. Accordingly, they do not include all information and notes required by generally accepted accounting principles for complete financial statements. The ~~Company’s financial results are impacted by the seasonality of the retail selling season and the timing of the release of new titles. The~~ results of operations for interim periods are not necessarily indicative of results to be expected for the entire fiscal year. The balance sheet at October 31, ~~2016~~2017 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended October 31, ~~2016~~2017 filed with the Securities and Exchange Commission on Form 10-K on ~~December~~January 30, ~~2016.~~

~~POLARITYTE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~2018.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of ~~Consolidation.~~Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned ~~subsidiaries; Polarity NV,~~subsidiaries: PolarityTE, Inc., a Nevada corporation, Utah CRO Services, Inc., IBEX Preclinical Research, Inc., IBEX Property, LLC, Majesco Acquisition Corp. II and Majesco Sub ~~and Majesco Europe Limited. Majesco Europe Limited was dissolved during~~(through the ~~year ended October 31, 2016 and~~date sold). Majesco Sub was sold on June 23, 2017. Significant intercompany accounts and transactions have been eliminated in consolidation. Utah CRO Services, Inc., IBEX Preclinical Research, Inc., and IBEX Property, LLC are included from the date of acquisition, May 3, 2018.

Cash and ~~cash equivalents.~~Cash Equivalents. Cash equivalents consist of highly liquid investments with original maturities of three months or less at the date of purchase. At various times, the Company has deposits in excess of the Federal Deposit Insurance Corporation limit. The Company has not experienced any losses on these accounts.

Accounts ~~Payable~~Receivable.Accounts receivable consists of amounts due to the Company related to the sale of the Company’s core product SkinTE and ~~Accrued Expenses.~~veterinary science services. Accounts that are outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due and the customer’s current ability to pay its obligation to the Company. The Company writes off accounts receivable when they become uncollectible. As of July 31, 2018, there was no allowance for doubtful accounts.

Inventory.Inventory comprises finished goods, which are valued at the lower of cost or net realizable value, on a first-in, first-out basis. The Company evaluates the carrying ~~amounts~~value of ~~accounts payable~~its inventory on a regular basis, taking into account anticipated future sales compared with quantities on hand, and ~~accrued expenses approximate fair value as these accounts are largely current and short term in nature.~~the remaining shelf life of goods on hand.

Property and ~~Equipment.~~Equipment. Property and equipment is stated at cost. Depreciation and amortization is being provided for by the straight-line method over the estimated useful lives of the assets, generally ~~five~~range from three to eight years. Amortization of leasehold improvements is provided for over the shorter of the term of the lease or the life of the asset.

Capitalized Software Development Costs. Software development costs are capitalized once technological feasibility is established and management expects such costs to be recoverable against future revenues. Amounts related to software development that are not capitalized are charged immediately to expense. Capitalized costs are amortized straight-line over the estimated useful life of three years.

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Goodwill and Intangible Assets.Goodwill represents the excess acquisition cost over the fair value of net tangible and intangible assets acquired. Goodwill is not amortized and is subject to annual impairment testing at the end of the third fiscal quarter or between annual tests if an event or change in circumstance occurs that would more likely than not reduce the fair value of a reporting unit below its carrying value. In testing for goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not required. If the Company concludes otherwise, it is required to perform the two-step impairment test. The goodwill impairment test is performed at the reporting unit level by comparing the estimated fair value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not impaired. If the estimated fair value is less than carrying value, further analysis is necessary to determine the amount of impairment, if any, by comparing the implied fair value of the reporting unit’s goodwill to the carrying value of the reporting unit’s goodwill.

The fair value of reporting units is based on widely accepted valuation techniques that the Company believes market participants would use, although the valuation process requires significant judgment and often involves the use of significant estimates and assumptions. The Company utilizes a market cap approach in estimating the fair value of reporting units. The estimates and assumptions used in determining fair value could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. Adverse market or economic events could result in impairment charges in future periods.

Intangible assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives, which generally range from one to eleven years. The useful life is the period over which the asset is expected to contribute directly, or indirectly, to its future cash flows. Intangible assets are reviewed for impairment on an interim basis when certain events or circumstances exist. For amortizable intangible assets, impairment exists when the undiscounted cash flows exceeds its carrying value. At least annually, the remaining useful life is evaluated.

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.

Income ~~Taxes.~~Taxes. The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company evaluates the potential for realization of deferred tax assets at each quarterly balance sheet date and records a valuation allowance for assets for which realization is not more likely than not.

Stock Based ~~Compensation.~~Compensation. The Company measures all stock-based compensation to employees using a fair value method and records such expense in general and administrative and research and development expenses. Compensation expense for stock options with cliff vesting is recognized on a straight-line basis over the vesting period of the award, based on the fair value of the option on the date of grant. For stock options with graded vesting, the Company recognizes compensation expense over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards. Forfeitures are recognized as they occur.

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

Loss Per ~~Share.~~Share. Basic loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share excludes the potential impact of common stock options, unvested shares of restricted stock and outstanding common stock purchase warrants because their effect would be anti-dilutive due to our net loss.

Commitments and ~~Contingencies.~~Contingencies. We are subject to claims and litigation in the ordinary course of our business. We record a liability for contingencies when the amount is both probable and reasonably estimable. We record associated legal fees as incurred.

Accounting for Warrants. The Company accounts for the issuance of common stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). In addition, under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the condensed consolidated balance sheet as a current liability.

~~POLARITYTE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

Change in Fair Value of ~~Warrant Liability.~~Derivatives. The Company assessed the classification of common stock purchase warrants as of the date of each offering and determined that certain instruments met the criteria for liability classification. Accordingly, the Company classified the warrants as a liability at their fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrants are exercised or ~~expired,~~expire, and any change in fair value is recognized as “change in fair value of ~~warrant liability”~~derivatives” in the ~~condensed~~ consolidated statements of operations. The fair value of the warrants ~~has~~as well as other derivatives have been estimated using a Monte-Carlo or Black-Scholes valuation ~~model (see Note 7).~~model.

~~Reverse stock-split~~Revenue Recognition. ~~On July 27, 2016, Majesco Entertainment~~The Company ~~(the “Company”) filed a certificate~~recognizes revenue upon the shipment of ~~amendment (the “Amendment”) to its Restated Certificate~~products or the performance of ~~Incorporation with the Secretary of State~~services when each of the ~~State~~following four criteria is met: (i) persuasive evidence of ~~Delaware in order to effectuate a reverse stock split of~~an arrangement exists; (ii) products are delivered or services are performed; (iii) the ~~Company’s issued~~sales price is fixed or determinable; and ~~outstanding common stock, par value $0.001 per share on a one (1) for six (6) basis, effective on July 29, 2016 (the “Reverse Stock Split”).~~(iv) collectability is reasonably assured.

The Reverse Stock Split was effective with The NASDAQ Capital Market (“NASDAQ”) at the open of business on August 1, 2016. The par value and other terms of Company’s common stock were not affected by the Reverse Stock Split. The Company’s post-Reverse Stock Split common stock has a new CUSIP number, 560690 406. The Company’s transfer agent, Equity Stock Transfer LLC, acted as exchange agent for the Reverse Stock Split.

As a result of the Reverse Stock Split, every six shares of the Company’s pre-Reverse Stock Split common stock was combined and reclassified into one share of the Company’s common stock. No fractional shares of common stock were issued as a result of the Reverse Stock Split. Stockholders who otherwise would be entitled to a fractional share shall receive a cash payment in an amount equal to the product obtained by multiplying (i) the closing sale price of our common stock on the business day immediately preceding the effective date of the Reverse Stock Split as reported on NASDAQ by (ii) the number of shares of our common stock held by the stockholder that would otherwise have been exchanged for the fractional share interest.

~~All common share and per share amounts have been restated to show the effect of the Reverse Stock Split.~~

Estimates

~~Reclassifications.~~Certain previously reported amounts have been reclassified to conform with the current financial statement presentation. One reclassification relates to discontinued operations. Another represents a reclassification of approximately $1.8 million from general and administrative expenses to research and development expenses for the six months ended April 30, 2017.

~~Estimates.~~. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Among the more significant estimates included in these financial statements are the ~~recoverability of advance payments for capitalized software development costs and intellectual property licenses, the~~ valuation of warrant liability, ~~stock based~~valuation of derivative liability, stock-based compensation and the valuation allowances for deferred tax benefits. Actual results could differ from those estimates.

Recently Adopted Accounting Pronouncements

In ~~August 2014,~~April 2016, the Financial Accounting ~~Standards~~Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~No. 2014-15,~~2016-09,~~Disclosure~~Share-Based Payment: Simplifying the Accounting for Share-Based Payments. The standard addresses several aspects of ~~Uncertainties about an Entity’s Ability to Continue~~the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as ~~a Going Concern~~ ~~(“ASU No. 2014-15”) that requires management to evaluate whether there are conditions and events that raise substantial doubt about~~well as classification in the Company’s ability to continue as a going concern within one year after the financial statements are issued on both an interim and annual basis. Management is required to provide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern.statement of cash flows. The Company adopted ASU 2016-09 during the first quarter of fiscal 2018 and the Company elected to account for forfeitures as they occur. The amendment was applied using a modified retrospective transition method. The provisions of ASU 2016-09 had no impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. ~~2014-15~~2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This new standard is effective for the Company on November 1, ~~2016 and its~~2018 but may be adopted early. The ASU is applied prospectively to any transaction occurring within the period of adoption. The Company early adopted this guidance effective November 1, 2017. The adoption of this standard did not have a material impact on the ~~Company’s~~Company's financial ~~statements.~~

~~In January 2017, the FASB issued ASU 2017-01,~~~~Business Combinations (Topic 805) Clarifying the Definition~~position, results of ~~a Business~~. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assetsoperations, or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted this guidance effective November 1, 2016.cash flows.

Recent Accounting Pronouncements.

In May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers (Topic 606), a new accounting standard that requires recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The FASB has also issued several updates to ASU 2014-09. The new standard supersedes U.S. GAAP guidance on revenue recognition and requires the use of more estimates and judgments than the present standards. It also requires additional disclosures regarding the nature, amount, timing and uncertainty of cash flows arising from contracts with customers. Topic 606 is effective for our fiscal year 2019 beginning on November 1, 2018. The Company is currently evaluating the overall effect that the standard will have on our consolidated financial statements and accompanying notes to the consolidated financial statements and which transition method to apply. As of July 31, 2018, the Company has completed and documented a preliminary assessment of the impact of the new revenue standard on its contracts with customers. The Company plans to finalize its assessment of the impact of the new revenue standard on its results of operations, internal controls and disclosures in the fourth quarter of 2018. The Company does not expect this new standard to have a material effect on the Company’s financial statements.

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In February 2016, FASB issued ASU ~~No.~~ 2016-02,Leases (Topic 842), which supersedes FASB ASC Topic 840,Leases (Topic 840)and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. ~~When adopted,~~The Company is currently assessing the ~~Company does not expect~~potential impact of this guidance, but expects it to have a material impact on ~~our financial statements.~~

~~POLARITYTE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~the Company’s balance sheet.

In ~~March~~August 2016, the FASB issued ASU ~~No. 2016-09,~~2016-15,~~Compensation-Stock Compensation (Topic 718)~~Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, ~~Improvements to Employee Share-Based Payment Accounting. Under ASU No. 2016-09, companies will no longer record excess tax benefits~~which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and ~~certain tax deficiencies~~cash payments are presented and classified in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when itThe standard is ~~likely to change, as is currently required. The amendments of this ASU are~~ effective for ~~reporting periods~~fiscal years beginning after December 15, ~~2016, with early~~2017, including interim periods within those fiscal years. Early adoption is permitted, ~~but all~~including adoption in an interim period. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04,Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.ASU No. 2017-04 removes Step 2 of the ~~guidance must~~goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be ~~adopted in~~ the ~~same period.~~amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard will be applied prospectively and is effective for the Company beginning November 1, 2020. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently ~~assessing~~evaluating the impact ~~that ASU No. 2016-09~~this standard will have on its ~~condensed consolidated~~ financial statements.

In ~~July~~May 2017, the FASB issued ASU ~~2017-11,~~2017-09,~~Earnings Per Share~~Compensation-Stock Compensation (Topic ~~260), Distinguishing Liabilities from Equity (Topic 480)~~718): Scope of Modification Accounting. ASU 2017-09 provides clarity and ~~Derivatives~~reduces both (1) diversity in practice and ~~Hedging (Topic 815)~~:I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception,(ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates(2) cost and complexity ~~for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement~~when applying the guidance in Topic 718, to a change to the terms or conditions of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests.a share-based payment award. The amendments in ~~Part II of this update do not have~~ASU 2017-09 should be applied prospectively to an ~~accounting effect.~~award modified on or after the adoption date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, ~~2018.~~2017. The Company is currently assessing the potential impact of adopting ASU ~~2017-11~~2017-09 on its consolidated financial statements and related disclosures.

~~3. GOING CONCERN~~In June 2018, the FASB issued ASU 2018-07,Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting. The standard expands the scope of Topic 718 to include share-based payments issued to nonemployees for goods or services, simplifying the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted, including adoption in an interim period. The Company does not believe the adoption of this standard will have a significant impact on its financial statements given the limited number of nonemployee stock-based awards outstanding.

~~The accompanying financial statements have been prepared on~~3. LIQUIDITY

On April 12, 2018, the Company completed a ~~going concern basis, which contemplates~~public offering providing for the ~~realization~~issuance and sale of ~~assets and~~2,335,937 shares of the ~~satisfaction~~Company’s common stock, par value $0.001 per share, at an offering price of ~~liabilities in the normal course of business. The Company has experienced~~$16.00 per share, for net ~~losses and negative cash flows from operations since its inception. The Company has sustained cumulative losses~~proceeds of approximately ~~$249.4~~$34.6 million, after deducting offering expenses payable by the Company (see Note 10).

