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 September 30, 2020March 31, 2021
Commission File No. 001-32404
POLARITYTE, INC.
(Exact name of registrant as specified in its charter)
delaware | 06-1529524 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) |
1960 S. 4250 West, Salt Lake City, UT84104
(Address of principal executive offices)
Registrant’s Telephone Number, Including Area Code: (800) 560-3983
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | |||
Common Stock, Par Value $0.001 | PTE | Nasdaq Capital Market NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ||
Non-accelerated filer | Smaller reporting company | ☒ | ||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No☒
As of November 5, 2020,May 10, 2021, there were shares of the Registrant’s common stock outstanding.
INDEX
As used in this report, the terms “we,” “us,” “our,” “the Company,” and “PolarityTE” mean PolarityTE, Inc., a Delaware corporation, and our wholly owned Nevada subsidiaries (direct and indirect), PolarityTE, Inc., PolarityTE MD, Inc., Arches Research, Inc., Utah CRO Services, Inc., IBEX Preclinical Research, Inc., and IBEX Property LLC., unless otherwise indicated or required by the context.
POLARITYTE, the PolarityTE Logo, WELCOME TO THE SHIFT, WHERE SELF REGENERATES SELF, COMPLEX SIMPLICITY, IBEX, ARCHES, and SKINTE are all trademarks or registered trademarks of PolarityTE. Solely for convenience, the trademarks and trade names in this report may be referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto.
2 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
POLARITYTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and per share amounts)
September 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 23,186 | $ | 10,218 | $ | 37,237 | $ | 25,522 | ||||||||
Short-term investments | – | 19,022 | ||||||||||||||
Accounts receivable, net | 3,379 | 1,731 | 4,320 | 3,819 | ||||||||||||
Inventory | 907 | 252 | 373 | 883 | ||||||||||||
Prepaid expenses and other current assets | 1,596 | 1,264 | 2,631 | 992 | ||||||||||||
Total current assets | 29,068 | 32,487 | 44,561 | 31,216 | ||||||||||||
Property and equipment, net | 11,970 | 14,911 | 9,414 | 10,550 | ||||||||||||
Operating lease right-of-use assets | 3,110 | 4,590 | 2,087 | 2,452 | ||||||||||||
Intangible assets, net | 589 | 731 | 495 | 542 | ||||||||||||
Goodwill | 278 | 278 | 278 | 278 | ||||||||||||
Other assets | 472 | 602 | 227 | 472 | ||||||||||||
TOTAL ASSETS | $ | 45,487 | $ | 53,599 | $ | 57,062 | $ | 45,510 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable and accrued expenses | $ | 4,818 | $ | 7,095 | $ | 4,295 | $ | 4,148 | ||||||||
Other current liabilities | 2,311 | 2,338 | 3,039 | 2,106 | ||||||||||||
Current portion of long-term notes payable | 1,887 | 528 | 2,508 | 2,059 | ||||||||||||
Deferred revenue | 25 | 98 | 207 | 168 | ||||||||||||
Total current liabilities | 9,041 | 10,059 | 10,049 | 8,481 | ||||||||||||
Common stock warrant liability | 7,233 | – | 15,866 | 5,975 | ||||||||||||
Operating lease liabilities | 1,817 | 2,994 | 1,142 | 1,476 | ||||||||||||
Other long-term liabilities | 872 | 1,630 | 596 | 723 | ||||||||||||
Long-term notes payable | 1,964 | – | 1,068 | 1,517 | ||||||||||||
Total liabilities | 20,927 | 14,683 | 28,721 | 18,172 | ||||||||||||
Commitments and Contingencies (Note 14) | - | - | ||||||||||||||
Commitments and Contingencies (Note 13) | - | |||||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||||||
Preferred stock - shares authorized, shares issued and outstanding at September 30, 2020 and December 31, 2019 | – | – | ||||||||||||||
Common stock – $ par value; shares authorized; and shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively | 39 | 27 | ||||||||||||||
Preferred stock - | shares authorized, shares issued and outstanding at March 31, 2021 and December 31, 2020– | – | ||||||||||||||
Common stock – $ | par value; shares authorized; and shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively80 | 55 | ||||||||||||||
Additional paid-in capital | 492,676 | 474,174 | 523,882 | 505,494 | ||||||||||||
Accumulated other comprehensive income | – | 72 | ||||||||||||||
Accumulated deficit | (468,155 | ) | (435,357 | ) | (495,621 | ) | (478,211 | ) | ||||||||
Total stockholders’ equity | 24,560 | 38,916 | 28,341 | 27,338 | ||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 45,487 | $ | 53,599 | $ | 57,062 | $ | 45,510 |
The accompanying notes are an integral part of these condensed consolidated financial statements
3 |
POLARITYTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share and per share amounts)
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | 2021 | 2020 | |||||||||||||||||||||
September 30, | September 30, | For the Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Net revenues | ||||||||||||||||||||||||
Products | $ | 1,156 | $ | 839 | $ | 2,528 | $ | 1,640 | $ | 1,729 | $ | 428 | ||||||||||||
Services | 2,181 | 556 | 4,008 | 2,546 | 2,980 | 505 | ||||||||||||||||||
Total net revenues | 3,337 | 1,395 | 6,536 | 4,186 | 4,709 | 933 | ||||||||||||||||||
Cost of sales | ||||||||||||||||||||||||
Products | 210 | 315 | 825 | 930 | 241 | 340 | ||||||||||||||||||
Services | 1,142 | 330 | 1,925 | 1,087 | 1,924 | 176 | ||||||||||||||||||
Total cost of sales | 1,352 | 645 | 2,750 | 2,017 | 2,165 | 516 | ||||||||||||||||||
Gross profit | 1,985 | 750 | 3,786 | 2,169 | 2,544 | 417 | ||||||||||||||||||
Operating costs and expenses | ||||||||||||||||||||||||
Research and development | 2,698 | 2,956 | 9,235 | 13,072 | 2,431 | 3,373 | ||||||||||||||||||
General and administrative | 6,264 | 16,044 | 22,080 | 48,299 | 6,371 | 10,605 | ||||||||||||||||||
Sales and marketing | 1,606 | 4,988 | 7,324 | 12,922 | 1,526 | 3,694 | ||||||||||||||||||
Restructuring and other charges | – | – | 2,536 | – | 425 | 452 | ||||||||||||||||||
Total operating costs and expenses | 10,568 | 23,988 | 41,175 | 74,293 | 10,753 | 18,124 | ||||||||||||||||||
Operating loss | (8,583 | ) | (23,238 | ) | (37,389 | ) | (72,124 | ) | (8,209 | ) | (17,707 | ) | ||||||||||||
Other income (expenses) | ||||||||||||||||||||||||
Change in fair value of common stock warrant liability | 1,503 | – | 4,444 | – | (4,027 | ) | 4,532 | |||||||||||||||||
Interest (expense) income, net | (58 | ) | 27 | (135 | ) | 126 | ||||||||||||||||||
Inducement loss on sale of liability classified warrants | (5,197 | ) | – | |||||||||||||||||||||
Interest expense, net | (38 | ) | (12 | ) | ||||||||||||||||||||
Other income, net | 57 | 228 | 282 | 650 | 61 | 147 | ||||||||||||||||||
Net loss | $ | (7,081 | ) | $ | (22,983 | ) | $ | (32,798 | ) | $ | (71,348 | ) | $ | (17,410 | ) | $ | (13,040 | ) | ||||||
Net loss per share, basic and diluted | $ | (0.18 | ) | $ | (0.87 | ) | $ | (0.89 | ) | $ | (2.94 | ) | ||||||||||||
Weighted average shares outstanding, basic and diluted | 38,761,141 | 26,405,307 | 36,743,864 | 24,273,774 | ||||||||||||||||||||
Net loss per share attributable to common stockholders | ||||||||||||||||||||||||
Basic | $ | (0.23 | ) | $ | (0.39 | ) | ||||||||||||||||||
Diluted | $ | (0.24 | ) | $ | (0.39 | ) | ||||||||||||||||||
Weighted average shares outstanding | ||||||||||||||||||||||||
Basic | 76,158,275 | 33,019,994 | ||||||||||||||||||||||
Diluted | 76,396,078 | 33,019,994 |
The accompanying notes are an integral part of these condensed consolidated financial statements
4 |
POLARITYTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | 2021 | 2020 | |||||||||||||||||||||
September 30, | September 30, | For the Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Net loss | $ | (7,081 | ) | $ | (22,983 | ) | $ | (32,798 | ) | $ | (71,348 | ) | $ | (17,410 | ) | $ | (13,040 | ) | ||||||
Other comprehensive income/(loss): | ||||||||||||||||||||||||
Unrealized gain on available-for-sale securities | – | 113 | 11 | 425 | – | 4 | ||||||||||||||||||
Reclassification of realized gains included in net loss | – | (129 | ) | (83 | ) | (398 | ) | – | (73 | ) | ||||||||||||||
Comprehensive loss | $ | (7,081 | ) | $ | (22,999 | ) | $ | (32,870 | ) | $ | (71,321 | ) | $ | (17,410 | ) | $ | (13,109 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements
5 |
POLARITYTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands, except share and per share amounts)
Number | Amount | Capital | Income | Deficit | Equity | Number | Amount | Capital | Income | Deficit | Equity | ||||||||||||||||||||||||||||||||||||
For the Three and Nine Months Ended September 30, 2020 | For the Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||
Number | Amount | Capital | Income | Deficit | Equity | Number | Amount | Capital | Income | Deficit | Equity | ||||||||||||||||||||||||||||||||||||
Balance – December 31, 2019 | 27,374,653 | $ | 27 | $ | 474,174 | $ | 72 | $ | (435,357 | ) | $ | 38,916 | |||||||||||||||||||||||||||||||||||
Issuance of common stock, net of issuance costs of $1.3 million | 10,854,710 | 11 | 12,588 | – | – | 12,599 | |||||||||||||||||||||||||||||||||||||||||
Proceeds received from issuance of common stock, net of issuance costs of $1,146 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance – December 31, 2020 | 54,857,099 | $ | 55 | $ | 505,494 | $ | – | $ | (478,211 | ) | $ | 27,338 | |||||||||||||||||||||||||||||||||||
Issuance of common stock and pre-funded warrants through underwritten offering, net of issuance costs of $114 | 6,670,000 | 7 | 1,248 | – | – | 1,255 | |||||||||||||||||||||||||||||||||||||||||
Issuance of common stock, net of issuance costs of $1,319 | |||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock, net of issuance costs of $1,319, shares | |||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon exercise of warrants | 10,713,543 | 10 | 6,661 | – | – | 6,671 | |||||||||||||||||||||||||||||||||||||||||
Reclassification of warrant liability upon exercise | – | – | 8,964 | – | – | 8,964 | |||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon exercise of pre-funded warrants | 7,658,953 | 8 | – | – | – | 8 | |||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | – | – | 3,221 | – | – | 3,221 | – | – | 1,651 | – | – | 1,651 | |||||||||||||||||||||||||||||||||||
Stock option exercises | 10,000 | – | 31 | – | – | 31 | 2,500 | – | 3 | – | 3 | ||||||||||||||||||||||||||||||||||||
Issuance of restricted stock awards | - | ||||||||||||||||||||||||||||||||||||||||||||||
Purchase of ESPP shares | - | ||||||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock units | 158,513 | – | – | – | – | – | 565,427 | – | – | – | – | – | |||||||||||||||||||||||||||||||||||
Shares withheld for tax withholding | (4,587 | ) | – | (5 | ) | – | – | (5 | ) | (116,593 | ) | – | (139 | ) | – | – | (139 | ) | |||||||||||||||||||||||||||||
Forfeiture of restricted stock awards | - | (34,620 | ) | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | – | – | – | (69 | ) | – | (69 | ) | |||||||||||||||||||||||||||||||||||||||
Net loss | – | – | – | – | (13,040 | ) | (13,040 | ) | – | – | – | – | (17,410 | ) | (17,410 | ) | |||||||||||||||||||||||||||||||
Balance – March 31, 2020 | 38,393,289 | 38 | 490,009 | 3 | (448,397 | ) | 41,653 | ||||||||||||||||||||||||||||||||||||||||
Balance – March 31, 2020 | 38,393,289 | 38 | 490,009 | 3 | (448,397 | ) | 41,653 | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | – | – | 563 | – | – | 563 | |||||||||||||||||||||||||||||||||||||||||
Purchase of ESPP shares | 38,293 | – | 40 | – | – | 40 | |||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock units | 119,132 | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||||
Shares withheld for tax withholding | (6,918 | ) | – | (9 | ) | – | – | (9 | ) | ||||||||||||||||||||||||||||||||||||||
Forfeiture of restricted stock awards | (46,886 | ) | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | – | – | – | (3 | ) | – | (3 | ) | |||||||||||||||||||||||||||||||||||||||
Net loss | – | – | – | – | (12,677 | ) | (12,677 | ) | |||||||||||||||||||||||||||||||||||||||
Balance – June 30, 2020 | 38,496,910 | 38 | 490,603 | – | (461,074 | ) | 29,567 | ||||||||||||||||||||||||||||||||||||||||
Balance – June 30, 2020 | 38,496,910 | 38 | 490,603 | – | (461,074 | ) | 29,567 | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | – | – | 2,179 | – | – | 2,179 | |||||||||||||||||||||||||||||||||||||||||
Stock option exercises | 208 | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock units | 485,614 | 1 | (1 | ) | – | – | – | ||||||||||||||||||||||||||||||||||||||||
Shares withheld for tax withholding | (70,727 | ) | – | (105 | ) | – | – | (105 | ) | ||||||||||||||||||||||||||||||||||||||
Net loss | – | – | – | – | (7,081 | ) | (7,081 | ) | |||||||||||||||||||||||||||||||||||||||
Balance – September 30, 2020 | 38,912,005 | $ | 39 | $ | 492,676 | $ | – | $ | (468,155 | ) | $ | 24,560 | |||||||||||||||||||||||||||||||||||