On June 7, 2018, the Company completed an underwritten offering with Cantor Fitzgerald & Co., as underwriter, providing for the issuance and sale of ~~July 31, 2017, has negative working capital and has not generated positive cash flows from operations. The continuation~~2,455,882 shares of the ~~Company as a going concern is dependent upon continued financial support from its shareholders, potential collaborations, the ability~~Company’s common stock, par value $0.001 per share, at an offering price of $23.65 per share, for net proceeds of approximately $58.0 million, after deducting offering expenses payable by the Company (see Note 10).

Based upon the current status of our product development and commercialization plans, we believe that our existing cash and cash equivalents will be adequate to ~~obtain necessary equity and/or debt~~satisfy our capital needs for at least the next 12 months from the date of filing. We anticipate needing substantial additional financing to continue ~~operations,~~clinical deployment and commercialization of our lead product SkinTE, development of our other product candidates, and scaling the ~~attainment of profitable operations. These factors raise substantial doubt regarding the Company’s ability~~manufacturing capacity for our products and product candidates, and prepare for commercial readiness. We will continue to ~~continue as a going concern. The Company cannot make any assurances that additional financings will~~pursue fundraising opportunities when available, but such financing may not be available in the future on terms favorable to ~~it and,~~us, if ~~available, completed on a timely basis, on acceptable terms or~~ at all. If adequate financing is not available, we may be required to delay, reduce the ~~Company is unable~~scope of, or eliminate one or more of our product development programs. We plan to ~~complete a~~meet our capital requirements primarily through issuances of equity securities, debt financing, revenue from product sales and future collaborations. Failure to generate revenue or ~~equity offering, execute a collaboration arrangement or otherwise obtain sufficient financing when and if needed, it~~raise additional capital would ~~negatively impact its~~adversely affect our ability to achieve our intended business and operations and could also lead to the reduction or suspension of the Company’s operations and ultimately force the Company to cease operations. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.objectives.

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.4. IBEX ACQUISITION

On March 2, 2018, the Company, along with its wholly owned subsidiary, Utah CRO Services, Inc., a Nevada corporation (“Acquisition Co.”), entered into agreements with Ibex Group, L.L.C., a Utah limited liability company, and Ibex Preclinical Research, Inc., a Utah corporation (collectively, the “Seller” or “IBEX”) for the purchase of the assets and rights to the Seller’s preclinical research and veterinary sciences business and related real estate. The Company acquired this preclinical biomedical research facility in order to accelerate research and development of PolarityTE pipeline products. The business consists of a “good laboratory practices” (GLP) compliant preclinical research facility, including vivarium, operating rooms, preparation rooms, storage facilities, and surgical and imaging equipment. The real property includes two parcels in Cache County, Utah, consisting of approximately 1.75 combined gross acres of land, together with the buildings, structures, fixtures, and personal property located on the real property. The above was accounted for as a business combination.

The acquisition closed on May 3, 2018. The aggregate purchase price was $3.8 million, of which $2.3 million was paid at closing and the balance satisfied by a promissory note payable to the Seller with an initial fair value of $1.2 million (see Note 9, for a description of the promissory note) and contingent consideration with an initial fair value of approximately $0.3 million. During the three and nine months ended July 31, 2018, the Company recorded approximately $38,000 of direct and incremental costs associated with acquisition-related activities. These costs were incurred primarily for banking, legal, and professional fees associated with the IBEX acquisition. These costs were recorded in general and administrative expenses in the consolidated statement of operations.

During the three and nine months ended July 31, 2018, IBEX contributed approximately $172,000 to net revenues and approximately $124,000 to gross profit, respectively.

Purchase Price Allocation

The following table summarizes the preliminary purchase price allocation for the IBEX acquisition (in thousands):

Equipment	$	430
Land and buildings		2,000
Intangible assets		1,057
Goodwill		278
Accrued property taxes		(9	)
Aggregate purchase price	$	3,756
Less: Promissory note to seller		1,220
Contingent consideration		278
Cash paid at closing	$	2,258

As part of the acquisition of IBEX, the Company recorded a contingent consideration liability of $0.3 million in current liabilities in the condensed consolidated balance sheets. The contingent consideration represents the estimated fair value of future payments due to the Seller of IBEX based on IBEX’s revenue generated from studies quoted prior to but completed after the transaction. Contingent consideration is initially recognized at fair value as purchase consideration and subsequently remeasured at fair value through earnings. The initial fair value of the contingent consideration was based on the present value of estimated future cash flows using a 20% discount rate. The total amount of the contingent consideration to be paid will not exceed $650,000. The subsequent increase in fair value of contingent consideration from acquisition to July 31, 2018 of approximately $20,000 was recognized in general and administrative expense in the Company’s condensed consolidated statement of operations for the three and nine months ended July 31, 2018. The excess of the fair value of purchase consideration over the fair values of identifiable assets and liabilities is recorded as goodwill, including the value of the assembled workforce.

The purchase price allocation for the IBEX acquisition is preliminary and subject to revision as additional information about fair value of assets acquired becomes available. Additional information that existed as of the acquisition date but at that time was unknown may become known during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date.

Disclosure of pro-forma revenues and earnings attributable to the acquisition is excluded because it is impracticable to obtain complete historical financial records for IBEX Preclinical Research, Inc.

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table shows the valuation of the individual identifiable intangible assets acquired along with their estimated remaining useful lives (in thousands):

	Approximate Fair Value		Remaining Useful Life (in years)
Non-compete agreement	$	410	4
Customer contracts / relationships		534	7 to 8
Trade names / trademarks		101	10 to 11
Backlog		12	Less than 1
Total intangible assets	$	1,057

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following (in thousands):

	July 31, 2017		October 31, 2016		July 31, 2018		October 31, 2017
Legal retainer	$	60	$	-	$	45	$	15
Prepaid insurance		86		22		84		69
Tax receivable		-		18
Trade show deposit		160		-
Other prepaids		71		-		586		126
Deposits		32		-
Other assets		2		7		-		27
Total prepaid expenses and other current assets	$	411	$	47	$	715	$	237

5.6. PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consists of the following (in thousands):

	July 31, 2018			October 31, 2017
Machinery and equipment	$	6,873		$	2,418
Land and buildings		2,000			-
Computers and software		1,194			211
Leasehold improvements		890			-
Construction in progress		667			-
Furniture and equipment		90			30
Total property and equipment, gross		11,714			2,659
Accumulated depreciation		(1,407	)		(486	)
Total property and equipment, net	$	10,307		$	2,173

Depreciation expense for the three months ended July 31, 2018 and 2017 was approximately $396,000 and $122,000, respectively. Depreciation expense for the nine months ended July 31, 2018 and 2017 was approximately $1,002,000 and $295,000, respectively.

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7. INTANGIBLE ASSETS

Intangible assets, net, consist of the following (in thousands):

July 31, 2017 October 31, 2016
Medical equipment $ 2,193 $ -
Computers and software 198 61
Furniture and equipment 109 78
Total property and equipment, gross 2,500 139
Accumulated depreciation (427 ) (121 )
Total property and equipment, net $ 2,073 $ 18

	July 31, 2018			October 31, 2017
Customer contracts / relationships	$	534		$	-
Trade names / trademarks		101			-
Non-compete agreement		410			-
Backlog		12
Total intangible assets, gross		1,057			-
Accumulated amortization		(50	)		-
Total intangible assets, net	$	1,007		$	-

Amortization expense for the three months and nine months ended July 31, 2018 was approximately $50,000.

The future amortization of these intangible assets is expected to be as follows (in thousands):

Fiscal year 2018 (three months remaining)	$	50
Fiscal year 2019		195
Fiscal year 2020		189
Fiscal year 2021		189
Fiscal year 2022		138
Thereafter		246
	$	1,007

6.8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following (in thousands):

	July 31, 2017		October 31, 2016		July 31, 2018		October 31, 2017
Accounts payable	$	56	$	-	$	82	$	25
Due to Zift		66		-		-		36
Medical equipment purchase		108		-
Medical study and supplies						186		362
Property and equipment purchases						368		54
Salaries and other compensation		662		463		1,108		574
Legal and accounting		454		-		1,050		555
Other accruals		93		11		1,073		333
Total accounts payable and accrued expenses	$	1,439	$	474	$	3,867	$	1,939

Salaries and other compensation include accrued payroll expense and employer 401K plan contributions.

~~POLARITYTE, INC.~~9. LONG TERM NOTES PAYABLE

In connection with the IBEX Acquisition, described in Note 4, the Company issued a promissory note payable to the Seller with an initial fair value of $1.22 million. The promissory note has a principal balance of $1,333,333 and bears interest at a rate of 3.5% interest per annum. Principal and interest are payable in five equal installments beginning on November 3, 2018 and continuing on each six-month anniversary thereafter (“Payment Date”). The promissory note may be prepaid by the Company at anytime and becomes due and payable at the earlier of the maturity date of November 3, 2020 or upon an event of default, which includes failure to pay any installment on each Payment Date, breach of any negative covenants, insolvency or bankruptcy. Upon the occurrence of an event of default, the promissory note will bear an accelerated interest of 7% per annum from the date of the event of default.

The Company initially recognized the promissory note at its fair value, using an estimated market rate of interest for the Company, which was higher than the promissory note’s stated rate. The result of imputing a market rate of interest resulted in an initial discount to the principal balance of approximately $113,000, which is being amortized to interest expense over the term of the promissory note using the effective interest method. Amortization of debt discount of $18,000 was included in interest expense for the three and nine months ended July 31, 2018.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~10. PREFERRED SHARES AND COMMON SHARES

~~7. STOCKHOLDERS’ EQUITY~~Common Stock Issuance

~~Convertible preferred stock as~~On April 12, 2018, the Company completed a public offering providing for the issuance and sale of ~~July 31, 2017 consisted~~2,335,937 shares of the ~~following (in thousands, except~~Company’s common stock, par value $0.001 per share, ~~amounts):~~at an offering price of $16.00 per share, for net proceeds of approximately $34.6 million, after deducting offering expenses payable by the Company.

Shares
Authorized Shares Issued and
Outstanding Net Carrying
Value Aggregate
Liquidation
Preference Common Shares
Issuable Upon
Conversion
Series A 8,830,000 3,146,671 $ 769 $ 2,140 713,245
Series B 54,250 47,689 4,020 - 794,806
Series C 26,000 17,965 1,401 - 417,791
Series D 170,000 26,667 312 - 44,445
Series E 7,050 7,050 104,693 - 7,050,000
Other authorized, unissued 912,700 - - - -
Total 10,000,000 3,246,042 $ 111,195 $ 2,140 9,020,287

~~Convertible preferred stock~~On June 7, 2018, the Company completed an underwritten offering with Cantor Fitzgerald & Co., as underwriter, providing for the issuance and sale of ~~October 31, 2016 consisted~~2,455,882 shares of the ~~following (in thousands, except~~Company’s common stock, par value $0.001 per share, ~~amounts):~~at an offering price of $23.65 per share, for net proceeds of approximately $58.0 million, after deducting offering expenses payable by the Company.

Shares
Authorized Shares Issued and
Outstanding Net Carrying
Value Aggregate
Liquidation
Preference Common Shares
Issuable Upon
Conversion
Series A 8,830,000 7,138,158 $ 1,745 $ 4,854 1,189,693
Series B 54,250 54,201 4,569 - 903,362
Series C 26,000 25,763 2,010 - 429,392
Series D 170,000 156,332 1,829 - 260,553
Other authorized, unissued 919,750 - - - -
Total 10,000,000 7,374,454 $ 10,153 $ 4,854 2,783,000

Exchange of 100% of Outstanding Series AF Preferred Stock Shares and Warrants

~~The~~On September 20, 2017, the Company sold an aggregate of $17,750,000 worth of units (the “Units”) of the Company’s securities to accredited investors at a purchase price of $2,750 per Unit with each Unit consisting of (i) one share of the Company’s newly authorized 6% Series AF Convertible Preferred ~~Shares are~~Stock, par value $0.001 per share (the “Series F Preferred Shares”), which were each convertible into one hundred (100) shares of the Company’s common stock, ~~based on~~and (ii) a ~~conversion calculation equal~~two-year warrant to the stated value of such Series A Preferred Share, plus all accrued and unpaid dividends, if any, on such Series A Preferred Share, as of such date of determination, divided by the conversion price. The stated value of each Preferred Share is $0.68 and the initial conversion price is $4.08 (current conversion price is $3.00) per share, each subjectpurchase up to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells, or is deemed to issue or sell,322,727 shares of ~~its~~the Company’s common stock, at aan exercise price of $30.00 per share price that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series A Convertible Preferred Stock of PolarityTE, Inc., the Company is prohibited from incurring debt or liens, or entering into new financing transactions without the consent of the lead investor (as defined in the December Subscription Agreements) as long as any of the Series A Preferred Shares are outstanding. The Series A Preferred Shares bear no dividends.

The holders of Series A Preferred Shares shall vote together with the holders of common stock on all matters on an as if converted basis, subject to certain conversion and ownership limitations, and shall not vote as a separate class. Notwithstanding the foregoing, the conversion price for purposes of calculating voting power shall in no event be lower than $3.54 per share. At no time may all or a portion of the Series A Preferred Shares be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of common stock which would result in such Holder beneficially owning (as determined in accordance with Section 13(d) of the 1934 Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time; provided, however, that the holder may waive the 4.99% limitation at which time he may not own beneficially own more than 9.99% of all the common stock outstanding at such time.

The Series A Preferred Shares do not represent an unconditional obligation to be settled in a variable number of shares of common stock, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the Series A Preferred Shares are considered equity hosts and recorded in stockholders’ equity.

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The ~~Company entered into separate Registration Rights Agreements with each~~ Series AF Preferred Shares Investor, (as amended on January 30, 2015 and March 31, 2015, the “December Registration Rights Agreement”). The Company agreed to use its best efforts to file by March 31, 2015 a registration statement covering the resale of the shares of common stock issuable upon exercise or conversion of the Series A Preferred Shares and to maintain its effectiveness until all such securities have been sold or may be sold without restriction under Rule 144 of the Securities Act. In the event the Company fails to satisfy its obligations under the December Registration Rights Agreements, the Company is required to pay to the Investors on a monthly basis an amount equal to 1% of the investors’ investment, up to a maximum of 12%. On March 31, 2015, the Company and the required holders of Series A Preferred Shares amended the registration rights agreement to extend the filing deadline for the registration statement to June 30, 2015.

~~Series B Preferred Shares~~

~~The Series B Preferred Shares are~~were convertible into shares of the Company’s common stock based on a conversion calculation equal to the stated value of ~~such~~the Series BF Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series B Preferred Shares, as of such date of determination, divided by the conversion price. The stated value of each Preferred Share is $140.00 and the initial conversion price is $8.40 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Company is prohibited from effecting a conversion of the Series B Preferred Shares to the extent that, as a result of such conversion, such holder would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series B Preferred Shares, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Subject to such beneficial ownership limitations, each holder is entitled to vote on all matters submitted to stockholders of the Company on an as converted basis, based on a conversion price of $8.40 per shares. The Series B Preferred Shares rank junior to the Series A Preferred Shares and bear no dividends. All of the convertible preferred shares do not represent an unconditional obligation to be settled in a variable number of shares, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the convertible preferred shares are considered equity hosts and recorded in stockholders’ equity.

~~Series C Preferred Shares~~

The Series C Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series C Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series CF Preferred Shares, as of such date of determination, divided by the conversion price. The stated value of each Series CF Preferred Share ~~is $120.00 per share,~~was $2,750 and the initial conversion price ~~is $7.20 (current conversion price is $5.16)~~was $27.50 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. ~~In addition, in~~

On the ~~event~~two-year anniversary of the initial issuance date, any Series F Preferred Shares outstanding and not otherwise already converted, shall, at the option of the holder, will either (i) automatically convert into common stock of the Company ~~issues or sells, or is deemed to issue or sell, shares of common stock~~ at ~~a per share price that is less than~~ the conversion price then in effect ~~the conversion price shall~~or (ii) be ~~reduced to such lower price, subject to certain exceptions and provided that the conversion price may not be reduced to less than $5.16, unless and until such time as~~repaid by the Company ~~obtains shareholder approval to allow for a lower conversion price.~~ based on the stated value of such outstanding Series F Preferred Shares.

The ~~Company is prohibited from effecting a conversion of~~warrants issued in connection with the Series CF Preferred Shares were determined to ~~the extent that, as a result of such conversion, such May Investor would beneficially own more than 4.99% of~~be liabilities pursuant to ASC 815. The warrant agreement provided for an adjustment to the number of common shares issuable under the warrant and/or adjustment to the exercise price, including but not limited to, if: (a) the Company issued shares of common stock as a dividend or distribution to holders of its common stock; (b) the Company subdivided or combined its common stock (i.e., stock split); (c) adjustment of exercise price upon issuance of new securities at less than the exercise price. Under ASC 815, warrants that provide for down-round exercise price protection are recognized as derivative liabilities.

The conversion feature within the Series F Preferred Shares was determined to not be clearly and closely related to the identified host instrument and, as such, was recognized as a derivative liability measured at fair value pursuant to ASC 815.

The initial fair value of the warrants and bifurcated embedded conversion feature, estimated to be approximately $4.3 million and $9.3 million, respectively, was deducted from the gross proceeds of the Unit offering to arrive at the initial discounted carrying value of the Series F Preferred Shares. The resulting discount to the aggregate stated value of the Series F Preferred Shares of approximately $13.6 million was recognized as accretion using the effective interest method similar to preferred stock dividends, over the two-year period prior to optional redemption by the holders.

On March 6, 2018, the Company entered into separate exchange agreements (the “Exchange Agreements”) with holders (each a “Holder”, and collectively the “Holders”) of 100% of the Company’s outstanding ~~immediately after giving effect~~Series F Preferred Shares, and the Company’s warrants to purchase shares of the Company’s common stock issued in connection with the Series F Preferred Shares (such “Warrants” and Series F Preferred Shares collectively referred to as the “Exchange Securities”) to exchange the Exchange Securities and unpaid dividends on the Series F Preferred Shares for common stock (the “Exchange”).

The Exchange resulted in the following issuances: (A) all outstanding Series F Preferred Shares were converted into 972,070 shares of restricted common stock at an effective conversion price of $18.26 per share of common stock (the closing price of Common Stock on the NASDAQ Capital Market on February 26, 2018); (B) the right to receive 6% dividends underlying Series F Preferred Shares was terminated in exchange for 31,321 shares of restricted common stock; (C) 322,727 Warrants to purchase common stock were exchanged for 151,871 shares of restricted common stock; and (D) the Holders of the Warrants relinquished any and all other rights pursuant to the Warrants, including exercise price adjustments.

As part of the Exchange, the Holders also relinquished any and all other rights related to the issuance of the Exchange Securities, the respective governing agreements and certificates of designation, including any related dividends, adjustment of conversion and exercise price, and repayment option. The existing registration rights agreement with the holders of the Series F Preferred Shares was also terminated and the holders of the Series F Preferred Shares waived the obligation of the Company to register the common shares issuable upon conversion of Series F Preferred Shares or upon exercise of the warrants, and waived any damages, penalties and defaults related to the Company failing to file or have declared effective a registration statement covering those shares.

The exchange of all outstanding Series F Preferred Shares, and the holders’ right to receive 6% dividends, for common stock of the Company was recognized as follows:

Fair market value of 1,003,391 shares of common stock issued at $20.05 (Company’s closing stock price on March 5, 2018) in exchange for Series F Preferred Shares and accrued dividends	$	20,117,990
Carrying value of Series F Preferred Shares at March 5, 2018, including dividends		(5,898,274	)
Carrying value of bifurcated conversion option at March 5, 2018		(7,162,587	)
Deemed dividend on Series F Preferred Shares exchange	$	7,057,129

As the Warrants were classified as a liability, the exchange of the Warrants for common shares should be recognized as a liability extinguishment. As of March 5, 2018, the fair market value of the 151,871 common shares issued in the Exchange was $3,045,034 and the fair value of the common stock warrant liability was $2,525,567 resulting in a loss on extinguishment of warrant liability of $519,467 during the nine months ended July 31, 2018.

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company recognized accretion of the discount to the stated value of the Series F Preferred Shares of approximately $1,290,000 in the nine months ended July 31, 2018, respectively, as a reduction of additional paid-in capital and an increase in the carrying value of the Series F Preferred Shares. The accretion is presented in the Statement of Operations as a deemed dividend, increasing net loss to arrive at net loss attributable to common stockholders.

Preferred Stock Conversion and Elimination

On February 6, 2018, 15,756 shares of Series B Convertible Preferred Stock (“Series B Preferred Shares”) were converted into 262,606 shares of common stock.

On March 6, 2018, the Company received conversion notices (in accordance with original terms) from holders of 100% of the outstanding shares of Series A Convertible Preferred Stock (the “Series A Preferred Shares”), Series B Preferred Shares and Series E Convertible Preferred Stock (the “Series E Preferred Shares”) and issued an aggregate of 7,945,250 shares of common stock ~~upon conversion of the~~to such holders.

The Series CE Preferred Shares ~~which beneficial ownership limitation may be increased~~were held by Dr. Denver Lough, the ~~holder up to, but not exceeding, 9.99%. Subject to the beneficial ownership limitations discussed previously, each holder is entitled to vote on all matters submitted to stockholders of~~Company’s Chief Executive Officer. On March 6, 2018, the Company and shall have the number of votes equal to the number of shares of common stock issuable upon conversion of such holder’s Series C Preferred Shares, based on a conversion price of $7.80 per share. The Series C Preferred Shares bear no dividends and shall rank junior to the Company’s Series A Preferred Shares but senior to the Company’s Series B Preferred Shares.

~~In connection with the sale of the Series C Preferred Shares, the Company also~~ entered into ~~separate~~a new registration rights ~~agreements~~agreement (the ~~“May~~“Lough Registration Rights Agreement”) with ~~each Investor. The~~Dr. Lough, pursuant to which the Company agreed ~~to use its best efforts~~ to file a registration statement to register the ~~Shares and the common stock issuable~~resale of 7,050,000 shares of Common Stock issued upon ~~the~~ conversion of the Series CE Preferred Shares within ~~thirty days following the Closing Date,~~six months, to cause such registration statement to be declared effective ~~within ninety days of~~by the Securities and Exchange Commission as promptly as possible following its filing ~~day~~ and, with certain exceptions set forth in the Lough Registration Rights Agreement, to maintain the effectiveness of the registration statement until all of such shares ~~of common stock~~ have been sold or are otherwise able to be sold pursuant to Rule 144 under the Securities Act without restriction. ~~In the event the Company fails to satisfy its obligations~~Any sales of shares under the Registration Rights Agreement, the Company is obligated to pay to the Investors on a monthly basis, an amount equal to 1% of the Investor’s investment, up to a maximum of 12%. Effective as of the original filing deadline of the registration statement were subject to certain limitations as specified with more particularity in the ~~Company obtained the requisite approval from the Investors for the waiver of its obligations under the May~~Lough Registration Rights Agreement.

~~The Company evaluated the guidance ASC 480-10~~~~Distinguishing Liabilities~~ In April 2018, Dr. Lough entered into a lock up agreement for 180 days, which prohibits him from ~~Equity and~~ ~~ASC 815-40~~~~Contracts in an Entity’s Own Equity~~ ~~to determine the appropriate classification of the instruments. The Series C Preferred Shares do not represent an unconditional obligation to be settled in a variable number of~~selling any shares of common stock, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the Series C Preferred Shares are considered equity hosts and recorded in stockholders’ equity.

~~POLARITYTE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~Series D Preferred Shares~~

The Preferred D Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Preferred D Shares, plus all accrued and unpaid dividends, if any, on such Preferred D Share, as of such date of determination, divided by the conversion price. The stated value Preferred D Shares is $1,000 per share and the initial conversion price is $600 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Company is prohibited from effecting a conversion of the Preferred D Shares to the extent that as a result of such conversion, such investor would beneficially own more than 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of the Preferred D Shares. Upon 61 days written notice, the beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Except as otherwise required by law, holders of Series D Preferred Shares shall not have any voting rights. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series D Convertible Preferred Stock, the Preferred D Shares bear no dividends and shall rank senior to the Company’s other classes of capital stock.

~~Series E Preferred Shares~~

The Preferred E Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Preferred E Shares, plus all accrued and unpaid dividends, if any as of such date of determination, divided by the conversion price. The stated value of each Preferred E Share is $1,000 and the initial conversion price is $1.00 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Preferred E Shares, with respect to dividend rights and rights on liquidation, winding-up and dissolution, in each case will rank senior to the Company’s common stock and all other securities of the Company that do not expressly provide that such securities rank on parity with or senior to the Preferred E Shares. Until converted, each Preferred E Share is entitled to two votes for every share of common stock into which it is convertible on any matter submitted for a vote of stockholders. The Preferred E Shares participate on an “as converted” basis with all dividends declared on the Company’s common stock.

~~April 2016 Registered Common Stock and Warrant Offering~~registered until October 2018.

On ~~April 13, 2016,~~March 7, 2018, the Company ~~entered into~~filed a ~~Securities Purchase Agreement~~Certificate of Elimination with ~~certain institutional investors providing for~~ the ~~issuance~~Secretary of State of the State of Delaware terminating the Company’s Series A, Series B, Series C, Series D, Series E and ~~sale by~~Series F Preferred Stock. As a result, the Company ~~of 250,000~~has 10,000,000 shares of ~~the Company’s common~~authorized and unissued preferred stock ~~par value $0.001 per share at an offering price of $6.00 per share, for net proceeds of $1.4 million after deducting placement agent fees and expenses. In addition, the Company sold~~with no designation as to purchasers of common stock in this offering, warrants to purchase 187,500 shares of its common stock. The common shares and the Warrant Shares were offered by the Company pursuant to an effective shelf registration statement on Form S-3, which was initially filed with the Securities and Exchange Commission on October 22, 2015 and declared effective on December 7, 2015. The closing of the offering occurred on April 19, 2016.series.

~~Each Warrant is immediately exercisable~~Convertible preferred stock activity for two years, but not thereafter, at an exercise price of $6.90 per share. Subject to limited exceptions, a holder of warrants will not have the right to exercise any portion of its warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to such exercise. The exercise price and number of warrants are subject to adjustment in the event of any stock dividends and splits, reverse stock split, stock dividend, recapitalization, reorganization or similar transaction. The Warrants were classified as liabilities and measured at fair value, with changes in fair value recognized in the Condensed Consolidated Statements of Operations in other expenses (income) until they were exchanged for shares of common stock on January 18, 2017. The initial recognition of the Warrants resulted in an allocation of the net proceeds from the offering to a warrant liability of approximately $318,000, with the remainder being attributable to the common stock sold in the offering.

~~Preferred Share Conversion Activity~~

~~During~~ the nine months ended July 31, ~~2017, 3,991,487 shares~~2018 consisted of Convertible Preferred Stock Series A, 6,512 shares of Convertible Preferred Stock Series B, 7,798 shares of Convertible Preferred Stock Series C and 129,665 shares of Convertible Preferred Stock Series D were converted into 1,232,793 shares of common stock.the following:

During the nine months ended July 31, 2016, 1,638,810 shares of Convertible Preferred Stock Series A and 12,001 shares of Convertible Preferred Stock Series D were converted into 293,137 shares of common stock.

~~POLARITYTE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~Common Stock~~

On January 4, 2016, the Company declared a special cash dividend of an aggregate of $10.0 million to holders of record on January 14, 2016 of its outstanding shares of: (i) common stock (ii) Series A Convertible Preferred Stock; (iii) Series B Convertible Preferred Stock; (iv) Series C Convertible Preferred Stock and (v) Series D Convertible Preferred Stock. The holders of record of the Company’s outstanding preferred stock participated in the dividend on an “as converted” basis. Approximately $6.0 million of the special cash dividend relates to preferred stock shares.