Balance – March 31, 2021 | 80,316,309 | $ | 80 | $ | 523,882 | $ | – | $ | (495,621 | ) | $ | 28,341 |
Number | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||
For the Three Months Ended March 31, 2020 | ||||||||||||||||||||||||
Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | ||||||||||||||||||||
Number | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||
Balance – December 31, 2019 | 27,374,653 | $ | 27 | $ | 474,174 | $ | 72 | $ | (435,357 | ) | $ | 38,916 | ||||||||||||
Issuance of common stock, net of issuance costs of $1,319 | 10,854,710 | 11 | 12,588 | – | – | 12,599 | ||||||||||||||||||
Stock-based compensation expense | – | – | 3,221 | – | – | 3,221 | ||||||||||||||||||
Stock option exercises | 10,000 | – | 31 | – | – | 31 | ||||||||||||||||||
Vesting of restricted stock units | 158,513 | – | – | – | – | – | ||||||||||||||||||
Shares withheld for tax withholding | (4,587 | ) | – | (5 | ) | – | – | (5 | ) | |||||||||||||||
Other comprehensive loss | – | – | – | (69 | ) | – | (69 | ) | ||||||||||||||||
Net loss | – | – | – | – | (13,040 | ) | (13,040 | ) | ||||||||||||||||
Balance – March 31, 2020 | 38,393,289 | $ | 38 | $ | 490,009 | $ | 3 | $ | (448,397 | ) | $ | 41,653 |
Number | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||
For the Three and Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||
Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | ||||||||||||||||||||
Number | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||
Balance – December 31, 2018 | 21,447,088 | $ | 21 | $ | 414,840 | $ | 36 | $ | (342,864 | ) | $ | 72,033 | ||||||||||||
Stock-based compensation expense | – | – | 10,327 | – | – | 10,327 | ||||||||||||||||||
Stock option exercises | 283,250 | 1 | 528 | – | – | 529 | ||||||||||||||||||
Vesting of restricted stock units | 100,912 | – | – | – | – | – | ||||||||||||||||||
Shares withheld for tax withholding | (82,011 | ) | – | (740 | ) | – | – | (740 | ) | |||||||||||||||
Other comprehensive income | – | – | – | 17 | – | 17 | ||||||||||||||||||
Net loss | – | – | – | – | (25,573 | ) | (25,573 | ) | ||||||||||||||||
Balance – March 31, 2019 | 21,749,239 | 22 | 424,955 | 53 | (368,437 | ) | 56,593 | |||||||||||||||||
Balance – March 31, 2019 | 21,749,239 | 22 | 424,955 | 53 | (368,437 | ) | 56,593 | |||||||||||||||||
Proceeds received from issuance of common stock, net of issuance costs of $1,146 | 3,418,918 | 3 | 27,945 | – | – | 27,948 | ||||||||||||||||||
Stock-based compensation expense | – | – | 8,618 | – | – | 8,618 | ||||||||||||||||||
Stock option exercises | 9,167 | – | – | – | – | – | ||||||||||||||||||
Purchase of ESPP shares | 7,260 | – | 35 | – | – | 35 | ||||||||||||||||||
Vesting of restricted stock units | 51,440 | – | – | – | – | – | ||||||||||||||||||
Shares withheld for tax withholding | (17,418 | ) | – | (62 | ) | – | – | (62 | ) | |||||||||||||||
Other comprehensive income | – | – | – | 26 | – | 26 | ||||||||||||||||||
Net loss | – | – | – | – | (22,792 | ) | (22,792 | ) | ||||||||||||||||
Balance – June 30, 2019 | 25,218,606 | 25 | 461,491 | 79 | (391,229 | ) | 70,366 | |||||||||||||||||
Balance – June 30, 2019 | 25,218,606 | 25 | 461,491 | 79 | (391,229 | ) | 70,366 | |||||||||||||||||
Stock-based compensation expense | – | – | 5,025 | – | – | 5,025 | ||||||||||||||||||
Issuance of restricted stock awards | 1,590,710 | 2 | (2 | ) | – | – | – | |||||||||||||||||
Vesting of restricted stock units | 123,448 | – | – | – | – | – | ||||||||||||||||||
Other comprehensive loss | – | – | – | (16 | ) | – | (16 | ) | ||||||||||||||||
Net loss | (22,983 | ) | (22,983 | ) | ||||||||||||||||||||
Balance – September 30, 2019 | 26,932,764 | $ | 27 | $ | 466,514 | $ | 63 | $ | (414,212 | ) | $ | 52,392 |
The accompanying notes are an integral part of these condensed consolidated financial statements
6 |
POLARITYTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
2020 | 2019 | 2021 | 2020 | |||||||||||||
For the Nine Months Ended September 30, | For the Three Months Ended March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
Net loss | $ | (32,798 | ) | $ | (71,348 | ) | $ | (17,410 | ) | $ | (13,040 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Stock based compensation expense | 5,963 | 23,932 | ||||||||||||||
Stock-based compensation expense | 1,651 | 3,221 | ||||||||||||||
Depreciation and amortization | 2,337 | 2,243 | 701 | 752 | ||||||||||||
Amortization of intangible assets | 142 | 146 | 47 | 48 | ||||||||||||
Amortization of debt discount | 17 | 40 | – | 8 | ||||||||||||
Bad debt expense | 97 | – | ||||||||||||||
Change in inventory reserve | 391 | – | ||||||||||||||
Change in fair value of common stock warrant liability | (4,444 | ) | – | 4,027 | (4,532 | ) | ||||||||||
Change in fair value of contingent consideration | – | (48 | ) | |||||||||||||
Loss on abandonment and disposal of property and equipment | 1,566 | 265 | ||||||||||||||
Inducement loss on sale of liability classified warrants | 5,197 | – | ||||||||||||||
Loss on restructuring and other charges | 425 | – | ||||||||||||||
Loss on sale of property and equipment | 7 | – | ||||||||||||||
Other non-cash adjustments | (21 | ) | 3 | – | (16 | ) | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (1,648 | ) | (881 | ) | (598 | ) | 545 | |||||||||
Inventory | (655 | ) | (10 | ) | 119 | 19 | ||||||||||
Prepaid expenses and other current assets | (332 | ) | 126 | (1,639 | ) | (1,543 | ) | |||||||||
Operating lease right-of-use assets | 1,348 | 1,214 | 328 | 448 | ||||||||||||
Other assets | 130 | 25 | 245 | 4 | ||||||||||||
Accounts payable and accrued expenses | (2,349 | ) | 4,095 | 138 | 818 | |||||||||||
Other current liabilities | – | 155 | (15 | ) | (61 | ) | ||||||||||
Deferred revenue | (73 | ) | (36 | ) | 39 | (75 | ) | |||||||||
Operating lease liabilities | (1,353 | ) | (1,142 | ) | (360 | ) | (450 | ) | ||||||||
Other long-term liabilities | – | 571 | ||||||||||||||
Net cash used in operating activities | (32,170 | ) | (40,650 | ) | (6,610 | ) | (13,854 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||
Purchase of property and equipment | (1,225 | ) | (2,386 | ) | (12 | ) | (999 | ) | ||||||||
Proceeds from sale of property and equipment | 10 | – | ||||||||||||||
Purchase of available-for-sale securities | (14,144 | ) | (29,002 | ) | – | (14,144 | ) | |||||||||
Proceeds from maturities of available-for-sale securities | 16,945 | 14,636 | – | 15,945 | ||||||||||||
Proceeds from sale of available-for-sale securities | 16,171 | 1,877 | – | 16,171 | ||||||||||||
Net cash provided by (used in) investing activities | 17,747 | (14,875 | ) | |||||||||||||
Net cash (used in) provided by investing activities | (2 | ) | 16,973 | |||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||
Net proceeds from the sale of common stock and warrants | 24,276 | 27,948 | ||||||||||||||
Proceeds from stock options exercised | 31 | 529 | ||||||||||||||
Proceeds from ESPP purchase | 40 | 35 | ||||||||||||||
Cash paid for tax withholdings related to net share settlement | (114 | ) | (679 | ) | ||||||||||||
Payment of contingent consideration liability | – | (109 | ) | |||||||||||||
Principal payments on financing leases | (376 | ) | (336 | ) | ||||||||||||
Proceeds from term note payable and financing arrangements | 4,630 | – | 1,028 | 1,053 | ||||||||||||
Principal payments on term note payable and financing arrangements | (1,096 | ) | (263 | ) | (9 | ) | (55 | ) | ||||||||
Principal payments on financing leases | (135 | ) | (123 | ) | ||||||||||||
Net proceeds from the sale of common stock and warrants | – | 24,276 | ||||||||||||||
Net proceeds from the sale of common stock, warrants and pre-funded warrants | 9,884 | – | ||||||||||||||
Proceeds from the sale of new warrants | 1,002 | – | ||||||||||||||
Proceeds from warrants exercised | 6,671 | – | ||||||||||||||
Proceeds from pre-funded warrants exercised | 8 | – | ||||||||||||||
Cash paid for tax withholdings related to net share settlement | (125 | ) | (2 | ) | ||||||||||||
Proceeds from stock options exercised | 3 | 31 | ||||||||||||||
Net cash provided by financing activities | 27,391 | 27,125 | 18,327 | 25,180 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | 12,968 | (28,400 | ) | |||||||||||||
Net increase in cash and cash equivalents | 11,715 | 28,299 | ||||||||||||||
Cash and cash equivalents - beginning of period | 10,218 | 55,673 | 25,522 | 10,218 | ||||||||||||
Cash and cash equivalents - end of period | $ | 23,186 | $ | 27,273 | $ | 37,237 | $ | 38,517 | ||||||||
Non-cash investing and financing activities: | ||||||||||||||||
Supplemental cash flow information: | ||||||||||||||||
Cash paid for interest | $ | 31 | $ | 46 | ||||||||||||
Supplemental schedule of non-cash investing and financing activities: | ||||||||||||||||
Unpaid liability for acquisition of property and equipment | $ | 10 | $ | 249 | $ | – | $ | 137 | ||||||||
Reclassification of stock-based compensation expense that was previously classified as a liability to paid-in capital | $ | – | $ | 38 | ||||||||||||
Unpaid tax liability related to net share settlement | $ | 5 | $ | – | ||||||||||||
Allocation of proceeds from sale of common stock and warrants to warrant liability | $ | 11,677 | $ | – | ||||||||||||
Property and equipment acquired through finance lease | $ | – | $ | 2,341 | ||||||||||||
Property and equipment acquired through financing arrangement | $ | – | $ | 58 | ||||||||||||
Fair value of placement agent warrants issued in connection with offering | $ | 838 | $ | – | ||||||||||||
Reclassification of warrant liability to stockholders’ equity upon exercise of warrant | $ | 8,964 | $ | – | ||||||||||||
Accrued offering costs | $ | 500 | $ | – | ||||||||||||
Allocation of proceeds to warrant liability | $ | 8,629 | $ | 11,677 |
The accompanying notes are an integral part of these condensed consolidated financial statements
7 |
POLARITYTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION
PolarityTE, Inc. (together with its subsidiaries, the “Company”) is a biotechnology company developing and commercializing regenerative tissue products and biomaterials. The Company also operates a laboratory testing and clinical research business using equipment, personnel, and facilities it acquired to advance the development of regenerative tissue products.
The accompanying interim condensed consolidated financial statements of the Company are unaudited, but in the opinion of management, reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented. Accordingly, they do not include all information and notes required by generally accepted accounting principles for complete financial statements. The results of operations for interim periods are not necessarily indicative of results to be expected for the entire fiscal year. The balance sheet at December 31, 20192020 has been derived from the audited consolidated 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 (U.S. GAAP) for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 20192020 filed with the Securities and Exchange Commission on Form 10-K on March 12, 2020.
2. LIQUIDITY AND NEED FOR ADDITIONAL CAPITAL
The Company has experienced recurring losses and cash outflows from operating activities. As of September 30, 2020, the Company had an accumulated deficit of $468.2 million. As of September 30, 2020, the Company had cash and cash equivalents of $23.2million. The Company has been funded historically through sales of equity and debt.2021.
On April 10, 2019, the Company completed an underwritten offering providing for the issuance and sale of shares of the Company’s common stock, par value $per share, at an offering price of $per share, for net proceeds of approximately $27.9million, after deducting offering expenses payable by the Company.
On December 5, 2019, the Company entered into an Equity Purchase Agreement (the “Purchase Agreement”), with Keystone Capital Partners, LLC (“Keystone”), pursuant to which Keystone has agreed to purchase from the Company up to $25.0 million of shares of its common stock, subject to certain limitations including a minimum stock price of $, at the direction of the Company from time to time during the 36-month term of the Purchase Agreement. Concurrently, the Company entered into a Registration Rights Agreement with Keystone, pursuant to which it agreed to register the sales of its common stock pursuant to the Purchase Agreement under the Company’s existing shelf registration statement on Form S-3 or a new registration statement. On December 19, 2019, the Company sold shares under the Purchase Agreement at a purchase price of $per share, for total proceeds of $0.1 million. During the three months ended March 31, 2020, the Company completed four additional sales of common stock to Keystone under the Purchase Agreement for a total of shares generating total gross proceeds of $0.6 million.