~~On January 6, 2016, certain employees exercised their options at $4.08 in exchange for the Company’s common stock for an aggregated amount of 31,656 shares.~~

On December 16, 2016, the Company sold an aggregate of 759,333 shares of its common stock to certain accredited investors pursuant to separate subscription agreements at a price of $3.00 per share for gross proceeds of $2.3 million.

On January 18, 2017, the Company entered into separate exchange agreements (each an “Exchange Agreement”) with certain accredited investors (the “Investors”) who purchased warrants to purchase shares of the Company’s common stock (the “Warrants”) pursuant to the prospectus dated April 13, 2016. In 2016, the Company issued 250,000 shares of the Company’s common stock and Warrants to purchase 187,500 shares of common stock (taking into account the reverse split of the Company’s common stock on a 1 for 6 basis effective with The NASDAQ Stock Market LLC on August 1, 2016). The common stock and Warrants were offered by the Company pursuant to an effective shelf registration statement. Under the terms of the Exchange Agreement, each Investor exchanged each Warrant it purchased in the Offering for 0.3 shares of common stock. Accordingly, the Company issued an aggregate of 56,250 shares of common stock in exchange for the return and cancellation of 187,500 Warrants.

During the nine months ended July 31, 2017, certain employees exercised their options at a weighted-average exercise price of $4.85 in exchange for the Company’s common stock for an aggregated amount of 231,404 shares. The Company received approximately $1.1 million from the exercise of stock options.

	Shares Outstanding - October 31, 2017		First Quarter 2018 -Preferred Stock Conversions			First Quarter 2018 - Common Stock Shares Issued		Second Quarter 2018 -Preferred Stock Conversions and Series F Exchange				Second Quarter 2018 - Common Stock Shares Issued		Year to Date 2018 -Preferred Stock Conversions and Series F Exchange			Year to Date 2018 - Common Stock Shares Issued
Series A		3,146,671		(1,544,572	)		350,000		(1,602,099	)			363,036		(3,146,671	)		713,036
Series B		47,689		-			-		(47,689	)			794,820		(47,689	)		794,820
Series C		2,578		(2,578	)		59,950		-				-		(2,578	)		59,950
Series D		26,667		(26,667	)		44,445		-						(26,667	)		44,445
Series E		7,050		-			-		(7,050	)			7,050,000		(7,050	)		7,050,000
Series F		6,455		-			-		(6,455	)			972,070		(6,455	)		972,070
Total		3,237,110		(1,573,817	)		454,395		(1,663,293	)	��		9,179,926		(3,237,110	)		9,634,321

8.11. FAIR VALUE MEASUREMENTS

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

●	Level 1: Observable inputs such as quoted prices in active markets for identical instruments

●	Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the market

●	Level 3: Significant unobservable inputs supported by little or no market activity. Financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, for which determination of fair value requires significant judgment or estimation.

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In connection with the ~~April 19, 2016 common stock~~ offering of Units in September 2017, the Company issued warrants to purchase an aggregate of ~~187,500~~322,727 shares of common stock. These warrants were exercisable at ~~$6.90~~$30.00 per share and expire ~~on April 19, 2018. These~~in two years. The warrants were ~~analyzed and it was determined that they require liability treatment.~~liabilities pursuant to ASC 815. The warrant agreement provided for an adjustment to the number of common shares issuable under the warrant and/or adjustment to the exercise price, including but not limited to, if: (a) the Company issues shares of common stock as a dividend or distribution to holders of its common stock; (b) the Company subdivides or combines its common stock (i.e., stock split); (c) adjustment of exercise price upon issuance of new securities at less than the exercise price. Under ASC 815, ~~registered common stock~~ warrants that ~~require the issuance of registered shares upon~~provide for down-round exercise ~~and do not expressly preclude an implied right to cash settlement~~price protection are ~~accounted for~~recognized as derivative liabilities.

The Series F Preferred Shares contained an embedded conversion feature that was not clearly and closely related to the identified host instrument and, as such, was recognized as a derivative liability measured at fair value. The Company ~~classifies~~classified these ~~derivative warrant liabilities~~derivatives on the ~~condensed~~ consolidated balance sheet as a current liability.

As noted in Note 10. above, both the warrants and the Series F Preferred Shares were exchanged for common stock on March 6, 2018.

The fair value of ~~these warrants~~the bifurcated embedded conversion feature was estimated to be approximately $7.2 million and $9.2 million, respectively, at ~~January 18, 2017~~March 5, 2018 and October 31, ~~2016~~2017 as calculated using a Monte Carlo simulation with the following assumptions:

	Series F Conversion Feature
		March 5, 2018			October 31, 2017
Stock price	$	20.05		$	25.87
Exercise price	$	27.50		$	27.50
Risk-free rate		2.158	%		1.581	%
Volatility		88.2	%		96.0	%
Term		1.54			1.89

The fair value of the warrant liability was ~~determined~~estimated to be approximately ~~$78,000~~$2.5 million and ~~$70,000,~~$4.3 million, respectively, at March 5, 2018 and October 31, 2017 as calculated using ~~Black-Scholes~~the Monte Carlo simulation with the following assumptions: ~~(1) stock price of $3.62 and $3.58, respectively; (2) a risk-free rate of 0.97% and 0.75%, respectively; and (3) an expected volatility of 68% and 61%, respectively.~~

		Warrant Liability
		March 5, 2018			October 31, 2017
Stock price	$	20.05		$	25.87
Exercise price	$	30.00		$	30.00
Risk-free rate		2.158	%		1.581	%
Volatility		88.2	%		96.0	%
Term		1.54			1.89

Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. At

The fair value hierarchy of financial instruments, measured at fair value on a recurring basis on the consolidated balance sheets as of July 31, 2018 is as follows (in thousands):

	Fair Value Measurement as of July 31, 2018
	Level 1		Level 2		Level 3		Total
Liabilities
Contingent consideration	$	-	$	-	$	268	$	268
Total	$	-	$	-	$	268	$	268

The fair value hierarchy of financial instruments, measured at fair value on a recurring basis on the consolidated balance sheets as of October 31, 2017 ~~there was no warrant liability balance.~~is as follows (in thousands):

	Fair Value Measurement as of October 31, 2017
	Level 1		Level 2		Level 3		Total
Liabilities
Warrant liability	$	-	$	-	$	4,256	$	4,256
Derivative liability		-		-		9,246		9,246
Total	$	-	$	-	$	13,502	$	13,502

The following table sets forth the changes in the estimated fair value for our Level 3 classified contingent consideration (in thousands):

	Contingent Consideration
Fair value – October 31, 2017	$	-
IBEX acquisition – May 3, 2018	$	278
Change in fair value		20
Earned and moved to accounts payable		(30	)
Fair value - July 31, 2018	$	268

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table sets forth the changes in the estimated fair value for our Level 3 classified derivative ~~warrant liability~~liabilities (in thousands):

Warrant Liability
Fair value - October 31, 2016 $ 70
Change in fair value 8
Exchanged - January 18, 2017 (see Note 7) (78 )
Fair value - July 31, 2017 $ -

	2017 Series F Preferred Stock - Warrant Liability			2017 Series F Preferred Stock - Embedded Derivative			Total Warrant and Derivative Liability
Fair value - October 31, 2017	$	4,256		$	9,246		$	13,502
Change in fair value		(1,731	)		(2,083	)		(3,814	)
Exchange / conversion to common shares		(2,525	)		(7,163	)		(9,688	)
Fair value - July 31, 2018	$	-		$	-		$	-

~~POLARITYTE, INC.~~The carrying value of the long-term promissory note approximates fair value, due to the imputation of interest on the note to an estimated market rate of interest. The carrying amounts of accounts payable, accrued expenses, and accounts receivable approximate fair value as these accounts are largely current and short term in nature.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

9.12. STOCK BASED COMPENSATION ARRANGEMENTS

~~Stock-based compensation expense during~~In the three ~~months ended July 31, 2017~~ and ~~2016 amounted to approximately $3.7 million and $1.6 million, respectively. Stock-based compensation expense (including stock based compensation recorded in discontinued operations) during the~~ nine months ended July 31, 2018 and 2017, ~~and 2016 amounted to approximately $11.8 million and $2.8 million, respectively. Stock-based~~the Company recorded stock-based compensation expense ~~is recorded in general~~related to restricted stock awards and ~~administrative and research and development expenses in the accompanying consolidated statements of operations.~~stock options as follows (in thousands):

	For the Three Months Ended July 31,
	2018		2017
General and administrative expense:
Continuing operations	$	8,718	$	2,464
Discontinued operations		-		274
		8,718		2,738
Research and development expense:
Continuing operations		1,204		452
Total stock-based compensation expense	$	9,922	$	3,190

On February 8, 2017, the Board appointed Steve Gorlin as a Class II director with a term expiring in 2019 and Dr. Jon Mogford as a Class III director with a term expiring in 2017 to fill vacancies created upon the resignations of Messrs. Brauser and Honig. In addition, Mr. Gorlin was appointed as a member of each of the Board’s Audit, Compensation and Nominating and Corporate Governance Committees. Each of Mr. Gorlin and Dr. Mogford are deemed an “independent” director as such term is defined by the rules of The NASDAQ Stock Market LLC. There are no family relationships between either of Mr. Gorlin and Dr. Mogford and any of our other officers and directors. Mr. Gorlin and Dr. Mogford were each granted (i) an option to purchase up to 50,000 shares of the Company’s common stock at an exercise price equal to $4.72 per share (the “Options”) which Options will vest in 24 equal monthly installments commencing on the one month anniversary of the grant date and (ii) a restricted stock award of 50,000 shares of common stock that will vest in 24 equal monthly installments commencing on the one month anniversary of the grant date (the “RSUs”). The Options and the RSUs were granted pursuant to the Company’s 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan, the vesting and the exercise of the Options and the vesting of the RSUs are subject to stockholder approval (which was considered perfunctory given management’s high level of ownership interest).

	For the Nine Months Ended July 31,
	2018		2017
General and administrative expense:
Continuing operations	$	22,783	$	10,057
Discontinued operations		-		1,118
		22,783		11,175
Research and development expense:
Continuing operations		4,891		639
Total stock-based compensation expense	$	27,674	$	11,814

A summary of the Company’s employee stock option activity in the nine months ended July 31, ~~2017~~2018 is presented below:

	Number of shares			Weighted-Average Exercise Price		Number of shares			Weighted-Average Exercise Price
Outstanding - October 31, 2016		383,210		$	5.74
Outstanding - October 31, 2017							3,525,530		$	6.34
Granted		2,715,000		$	3.49		1,768,000		$	25.22
Exercised		(231,404	)	$	4.85		(30,794	)	$	3.87
Outstanding - July 31, 2017		2,866,806		$	3.68
Options exercisable - July 31, 2017		997,008		$	3.88
Forfeited							(34,167	)	$	18.90
Outstanding - July 31, 2018							5,228,569		$	12.65
Options exercisable - July 31, 2018							3,028,208		$	7.64
Weighted-average fair value of options granted during the period				$	2.37				$	18.33

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

A summary of the Company’s non-employee stock option activity in the nine months ended July 31, ~~2017~~2018 is presented below:

Number of
shares

Weighted-Average
Exercise Price

Outstanding - October 31, 2016 - $ -
Granted 52,000 $ 4.71
Outstanding - July 31, 2017 52,000 $ 4.71
Options exercisable - July 31, 2017 10,833 $ 4.71

	Number of shares		Weighted-Average Exercise Price
Outstanding - October 31, 2017	$	293,000	$	19.61
No activity		-	$	-
Outstanding – July 31, 2018		293,000	$	19.61
Options exercisable - July 31, 2018		136,542	$	17.12

Stock options are generally granted to employees or non-employees at exercise prices equal to the fair market value of the Company’s common stock at the dates of grant. Stock options generally vest over one to three years and have a term of five to ten years. The total fair value of employee options granted during the nine months ended July 31, 2018 was approximately $32.4 million. The intrinsic value of options outstanding at July 31, 2018 was $60.1 million. The intrinsic value of options exercised during the nine months ended July 31, 2018 was $583,000. The weighted average remaining contractual term of outstanding and ~~non-employee stock option grants is amortized over the vesting period of, generally, one to three years.~~exercisable options at July 31, 2018 was 8.8 years and 8.5 years, respectively. As of July 31, ~~2017,~~2018, there was approximately ~~$2.8~~$19.6 million of unrecognized compensation cost related to ~~non-vested employee and non-employee~~ stock ~~option awards,~~options, which is expected to be recognized over a remaining weighted-average vesting period of ~~0.7~~0.6 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following ~~weighted-average~~ assumptions for the nine months ended July 31, ~~2017:~~2018:

Risk free annual interest rate	~~1.78-2.28~~2.01%-3.04	%
Expected volatility	~~71.65-86.34~~80.86-85.62	%
Expected life	~~5.04-6.00~~5.00-6.01
Assumed dividends	None

~~POLARITYTE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~A summary of the Company’s~~Restricted stock and restricted stock units activity for employees and non-employees in the nine months ended July 31, ~~2017 is presented below:~~2018:

Number of
shares
Weighted-Average
Grant-Date Fair Value
Unvested - October 31, 2016 274,829 $ 6.00
Granted 1,031,000 $ 4.56
Vested (1,011,466 ) $ 4.22
Unvested - July 31, 2017 294,363 $ 7.07

~~During the nine months ended July 31, 2017, the Company granted 1,031,000 restricted shares to employees and non-employees.~~

	Number of shares			Weighted-Average Grant-Date Fair Value
Unvested - October 31, 2017		227,132		$	7.83
Granted		308,387		$	27.48
Vested		(187,488	)	$	11.53
Unvested – July 31, 2018		348,031		$	23.25

The ~~weighted-average~~total fair value of restricted ~~shares~~stock and restricted stock units granted during the nine months ended July 31, ~~2017~~2018 was ~~$4.56.~~ approximately $8.5 million.