On February 14, 2020, the Company completed an underwritten offering of shares of its common stock and warrants to purchase 10,638,298 shares of common stock. Each common share and warrant were sold together for a combined public purchase price of $before underwriting discount and commission. The exercise price of each warrant is $per share, the warrants were exercisable immediately, and they will expire February 12, 2027. The net proceeds to the Company from the offering were $22.5 million, after offering expenses payable by the Company. In connection with this agreement, the Company agreed not to sell any additional shares under the Keystone Purchase Agreement for a period of 90 days after the closing date of the offering.
The Company entered into a promissory note for $3.6 million under the Paycheck Protection Program on April 12, 2020. Additional details are available in note 12.
In the second quarter of 2020 the Company took steps to reduce cash burn by reducing payroll expense, adopting a salary and wage reduction, and reducing discretionary spending across the organization to minimal levels.
The Company does not expect existing cash as of September 30, 2020 to be sufficient to fund the Company’s operations for at least twelve months from the date of filing. The Company will seek additional capital through equity offerings or debt financing. However, such financing may not be available in the future on favorable terms, if at all. If adequate financing is not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its product development programs, or be unable to continue operations over a longer term. These financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and settle its liabilities in the normal course of business. The Company has incurred recurring losses and negative cash flows, has not yet generated material revenue from operations, and will require additional funds to maintain its operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern within one year after these condensed consolidated financial statements are issued. No adjustments have been made to these consolidated financial statements as a result of these uncertainties.
3.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation.. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Among the more significant estimates included in these financial statements is the extent of progress toward completion of contracts, stock-based compensation, the valuation of common stock warrant liability,liabilities, and the valuation allowances for deferred tax benefits.impairment of property and equipment. Actual results could differ from those estimates.
Reclassifications. Certain reclassifications of amounts previously reported have been made to the accompanying consolidated statement of operations to maintain consistency and comparability between periods presented. Restructuring and other charges of $0.5 million were reclassified from general and administrative, research and development, and sales and marketing expenses for the three-month period ended March 31, 2020 on the condensed consolidated statement of operations. These reclassifications had no impact on previously reported operating loss or net loss within the consolidated results of operations.
Cash and cash equivalents.. Cash equivalents consist of highly liquid investments with original maturities of three months or less from the date of purchase. As of March 31, 2021, the Company did not hold any cash equivalents.
LeasesInventory. Inventory comprises raw materials, which are valued at the lower of cost or net realizable value, on a first-in, first-out basis. The Company evaluates the carrying value of its inventory on a regular basis, taking into account anticipated future sales compared with quantities on hand, and the remaining shelf life of goods on hand to record an inventory reserve. An inventory reserve of $0.4 million was recorded as of March 31, 2021. There was 0 inventory reserve recorded as of December 31, 2020.
Leases. The Company determines if an arrangement is a lease at inception. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Finance leases are reported in the condensed consolidated balance sheet in property and equipment and other current and long-term liabilities. The short-termcurrent portion of operating lease obligations are included in other current liabilities. The classification of the Company’s leases as operating or finance leases along with the initial measurement and recognition of the associated ROU assets and lease liabilities is performed at the lease commencement date. The measurement of lease liabilities is based on the present value of future lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The ROU asset is based on the measurement of the lease liability and also includes any lease payments made prior to or on lease commencement and excludes lease incentives and initial direct costs incurred, as applicable. The lease terms may include options to extend or terminate the lease when it is reasonably certain the Company will exercise any such options. Rent expense for the Company’s operating leases is recognized on a straight-line basis over the lease term. Amortization expense for the ROU asset associated with its finance leases is recognized on a straight-line basis over the term of the lease and interest expense associated with its finance leases is recognized on the balance of the lease liability using the effective interest method based on the estimated incremental borrowing rate.
8 |
The Company has lease agreements with lease and non-lease components. As allowed under ASC 842, the Company has elected not to separate lease and non-lease components for any leases involving real estate and office equipment classes of assets and, as a result, accounts for the lease and non-lease components as a single lease component. The Company has also elected not to apply the recognition requirement of ASC 842 to leases with a term of 12 months or less for all classes of assets.
Revenue Recognition.. Revenue Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
The Company records product revenues primarily from the sale of its regenerative tissue products. The Company sells its products to healthcare providers (customers), primarily through direct sales representatives. Product revenues consist of a single performance obligation that the Company satisfies at a point in time. In general, the Company recognizes product revenue upon delivery to the customer.
TheIn the contract services segment, the Company records service revenues from the sale of its preclinical research services, and contract services. Preclinical research services includewhich includes delivery of preclinical studies and other research services to unrelated third parties. These customer contractsService revenues generally consist of a single performance obligation that the Company satisfies over time using an input method based on costs incurred to date relative to the total costs expected to be required to satisfy the performance obligation. The Company believes that this method provides an appropriate measure of the transfer of services over the term of the performance obligation based on the remaining services needed to satisfy the obligation. This requires the Company to make reasonable estimates of the extent of progress toward completion of the contract. As a result, unbilled receivables and deferred revenue are recognized based on payment timing and work completed. Generally, a portion of the payment is due upfront and the remainder upon completion of the contract, with most contracts completing in less than a year. Contract services include research and laboratory testing services to unrelated third parties on a contract basis. These customer contracts generally consist of a single performance obligation that the Company satisfies at a point in time. The Company recognizes revenue upon delivery of testing results to the customer. As of March 31, 2021 and December 31, 2020, the Company had unbilled receivables of $0.4
million and $0.2
million, respectively, and deferred revenue of $For0.2 million as of each period. The unbilled receivables balance is included in consolidated accounts receivable. Revenue of $0.2 million was recognized during the three months ended September 30, 2020 revenue from two hospital systems accounted for 55% of total revenueMarch 31, 2021 that was included in the regenerative medicine product segment. For the nine months ended September 30, 2020deferred revenue from one hospital system accounted for 33%balance as of total revenue in the regenerative medicine product segment. As of September 30, 2020, accounts receivable from the two hospital systems represented 10% of total accounts receivable.December 31, 2020.
For the three months ended September 30, 2020 revenue from 32 facilities controlled by a single company accounted for 94% of COVID-19 testing revenues. For the nine months ended September 30, 2020 revenue from 32 facilities controlled by a single company accounted for 96% of COVID-19 testing revenues. As of September 30, 2020, accounts receivable from the 32 facilities represented 40% of total accounts receivable.
Research and Development Expenses.. Costs incurred for research and development are expensed as incurred. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities pursuant to executory contractual arrangements with third party research organizations are deferred and recognized as an expense as the related goods are delivered or the related services are performed.
Accruals for Research and Development Expenses and Clinical Trials.. As part of the process of preparing its financial statements, the Company is required to estimate its expenses resulting from its obligations under contracts with vendors, clinical research organizations and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment terms that do not match the periods over which materials or services are provided under such contracts. The Company’s objective is to reflect the appropriate expenses in its financial statements by matching those expenses with the period in which services are performed and efforts are expended. The Company accounts for these expenses according to the timing of various aspects of the expenses. The Company determines accrual estimates by taking into account discussion with applicable personnel and outside service providers as to the progress of clinical trials, or the services completed. During the course of a clinical trial, the Company adjusts its clinical expense recognition if actual results differ from its estimates. The Company makes estimates of its accrued expenses as of each balance sheet date based on the facts and circumstances known to it at that time. The Company’s clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in it reporting amounts that are too high or too low for any particular period.
9 |
Common Stock Warrant Liability.. The Company accounts for common stock warrants issued as freestanding instruments in accordance with applicable accounting guidance as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. The Company’s warrants underagreements. Under certain change of control situations,provisions, some warrants issued by the Company could require cash settlement in cash, which require thenecessitates such warrants to be recorded as liabilities. Warrants classified as liabilities are remeasured each period until settled or until classified as equity.
The fair value of 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.grant commensurate with the expected term of the option. The volatility factor is determined based on the Company’s historical stock prices. Forfeitures are recognized as they occur.
The fair value of restricted stock grants is measured based on the fair market value of the Company’s common stock on the date of grant and amortized to compensation expense over the vesting period of, generally, six months to three years.
Impairment of Long-Lived Assets. The Company reviews long-lived assets, including property and equipment and intangible assets and goodwill 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.
10 |
Goodwill. Under accounting guidelines, goodwill is not amortized, but must be tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below the carrying amount. The Company reviews goodwill for impairment annually and whenever events or changes indicate that the carrying value of an asset may not be recoverable. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of significant assets or products. Application of these impairment tests requires significant judgment. There were 0 goodwill impairments recorded during the three months ended March 31, 2021 and 2020.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which defers the effective date of Topic 326. As a smaller reporting company, Topic 326 will now be effective for the Company beginning January 1, 2023. As such, the Company plans to adopt this ASU beginning January 1, 2023. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.
Recently Adopted Accounting Pronouncements
In August 2018,2020, the FASB issued ASU 2018-13,No. 2020-06, Fair Value Measurement (Topic 820), Disclosure Framework-ChangesDebt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Those instruments that do not have a separately recognized embedded conversion feature will no longer recognize a debt issuance discount related to such a conversion feature and would recognize less interest expense on a periodic basis. It also removes from ASC 815-40-25-10 certain conditions for equity classification and amends certain guidance in ASC Topic 260 on the Disclosure Requirementscomputation of EPS for Fair Value Measurement. Theconvertible instruments and contracts in an entity’s own equity. An entity can use either a full or modified retrospective approach to adopt the ASU’s guidance. As a smaller reporting company, the Company is required to adopt this ASU modifiesfor the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. The standard is effectivefiscal year beginning January 1, 2024, with early adoption permitted for fiscal years beginning after December 15, 2019, including2020, and interim periods within those fiscal years with earlyyears. The Company is currently assessing the impact and timing of adoption permitted.of this ASU.
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2021-04”). ASU 2021-04 updates current accounting guidance for modifications or exchanges of freestanding equity-classified written call options that remain equity-classified after modification or exchange as an exchange of the original instrument for a new instrument. The ASU specifies that the effects of modifications or exchanges of freestanding equity-classified written call options that remain equity after modification or exchange should be recognized depending on the substance of the transaction, whether it be a financing transaction to raise equity (topic 340), to raise or modify debt (topic 470 and 835), or other modifications or exchanges. If the modification or exchange does not fall under topics 340, 470, or 835, an entity may be required to account for the effects of such modifications or exchanges as dividends which should adjust net income (or loss) in the basic EPS calculation. The Company is required to apply the amendments within this ASU prospectively to modifications or exchanges occurring on or after the effective date of the amendment. The Company plans to adopt this ASU on January 1, 2022 and is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the current guidance, and improving the consistent application of and simplification of other areas of the guidance. The Company adopted this standard prospectively on January 1, 2020.2021. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
11 |
3. LIQUIDITY
In August 2018,
The Company has experienced recurring losses and cash outflows from operating activities. As of March 31, 2021, the FASB issued ASU 2018-15, Customer’s AccountingCompany had an accumulated deficit of $495.6 million. As of March 31, 2021, the Company had cash and cash equivalents of $37.2 million. The Company has been funded historically through sales of equity and debt.
On January 14, 2021, the Company completed a registered direct offering of 2,420,910 shares of common stock and accompanying common warrants to purchase up to 9,090,910 shares of common stock. Each share of common stock and pre-funded warrant were sold together with a common warrant. The combined offering price of each common share and accompanying common warrant was $ and for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contracteach pre-funded warrant and accompanying common warrant was $ . The ASU alignspre-funded warrants had an exercise price of $0.001 each and were exercised in full in January 2021. Each common warrant is exercisable for one share of the requirementsCompany’s common stock at an exercise price of capitalizing implementation costs incurred$1.20 per share. The warrants are immediately exercisable and will expire five years from the date of issuance. The holder of the warrants may not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent for the registered direct offering, warrants to purchase up to 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in a hosting arrangementthe offering (or warrants to purchase up to 545,455 shares of common stock). The placement agent warrants have substantially the same terms as the common warrants, except that is a service contractthe placement agent warrants have an exercise price equal to 125% of the purchase price per share (or $1.375 per share). The Company received net proceeds of $9.2 million in connection with the requirements for capitalizing implementation costs incurredoffering, after deducting placement agent fees and related offering expenses.
On January 22, 2021, the Company entered into a letter agreement with the holder of warrants to develop or obtain internal-use software. Adoptionpurchase 10,688,043 shares of common stock at an exercise price of $0.624 per share that were issued to the holder in the registered direct offering that closed on December 23, 2020. Under the letter agreement the holder agreed to exercise the warrants in full and the Company agreed to issue and sell to the holder new common warrants to purchase up to 8,016,033 shares of the ASUCompany’s common stock, par value $ per share, at a price of $ . Each new warrant is either retrospectiveexercisable for one share of common stock at an exercise price of $1.20 per share. The new warrants are immediately exercisable and will expire five years from the date of issuance. The holder of the warrants may not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or prospective.to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company adopted this standard prospectivelyalso issued to designees of the placement agent for the registered direct offering in December 2020, warrants to purchase 6.0% of the aggregate number of new warrants issued under the letter agreement (or warrants to purchase up to 480,962 shares of common stock). The placement agent warrants have substantially the same terms as the new warrants. The Company received net proceeds of $6.7 million from the exercise of the existing warrants and $0.9 million from the sale of the newly issued warrants, after deducting placement agent fees and related offering expenses. The offering closed on January 1, 2020. 25, 2021.
The adoptionCompany believes that its existing cash and cash equivalents will be adequate to satisfy its capital and operating needs for at least the next 12 months from the date of this ASU didfiling. The Company will continue to pursue fundraising opportunities when available, but such financing may not havebe available in the future on favorable terms, if at all. If adequate financing is not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its product development programs, or be unable to continue operations over a material impact onlonger term. The Company plans to meet its capital requirements primarily through issuances of equity securities, debt financing, or strategic partnership arrangements. Failure to raise additional capital would adversely affect the Company’s condensed consolidated financial statements and related disclosures.ability to fully achieve its intended business objectives.
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4. FAIR VALUE
In accordance with ASC 820, Fair Value Measurements and Disclosures, financial instruments were measured at fair value using a three-level hierarchy which maximizes use of observable inputs and minimizes use of unobservable inputs:
● | Level 1: Observable inputs such as quoted prices in active markets for identical instruments. | |
● | Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the market. | |
● | Level 3: Significant unobservable inputs supported by little or no market activity. Financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, for which determination of fair value requires significant judgment or estimation. |
Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. There were no transfers within the hierarchy for any of the periods presented.
During the nine months ended September 30, 2020, the Company transferred all available-for-sale securities to cash accounts.
The following table sets forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy (in thousands):
SCHEDULE OF FAIR VALUE OF FINANCIAL INSTRUMENTS MEASURED ON RECURRING BASIS
September 30, 2020 | March 31, 2021 | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Common stock warrant liability | $ | – | $ | – | $ | 7,233 | $ | 7,233 | $ | – | $ | – | $ | 15,866 | $ | 15,866 | ||||||||||||||||
Total | $ | – | $ | – | $ | 7,233 | $ | 7,233 | $ | – | $ | – | $ | 15,866 | $ | 15,866 |
December 31, 2019 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||
Money market funds | $ | 2,019 | $ | – | $ | – | $ | 2,019 | ||||||||
Commercial paper | – | 11,064 | – | 11,064 | ||||||||||||
Corporate debt securities | – | 8,982 | – | 8,982 | ||||||||||||
U.S. government debt securities | – | 3,770 | – | 3,770 | ||||||||||||
Total | $ | 2,019 | $ | 23,816 | $ | – | $ | 25,835 | ||||||||
Liabilities: | ||||||||||||||||
Contingent consideration | $ | – | $ | – | $ | 31 | $ | 31 | ||||||||
Total | $ | – | $ | – | $ | 31 | $ | 31 |
December 31, 2020 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities: | ||||||||||||||||
Common stock warrant liability | $ | – | $ | – | $ | 5,975 | $ | 5,975 | ||||||||
Total | $ | – | $ | – | $ | 5,975 | $ | 5,975 |
The following table presents the change in fair value of the liability classified common stock warrant liability is estimated using a Monte Carlo simulation model, which uses certain assumptions related to risk-free interest rates, expected volatility, and expected term. The fair value ofwarrants for the warrant liability was $11.7 million upon the issuance date of February 14, 2020 and $7.2million as of September 30, 2020.three months ended March 31, 2021 (in thousands):
SCHEDULE OF FAIR VALUE OF LIABILITY CLASSIFIED COMMON STOCK WARRANTS
Fair Value at December 31, 2020 | Initial Fair Value at Issuance | (Gain) Loss Upon Change in Fair Value | Liability Reduction Due to Exercises | Fair Value on March 31, 2021 | ||||||||||||||||
Warrant liabilities | ||||||||||||||||||||
February 14, 2020 issuance | $ | 328 | $ | – | $ | 217 | $ | – | $ | 545 | ||||||||||
December 23, 2020 issuance | 5,647 | – | 3,861 | (8,964 | ) | 544 | ||||||||||||||
January 14, 2021 issuance | – | 8,629 | (797 | ) | – | 7,832 | ||||||||||||||
January 25, 2021 issuance | – | 6,199 | 746 | – | 6,945 | |||||||||||||||
Inducement loss on initial fair value (1) | – | – | 5,197 | – | – | |||||||||||||||
Total | $ | 5,975 | $ | 14,828 | $ | 9,224 | $ | (8,964 | ) | $ | 15,866 |
(1) | Concurrent with the issuance of the January 25, 2021 warrants, upon the exercise of the December 23, 2020 warrants, an inducement loss of $5.2 million was recorded as the fair value of the initial warrant liability for the new warrants of $6.2 million exceeded the gross proceeds received upon sale of the new warrants of approximately $1.0 million. |
The following assumptions were usedtable presents the change in estimatingfair value of the liability classified common stock warrants for the three months ended March 31, 2020 (in thousands):
Fair Value at December 31, 2019 | Initial Fair Value at Issuance | (Gain) Loss Upon Change in Fair Value | Liability Reduction Due to Exercises | Fair Value on March 31, 2020 | ||||||||||||||||
Warrant liabilities | ||||||||||||||||||||
February 14, 2020 issuance | $ | 0 | $ | 11,677 | $ | (4,532 | ) | $ | 0 | $ | 7,145 |
The Company uses the Monte Carlo simulation model to determine the fair value of the warrant liability classified warrants. Input assumptions used to measure the fair value of these freestanding instruments during the three months ended March 31, 2021 are as of September 30, 2020 and upon the issuance date of February 14, 2020:
follows:
SCHEDULE OF FAIR VALUE ASSUMPTIONS OF WARRANTS LIABILITY
September 30, 2020 | February 14, 2020 | |||||||
Stock price | $ | 1.04 | $ | 1.69 | ||||
Exercise price | $ | 2.80 | $ | 2.80 | ||||
Risk-free rate | 0.41 | % | 1.51 | % | ||||
Volatility | 99.6 | % | 93.40 | % | ||||
Term | 6.37 | 6.99 |
For the Three Months ended March 31, 2021 | ||||
Stock price | $ | – | ||
Exercise price | $ | – | ||
Risk-free rate | – | % | ||
Volatility | – | % | ||
Remaining term (years) | – |
The contingent consideration relatedInput assumptions used to measure the IBEX acquisitionfair value of $31,000 outstanding at December 31, 2019, was paidthese freestanding instruments during the ninethree months ended September 30, 2020. As of September 30,March 31, 2020 the obligation related to the contingent consideration was fully satisfied.are as follows:
For the Three Months ended March 31, 2020 | ||||
Stock price | $ | – | ||
Exercise price | $ | |||
Risk-free rate | – | % | ||
Volatility | – | % | ||
Remaining term (years) | – |
5.CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
During the nine months ended September 30, 2020, the Company transferred all available-for-sale securities to cash accounts.
Cash equivalents and short-term investments consisted of the following as of December 31, 2019 (in thousands):
SCHEDULE OF CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
December 31, 2019 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Market Value | |||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 2,019 | $ | – | $ | – | $ | 2,019 | ||||||||
Commercial paper | 1,020 | 4 | – | 1,024 | ||||||||||||
U.S. government debt securities | 3,761 | 9 | – | 3,770 | ||||||||||||
Total cash equivalents (1) | 6,800 | 13 | – | 6,813 | ||||||||||||
Short-term investments: | ||||||||||||||||
Commercial paper | 9,986 | 54 | – | 10,040 | ||||||||||||
Corporate debt securities | 8,977 | 5 | – | 8,982 | ||||||||||||
Total short-term investments | 18,963 | 59 | – | 19,022 | ||||||||||||
Total | $ | 25,763 | $ | 72 | $ | – | $ | 25,835 |
For the nine months ended September 30, 2020 and 2019, the Company recognized net realized gains on available-for-sale securities of $0.1million and $0.4 million, respectively.
6. PROPERTY AND EQUIPMENT, NET
The following table presents the components of property and equipment, net (in thousands):
SCHEDULE OF PROPERTY AND EQUIPMENT, NET
March 31, 2021 | December 31, 2020 | |||||||
Machinery and equipment | $ | 11,604 | $ | 12,232 | ||||
Land and buildings | 2,000 | 2,000 | ||||||
Computers and software | 1,207 | 1,240 | ||||||
Leasehold improvements | 2,107 | 2,107 | ||||||
Construction in progress | – | 87 | ||||||
Furniture and equipment | 148 | 148 | ||||||
Total property and equipment, gross | 17,066 | 17,814 | ||||||
Accumulated depreciation and amortization | (7,652 | ) | (7,264 | ) | ||||
Total property and equipment, net | $ | 9,414 | $ | 10,550 |
The Company sold SkinTE under Section 361 of the Public Health Service Act in 2020 and into 2021 and, after the Company’s decision to file an investigational new drug application (IND) under Section 351 of that Act, under an enforcement discretion position stated by the FDA in a regenerative medicine policy framework to help facilitate regenerative medicine therapies. On or about April 21, 2021, the FDA announced that enforcement discretion will not be extended beyond May 31, 2021. As a result of this development and the Company’s plan to file its IND in the second half of 2021, the Company has decided it will terminate commercial sales of SkinTE on May 31, 2021, and wind down its SkinTE commercial operation. Approximately $3.0 million of total property and equipment is related to commercial SkinTE operations, of which, the Company has determined approximately $2.5 million can be repurposed primarily as research and development equipment. The Company evaluated the future use of its commercial property and equipment and recorded an impairment charge of approximately $0.4 million during the first quarter of 2021. The impairment charges occurred within the Company’s regenerative medicine business segment and are included in restructuring and other charges within the accompanying consolidated statement of operations for the three months ended March 31, 2021. Certain production assets will remain in use until commercial operations have officially ceased. Accordingly, the lives of such production assets were reduced and will be depreciated over their remaining estimated economic useful lives.
September 30, 2020 | December 31, 2019 | |||||||
Machinery and equipment | $ | 12,215 | $ | 12,083 | ||||
Land and buildings | 2,000 | 2,000 | ||||||
Computers and software | 1,240 | 1,189 | ||||||
Leasehold improvements | 3,057 | 2,282 | ||||||
Construction in progress | 169 | 1,606 | ||||||
Furniture and equipment | 233 | 470 | ||||||
Total property and equipment, gross | 18,914 | 19,630 | ||||||
Accumulated depreciation and amortization | (6,944 | ) | (4,719 | ) | ||||
Total property and equipment, net | $ | 11,970 | $ | 14,911 |
Depreciation and amortization expense for property and equipment, including assets acquired under financing leases was as follows (in thousands):
SCHEDULE OF DEPRECIATION AND AMORTIZATION EXPENSE
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | For the Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
General and administrative expense | $ | 402 | $ | 407 | $ | 1,202 | $ | 1,171 | $ | 304 | $ | 392 | ||||||||||||
Research and development expense | 386 | 390 | 1,135 | 1,072 | 397 | 360 | ||||||||||||||||||
Total depreciation and amortization expense | $ | 788 | $ | 797 | $ | 2,337 | $ | 2,243 | $ | 701 | $ | 752 |
7.6. LEASES
The Company leases facilities and certain equipment under noncancelable leases that expire at various dates through NovemberAugust 2024. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases may include options to extend or terminate the lease at the election of the Company.These optional periods have not been considered in the determination of the right-of-use-assets or lease liabilities associated with these leases as the Company did not consider it reasonably certain it would exercise the options.
Operating Leases
On December 27, 2017, the Company entered into a commercial lease agreement with Adcomp LLC, a Utah limited liability company, pursuant to which the Company leased approximately 178,528 rentable square feet of warehouse, manufacturing, office, and lab space in Salt Lake City, Utah from the landlord. The initial term of the lease is five years and it expires on November 30, 2022. The Company has a one-time option to renew for an additional five years. The initial base rent under this lease is $98,190 per month ($0.55 per sq. ft.) for the first year of the initial lease term and increases 3.0% per annum thereafter. Because the rate implicit in the lease is not readily determinable, the Company has used an incremental borrowing rate of 10% to determine the present value of the lease payments.
In MayApril 2019, the Company entered into an operating lease to obtain 6,307 square feet of manufacturing, laboratory, and office space. The lease expires April 2024 and requires monthly lease payments subject to annual increases. During the third quarter of 2020, the Company reduced space under one of its facility leases, which resulted ininitiated a remeasurementbusiness analysis to determine the long-term strategy of the operatingremote facility and cost to remain operational. During the fourth quarter of fiscal year 2020, it was determined that the Company would cease operations and vacate the facility. As a result, the Company determined that the approved plan to vacate the lease liability. See Note 15represented a triggering event requiring the long-lived assets attributable to the disposal group be assessed for further discussionimpairment. Given the facts and circumstances, the Company determined that the carrying value of the modification.related assets of the disposal group were not recoverable. As a result, the carrying values were reduced to $0 as of December 31, 2020.
Financing Leases
In November 2018 and April 2019, the Company entered into financing leases primarily for laboratory equipment used in research and development activities. The financing leases have remaining terms that range from 12 to 37 months as of March 31, 2021 and include options to purchase equipment at the end of the lease. Because the rate implicit in the lease is not readily determinable, the Company has used an incremental borrowing rate of approximately 10% to determine the present value of the lease payments for these leases.