The ~~total~~ fair value of restricted stock ~~granted during the nine months ended July 31, 2017 was approximately $4.7 million.~~

~~The value of~~and restricted stock unit grants is measured based on ~~its~~the fair market value of the Company’s common stock on the date of grant and amortized over the vesting period of, generally, six months to three years. As of July 31, ~~2017,~~2018, there was approximately ~~$2.0~~$6.0 million of unrecognized compensation cost related to unvested restricted stock and restricted stock unit awards, which is expected to be recognized over a remaining weighted-average vesting period of ~~0.6 years.~~1.0 year.

~~10.~~13. INCOME TAXES

The Company calculates its provision for federal and state income taxes based on current tax law. The Tax Cuts and Jobs Act (tax reform) was enacted on December 22, 2017 (“Enactment Date”), and has several key provisions impacting accounting for and reporting of income taxes. The most significant provision reduces the U.S. corporate statutory tax rate from 35% to 21% beginning on January 1, 2018. Although most provisions of tax reform are not effective until 2018, the Company is required to record the effect of a change in tax law as of the Enactment Date on its deferred tax assets. As the Company maintains a full valuation allowance against its deferred tax assets, there is no income tax expense recorded related to this change. As of the Enactment Date, the Company estimated that its deferred tax asset and related valuation allowance were each reduced by approximately $2.2 million.

In accordance with Staff Accounting Bulletin 118 (“SAB 118”), income tax effects of the Tax Act may be refined upon obtaining, preparing, or analyzing additional information during the measurement period and such changes could be material. During the measurement period, provisional amounts may be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017, by U.S. regulatory and standard-setting bodies. While we are able to make reasonable estimates of the impact of the reduction in corporate rate and the deemed repatriation transition tax, the final impact of the Tax Act may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by the I.R.S., and actions we may take. We are continuing to gather additional information to determine the final impact.

Due to the Company’s history of losses and uncertainty of future taxable income, a valuation allowance sufficient to fully offset net operating losses and other deferred tax assets has been established. The valuation allowance will be maintained until sufficient positive evidence exists to support a conclusion that a valuation allowance is not necessary. The ~~Company’s effective tax rate for~~issuance of the ~~nine months ended July 31, 2017 and 2016 differed from the expected U.S. federal statutory rate primarily due to the change in the valuation allowance. The issuance of~~Series E Preferred Stock in connection with its original acquisition of the ~~Polarity acquisition~~PolarityTE, Inc., a Nevada corporation in April 2017, will likely result in limitations on the utilization of the Company’s net operating loss carryforwards under IRS section 382.

POLARITYTE, INC.

~~11.~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

14. LOSS PER SHARE

Shares of common stock issuable under convertible preferred stock, warrants and options and shares subject to restricted stock grants were not included in the calculation of diluted earnings per common share for the three ~~months~~ and nine months ended July 31, ~~2017~~2018 and ~~2016,~~2017, as the effect of their inclusion would be anti-dilutive.

For periods when shares of participating preferred stock (as defined in ASC 260 earnings per share) are outstanding, the two-class method is used to calculate basic and diluted earnings (loss) per common share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under the two-class method, basic earnings (loss) per common share is computed by dividing net earnings (loss) attributable to common shares after allocation of earnings to participating securities by the weighted-average number of shares of common stock outstanding during the year. Diluted earnings (loss) per common share, when applicable, is computed using the more dilutive of the two-class method or the if-converted method. In periods of net loss, no effect is given to participating securities since they do not contractually participate in the losses of the Company.

The table below provides total potential shares outstanding, including those that are anti-dilutive, on July 31, ~~2017~~2018 and ~~2016:~~2017:

	July 31,				July 31,
	2017		2016		2018		2017
Shares issuable upon exercise of warrants		-		187,500
Shares issuable upon conversion of preferred stock		9,020,287		2,783,000		-		9,020,287
Shares issuable upon exercise of stock options		2,918,806		394,278		5,521,569		2,918,806
Non-vested shares under restricted stock grants		294,363		303,477		348,031		294,363

~~12.~~15. COMMITMENTS AND CONTINGENCIES

Contingencies

On June 26, 2018, a class action complaint alleging violations of the Federal securities laws was filed in the United States District Court, District of Utah, by Jose Moreno against the Company and two directors of the Company, Case No. 2:18-cv-00510-JNP (the “Moreno Complaint”). On July 6, 2018, a similar complaint was filed in the same court against the same defendants by Yedid Lawi, Case No. 2:18-cv-00541-PMW (the “Lawi Complaint”). Both the Moreno Complaint and Lawi Complaint allege 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 and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 adopted thereunder. Specifically, both complaints allege that the defendants misrepresented the status of one of the Company’s patent applications while touting the unique nature of the Company’s technology and its effectiveness. Plaintiffs are seeking damages suffered by them and the class consisting of the persons who acquired the publicly-traded securities of the Company between March 31, 2017, and June 22, 2018. Plaintiffs have filed motions to consolidate and for appointment as lead plaintiff, which are pending, so that defendants have not filed any responsive pleadings to the complaints. The Company believes the allegations in the Moreno Complaint and Lawi Complaint are without merit, and intends to defend the litigation, vigorously. At this early stage of the proceedings the Company is unable to make any prediction regarding the outcome of the litigation.

On February 26, 2015, a complaint for patent infringement was filed in the United States District Court for the Eastern District of Texas by Richard Baker, an individual residing in Australia, against Microsoft, Nintendo, ~~the Company~~Majesco Sub, and a number of other game publisher defendants. The complaint ~~alleges~~alleged that the ~~Company’s~~ Zumba Fitness Kinect game infringed plaintiff’s patents in motion tracking technology. The plaintiff is representing himself pro se in the litigation and is seeking monetary damages in the amount of $1.3 million. The Company, in conjunction with Microsoft, is defending itself against the claim and has certain third-party indemnity rights from developers for costs incurred in the litigation. In August 2015, the defendants jointly moved to transfer the case was subsequently transferred to the Western District of Washington. On ~~May 17, 2016, the Washington Court issued a scheduling order that provides that defendants leave to jointly file an early motion for summary judgement~~June 16, 2017, final judgment was entered in ~~June 2016. On June 17, 2016, the defendants jointly filed a motion for summary judgment that stated that none~~favor of the defendants ~~including~~finding that the ~~Company, infringed upon~~accused products did not literally infringe the asserted ~~patent.~~patent and that plaintiff was barred from pursing infringement under the doctrine of equivalents due to prosecution history estoppel. The plaintiff appealed that decision to the Court of Appeals for the Federal Circuit. On ~~July~~April 9, ~~2016, Mr. Baker opposed~~2018, the ~~motion.~~Court of Appeals for the Federal Circuit affirmed the judgment of the District Court for the Western District of Washington. On ~~July 15, 2016,~~May 7, 2018, the ~~defendants jointly~~plaintiff filed a ~~reply.~~petition for panel rehearing and rehearing en banc by the Court of Appeals. The ~~briefing~~petition for rehearing was denied on June 8, 2018. The plaintiff subsequently filed a petition for a writ of certiorari with the Supreme Court of the United States. That petition was placed on the ~~motion~~docket September 4, 2018 as No. 18-276 and is ~~now closed.~~currently pending. On June 23, 2017, as part of a purchase agreement, liabilities and claims relating to this litigation were assumed by Zift. The ~~Court has not yet issued a decision~~Company cannot be certain about the outcome of the appeal, or ~~indicated if or when there will be oral argument on~~whether litigation regarding the ~~motion.~~assumption of liabilities by Zift may occur.

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Intelligent Verification Systems, LLC (“IVS”), filed a patent infringement complaint on September 20, 2012, in the United States District Court for the Eastern District against the Company and Microsoft Corporation. In March 2015, the court issued an order excluding the evidence proffered by IVS in support of its alleged damages, including the opinion of its damages expert. IVS appealed that decision. On January 19, 2016, the Federal Circuit denied IVS’ appeal and affirmed the district court’s orders that excluded the plaintiff’s damages expert and dismissed the case.

In addition to the ~~item~~items above, the Company at times may be a party to claims and suits in the ordinary course of business. We record a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. The Company has not recorded a liability with respect to the matter above. While the Company believes that it has valid defenses with respect to the legal matter pending and intends to vigorously defend the matter above, given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome, it is possible that the resolution of the matter could have a material adverse effect on our consolidated financial position, cash flows or results of operations.

Commitments

The Company leases office space in Hazlet, New Jersey at a cost of approximately $1,100 per month under a lease agreement that expires on March 31, ~~2018.~~2019.

The Company also ~~leases~~leased space in Salt Lake City, Utah at a cost of approximately ~~$24,044~~$24,000 per month under a lease agreement that expired on March 31, 2018. The Company will continue to lease space in Salt Lake City, Utah at a cost of approximately $12,400 per month under a lease agreement that expires on ~~March~~September 30, 2018. The Company will exit the property at the termination of the lease.

On December 27, 2017, the Company signed a five-year lease with one five-year option to renew on approximately 178,528 rentable square feet in Salt Lake City, Utah. The base rent for the first year of the lease is $1,178,285 and escalates at the rate of 3% per annum thereafter.

On July 11, 2018, the Company signed a two-year lease with one five-year option to renew on approximately 44,695 rentable square feet in Salt Lake City, Utah. The base rent, including building maintenance fees is $478,237 per annum. As of July 31, 2018, this lease had not commenced and is expected to commence during the fiscal quarter ending October 31, 2018.

Rent expense for the three months ended July 31, 2018 and 2017 was approximately $356,000 and $87,000, respectively. Rent expense for the nine months ended July 31, 2018 and 2017 was approximately $994,000 and $147,000, respectively.

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

~~13. RELATED PARTIES~~

In January 2015, the Company entered into an agreement with Equity Stock Transfer for transfer agent services. A former Board member of the Company is a co-founder and chief executive officer of Equity Stock Transfer. Fees under the agreement were approximately $2,000 and $0, in the nine months ended July 31, 2017 and 2016, respectively.

~~14.~~16. DISCONTINUED OPERATIONS

On July 31, 2015, the Company transferred to Zift Interactive LLC (“Zift”), a newly-formed subsidiary, certain rights under certain of its publishing licenses related to developing, publishing and distributing video game products through retail distribution for a term of one year. The Company transferred Zift to its former chief executive officer, Jesse Sutton. In exchange, the Company received Mr. Sutton’s resignation from the position of chief executive officer of the Company, including waiver of any severance payments and the execution of a separation agreement, together with his agreement to serve as a consultant to the Company. In addition, Zift will pay the Company a specified percent of its net revenue from retail sales on a quarterly basis.

In addition, the Company entered into a conveyance agreement with Zift under which it assigned to Zift certain assets used in the retail business and Zift agreed to assume and indemnify the Company for liabilities and claims related to the retail business, including customer claims for price protection and promotional allowances. The assets transferred to Zift included cash in an amount of $800,000, of which $400,000 was transferred immediately and the remaining $400,000 was payable by the Company in twelve equal consecutive monthly installments of $33,000 commencing August 1, 2015, and certain accounts receivable and inventory with an aggregate carrying value of approximately $87,000.

On June 23, 2017, the Company sold Majesco Entertainment Company, a Nevada corporation and wholly-owned subsidiary of the Company (“Majesco”) to Zift (the “Purchaser”) pursuant to a purchase agreement (the “Purchase Agreement”). Pursuant to the terms of the Purchase Agreement, the Company sold to the Purchaser 100% of the issued and outstanding shares of common stock of Majesco, including all of the right, title and interest in and to Majesco’s business of developing, publishing and distributing video game products through mobile and online digital downloading. Pursuant to the terms of the Purchase Agreement, the Company will receive total cash consideration of $100,000 ($5,000 upon signing the Purchase Agreement and 19 additional monthly payments of $5,000) plus contingent consideration based on net revenues valued at $0. The Company received $10,000 in cash consideration as of July 31, 2017. Subsequent to July 31, 2017, the Company received another $5,000.

~~POLARITYTE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

The Company recorded a gain of $100,000 on the sale of Majesco Entertainment Company, calculated as the difference between the $100,000 in non-contingent consideration and the net carrying amount of Majesco Entertainment Company, which was $0. The gain on the sale of Majesco Entertainment Company may be adjusted in future periods by the contingent consideration, based upon the achievement of pre-determined revenue milestones of more than $50,000 per month.

The sale of Majesco Entertainment Company, classified in the Company’s video games segment, qualifies as a discontinued operation as the sale represents a strategic shift that has (or will have) a major effect on operations and financial results.

The results of operations from the discontinued business for the three and nine months ended July 31, ~~2017~~2018 and ~~2016~~2017 are as follows (in thousands):

	For the Three Months Ended						For the Nine Months Ended						For the Three Months Ended					For the Nine Months Ended
	July 31,						July 31,						July 31,					July 31,
	2017			2016			2017			2016			2018		2017			2018		2017
Revenues	$	143		$	315		$	558		$	1,318		$	-	$	143		$	-	$	558
Expenses		176			1,085			1,007			2,169			-		176			-		1,007
Loss from discontinued operations	$	(33	)	$	(770	)	$	(449	)	$	(851	)
Gain (loss) from discontinued operations													$	-	$	(33	)	$	-	$	(449	)

Gain on sale of discontinued operations	$	100		$	-		$	100		$	-		$	-	$	100		$	-	$	100

POLARITYTE, INC.