15 |
As of September 30, 2020,March 31, 2021, the maturities of our operating and finance lease liabilities were as follows (in thousands):
SCHEDULE OF OPERATING AND FINANCE LEASE LIABILITIES
Operating leases | Finance leases | Operating leases | Finance leases | |||||||||||||
2020 (excluding the nine months ended September 30, 2020) | $ | 416 | $ | 166 | ||||||||||||
2021 | 1,646 | 656 | ||||||||||||||
2021 (excluding the three months ended March 31, 2021) | $ | 1,231 | $ | 491 | ||||||||||||
2022 | 1,345 | 405 | 1,345 | 405 | ||||||||||||
2023 | 132 | 336 | 132 | 336 | ||||||||||||
2024 | 86 | 42 | 87 | 42 | ||||||||||||
Total lease payments | 3,625 | 1,605 | 2,795 | 1,274 | ||||||||||||
Less imputed interest | (369 | ) | (206 | ) | ||||||||||||
Total lease liabilities | $ | 3,256 | $ | 1,399 | ||||||||||||
Less: | ||||||||||||||||
Imputed interest | (231 | ) | (143 | ) | ||||||||||||
Total | $ | 2,564 | $ | 1,131 |
Supplemental balance sheet information related to leases was as follows (in thousands):
Finance leases
SCHEDULESHCEDULE OF SUPPLEMENTAL BALANCE SHEET INFORMATION RELATED TO FINANCE AND OPERATING LEASES
September 30, 2020 | December 31, 2019 | |||||||
Finance lease right-of-use assets included within property and equipment, net | $ | 1,466 | $ | 2,177 | ||||
Current finance lease liabilities included within other current liabilities | $ | 544 | $ | 508 | ||||
Non-current finance lease liabilities included within other long-term liabilities | 855 | 1,267 | ||||||
Total finance lease liabilities | $ | 1,399 | $ | 1,775 |
Finance leases
March 31, 2021 | December 31, 2020 | |||||||
Finance lease right-of-use assets included within property and equipment, net | $ | 1,135 | $ | 1,301 | ||||
Current finance lease liabilities included within other current liabilities | $ | 544 | $ | 556 | ||||
Non-current finance lease liabilities included within other long-term liabilities | 587 | 711 | ||||||
Total finance lease liabilities | $ | 1,131 | $ | 1,267 |
Operating leases
September 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||
Current operating lease liabilities included within other current liabilities | $ | 1,439 | $ | 1,746 | $ | 1,422 | $ | 1,485 | ||||||||
Operating lease liabilities – non current | 1,817 | 2,994 | 1,142 | 1,476 | ||||||||||||
Total operating lease liabilities | $ | 3,256 | $ | 4,740 | $ | 2,564 | $ | 2,961 |
The components of lease expense were as follows (in thousands):
SUMMARY OF COMPONENTS OF LEASE EXPENSE
For the Three Months Ended | For the Nine Months Ended | 2021 | 2020 | |||||||||||||||||||||
September 30, | September 30, | For the Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Operating lease costs included within operating costs and expenses | $ | 531 | $ | 556 | $ | 1,635 | $ | 1,617 | $ | 394 | $ | 556 | ||||||||||||
Finance lease costs: | ||||||||||||||||||||||||
Amortization of right-of-use assets | $ | 175 | $ | 171 | $ | 524 | $ | 479 | $ | 165 | $ | 175 | ||||||||||||
Interest on lease liabilities | 36 | 42 | 118 | 109 | 30 | 43 | ||||||||||||||||||
Total | $ | 211 | $ | 213 | $ | 642 | $ | 588 | $ | 195 | $ | 218 |
16 |
Supplemental cash flow information related to leases was as follows (in thousands):
SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO LEASES
For the Nine Months Ended September 30, | For the Three Months Ended March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
Operating cash out flows from operating leases | $ | 1,640 | $ | 1,550 | $ | 426 | $ | 558 | ||||||||
Operating cash out flows from finance leases | $ | 118 | $ | 109 | $ | 30 | $ | 43 | ||||||||
Financing cash out flows from finance leases | $ | 376 | $ | 336 | $ | 135 | $ | 123 | ||||||||
Lease liabilities arising from obtaining right-of-use assets: | ||||||||||||||||
Finance leases | $ | – | $ | 1,828 | ||||||||||||
Lease payments made in prior period reclassified to property and equipment | $ | – | $ | 535 | ||||||||||||
Remeasurement of finance lease liability due to lease modification | $ | – | $ | (22 | ) | |||||||||||
Operating leases | $ | – | $ | 936 | ||||||||||||
Remeasurement of operating lease liability due to lease modification | $ | 131 | $ | – | $ | 37 | $ | – |
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, the weighted average remaining lease term for operating leases was 2.3 1.9and 2.8 2.1years, respectively, and the weighted average discount rate used for operating leases was 9.799.81% and 9.839.75%, respectively. As of September 30, 2020March 31, 2021 and December 31, 2019,2020, the weighted average remaining lease term for finance leases was 2.82.4 and 3.52.6 years, respectively, and the weighted average discount rate used for finance leases was 9.77% 9.78% for both periods.
8.7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES AND OTHER CURRENT LIABILITIESEXPENSES
The following table presents the major components of accounts payable and accrued expenses (in thousands):
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
September 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||
Accounts payable | $ | 1,384 | $ | 1,689 | $ | 339 | $ | 1,193 | ||||||||
Salaries and other compensation | 1,362 | 1,462 | 1,519 | 1,129 | ||||||||||||
Legal and accounting | 317 | 1,404 | 377 | 241 | ||||||||||||
Accrued severance | 571 | 1,053 | 83 | 330 | ||||||||||||
Benefit plan accrual | 588 | 557 | 700 | 659 | ||||||||||||
Accrued offering costs | 500 | – | ||||||||||||||
Other | 596 | 930 | 777 | 596 | ||||||||||||
Total accounts payable and accrued expenses | $ | 4,818 | $ | 7,095 | $ | 4,295 | $ | 4,148 |
Accrued severance as of March 31, 2021 and December 31, 2020 consists of accrued compensation owed to Dr. Denver Lough, a former officer and director, under a settlement terms agreement dated August 21, 2019 (Note 14).
8. OtherOTHER CURRENT LIABILITIES
The following table presents the major components of other current liabilities are comprised of the current portion of operating lease liabilities and finance lease liabilities, and short-term debt. (in thousands):
SCHEDULE OF OTHER CURRENT LIABILITIES
March 31, 2021 | December 31, 2020 | |||||||
Current finance lease liabilities | $ | 544 | $ | 556 | ||||
Current operating lease liabilities | 1,422 | 1,485 | ||||||
Short-term financing arrangement | 1,048 | 20 | ||||||
Other | 25 | 45 | ||||||
Total other current liabilities | $ | 3,039 | $ | 2,106 |
The short-term debt had a balance of $0.3 million as of September 30, 2020, while the other components are disclosed in Note 7 above. The short-term debtfinancing balance is related to twoa financing arrangementsarrangement entered into during the ninethree months ended September 30, 2020March 31, 2021 to fund an insurance contract. Under the financing arrangements,arrangement, the Company borrowed $0.8 million and $0.2 million. The amounts will be repaid in nine equal monthly installments, with an interest rate of 4.25% 3.85and 6.35%, respectively.%.
17 |
2020, 2019 and 2017 Equity Incentive Plans
2020 Plan
On October 25, 2019, the Company’s Board of Directors (the “Board”) approved the Company’s 2020 Stock Option and Incentive Plan (the “2020 Plan”). The 2020 Plan became effective on December 19, 2019, the date approved by the stockholders. The 2020 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, unrestricted stock awards, dividend equivalent rights, and cash-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the Board will administer the 2020 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to shares of common stock are issuable pursuant to awards under the 2020 Plan. No grants of awards may be made under the 2020 Plan after the later of , or the tenth anniversary of the latest material amendment of the 2020 Plan and no grants of incentive stock options may be made after October 25, 2029. The 2020 Plan provides that effective on January 1 of each year the number of shares of common stock reserved and available for issuance under the 2020 Plan shall be cumulatively increased by the lesser of 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the 2020 plan administrator. As of September 30, 2020,March 31, 2021, the Company had shares available for future issuances under the 2020 Plan.
2019 Plan
On October 5, 2018, the Company’s Board approved the Company’s 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the Board will administer the 2019 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to shares of common stock are issuable pursuant to awards under the 2019 Plan. Unless earlier terminated by the Board, the 2019 Plan shall terminate at the close of business on . As of September 30, 2020,March 31, 2021, the Company had shares available for future issuances under the 2019 Plan.
2017 Plan
On December 1, 2016, the Company’s Board approved the Company’s 2017 Equity Incentive Plan (the “2017 Plan”). The purpose of the 2017 Plan is to promote the success of the Company and to increase stockholder value by providing an additional means through the grant of awards to attract, motivate, retain and reward selected employees, consultants and other eligible persons. The 2017 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the Board will administer the 2017 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to shares of common stock are issuable pursuant to awards under the 2017 Plan. Unless earlier terminated by the Board, the 2017 Plan shall terminate at the close of business on . As of September 30, 2020,March 31, 2021, the Company had shares available for future issuances under the 2017 Plan.
18 |
SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY
Number of Shares | Weighted- Average Exercise Price | Number of Shares | Weighted- Average Exercise Price | |||||||||||||
Outstanding – December 31, 2019 | 4,529,988 | $ | 15.26 | |||||||||||||
Outstanding – December 31, 2020 | 4,794,567 | $ | 10.03 | |||||||||||||
Granted | 1,882,888 | $ | 1.23 | 1,352,058 | $ | 1.30 | ||||||||||
Exercised | (10,208 | ) | $ | 3.08 | (2,500 | ) | $ | 1.10 | ||||||||
Forfeited | (1,363,754 | ) | $ | 16.30 | (62,415 | ) | $ | 6.26 | ||||||||
Outstanding – September 30, 2020 | 5,038,914 | $ | 9.75 | |||||||||||||
Options exercisable, September 30, 2020 | 3,447,648 | $ | 12.69 | |||||||||||||
Outstanding – March 31, 2021 | 6,081,710 | $ | 8.13 | |||||||||||||
Options exercisable, March 31, 2021 | 4,030,490 | $ | 11.27 |
(1) | The number of exercised options includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements. |
Employee Stock Purchase Plan (ESPP)
In May 2018, the Company adopted the Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved shares of common stock for purchase under the ESPP. The initial offering period began January 1, 2019 and ended on June 30, 2019 with the first purchase date. Subsequent offering periods will automatically commence on each January 1 and July 1 and will have a duration of six months ending with a purchase date June 30 and December 31 of each year. On each purchase date, ESPP participants will purchase shares of common stock at a price per share equal to % of the lesser of (1) the fair market value per share of the common stock on the offering date or (2) the fair market value of the common stock on the purchase date.
Restricted Stock
SCHEDULE OF SHARE-BASED COMPENSATION, RESTRICTED STOCK ACTIVITY
Number of Shares | ||||
Unvested - December 31, | ||||
Granted | ||||
Vested (1) | ( | ) | ||
Forfeited | ( | ) | ||
Unvested – |
(1) | The number of vested restricted stock units and awards includes shares that were withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements. |
Stock-Based Compensation Expense
SCHEDULE OF SHARE-BASED COMPENSATION RELATED TO RESTRICTED STOCK AWARDS AND STOCK OPTIONS
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | For the Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
General and administrative expense | $ | 1,655 | $ | 4,822 | $ | 4,875 | $ | 20,751 | $ | 1,229 | $ | 3,076 | ||||||||||||
Research and development expense | 388 | (164 | ) | 755 | 2,401 | 323 | (36 | ) | ||||||||||||||||
Sales and marketing expense | 136 | 367 | 333 | 780 | 99 | 181 | ||||||||||||||||||
Total stock-based compensation expense | $ | 2,179 | $ | 5,025 | $ | 5,963 | $ | 23,932 | $ | 1,651 | $ | 3,221 |
19 |
10. SALE OF COMMON STOCK, WARRANTS AND PRE-FUNDED WARRANTS
On FebruaryJanuary 14, 2020,2021, the Company completed an underwrittena registered direct offering of shares of its common stock, andpar value $ per share, pre-funded warrants to purchase up to 10,638,2982,420,910 shares of common stock and accompanying common warrants to purchase up to 9,090,910 shares of common stock. Each share of common stock and pre-funded warrant was sold together with a warrant. The combined offering price of each common stock share and accompanying warrant was $ and for each pre-funded warrant and accompanying warrant was $ . The pre-funded warrants had an exercise price of $0.001 each and were exercised in full in January 2021. Each warrant is exercisable for one share of the Company’s common stock at an exercise price of $1.20 per share. The warrants are immediately exercisable and will expire five years form the date of issuance. The holder of the warrants may not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent warrants to purchase 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 545,455 shares of common stock. Each common share and warrant were sold together for a combined publicstock). The placement agent warrants have substantially the same terms as the warrants, except that the placement agent warrants have an exercise price equal to 125% of the purchase price ofper share (or $2.35 before underwriting discount and commission. The exercise price of each warrant is $2.801.375 per share,share). The net proceeds to the warrantsCompany from the offering were exercisable immediately, and they will expire $February 12, 20279.2 million, after direct offering expenses of $0.8 . million payable by the Company.
As the common stock warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the common stock warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $8.1 million and $0.5 million, respectively. Since the pre-funded warrants did not contain the same cash settlement provision, these warrants were classified as a liability and are recorded at an estimated fair value using a Monte Carlo simulation model. component of stockholders’ equity within additional paid-in-capital. The pre-funded warrants were equity classified because they met characteristics of the equity classification criteria. The total proceeds from the offering were first allocated first to the warrant liability classified warrants, based on thetheir estimated fair valuevalues, with the residual $1.4 million allocated to the common shares. Asstock and pre-funded common stock warrants in equity. Issuance costs allocated to the equity classified pre-funded common stock warrants and common stock of September 30, 2020, none$0.1 million were recorded as a reduction to additional paid-in capital. Issuance costs allocated to the liability classified warrants of $0.7 million were recorded as an expense. The Company measured the fair value of the accompanying common warrants and placement agent warrants using the Monte Carlo simulation model at issuance and again at March 31, 2021 using the following inputs:
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON WARRANTS
January 14, 2021 | March 31, 2021 | |||||||
Stock price | $ | 1.21 | $ | 1.11 | ||||
Exercise price | $ | 1.20 | $ | 1.20 | ||||
Risk-free rate | 0.49 | % | 0.86 | % | ||||
Volatility | 100.1 | % | 102.4 | % | ||||
Remaining term (years) | 5.0 | 4.8 |
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF PLACEMENT AGENT WARRANTS
January 14, 2021 | March 31, 2021 | |||||||
Stock price | $ | 1.21 | $ | 1.11 | ||||
Exercise price | $ | 1.38 | $ | 1.38 | ||||
Risk-free rate | 0.49 | % | 0.86 | % | ||||
Volatility | 99.3 | % | 102.4 | % | ||||
Remaining term (years) | 5.0 | 4.8 |
On January 22, 2021, the Company entered into a letter agreement with the holder of warrants to purchase 10,688,043 shares of common stock at an exercise price of $0.624 per share that were issued to the holder in the registered direct offering that closed on December 23, 2020. Under the letter agreement the holder agreed to exercise the 10,688,043 warrants in full and the Company agreed to issue and sell to the holder common warrants to purchase up to shares of the Company’s common stock, par value $per share, at a price of $. Each warrant is exercisable for one share of Common Stock at an exercise price of $1.20 per share. The warrants are immediately exercisable and will expire five years from the date of issuance.A holder may not exercise any portion of the warrants had been exercised.to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent, warrants to purchase 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 480,962 shares of common stock). The placement agent warrants have substantially the same terms as the new warrants. The 10,688,043 warrants issued on December 23, 2020 were exercised on January 22, 2021 and closing of the offering occurred on January 25, 2021. The Company received gross proceeds of approximately $6.7 million from the exercise of the existing warrants and gross proceeds of approximately $1.0 million from the sale of the new warrants.
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inputs:
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON STOCKWARRANTS
January 22, 2021 | ||||
Stock price | $ | 1.05 | ||
Exercise price | $ | 0.624 | ||
Risk-free rate | 0.43 | % | ||
Volatility | 99.4 | % | ||
Remaining term (years) | 4.92 |
As the new common stock warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the new common stock warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $5.8 million and $0.4 million, respectively. Cash issuance costs of $0.1 million were recorded as an expense. The Company measured the fair value of the accompanying common stock warrants and placement agent common stock warrants using the Monte Carlo simulation model at issuance and again at March 31, 2021 using the following inputs:
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON WARRANTS
January 25, 2021 | March 31, 2021 | |||||||
Stock price | $ | 1.02 | $ | 1.11 | ||||
Exercise price | $ | 1.20 | $ | 1.20 | ||||
Risk-free rate | 0.42 | % | 0.87 | % | ||||
Volatility | 99.0 | % | 102.4 | % | ||||
Remaining term (years) | 5.0 | 4.8 |
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON WARRANTS
January 22, 2021 | March 31, 2021 | |||||||
Stock price | $ | 1.05 | $ | 1.11 | ||||
Exercise price | $ | 1.20 | $ | 1.20 | ||||
Risk-free rate | 0.44 | % | 0.87 | % | ||||
Volatility | 99.6 | % | 102.4 | % | ||||
Remaining term (years) | 5.0 | 4.8 |
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The following table summarizes warrant activity for the year ended March 31, 2021.
SUMMARY OF WARRANT LIABILITYACTIVITY
September 30, 2020 | ||||
Beginning balance | $ | – | ||
Initial value of common stock warrant liability | 11,677 | |||
Change in fair value of common stock warrant liability | (4,444 | ) | ||
Ending balance | $ | 7,233 |
Outstanding December 31, 2020 | Warrants Issued | Warrants Exercised | Outstanding March 31, 2021 | |||||||||||||
Transaction | ||||||||||||||||
February 14, 2020 common warrants | 565,000 | – | (25,500 | ) | 539,500 | |||||||||||
December 23, 2020 common warrants | 10,688,043 | – | (10,688,043 | ) | – | |||||||||||
December 23, 2020 placement agent warrants | 641,283 | – | – | 641,283 | ||||||||||||
December 23, 2020 pre-funded warrants | 5,238,043 | – | (5,238,043 | ) | – | |||||||||||
January 14, 2021 common warrants | – | 9,090,910 | – | 9,090,910 | ||||||||||||
January 14, 2021 placement agent warrants | – | 545,455 | – | 545,455 | ||||||||||||
January 14, 2021 pre-funded warrants | – | 2,420,910 | (2,420,910 | ) | – | |||||||||||
January 25, 2021 common warrants | – | 8,016,033 | – | 8,016,033 | ||||||||||||
January 22, 2021 placement agent warrants | – | 480,962 | – | 480,962 | ||||||||||||
Total | 17,132,369 | 20,554,270 | (18,372,496 | ) | 19,314,143 |
On March 30, 2021, the Company entered into a sales agreement with Cantor Fitzgerald & Co. to sell shares of common stock having aggregate sales proceeds of up to $50.0 million, from time to time, through an “at the market” equity offering program under which Cantor Fitzgerald & Co. will act as sales agent. As of March 31, 2021, no common stock had been sold.
Pursuant to an Equity Purchase Agreement dated as of December 5, 2019 (the “Purchase Agreement”) that the Company entered into with Keystone Capital Partners, LLC (“Keystone”), Keystone agreed to purchase up to $25.0 million of shares of our common stock, subject to certain limitations, at our direction from time to time during the 36-month term of the Purchase Agreement. In anticipation of the “at the market” equity offering program described above, the Company provided notice to Keystone of its decision to terminate the Purchase Agreement, which was effective on March 26, 2021.
SCHEDULE OF EARNINGS PER SHARE, BASIC AND DILUTED
March 31, 2021 | March 31, 2020 | |||||||
Numerator: | ||||||||
Net loss | $ | (17,410 | ) | $ | (13,040 | ) | ||
Less: Gain from change in fair value of warrant liabilities | (755 | ) | – | |||||
Net loss, available to common stockholders | $ | (18,165 | ) | $ | (13,040 | ) |
March 31, 2021 | March 31, 2020 | |||||||
Denominator: | ||||||||
Basic weighted average number of common shares (1) | 76,158,275 | 33,019,994 | ||||||
Incremental shares from assumed exercise of warrants | 237,803 | – | ||||||
Diluted weighted average number of common shares | 76,396,078 | 33,019,994 |
(1) | In December 2020 and January 2021, the Company sold pre-funded warrants to purchase up to 5,238,043 and 2,420,910 shares of common stock, respectively. The shares of common stock associated with the pre-funded warrants are considered outstanding for the purposes of computing earnings per share prior to exercise because the shares may be issued for little or no consideration, are fully vested, and are exercisable after the original issuance date. The pre-funded warrants sold in December 2020 and January 2021 were exercised during the period and included in the denominator for the period of time the warrants were outstanding. |
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SCHEDULE OF ANTI-DILUTIVE POTENTIAL SHARES OUTSTANDING ACTIVITY
As of September 30, | As of March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Stock options | 5,038,914 | 6,357,029 | 6,081,710 | 4,348,559 | ||||||||||||
Restricted stock | 3,874,945 | 2,027,100 | 3,061,070 | 1,574,878 | ||||||||||||
Common stock warrants | 10,638,298 | 15,235 | 10,223,233 | 10,638,298 | ||||||||||||
Shares committed under ESPP | 56,806 | 54,632 |
12. DEBT
PPP Loan
On April 12, 2020, our subsidiary PolarityTE MD, Inc. (the “Borrower”) entered into a promissory note evidencing an unsecured loan in the amount of $3,576,145made to it under the Paycheck Protection Program (the “Loan”). The Paycheck Protection Program (or “PPP”) was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The Loan to the Borrower was made through KeyBank, N.A., a national banking association (the “Lender”). The interest rate on the Loan is 1.00%. Beginning seven months from the date of the Loan the Borrower is required to make 24monthly payments of principal and interest in the amount of $150,563. The promissory note evidencing the Loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or Lender, or breaching the terms of the Loan documents. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Borrower, or filing suit and obtaining judgment against the Borrower. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of a loan granted under the PPP. SuchOn October 15, 2020, the Borrower applied to the Lender for forgiveness will be determined, subject to limitations,of the PPP loan in its entirety based on the Borrower’s use of the PPP loan proceeds for payment of payroll costs, and any payments of mortgage interest, rent, and utilities. On October 26, 2020, the Borrower was advised that the Lender approved the application, and that the Lender was submitting the application to the SBA for a final decision. The Company classified the principal balance of the PPP loan within “Current portion of long-term notes payable” and “Long-term notes payable” on the consolidated balance sheet as of March 31, 2021. If the Borrower’s application for forgiveness of the PPP loan is not approved or approved only in part, it will be obligated to repay the unforgiven portion of the loan after the SBA makes its decision on the application for forgiveness. No assurance ishas been provided that the Company will obtain forgiveness of the Loan in whole or in part.
13. RESTRUCTURING
InThe SBA adopted a procedure for auditing all PPP loans over $2 million and pursuant to that procedure the second quarter of 2020, management approved several actions as part of a restructuring plan designed to improve operational efficiencyCompany completed the SBA’s form requesting information surrounding the Borrower’s original application for the Loan and financial results. Management approved a reduction in force, which affected 40information on use of the 126 employeesLoan proceeds, which was submitted to the SBA in December 2020. The Borrower has yet to receive any response from the regenerative medicine business segment,SBA. If the SBA makes a determination pursuant to its audit of the Borrower that it was not eligible to obtain the Loan or approximately 31.7% of that workforce. The Company did not make any change inuse the workforce of its contract services segment. The Company recognized $0.6 million of expense related to employee severance and benefit arrangementsLoan for the second quarter restructuring. The Company also recognized $0.4 million of other employee severance expense duringpurposes contemplated by the first quarter of 2020. Total severance expense recorded duringCARES Act, it is likely the nine months ended September 30, 2020 was $1.0 million. It is expected that the full amount of severanceBorrower will be paid byrequired to promptly repay the end of 2020. Management also recorded $1.5 million of asset abandonments within the Company’s regenerative medicine business segment.Loan in full and may be subject to additional charges or penalties.
14.13. 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”). BothOn November 28, 2018, the Court consolidated the Moreno Complaint and Lawi Complaint allegecases under the caption In re PolarityTE, Inc. Securities Litigation with Case No. 2:18-cv-00510 (the “Consolidated Securities Litigation”). The gravamen of the consolidated complaint in the Consolidated Securities Litigation was that the defendants made statements or disseminated 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 Exchange Act and Rule 10b-5 adopted thereunder. Specifically, both complaints allegethereunder, specifically 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. On November 28, 2018, the Court consolidated the Moreno and Lawi cases under the caption In re PolarityTE, Inc. Securities Litigation (the “Consolidated Securities Litigation”), and requested the appointment of the plaintiff in Lawi as the lead plaintiff. On January 16, 2019, the Court granted the motion of Yedid Lawi for appointment as lead plaintiff, and on February 1, 2019, the Court granted the lead plaintiff’s motion for approval of lead counsel and liaison counsel. The Court also ordered that the lead plaintiff file and serve a consolidated complaint no later than 60 days after February 1, 2019. The lead plaintiff filed a consolidated complaint on April 2, 2019, and asserted essentially the same violations of Federal securities laws recited in the original complaints. The Company filed a motion to dismiss the consolidated complaint on June 3, 2019. Plaintiffs’ opposition to the Company’s motion to dismiss was filed on August 2, 2019, and the Company filed a reply to the opposition on September 13, 2019. AFollowing a hearing on the Company’s motion to dismiss was heldthe Court issued an order on November 19, 2019; no order has been issued to date. At this early stage of22, 2020, dismissing the proceedingscomplaint in the Company is unable to make any prediction regarding the outcome of the litigation.Consolidated Securities Litigation with prejudice.
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In November 2018, a shareholder derivative lawsuit was filed in the United States District Court, District of Utah, with the caption Monther v. Lough, et al., case no. 2:18-cv-00791-TC, alleging violations of the Exchange Act, breach of fiduciary duty, and unjust enrichment on the part of certain officers and directors based on the facts and circumstances recited in the Consolidated Securities Litigation. On November 26, 2018, the court issued an order staying all proceedings until after the disposition of motions to dismiss the Consolidated Securities Litigation. After disposition of the Consolidated Securities Litigation described above the parties to the shareholder derivative lawsuit agreed to dismiss the lawsuit without prejudice and the lawsuit was dismissed on January 29, 2021.
Other Matters
In the ordinary course of business, the Company may become involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements, employment, regulatory compliance, and other matters. Except as noted above, as of September 30, 2020,at March 31, 2021, the Company was not party to any legal or arbitration proceedings that may have materialsignificant effects on its financial position or results of operations. No governmental proceedings are pending or, to the Company’s knowledge, contemplated against the Company. The Company is not a party to any material proceedings in which any director, member of senior management or affiliate of the CompanyCompany’s is either a party adverse to the Company or its subsidiaries or has a material interest adverse to the Company or its subsidiaries.
Commitments
The Company has entered into employment agreements with key executives and adopted a change in control plan that contain severance terms and change of control provisions.