~~The assets and liabilities related to the discontinued operations as of July 31, 2017 and October 31, 2016 are as follows (in thousands):~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

July 31, 2017 October 31, 2016
(Unaudited)
Current assets related to discontinued operations
Accounts receivable $ - $ 113
Capitalized software development costs and license fees - 50
$ - $ 163

Current liabilities related to discontinued operations
Accounts payable and accrued expenses $ - $ 810
$ - $ 810

The cash flows from the discontinued business for the nine months ended July 31, ~~2017~~2018 and ~~2016~~2017 are as follows (in thousands):

	For the nine months ended July 31,						For the nine months ended July 31,
	2017			2016			2018		2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from discontinued operations		(349	)		(851	)	$	-	$	(349	)
Adjustments to reconcile net loss from discontinued operations to net cash used in discontinued operating activities:
Depreciation and amortization		11			21			-		11
Stock based compensation expense		1,118			994			-		1,118
Amortization of capitalized software development costs and license fees		50			150			-		50
Gain on sale of Majesco Sub		(100	)		-					(100	)
Changes in operating assets and liabilities:
Accounts receivable		113			107			-		113
Capitalized software development costs and license fees		-			(21	)
Accounts payable and accrued expenses		(810	)		(218	)		-		(810	)
Payable to Zift		-			(19	)
Net cash provided by discontinued operating activities		33			163		$	-	$	33

CASH FLOWS FROM INVESTING ACTIVITIES
Cash received from sale of Majesco Sub		10			-		$	45	$	10
Net cash provided by discontinued investing activities		10			-		$	45	$	10

~~15.~~17. SEGMENT REPORTING

The Company’s operations involve dissimilar products which are managed separately. Accordingly, it operates in two segments: 1) regenerative medicine and 2) veterinary sciences.

Certain information concerning our segments for the three and nine months ended July 31, 2018 and 2017 and as of July 31, 2018 and 2017 is presented in the following table (in thousands):

	Three Months Ended July 31,
	2018			2017
Revenues:
Reportable Segments:
Regenerative Medicine	$	244		$	—
Veterinary Sciences		172			—
Discontinued Operations		—			—
Total consolidated revenues	$	416		$	—

Net loss:
Reportable Segments:
Regenerative Medicine	$	(17,157	)	$	(5,267	)
Veterinary Sciences		(88	)		—
Discontinued Operations		—			67
Total net loss	$	(17,245	)	$	(5,200	)

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Nine Months Ended July 31,
	2018			2017
Revenues:
Reportable Segments:
Regenerative Medicine	$	260		$	—
Veterinary Sciences		172			—
Discontinued Operations		—			—
Total consolidated revenues	$	432		$	—

Net loss:
Reportable Segments:
Regenerative Medicine	$	(42,865	)	$	(120,872	)
Veterinary Sciences		(88	)		—
Discontinued Operations		—			(349	)
Total net loss	$	(42,953	)	$	(121,221	)

	As of July 31, 2018		As of October 31, 2017
Identifiable assets employed:
Reportable Segments:
Regenerative Medicine	$	93,577	$	20,152
Veterinary Sciences		4,310		—
Discontinued Operations		—		—
Total assets	$	97,887	$	20,152

18. SUBSEQUENT EVENTS

Changes in Board of Directors and Officers

On August 7, 2018, Edward Swanson resigned from the position of director of the Company, and the Board of Directors of the Company (the “Board”) elected Rainer Erdtmann a director of the Company to fill the Class III director vacancy left by the resignation of Dr. Swanson. The Board determined that Mr. Erdtmann is “independent” pursuant to the definition of independence under Rule 5605(a)(2) of the Nasdaq Listing Rules. In consideration of Mr. Erdtmann’s agreement to join the Board the Company issued to Mr. Erdtmann an option to purchase 50,000 shares of the Company’s common stock exercisable over a term of 10 years and vests in 24 equal monthly installments commencing September 7, 2018, subject to continued service on the Board. The option was issued under the Company’s 2017 Equity Incentive Plan (the “Plan”), and the exercise price is $20.47 per share, which is fair value determined under the Plan. Mr. Erdtmann will also be entitled to participate in the annual compensation package the Company provides to its non-employee directors.

On August 7, 2018, pursuant to Article II, Section 1.B of the Company’s Bylaws the Board approved an increase in the number of persons comprising the Board from seven to eight by adding one new director position to Class II of the Board, and the Board elected David Seaburg a director of the Company to fill the vacancy in Class II of the Board. The Company entered into a consulting agreement with Mr. Seaburg pursuant to which he will provide investor relations and other services to the Company over a period of two years for a fee consisting of (a) quarter-annual cash payment of $10,000, (b) 60,000 restricted stock units issued under the Plan that vest in four equal installments every six months during the term of the agreement subject to continued service, and (c) an annual award under the Plan of options exercisable over a term of 10 years to purchase common stock with a value of $150,000 at the time of the award based on a Black-Scholes calculation.

John Stetson was an executive officer Company serving as the Chief Investment Officer. On September ~~14, 2017,~~7, 2018, the employment of John Stetson in any capacity with the Company, announced that it has entered into securities purchase agreements with investors for the sale of $15.2 million of Series F Convertible Preferred Stock. The Investor will also receive 276,364 Warrants exercisable at $30.00 per share of common stock. ~~The Series F Convertible Preferred stock converts at $27.50 per share into a total of 552,727 shares of common stock, upon conversion.~~including as Chief Investment Officer, was terminated.

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

Statements in this quarterly report on Form 10-Q that are not historical facts constitute forward-looking statements that are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act”. Examples of forward-looking statements include statements relating to industry prospects, our future economic performance including anticipated revenues and expenditures, results of operations or financial position, and other financial items, our business plans and objectives, including our intended product releases, and may include certain assumptions that underlie forward-looking statements. Risks and uncertainties that may affect our future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements include, among other things, those ~~listed under “Risk~~discussed in this section as well as factors described in Part II, Item 1A-“Risk Factors” ~~and elsewhere in our annual report on Form 10-K for the fiscal year ended October 31, 2016.~~. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are subject to business and economic risk and reflect management’s current expectations and involve subjects that are inherently uncertain and difficult to predict. Actual events or results may differ materially. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results. References herein to “we,” “us,” and “the Company” are to PolarityTE, Inc. and its consolidated subsidiaries.

Overview

PolarityTE, Inc. is ~~aiming to be~~a commercial-stage biotechnology and regenerative biomaterials company focused on transforming the ~~first~~lives of patients by discovering, designing and developing a range of regenerative tissue products and biomaterials for the fields of medicine, biomedical engineering and material sciences.

On March 2, 2018, the Company, along with its wholly owned subsidiary, Utah CRO Services, Inc., a Nevada corporation (“Acquisition Co.”), entered into agreements with Ibex Group, L.L.C., a Utah limited liability company, ~~to deliver regenerative medicine into clinical practice through tissue engineering. Subsequent~~and Ibex Preclinical Research, Inc., a Utah corporation (collectively, the “Seller”) for the purchase of the assets and rights to the Seller’s preclinical research and veterinary sciences business and related real estate. The business consists of a “good laboratory practices” (GLP) compliant preclinical research facility, including vivarium, operating rooms, preparation rooms, storage facilities, and surgical and imaging equipment. The real property includes two parcels in Cache County, Utah, consisting of approximately 1.75 combined gross acres of land, together with the buildings, structures, fixtures, and personal property located on the real property.

The acquisition closed on May 3, 2018. The aggregate purchase price was $3.8 million, of which $2.3 million was paid at closing and the ~~Company’s platform technology will allow it~~balance satisfied by a promissory note payable to ~~regenerate a patient’s tissues using their own cells.~~the Seller with an initial fair value of $1.22 million and contingent consideration with an initial fair value of approximately $0.3 million.

Research and Development Expenses. Research and development expenses primarily represent employee related costs, including stock compensation, for research and development executives and staff, lab and office expenses and other overhead charges.

~~Research and Development - Intellectual Property Acquired.~~ On April 7, 2017, as payment for the Polarity NV asset acquisition, the Company issued 7,050 shares of Series E Preferred Stock convertible into an aggregate of 7,050,000 shares of the Company’s common stock and with a fair value of approximately $104.7 million which is equal to 7,050,000 common shares times $14.85 (the closing price of the Company’s common stock as of April 7, 2017). Since the assets purchased were in-process research and development assets, the total purchase price was immediately expensed as research and development - intellectual property acquired since they have no alternative future use.

General and Administrative Expenses. General and administrative expenses primarily represent employee related costs, including stock compensation, for corporate executive and support staff, general office expenses, professional fees and various other overhead charges. Professional fees, including legal and accounting expenses, typically represent one of the largest components of our general and administrative expenses. These fees are partially attributable to our required activities as a publicly traded company, such as SEC filings, and corporate- and business-development initiatives.

~~Discontinued Operations.~~ On June 23, 2017, the Company sold Majesco Entertainment Company, a Nevada corporation and wholly-owned subsidiary of the Company (“Majesco”) to Zift Interactive LLC, a Nevada limited liability company (the “Purchaser”) pursuant to a purchase agreement (the “Agreement”). Pursuant to the terms of the Agreement, the Company sold to the Purchaser 100% of the issued and outstanding shares of common stock of Majesco, including all of the right, title and interest in and to Majesco’s business of developing, publishing and distributing video game products through both retail distribution and mobile and online digital downloading. Pursuant to the terms of the Agreement, the Company will receive total cash consideration of approximately $100,000 ($5,000 upon signing the Agreement and 19 additional monthly payments of $5,000) plus contingent consideration based on net revenues.

Income Taxes. Income taxes consist of our provisions for income taxes, as affected by our net operating loss carryforwards. Future utilization of our net operating loss, or NOL, carryforwards may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code. The annual limitation may result in the expiration of NOL carryforwards before utilization. Due to our history of losses, a valuation allowance sufficient to fully offset our NOL and other deferred tax assets has been established under current accounting pronouncements, and this valuation allowance will be maintained unless sufficient positive evidence develops to support its reversal.

Critical Accounting Estimates

Our discussion and analysis of the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.

The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from these estimates under different assumptions or conditions.

We have identified the policies below as critical to our business operations and to the understanding of our financial results. The impact and any associated risks related to these policies on our business operations is discussed throughout management’s discussion and analysis of financial condition and results of operations when such policies affect our reported and expected financial results.

Accounting for Stock-Based Compensation. Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including, in the case of stock option awards, estimating expected stock volatility. In addition, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

Accounting for Common and Preferred Stock and Warrant transactions. We issued units consisting of preferred shares and warrants and common stock and warrants and subsequently remeasured certain of those warrants. Determining the fair value of the securities in these transactions requires significant judgment, including adjustments to quoted share prices and expected stock volatility. Such estimates may significantly impact our results of operations and losses applicable to common stockholders.

Commitments and Contingencies. We record a liability for contingencies when the amount is both probable and reasonably estimable. We record associated legal fees as incurred.

Results of Operations

Three months ended July 31, ~~2017~~2018 versus three months ended July 31, ~~2016~~2017

Net Revenues. For the three-month period ended July 31, 2018, net revenues from product sales were $0.4 million, which represents approximately $0.2 million from the sale of the Company’s core product SkinTE and approximately $0.2 million from contract research operations in Veterinary Sciences.

Cost of Sales. For the three-month period ended July 31, 2018, cost of sales was approximately $0.2 million and approximately 55% of net revenues.

Research and Development Expenses. For the three-month period ended July 31, 2018, research and development expenses were approximately $2.3 million, mostly consisting of stock-based compensation of approximately $1.2 million, salaries of approximately $0.5 million and depreciation of approximately $0.3 million. For the three-month period ended July 31, 2017, research and development expenses were approximately $1.6 ~~million. Research~~million and ~~development costs~~ mostly ~~consist~~consisted of salaries of approximately ~~$488,000,~~$0.5 million, stock-based compensation of approximately of ~~$452,000,~~$0.5 million, travel relates expenses of approximately ~~$264,000~~$0.3 million and ~~medical equipment~~ depreciation of approximately ~~$122,000.~~$0.1 million.

General and Administrative Expenses. For the three-month period ended July 31, ~~2017,~~2018, general and administrative expenses ~~increased 93% to~~were approximately ~~$3.6~~$15.2 million compared to ~~$1.9~~$3.6 million for the three months ended July 31, ~~2016.~~2017. The increase is primarily due to ~~increased~~an increase of approximately $6.3 million in stock-based ~~compensation.~~compensation, $0.6 million in legal and accounting and $0.6 million in consulting expenses.

Other (Expenses) Income. For the three-month period ended July 31, 2018, other (expenses) income mainly included an interest income of approximately $0.1 million. For the three-month period ended July 31, 2017, other (expenses) income was insignificant.

Net ~~loss~~Loss from continuing operations. ~~Operating~~Net loss from continuing operations for the three months ended July 31, ~~2017~~2018 was approximately ~~$5.3~~$17.2 million, compared to ~~an operating~~a loss of approximately ~~$1.7~~$5.3 million in the comparable period in ~~2016,~~2017, primarily reflecting ~~higher~~the increase in stock-based compensation and other product research and development and general and administrative expenses.

Nine months ended July 31, ~~2017~~2018 versus nine months ended July 31, ~~2016~~2017

Net Revenues. For the nine-month period ended July 31, 2018, net revenues from product sales were $0.4 million, which represents approximately $0.2 million from the sale of the Company’s core product SkinTE and approximately $0.2 million from contract research operations in Veterinary Sciences.

Cost of Sales. For the nine-month period ended July 31, 2018, cost of sales was approximately $0.2 million and approximately 53% of net revenues.

Research and Development Expenses. For the nine-month period ended July 31, 2018, research and development expenses were approximately $14.6 million. Research and development expenses mostly consist of stock-based compensation of approximately $4.9 million, salaries of approximately $4.1 million, medical studies of approximately $0.5 million, bonuses of approximately $0.5 million, medical samples of approximately $0.5 million, depreciation of approximately $0.9 million, rent of approximately $0.7 million, office expense of approximately $0.5 million, business meals and transportation of approximately $0.3 million, consulting of approximately $0.2 million and health insurance of approximately $0.2 million. For the nine-month period ended July 31, 2017, research and development expenses were approximately $3.4 ~~million. Research~~million and ~~development costs~~ mostly consist of salaries of approximately $1.3 million, stock-based compensation of approximately of ~~$639,000,~~$0.6 million, travel relates expenses of approximately ~~$543,000~~$0.5 million and ~~medical equipment~~ depreciation of approximately ~~$295,000.~~$0.3 million.