On September 2, 2020, Arches Research, Inc., a subsidiary of PolarityTE, Inc. (“Arches”) entered into two agreements with Co-Diagnostics, Inc. (“Co-Diagnostics”). The COVID-19 Laboratory Services Agreement between the parties provides that Arches will perform specimen testing services for customers referred by Co-Diagnostics to Arches. Co-Diagnostics will arrange all logistics for delivering specimens to Arches for COVID-19 testing for those customers of Co-Diagnostics electing to use the service. Arches bills Co-Diagnostics for the testing services and Co-Diagnostics manages all customer billing. The Rental Agreement for LGC Genomics Oktopure Extraction Machine between Arches and Co-Diagnostics provides that Co-Diagnostics will make available to Arches the Oktopure high throughput extraction machine that Arches will use to perform COVID-19 testing. The term of the agreement is 12 monthsmonths,, requires Arches to use Co-Diagnostics tests exclusively in the machine, and establishes for Arches a minimum monthly purchase obligation, valued at approximately $1.1 millionmillion annually for Co-Diagnostics tests and related consumables used in the testing process. The COVID-19 Laboratory Services Agreement can be canceled by the Company at any time by providing 60 days written notice, and the Rental Agreement can be canceled at any time by written notice given within 60 days after termination of the Laboratory Services Agreement.
15.14. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On August 21, 2019, the Company and Dr. Denver Lough, a principal shareholder and former officer and director, signed a settlement terms agreement that provides, in part, that the Company pay to Dr. Lough $1,500,000in cash on October 1, 2019 and an additional $1,500,000in cash in equal monthly installments beginning November 1, 2019 and ending April 1, 2021. In addition, the Company agreed to award to Dr. Lough restricted stock units that vest in 18 equal monthly installments beginning October 1, 2019. As of March 31, 2021, the Company has recorded a liability of $0.1 million related to future cash payments under the agreement. The fair value of the restricted stock units was $0.8 million. The Company and was fully expensed the cash portion and equity portion of these awards upon Dr. Lough’s termination. As of September 30, 2020, the Company has recorded a liability of $0.6 millionrelated to future cash payments under the agreement.
In October 2018, the Company entered into an office lease covering approximately 7,250 square feet of rental space in the building located at 40 West 57th57th Street in New York City. The lease is for a term of three years. The annual lease rate is $60 per square foot. Initially the Company occupiedwill occupy and paidpay for only 3,275 square feet of space, and the Company is not obligated under the lease to pay for the remaining 3,975 square feet covered by the lease unless we electit elects to occupy that additional space.The Company believes the terms of the lease are very favorable to us, and the Company obtained these favorable terms through the assistance of Peter A. Cohen, a director, which he provided so that the company he owns, Peter A. Cohen, LLC (“Cohen LLC”), could sublease a portion of the office space.
During 2019,Q1 2021, the Company increaseddecreased the space leased from 3,2755,500 square feet to 6,232 4,747 square feet. In May 2020, the Company reduced the space from 6,232 to 4,554. The Company is using 1,099 square feet, and Cohen LLC is using approximately 3,455 3,648 square feet as of September 30, 2020.March 31, 2021. The monthly lease payment for 4,5544,747 square feet is $22,77123,737. Of this amount $17,277 $18,243 is chargedallocated pro rata to Cohen, LLC based on square footage occupied. Additional lease charges for operating expenses and taxes are also chargedallocated under the sublease based on the ratio of rent paid by the Company and Cohen LLC to total rent. IfOnce the space becomesis fully occupied, the Company will reduce the overall annual lease rate for the Cohen LLC space to $58.60 per square foot. However, the Company has yet to fully occupy the 7,250 square feet covered by the office lease and the lease expires at the end of October 2021. The Company recognized $55,000 and $69,000 of sublease income related to this agreement of $52,000and $69,000 for the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and $184,000and $195,000 for the nine months ended September 30, 2020 and 2019, respectively. The sublease income is included in other income, net in the statementscondensed consolidated statement of operations. As of September 30, 2020March 31, 2021, and December 31, 2019,2020, there were 0amounts due from the related party under this agreement.
16.15. SEGMENT REPORTING
Reportable segments are presented in a manner consistent with the internal reporting provided to the chief operating decision maker (CODM). In April 2020,, the Company designated its Chief Executive Officer (CEO) to be its Chief Operating Decision Maker (CODM) and dissolved the function of the Office of the Chief Executive consisting of the President, Chief Operating Officer, and Chief Financial Officer, which previously acted as its CODM.Company.
The CODM allocates resources to and assesses the performance of each segment using information about its revenue and operating income (loss). These measures are presented in the following tables (in thousands). Asset information by segment is not presented, as this measure is not used by the CODM to assess the segment’s performance.
SCHEDULE OF SEGMENT INFORMATION
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended March 31, | ||||||||||||||||||||||
September 30, | September 30, | 2021 | 2020 | |||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||
Net revenues by segment: | ||||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||
Reportable segments: | ||||||||||||||||||||||||
Regenerative medicine | $ | 1,156 | $ | 839 | $ | 2,528 | $ | 1,640 | $ | 1,729 | $ | 428 | ||||||||||||
Contract services | 2,181 | 556 | 4,008 | 2,546 | 2,980 | 505 | ||||||||||||||||||
Total net revenues | $ | 3,337 | $ | 1,395 | $ | 6,536 | $ | 4,186 | $ | 4,709 | $ | 933 | ||||||||||||
Net income (loss) by segment: | ||||||||||||||||||||||||
Net income/(loss): | ||||||||||||||||||||||||
Reportable segments: | ||||||||||||||||||||||||
Regenerative medicine | $ | (7,246 | ) | $ | (22,466 | ) | $ | (32,516 | ) | $ | (70,247 | ) | $ | (17,702 | ) | $ | (12,703 | ) | ||||||
Contract services | 165 | (517 | ) | (282 | ) | (1,101 | ) | 292 | (337 | ) | ||||||||||||||
Total net loss | $ | (7,081 | ) | $ | (22,983 | ) | $ | (32,798 | ) | $ | (71,348 | ) | $ | (17,410 | ) | $ | (13,040 | ) |
17.16. SUBSEQUENT EVENTSEVENT
On October 15,The FDA developed and published in November 2017 a regenerative medicine policy framework to help facilitate regenerative medicine therapies. Under the framework, the FDA stated its intent to exercise enforcement discretion until November 2020 the Borrower appliedwith respect to the LenderFDA’s IND and premarket approval requirements for forgiveness of the PPP loan described under Note 12361 HCT/Ps, which was subsequently extended through May 2021. We continued to sell SkinTE as a 361 HCT/P in its entirety based2020 and into 2021 in reliance on our view that there is a reasonable basis for regulating SkinTE as a 361 HCT/P and also in reliance on the Borrower’s useenforcement discretion position stated in the policy framework. On or about April 21, 2021, the FDA announced that enforcement discretion will not be extended beyond May 31, 2021. As a result of this development and our decision to submit an IND for SkinTE, which we expect to submit in the PPP loansecond half of 2021, we plan to terminate our commercial sales effort for payroll costs, rent,SkinTE on May 31, 2021, wind down our commercial operation before the end of June 2021, and utilities. On October 26, 2020, the Borrower was advised that the Lender approved the application and that the Lender was submitting the application to the SBA for a final decision. The SBA may take up to 90 days to make a decisionfocus on the Borrower’s forgiveness application. The Company classified the principal balance of the PPP loan within “Current portion of long-term notes payable” and “Long-term notes payable” on the consolidated balance sheet as of September 30, 2020. If the Borrower’s applicationIND for forgiveness of the PPP loan is not approved or approved only in part, it will be obligated to repay the unforgiven portion of the loan after the SBA makes its decision on the application for forgiveness.SkinTE.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, as described in “Risk Factors” in our Annual Report on Form 10-K and this report, that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and periods that follow to differ materially from those expressed in or implied by those forward-looking statements. Readers are cautioned that forward-looking statements contained in this Quarterly Report on Form 10-Q should be read in conjunction with our disclosure under the heading “Disclosure Regarding Forward-Looking Statements” below.
Overview
We arePolarityTE, Inc., headquartered in Salt Lake City, Utah, is a commercial-stage biotechnology and regenerative biomaterials company focused on transforming the lives of patients by discovering, designing and developing regenerative tissue products and biomaterialsbiomaterials. We also operate a laboratory testing and clinical research business using equipment, personnel, and facilities we acquired to advance our development of regenerative tissue products.
Regenerative Tissue Product
Our first regenerative tissue product is SkinTE, which is intended for the fieldsrepair, reconstruction, replacement, and supplementation of medicine, biomedical engineering and material sciences. Historically, weskin in patients who have operated two segments:a need for treatment of acute or chronic wounds, burns, surgical reconstruction events, scar revision, or removal of dysfunctional skin grafts. Given our significant real-world experience with the regenerative medicine product segment and the contract services segment.
Segment Reporting
Regenerative Medicine Product Segment
The regenerative medicine product segment is engaged in the developmentapplication of SkinTE our first commercial product, and alsoseveral supporting publications, we believe SkinTE can be successful in closing full-thickness complex wounds, such as DFUs penetrating to tendon, capsule, and bone classified Wagner Grades 2 through 4; Stage 3 and 4 pressure injuries; and, acute wounds. We believe that SkinTE could significantly improve clinical outcomes versus the developmentstandards of SkinTE POC (point-of-care devicecare for on-site SkinTE processing and deployment), Skin TE Cryo (cryopreservation of SkinTE for multiple deployments on a single patient), and PTE 11000 (allogeneic, biologically active dressing for use in wound care).these wounds.
SkinTE was registered and listed with the United States Food and Drug Administration (FDA)(“FDA”) in August 2017 based on our determination that SkinTE is appropriately regulated solely under Section 361 of the Public Health Service Act and Part 1271 of Title 21 of the Code of Federal Regulations (i.e., as a so-called “361361 HCT/P”)P) and that, as a result, no premarket review or approval by the FDA iswas required. We proceeded to develop sales and manufacturing capabilities for SkinTE and focused on advancing commercialization of SkinTE. We began a regional commercial rollout of SkinTE in October 2018.
Following informal, voluntary discussions between us and the FDA we were advised by the FDA in April 2020 that its preliminary assessment is that SkinTE does not meet the requirements to be regulated solely as a 361 HCT/P. Rather, the FDA’s view ispreliminary assessment was that SkinTE is a biological product that should be regulated under Section 351 of the Public Health Service Act. We re-evaluated our regulatory approach and determined it is prudent to submit an investigational new drug application (IND),(“IND”) for SkinTE and thereafter aan eventual biologics license application (BLA)(“BLA”) because we believe it will create a more valuable asset with a greater likelihood of achieving widespread commercial adoption, and to avoid the possibility of a protracted dispute with the FDA. As a result of the change in the regulatory approach for SkinTE, andwe decided to adjust our SkinTE commercial operations as disclosed in our Annual Report on Form 10-K for the focusyear ended December 31, 2020.
The FDA developed and published in November 2017 a regenerative medicine policy framework to help facilitate regenerative medicine therapies. Under the framework, the FDA stated its intent to exercise enforcement discretion until November 2020 with respect to the FDA’s IND and premarket approval requirements for 361 HCT/Ps, which was subsequently extended through May 2021. We continued to sell SkinTE as a 361 HCT/P in 2020 and into 2021 in reliance on our view that there is a reasonable basis for regulating SkinTE as a 361 HCT/P and also in reliance on the enforcement discretion position stated in the policy framework. On or about April 21, 2021, the FDA announced that enforcement discretion will not be extended beyond May 31, 2021. As a result of this development and our commercial effortdecision to submit an IND for SkinTE, based on the following factors:
In August 2020 we submitted a Type B Pre-IND meeting request to FDA regarding an indication for SkinTE to treat diabetic foot ulcers (DFUs), and we received written responses to our meeting request and questions in October 2020. FDA’s responses included, among other things, feedback and recommendations on SkinTE manufacturing, preclinical studies, and clinical data submitted in the Company’s briefing package, and guidance on additional information for the Company to include in its IND submission. Consistent with published FDA guidance documents, including “Guidance for Industry: Providing Clinical Evidence of Effectiveness for Human Drug and Biological Products,” the Agency stated that for a condition like DFUs, it would generally expect at least two adequate and well-controlled studies to provide substantial evidence of effectiveness and evidence of safety to support a future marketing application. The Agency noted that our ongoing randomized controlled trial (RCT) in DFUs has elements of an adequate and well-controlled study, but stated that it would not accept our ongoing post-marketing RCT in DFUs as one of the two adequate and well-controlled studies to support a future marketing application.
With this FDA feedback we are re-evaluating our development plan for SkinTE. We believe much of the chemistry, manufacturing and controls (CMC) work, as well as non-clinical work, we will do for the DFU indication can be leveraged for multiple indications. Based on our experience with the deployment of SkinTE, we believe SkinTE can be successful in closing complex wounds such as DFU Wagner grade 2 through 4, grade 3 & 4 pressure injuries, and acute wounds. Our present intention is to focus our efforts on these wound types, where we believe there are significant unmet needs, and pursue these indications in our IND submission for approval either in parallel or a tight sequential process.
In the coming months we will pursue the preparation of an IND filing with FDA, which we believe we will be ableexpect to filesubmit in the second half of 2021. This effort will include, among other things,2021, we plan to terminate our commercial sales of SkinTE on May 31, 2021, wind down our commercial operations before the completionend of CMCJune 2021, and pre-clinical work to satisfy FDA requirements, interaction with FDAfocus on additional indications, trials design, preparation and submission of the IND and planning for clinical trial enrollment to begin as soon as we have an open IND.SkinTE.
ContractIn connection with terminating commercial sales of SkinTE we expect to effectuate reductions in staff and resources that support the commercial operations, which we believe will offset the loss of revenues from SkinTE sales, but we cannot predict to what extent such reductions will make up for lost SkinTE revenues in future periods.