~~Research and Development - Intellectual Property Acquired.~~ For the nine months ended July 31, 2017, research and development - intellectual property acquired relates to the Polarity NV asset acquisition and the issuance of 7,050 shares of Series E Preferred Stock convertible into an aggregate of 7,050,000 shares of the Company’s common stock with a fair value of approximately $104.7 million which is equal to 7,050,000 common shares times $14.85 (the closing price of the Company’s common stock as of April 7, 2017). Since the assets purchased were in-process research and development assets, the total purchase price was immediately expensed as research and development - intellectual property acquired since there is no alternative future use.

General and Administrative Expenses. For the nine-month period ended July 31, ~~2017,~~2018, general and administrative expenses ~~increased 261% to~~were approximately ~~$12.8~~$32.1 million compared to ~~$3.5~~$12.8 million for the nine months ended July 31, ~~2016.~~2017. The increase is primarily due to ~~increased~~an increase of $12.7 million in stock-based compensation, $1.1 million in legal and ~~increased headcount related to the Company’s new medical activities.~~accounting and $1.0 million in consulting expenses.

Other (Expenses) Income. For the nine-month period ended July 31, 2018, other (expenses) income mainly included a change in fair value of derivatives of approximately a $3.8 million gain and a loss on extinguishment of warrant liability of approximately $0.5 million. For the nine-month period ended July 31, 2017, other (expenses) income was insignificant.

Net loss from continuing operations. ~~Operating~~Net loss from continuing operations for the nine months ended July 31, ~~2017~~2018 was approximately ~~$120.9~~$43.0 million, compared to ~~an operating~~a loss of approximately ~~$3.4~~$120.9 million in the comparable period in ~~2016,~~2017, primarily reflecting ~~higher~~the decrease of $104.7 million in research and development - intellectual property acquired expenses ~~and~~offset by the increase in stock-based ~~compensation expenses.~~compensation.

Liquidity and Capital Resources

As of July 31, ~~2017,~~2018, our cash and cash equivalents balance was ~~$3.0~~approximately $84.8 million and our working capital was approximately ~~$2.1~~$81.5 million, compared to cash and cash equivalents of ~~$6.5~~$17.7 million and working capital of ~~$5.4~~$2.5 million at October 31, ~~2016.~~2017.

As reflected in the condensed consolidated financial statements, we had an accumulated deficit of approximately ~~$249.4~~$302.0 million at July 31, ~~2017,~~2018, a net loss of approximately ~~$120.9~~$43.0 million ~~from continuing operations~~ and approximately ~~$4.7~~$17.0 million net cash used in continuing operating activities for the nine months ended July 31, ~~2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern.~~

We will continue to pursue fundraising opportunities that meet our long-term objectives, however, our cash position is not sufficient to support our operations for the foreseeable future. The condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

~~Dividends~~

On January 4, 2016, we declared a special cash dividend of an aggregate of $10.0 million to holders of record on January 14, 2016 of its outstanding shares of: (i) common stock (ii) Series A Preferred Shares; (iii) Series B Preferred Shares; (iv) Series C Preferred Shares and (v) Series D Preferred Shares. The holders of record of the Company’s outstanding preferred stock participated in the dividend on an “as converted” basis.

~~April 2016 Registered Common Stock and Warrant Offering~~2018.

On April ~~13, 2016, the Company entered into~~12, 2018, we completed a ~~Securities Purchase Agreement with certain institutional investors~~public offering providing for the issuance and sale ~~by the Company~~ of ~~250,000~~2,335,937 shares of our common stock, par value $0.001 per shares at an offering price of $16.00 per share, for net proceeds of $34.6 million, after deducting offering expenses payable by us.

On June 7, 2018, we completed an underwritten offering with Cantor Fitzgerald & Co., as underwriter, providing for the ~~Company’s~~issuance and sale of 2,455,882 shares of our common stock, par value $0.001 per share, at an offering price of ~~$6.00~~$23.65 per share, for net proceeds of ~~$1.4~~approximately $58.0 million, after deducting ~~placement agent fees~~offering expenses payable by us.

Based upon the current status of our product development and ~~expenses. In addition,~~commercialization plans, we believe that our existing cash and cash equivalents will be adequate to satisfy our capital needs for at least the ~~Company sold~~next 12 months from the date of filing. We anticipate needing substantial additional financing to ~~purchasers~~continue clinical deployment and commercialization of ~~common stock in this offering, warrants~~our lead product SkinTE, development of our other product candidates, and scaling the manufacturing capacity for our products and product candidates, and prepare for commercial readiness. We will continue to ~~purchase 187,500 shares~~pursue fundraising opportunities when available, however, such financing may not be available on terms favorable to us, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of, ~~its common stock. The common shares~~or eliminate one or more of our product development programs. We plan to meet our capital requirements primarily through issuances of equity securities, debt financing, revenue from product sales and future collaborations. Failure to generate revenue or raise additional capital would adversely affect our ability to achieve our intended business objectives.

Our actual capital requirements will depend on many factors, including among other things: our ability to scale the manufacturing for and to commercialize successfully our lead product, SkinTE; the progress and success of clinical evaluation and acceptance of SkinTE; our ability to develop our other product candidates; and the ~~Warrant Shares were offered by~~costs and timing of obtaining any required regulatory registrations or approvals. Our forecast of the ~~Company pursuant~~period of time through which our financial resources will be adequate to ~~an effective shelf registration~~support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. The foregoing factors, along with the other factors described in the section, Item 1A, “Risk Factors” in Part II of this Report on Form ~~S-3,~~10-Q as well as our risk factors set forth in our Annual Report on Form 10-K for the year ended October 31, 2017, will impact our future capital requirements and the adequacy of our available funds. If we are required to raise additional funds, any additional equity financing may be highly dilutive, or otherwise disadvantageous, to existing stockholders and debt financing, if available, may involve restrictive covenants. Collaborative arrangements, if necessary to raise additional funds, may require us to relinquish rights to certain of our technologies, products or marketing territories. Our failure to raise capital when needed, and on acceptable terms, would require us to reduce our operating expenses and would limit our ability to respond to competitive pressures or unanticipated requirements to develop our product candidates and to continue operations, any of which ~~was initially filed with~~would have a material adverse effect on our business, financial condition and results of operation.

As previously reported, we identified a material weakness in the ~~Securities~~effectiveness of our internal controls over financial reporting, a factor that could affect our liquidity and ~~Exchange Commission on October 22, 2015 and declared effective on December 7, 2015. The closing~~capital resources. At present, management believes that the recent improvement of the ~~offering occurred on April 19, 2016.~~processes for granting equity awards to certain employees and service providers will ultimately correct the material weakness.

Each Warrant is immediately exercisable for two years, but not thereafter, at an exercise price of $6.90 per share. Subject to limited exceptions, a holder of warrants will not have the right to exercise any portion of its warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to such exercise. The exercise price and number of warrants are subject to adjustment in the event of any stock dividends and splits, reverse stock split, stock dividend, recapitalization, reorganization or similar transaction.

~~Preferred Share Conversion Activity~~Common Stock

During the nine months ended July 31, 2017, 3,991,487 shares of Convertible Preferred Stock Series A, 6,512 shares of Convertible Preferred Stock Series B, 7,798 shares of Convertible Preferred Stock Series C and 129,665 shares of Convertible Preferred Stock Series D were converted into 1,232,793 shares of common stock.

~~Common Stock~~

~~On January 6, 2016,~~2018, certain ~~investors~~employees exercised their options at ~~$4.08~~a weighted-average exercise price of $3.87 in exchange for the Company’s common stock for an aggregated amount of ~~31,656~~30,417 shares.

On January 18, 2017, the Company entered into separate exchange agreements (each an “Exchange Agreement”) with certain accredited investors (the “Investors”) who purchased warrants to purchase shares of the Company’s common stock (the “Warrants”) pursuant to the prospectus dated April 13, 2016. Pursuant to the Offering, the Company issued 250,000 shares of the Company’s common stock and Warrants to purchase 187,500 shares of common stock (taking into account the reverse split of the Company’s common stock on a 1 for 6 basis effective with The NASDAQ Stock Market LLC on August 1, 2016). The common stock and Warrants were offered by the Company pursuant to an effective shelf registration statement.

Under the terms of the Exchange Agreement, each Investor exchanged each Warrant it purchased in the Offering for 0.3 shares of common stock. Accordingly, the Company issued an aggregate of 56,250 shares of common stock in exchange for the return and cancellation of 187,500 Warrants.

Off-Balance Sheet Arrangements

As of July 31, ~~2017,~~2018, we had no off-balance sheet arrangements.

Inflation

Our management currently believes that inflation has not had, and does not currently have, a material impact on continuing operations.

Cash Flows

Cash and cash equivalents and working capital were approximately ~~$3.0~~$84.8 million and ~~$2.1~~$81.5 million, respectively, as of July 31, ~~2017~~2018 compared to cash and cash equivalents and working capital of approximately ~~$6.5~~$17.7 million and ~~$5.4~~$2.5 million at October 31, ~~2016,~~2017, respectively.

Operating Cash Flows. Cash used in continuing operating activities in the nine months ended July 31, ~~2017~~2018 amounted to approximately $17.0 million compared to approximately $4.7 million ~~compared to approximately $1.7 million~~ for the ~~2016~~2017 period. The increase in net cash used in continuing operating activities mostly relates to the ~~increase~~increases in ~~net loss, partially offset by the~~both research and development ~~- intellectual property acquired paid for in preferred shares~~ and ~~by the increase in share-based compensation.~~general and administrative expenses.

Cash used in discontinued operating activities in the nine months ended July 31, ~~2017~~2018 amounted to $0 compared to approximately $33,000 ~~compared to approximately $163,000~~ for the ~~2016 period.~~same period in 2017.

Investing Cash Flows. Cash used in continuing investing activities in the nine months ended July 31, ~~2017~~2018 amounted to approximately ~~$2.3 million. The~~$8.7 million compared to $2.3 million for the 2017 period. For the nine months ended July 31, 2018, the activity relates to the acquisition of IBEX and the purchase of property and equipment. For the nine months ended July 31, 2017, the activity only relates to the purchase of property and ~~equipment (mostly medical equipment). There were no investing activities in the 2016 period.~~equipment.

Financing Cash ~~Flows.~~Flows. Net cash provided by financing activities for the nine months ended July 31, ~~2017~~2018 amounted to approximately $92.8 million compared to approximately $3.4 million ~~compared to approximately $8.8~~for the 2017 period. The $92.7 million ~~used~~ in ~~2016 period. For~~net proceeds from the sale of common stock in the nine months ended July 31, ~~2017,~~2018, accounts for the ~~$3.4 million related~~majority of that period’s financing activity and accounts for the majority of the increase in net cash proved by financing activities as compared to ~~capital raising activities and proceeds from option exercises. For~~ the ~~nine months ended July 31, 2016, the $8.8 million mostly related to a payment of a $10.0 million special cash dividend, partially offset by an equity capital raise of approximately $1.4 million.~~comparable prior year period.

Recent Accounting Pronouncements

Refer to our discussion of recent accounting pronouncements in Note 2 - Summary of Significant Accounting Policies to the accompanying condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Not applicable.

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in the Securities Exchange Act of 1934 Rule 13a-15(e) and 15d-15(e), as of the end of the period covered by this report.

In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

~~While~~

A material weakness is a deficiency, or a combination of deficiencies, within the meaning of Public Company Accounting Oversight Board (“PCOAB”) Audit Standard No. 5, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Under the caption “Item 4. Controls and Procedures” of our report on Form 10-Q for the quarter ended January 31, 2018, filed with the Securities and Exchange Commission on March 19, 2018, we ~~believe our disclosure controls and procedures and~~reported a material weakness in our internal control over financial reporting. Specifically, due to a lack of processes in place to address personnel changes, controls over the Company’s process of accounting for stock-based compensation failed to ensure the completeness of stock options and restricted stock grants in the Company’s calculation of stock-based compensation expense. In addition, due to a lack of adequate review and reconciliation control procedures, the Company’s internal control over financial reporting ~~are adequate, no system~~failed to prevent adjustments to the Company’s financial statements in the quarter ended January 31, 2018, with respect to certain costs not material in amount that we expensed, which should have been capitalized and classified as fixed assets.

During the quarter ended January 31, 2018, we started the process to mitigate the material weakness in our process of ~~controls can prevent errors~~accounting for stock-based compensation, and ~~fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that~~we expect it to be remediated during fiscal year 2018. At the ~~control system’s objectives will be met. Further,~~end of April 2018, we engaged the ~~design~~services of a ~~control system must reflect the fact that there are resource constraints,~~third party accounting advisory firm to provide assistance in developing more effective processes and ~~the benefits of~~ controls ~~must be considered relative to their costs. Because of the inherent limitations~~ in ~~all control systems, no evaluation of controls can provide absolute assurance that all control issues~~recording and ~~instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty,~~classifying expenditures, and that breakdowns can occur. Controls can also be circumvented by individual acts of some people, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events,reviewing and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with its policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Subject to the limitations above, management believes that the condensed consolidated financial statements and other financial information contained in this report, fairly present in all material respects our financial condition, results of operations, and cash flows for the periods presented.making appropriate period-end adjustments.

Based on the evaluation of the effectiveness of our disclosure controls and procedures and the material weaknesses identified above that have not yet been remediated, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were not effective at a reasonable assurance ~~level.~~level at July 31, 2018.

Changes in Internal Control Over Financial Reporting

~~During~~At the ~~three months~~end of April 2018, we obtained from a third-party accounting advisory firm assistance in developing more effective processes and controls in recording and classifying expenditures, and reviewing and making appropriate period-end adjustments. In addition, we implemented a phased approach of a company-wide enterprise resource planning system during the quarter ended July 31, ~~2017, there were no changes in~~2018, to further enhance our internal control environment. To effectuate these systems we added three additional people to our accounting staff beginning in April 2018.We continue to monitor the impact of this implementation on our processes as well as the impact to the internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

~~In addition to the item above, the~~The Company at times may be a party to claims and suits in the ordinary course of business. We record a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. The Company has not recorded a liability with respect to the ~~matter~~matters above. ~~While the Company believes that it has valid defenses with respect to the legal matter pending and intends to vigorously defend the matter above, given~~Given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome, it is possible that the resolution of ~~the matter~~either or both matters could have a material adverse effect on our consolidated financial position, cash flows or results of operations.

Item 1A. Risk Factors

~~None.~~The following updates certain risk factors set forth in our Annual Report on Form 10-K, for the year ended October 31, 2017, as amended and restated in our Quarterly Reports on Form 10-Q for the period ended January 31, 2018, filed with the Securities and Exchange Commission (SEC) on March 19, 2018, and for the period ended April 30, 2018, filed with the SEC on June 14, 2018, and should be read in conjunction with the risk factors presented in those reports under the caption “Risk Factors.”

We have a history of operating losses and may never achieve or sustain profitability.

We have to date incurred, and may continue to incur, significant operating losses over the next several years. We have incurred significant net losses in each year since our inceptions, and have a net loss of $130.8 million for the year ended October 31, 2017, and $43.0 million for the nine months ended July 31, 2018. Our ability to achieve profitable operations in the future will depend in large part upon the successful development and commercialization of our product candidates and technologies. Factors impacting our ability to successfully develop and commercialize our product candidates include:

	●	approvals by and/or registrations with the FDA and other US and foreign government agencies;
	●	our ability to educate and train physicians and hospitals on the benefits of our product candidates;
	●	the rate at which providers adopt our technology and product candidates;
	●	our ability to scale up our global commercialization, including our selling and manufacturing activities;
	●	our ability to complete the development of our product candidates in a timely manner;
	●	our ability to obtain adequate reimbursement from third parties for our products and product candidates; and
	●	other activities generally necessary in order to introduce and bring new products and medical technologies to market.

The likelihood of the long-term success of our company must be considered in light of the expenses, difficulties and delays frequently encountered in the development and commercialization of new and innovative medical techniques and technologies, unknown and uncertain regulatory hurdles for a new and novel technology or technique, competitive factors and competition, as well as the uncertain nature of new business development and ongoing capital requirements.

If we are not able to integrate acquisitions successfully, our operating results and prospects could be harmed.

In May 2018, we acquired from the Ibex Group, L.L.C., and Ibex Preclinical Research, Inc., certain assets and rights to their preclinical research and veterinary sciences business and related real estate. We will continue to look for opportunities to acquire technologies or operations that we believe will contribute to our growth and development. The success of our present and future acquisitions will depend on our ability to identify, negotiate, complete and integrate acquisitions. Acquisitions are inherently risky, and any acquisitions we complete may not be successful. Any acquisitions we pursue would involve numerous risks, including the following:

	●	difficulties in integrating and managing the operations and technologies of the businesses we acquire;
	●	diversion of our management’s attention from normal daily operations of our business;
	●	our inability to maintain the customers, the key employees, the key business relationships and the reputations of the businesses we acquire;
	●	our inability to generate sufficient revenue from acquisitions to offset our increased expenses associated with acquisitions;
	●	our responsibility for the liabilities of the businesses we acquire, including, without limitation, liabilities arising out of their failure to maintain effective data security, data integrity, disaster recovery and privacy controls prior to the acquisition, or their infringement or alleged infringement of third party intellectual property, contract or data access rights prior to the acquisition;
	●	difficulties in complying with new markets or regulatory standards to which we were not previously subject;
	●	delays in our ability to implement internal standards, controls, procedures and policies in the businesses we acquire; and
	●	adverse effects of acquisition activity on the key performance indicators we use to monitor our performance as a business.

Unanticipated events and circumstances may occur in future periods which may affect the realizability of our intangibles assets recognized through acquisitions. The events and circumstances that we consider include significant under-performance relative to projected future operating results and significant changes in our overall business and/or product strategies. These events and circumstances may cause us to revise our estimates and assumptions used in analyzing the value of our other intangible assets with indefinite lives, the revision could result in a non-cash impairment charge that could have a material impact on our financial results.

If we fail to maintain proper and effective internal control over financial reporting in the future, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results.

We identified certain material weaknesses in our internal control over financial reporting that were reported in our quarterly report on Form 10-Q for the quarter ended January 31, 2018. Specifically, due to a lack of processes in place to address personnel changes, controls over our process of accounting for stock-based compensation failed to ensure the completeness of stock options and restricted stock grants in our calculation of stock-based compensation expense. In addition, due to a lack of adequate review and reconciliation control procedures, our internal control over financial reporting failed to prevent adjustments to our financial statements in the quarter ended January 31, 2018, with respect to certain costs not material in amount that we expensed, which should have been capitalized and classified as fixed assets. We have taken steps to remediate these material weaknesses and we expect them to be remediated during fiscal year 2018. At the end of April 2018, we obtained from a third-party accounting advisory firm assistance in developing more effective processes and controls in recording and classifying expenditures, and reviewing and making appropriate period-end adjustments. In addition, we implemented a phased approach of a company-wide enterprise resource planning system during the quarter ended July 31, 2018, and added three additional people to our accounting staff to further enhance our internal control environment. Nevertheless, by the end of the current fiscal year these changes may not be in operation long enough for us to adequately test and evaluate whether the processes and controls we have added are effective period over period. If our remedial measures prove to be insufficient to address the material weakness, or if we otherwise fail to establish and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, timely file our periodic reports, maintain our reporting status or prevent fraud, any of which could adversely affect our business and operating results, investor confidence in our reported financial information, and the trading price of our common stock.

As of October 31, 2018, we will be an “accelerated filer” and are therefore subject to the auditor attestation requirement in the assessment of our internal control over financial reporting.

Because the worldwide market value of our common stock held by non-affiliates exceeded $75 million (but was less than $700 million), as of the last business day of our fiscal quarter ended April 30, 2018, we are an “accelerated filer” as defined by SEC rule as of October 31, 2018. Therefore, we are now subject to the requirement that we include in our annual report on Form 10-K for the fiscal year ending October 31, 2018, the auditor’s attestation report on its assessment of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We identified certain material weaknesses in our internal control over financial reporting that were reported in our quarterly report on Form 10-Q for the quarter ended January 31, 2018, and are described in the preceding risk factor. If we do not have a sufficient history for us and our independent registered public accounting firm to test and evaluate our new processes and controls, we may be unable to obtain an unqualified attestation report from our independent registered public accounting firm required under Section 404 of the Sarbanes-Oxley Act. If our independent registered public accounting firm is not able to render an unqualified attestation, it could result in lost investor confidence in the accuracy, reliability, and completeness of our financial reports. We expect that our status as an accelerated filer and compliance with these increased requirements will require management to expend additional time while also condensing the time frame available to comply with certain requirements, which may further increase our legal and financial compliance costs.

Our October 31, 2017 financial statements were prepared on a going concern basis.

In its report dated January 29, 2018, related to our October 31, 2017 consolidated financial statements, EisnerAmper LLP, our independent registered public accounting firm, expressed substantial doubt about our ability to continue as a going concern as we had suffered recurring losses from operations and had insufficient liquidity to fund our future operations.

On June 7, 2018, the Company completed an underwritten offering with Cantor Fitzgerald & Co., as underwriter, providing for the issuance and sale of 2,455,882 shares of the Company’s common stock, par value $0.001 per share, at an offering price of $23.65 per share, for net proceeds of approximately $58.0 million, after deducting offering expenses payable by the Company. As a result, as of July 31, 2018, we had $84.8 million in cash. We anticipate that our principal sources of liquidity will be sufficient to fund our activities through for at least the next 12 months from the date of filing.

Nevertheless, we anticipate we will need additional cash in order to have sufficient cash to fund our operations in future periods, and we will need to continue to raise additional equity or debt capital and we cannot provide any assurance that we will be successful in doing so.

We may not be able to raise the required capital to conduct our operations and develop and commercialize our product candidates.

We incurred net losses of $130.8 million in fiscal 2017, and additional net losses of $43.0 for the nine months ended July 31, 2018. We will require substantial additional capital resources in order to complete our product development programs, complete clinical trials, and market and commercialize our product candidates. In order to grow and expand our business, and to introduce our new product candidates into the marketplace, we will need to raise a significant amount of additional funds. We will also need significant additional funds or a collaborative partner, or both, to finance the research and development activities. Accordingly, we are continuing to pursue additional sources of financing.

Our future capital requirements will depend on numerous factors, including:

	●	our ability to generate future revenues;
	●	costs and timing of our product development activities;
	●	timing of conducting pre-clinical and clinical trials and seeking regulatory approvals and/or registrations;
	●	our ability to commercialize our product candidates;
	●	our ability to avoid infringement and misappropriation of third-party intellectual property;
	●	our ability to obtain valid and enforceable patents;
	●	competing technological and market developments;
	●	our ability to establish collaborative relationships;
	●	market acceptance of our product candidates;
	●	the development of an infrastructure to support or business;
	●	our need to remediate material weaknesses and implement and maintain additional internal systems, processes and infrastructure, to have an effective system of internal control over financial reporting;
	●	our ability to scale up our production capabilities for larger quantities of our products; and
	●	our ability to control costs.

We expect to devote substantial capital resources to, among other things, fund operations, continue development programs, and to build out and increase our portfolio of product candidates. If we are unable to secure such additional financing, it will have a material adverse effect on our business and we may have to limit operations in a manner inconsistent with our development and commercialization plans. If additional funds are raised through the issuance of equity securities or convertible debt securities, it will be dilutive to our stockholders and could result in a decrease in our stock price.

We have funded our operations primarily with proceeds from public and private offerings of our common stock. Our history of operating losses and cash uses, our projections of the level of cash that will be required for our operations to reach profitability, and the restricted availability of credit for emerging industries, may impair our ability to raise capital on terms that we consider reasonable and at the levels that we will require over the coming months. We cannot provide any assurances that we will be able to secure additional funding from public or private offerings on terms acceptable to us, if at all. If we are unable to obtain the requisite amount of financing needed to fund our planned operations, it would have a material adverse effect on our business and ability to continue as a going concern.

If adequate funds are not available in the future, we may not be able to develop or enhance our product candidates, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements and we may be required to delay or terminate research and development programs, curtail capital expenditures, and reduce business development and other operating activities. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could have a material adverse effect on our business, operating results, financial condition and prospects.

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

~~None.~~During the fiscal quarter ended July 31, 2018, we issued to eight employees options to purchase 125,500 shares of common stock at a weighted-average exercise price of $20.60 per share. We also issued to one of those employees a restricted share award for 10,000 shares of common stock with a fair market value on the date of grant equal to $22.53. The options and restricted share award were issued in reliance on the exemption from registration set forth in Section 4(a)(2) of the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~None.~~Our trading symbol on the Nasdaq Stock Market is scheduled to change from “COOL” to “PTE” on September 17, 2018.

Item 6. Exhibits

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

~~10.1~~2.1		Asset Purchase Agreement dated March 2, 2018 (1)
2.2		Purchase and Sale Agreement dated March 2, 2018 (1)
2.3		First Amendment to Asset Purchase Agreement dated April 9, 2018 (1)
2.4		First Amendment to Purchase and Sale Agreement dated April 9, 2018 (1)
10.1		Executive Employment Agreement with Paul Mann dated May 12, 2018, with addendum dated June ~~23, 2017~~3, 2018, and confirmation dated June 20, 2018
10.2		Stock Option Agreement with Paul Mann dated June 20, 2018
10.3		Restricted Stock Unit Agreement with Paul Mann dated June 20, 2018
31.1*10.4		Restricted Stock Unit Agreement with Peter A. Cohen dated June 29, 2018
10.5		Restricted Stock Unit Agreement with Willie C. Bogan dated July 3, 2018
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
31.2*	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
32*	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
101.INS*	XBRL Instance Document.
101.SCH*101.SCH		XBRL Schema Document.
101.CAL*101.CAL		XBRL Calculation Linkbase Document.
101.DEF*101.DEF		XBRL Definition Linkbase Document.
101.LAB*101.LAB		XBRL Label Linkbase Document.
101.PRE*101.PRE		XBRL Presentation Linkbase Document.

* Filed herewith.(1) These documents were filed as exhibits to the current report on Form 8-K filed by the Company with the SEC on May 8, 2018, and are incorporated herein by this reference.

SIGNATURES

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

POLARITYTE, INC.

	/s/ Denver Lough
	Denver Lough
	Chief Executive Officer
	(Principal Executive Officer)

Date:	September 14, ~~2017~~2018

	/s/ ~~John Stetson~~Paul Mann
	~~John Stetson~~Paul Mann
~~Title:~~	Chief Financial Officer
	(Principal Financial and Accounting Officer)

Date:	September 14, ~~2017~~2018

	July 31, 2017			October 31, 2016
Medical equipment	$	2,193		$	-
Computers and software		198			61
Furniture and equipment		109			78
Total property and equipment, gross		2,500			139
Accumulated depreciation		(427	)		(121	)
Total property and equipment, net	$	2,073		$	18

	Shares Authorized		Shares Issued and Outstanding		Net Carrying Value		Aggregate Liquidation Preference		Common Shares Issuable Upon Conversion
Series A		8,830,000		3,146,671	$	769	$	2,140		713,245
Series B		54,250		47,689		4,020		-		794,806
Series C		26,000		17,965		1,401		-		417,791
Series D		170,000		26,667		312		-		44,445
Series E		7,050		7,050		104,693		-		7,050,000
Other authorized, unissued		912,700		-		-		-		-
Total		10,000,000		3,246,042	$	111,195	$	2,140		9,020,287

	Warrant Liability
Fair value - October 31, 2016	$	70
Change in fair value		8
Exchanged - January 18, 2017 (see Note 7)		(78	)
Fair value - July 31, 2017	$	-

	Number of shares			Weighted-Average Grant-Date Fair Value
Unvested - October 31, 2016		274,829		$	6.00
Granted		1,031,000		$	4.56
Vested		(1,011,466	)	$	4.22
Unvested - July 31, 2017		294,363		$	7.07