Notwithstanding this development, our experience indicates that SkinTE benefits patients with immediately life-threatening conditions and other serious diseases or conditions. In 2009, the FDA implemented new regulations related to Expanded Access Investigational New Drug Applications (“Expanded Access INDs”), which are often colloquially referred to as “compassionate use,” and pertain to the use of an investigational drug or biologic when the primary purpose is to diagnose, monitor, or treat a patient’s disease or condition, rather than to obtain the kind of information about the drug that is generally derived from clinical trials. The FDA has proposed several processes for obtaining Expanded Access INDs, which we will evaluate for potential implementation in connection with a successful opening of an IND for SkinTE. Under FDA regulations the amount that may be charged for SkinTE used under an Expanded Use IND is limited to our direct costs of manufacture. Accordingly, Expanded Access INDs are not a means of replacing revenue we lose when we discontinue our commercial sale of SkinTE, but we believe this may enable us to provide SkinTE to providers treating patients with life-threatening or serious diseases and conditions and maintain on-going relationships with physicians we believe to be key opinion leaders in the wound care industry.
Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending upon the timing of our clinical trials and our expenditures for satisfying all the conditions of obtaining FDA premarket approval for SkinTE. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our accounts payable and accrued research and development and other current liabilities.
Testing and Research Services Segment
The contract services segment operatesBeginning in 2017 we developed internally a laboratory and research capability to advance the development of SkinTE and related technologies, which we operate through our subsidiary, Arches Research, Inc. (“Arches”). At the beginning of May 2018, we acquired a preclinical research and veterinary sciences business to be used, in part, for preclinical studies on our regenerative tissue products, which we operate through our subsidiary IbexIBEX Preclinical Research, Inc. We(“IBEX”). Through Arches and IBEX, we also offer research and laboratory testing services to unrelated third parties on a contract basis through our subsidiary, Arches Research, Inc. (“Arches”).
There was a substantial surge inbasis. At the end of May 2020, we began to offer COVID-19 testing throughout the United States as a result of the COVID-19 pandemic, which began in the spring of 2020. In the course of its operations, Arches maintains equipment and staff capable of performing molecular polymerase chain reaction testing for COVID-19, which made it possible for Arches to begin providing COVID-19 testing services on May 27, 2020. We believe that COVID-19 testing offers an opportunity to use existing resources to generate additional revenue in the contract services segment and thereby help defray our operating expenses. We
Revenues generated from our laboratory testing and research services have pursued this opportunity duringbeen helpful in lowering the thirdrate at which we use capital obtained from external sources. In the first quarter of 2020 and expect to continue to do so as long as we believe COVD-19 testing services are beneficial to supporting our operations.
Revenue Recognition
In the regenerative medicine products segment, we record product revenues primarily from the sale2021 57% of our regenerative tissue products. We sell our products to healthcare providers, primarily through direct sales representatives. Product revenues consist of a single performance obligation that we satisfy at a point in time. In general, we recognize product revenue upon delivery to the customer. In the contract services segment, we earn service revenues from the provision of contracttesting and research services which includes delivery of preclinical studiesnet revenues were generated by COVID-19 testing and other research services to unrelated third parties. Service revenues generally consist of a single performance obligation that we satisfy over time using an input method based on costs incurred to date relative to the total costs expected to be required to satisfy the performance obligation. Contract services also includes research and laboratory testing services to unrelated third parties on a contract basis. These customer contracts generally consist of a single performance obligation that the Company satisfies at a point in time. The Company recognizes revenue upon delivery of testing results to the customer.
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, clinical trial costs, and other overhead charges.
General and Administrative Expenses
General and administrative expenses primarily represent employee related costs, including stock compensation for corporate executives 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 components93% 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.
Sales and Marketing Expenses
Sales and marketing expenses primarily represent employee related costs, including stock compensation for sales and marketing executives and staff, marketing and advertising expenses, trade shows and other promotional costs, and other related charges.
Results of Operations
Comparison of the three months ended September 30, 2020 compared to the three months ended September 30, 2019.
For the Three Months Ended | Increase (Decrease) | |||||||||||||||
(in thousands) | September 30, 2020 | September 30, 2019 | Amount | % | ||||||||||||
(Unaudited) | ||||||||||||||||
Net revenues | ||||||||||||||||
Products | $ | 1,156 | $ | 839 | $ | 317 | 38 | % | ||||||||
Services | 2,181 | 556 | 1,625 | 292 | % | |||||||||||
Total net revenues | 3,337 | 1,395 | 1,942 | 139 | % | |||||||||||
Cost of sales | ||||||||||||||||
Products | 210 | 315 | (105 | ) | (33 | )% | ||||||||||
Services | 1,142 | 330 | 812 | 246 | % | |||||||||||
Total cost of sales | 1,352 | 645 | 707 | 110 | % | |||||||||||
Gross profit | 1,985 | 750 | 1,235 | 165 | % | |||||||||||
Operating costs and expenses | ||||||||||||||||
Research and development | 2,698 | 2,956 | (258 | ) | (9 | )% | ||||||||||
General and administrative | 6,264 | 16,044 | (9,780 | ) | (61 | )% | ||||||||||
Sales and marketing | 1,606 | 4,988 | (3,382 | ) | (68 | )% | ||||||||||
Total operating costs and expenses | 10,568 | 23,988 | (13,420 | ) | (56 | )% | ||||||||||
Operating loss | (8,583 | ) | (23,238 | ) | 14,655 | (63 | )% | |||||||||
Other income (expense) | ||||||||||||||||
Change in fair value of common stock warrant liability | 1,503 | – | 1,503 | * | ||||||||||||
Interest income (expense), net | (58 | ) | 27 | (85 | ) | (315 | )% | |||||||||
Other income, net | 57 | 228 | (171 | ) | (75 | )% | ||||||||||
Net loss | $ | (7,081 | ) | $ | (22,983 | ) | $ | 15,902 | (69 | )% |
Net Revenues
For the three-month period ended September 30, 2020, we recorded net revenues of $3.337 million, which represents an increase of $1.942 million or 139% from the $1.395 million of net revenues recorded for the three months ended September 30, 2019. The increase in net revenues was due to an increase in revenue in both our regenerative medicine product segment and the contract services segment.
Regenerative Medicine Product Segment
For the three-month period ended September 30, 2020, net revenues from the regenerative medicine product segment are $1.156 million, which represents an increase of $0.317 million or 38% from the $0.839 million of net revenues recorded for the three months ended September 30, 2019. This change is attributable to an increase of 51% in the number of paid cases from 81 in the third quarter of 2019 to 122 in the third quarter of 2020, and to a lesser extent the higher average revenue per paid case we experienced in the third quarter of 2020. Of SkinTE revenues for the third quarter, $0.639 million, or 55%, of net revenues was generated by two hospital systems, and one of these hospital systems alone was the source of 44% of the net revenues.
As noted above, we plan to submit to FDA an IND and BLA for SkinTE. We are in the process of preparing our IND submission and FDA has not asked us to stop marketing SkinTE pending submission or approval of a BLA. FDA announced in revised final guidance issued in July 2020 that it would generally observe its practice of enforcement discretion established in prior guidance unless there are reported or potential significant safety concerns until May 31, 2021. It is not customary for the FDA to allow wide-spread commercial sales of a product subject to a pending BLA, but we plan to discuss with FDA the possibility of continued marketing of SkinTE as a 361 HCT/P on a limited basis at a future meeting.
At the same time as the regulatory development described above, we were experiencing the effects of the COVID-19 pandemic. Throughout the country, healthcare assets in terms of facilities and providers were dedicated in March, April, and May to the care and treatment of COVID-19 patients while still trying to meet the acute and traumatic care needs of the general population. The substantial rise in COVID-19 cases since the spring of 2020 indicates that the dedication of resources to the treatment of COVID-19 will continue for the immediate future. Consequently, medical care and procedures that are considered “elective” have been put on hold in many regions across the country. We experienced the effect of the COVID-19 pandemic in our commercial operations in March 2020, when there was a drop in paid cases in that month followed by cancellation or postponement of SkinTE procedures scheduled for April 2020. This negative impact was most evident in chronic wounds without amputation risk and we expect this impact to continue in subsequent periods as long as the pandemic continues to surge.
We do not know, and cannot predict, whether FDA will allow us to continue selling SkinTE while our BLA is pending. Accordingly, management determined it was prudent under the circumstances discussed above to focus our commercialization effort on the territories where we have current and repeat users of SkinTE. As a result, in May 2020 we eliminated 40 positions in the regenerative medicine product segment, including 24 positions engaged in performing sales and marketing functions.
Contract Services Segment
For the three-month period ended September 30, 2020, net revenues from the contract services segment are $2.181 million, which represents an increase of $1.625 million or 292% from the $0.556 million of net revenues recorded for the three months ended September 30, 2019. This change is primarily attributable to the revenues generated by the new COVID-19 testing services offered by Arches. COVID-19 testing service contributed $1.751 million to net revenues in the third quarter of 2020 and the remainder was generated by our historical clinical service offerings. Net revenues from our historical clinical service offerings decreased from $0.556 million for the three months ended September 30, 2019 to $0.430 million for the three months ended September 30, 2020.
As noted above we began COVID-19 testing at the end of May 2020. At September 30, 2020, we hadwere obtained under 30-day renewable testing agreements with 29multiple nursing homeshome and three pharmaciespharmacy facilities in the northeast,state of New York controlled by a single company 29 of which are located(the “NY Client”). On March 26, 2021, we were advised by the NY Client it is adopting on-site employee testing at its facilities as allowed under new regulations in the state of New York. These 32 facilities accounted for $1.651 million, or 94%,Based on the number of COVID-19 testing revenues in the third quarter ended September 30, 2020, most of which was generated in New York. On May 10, 2020, the Governor of the State of New York issued an order requiring COVID-19 testing of all employees working in nursing homes within the state weekly, which has been renewed on a monthly basis. Previously the New York Governor issued an order, Executive Order 202.10 (the “Executive Order’) that, among other things, suspended the requirement that a laboratory outside New York obtain a clinical laboratory permit from New York State if the laboratory holds a CLIA certificate and is engaged to test for COVID-19 in specimens collected from persons in New York State. The Executive Order had a limited duration until April 22, 2020 but has been extended monthly and now expires December 3, 2020. We have not received any indication from the State of New York that the Executive Order will not be renewed in December 2020. Furthermore, our testing service agreementstests we performed for the 32 facilities controlled byNY Client in April 2021, we estimate a single company in the northeast are on a month-to-month basis.
On September 2, 2020, Arches entered into two agreements with Co-Diagnostics, Inc. (“Co-Diagnostics”). The COVID-19 Laboratory Services Agreement between the parties provides that Arches will perform specimen testing services for customers referred by Co-Diagnostics to Arches. Co-Diagnostics will arrange all logistics for delivering specimens to Arches for COVID-19 testing for those customersdecrease of Co-Diagnostics electing to use the service. Arches bills Co-Diagnostics for the testing services and Co-Diagnostics manages all customer billing. The Rental Agreement for LGC Genomics Oktopure Extraction Machine between Arches and Co-Diagnostics provides that Co-Diagnostics will make available to Arches the Oktopure high throughput extraction machine that Arches will use to perform COVID-19 testing. The term of the agreement is 12 months, requires Arches to use Co-Diagnostics tests exclusively in the machine, and establishes for Arches a minimum monthly purchase obligation, valued at approximately $1.1 million annually for Co-Diagnostics tests and related consumables used in the testing process.
Gross Profit
Cost of sales for the product segment as a percentage of product revenues was 18% in the third quarter of 2020 compared to 38% for the third quarter of 2019. Built in production capacity results in a lower incremental cost per unit as product sales increase. There was a reduction in staff during 2020 that reduced fixed overhead costs increasing gross profit. Cost of sales for the services segment as a percentage of service revenues was 59% in the third quarter of 2019 compared to 52% for the third quarter of 2020, which we primarily attribute to cost variations in the services provided by our historical clinical service business and by Arches including the new COVID-19 testing in the third quarter of 2020, which was not being performed in 2019. As a result of the changes75% in net revenues and cost of sales in both segments, the combined effect is that gross profit increased as a percentage higher than net revenues period over period from $0.750 milliontests performed for the three-month period ended September 30, 2019 to $1.985 million for the three-month period ended September 30, 2020, or an increase in gross profit of 165%.
Research and Development
For the three-month period ended September 30, 2020, we recorded research and development expenses totaling $2.698 million, which represents a decrease of $0.258 million, or 9%, from $2.956 million of research and development expenses for the three months ended September 30, 2019. There was a reduction in staff in research and development that reduced compensation and benefits costs by $0.443 million, which was offset by an increaseNY Client in the portion of allocated operating costs assigned to research and development.
General and Administrative Expenses
General and administrative expenses totaled $6.264 million for the three-month period ended September 30, 2020, which represents a decrease of $9.780 million as compared to $16.044 million of general and administrative expenses incurred during the three months ended September 30, 2019. The primary drivers for this decrease are a $3.167 million reduction in stock-based compensation expense, due to restricted stock and option forfeitures related to the reductions in force taken during 2020, a $2.888 million decrease in severance expense, a $1.684 million reduction in legal, accounting, and consulting fees, and a $2.414 million reduction in compensation-related expenses in the thirdsecond quarter of 20202021 compared to the thirdfirst quarter, and we cannot predict whether we will obtain any further business from the NY Client in future periods. We are a relatively unknown testing laboratory, so we have relied on word of 2019.
Salesmouth and Marketing
Salesmanagement relationships to connect with prospects and vied for new business on the basis of price and service. We cannot predict how well this marketing expenses totaled $1.606 millionapproach will work in finding new customers, how quickly we may be able to find new customers to replace the net revenues lost from the NY Client, or how much any such revenues may be. Even if we are able to find new customers for the three-month period ended September 30, 2020, which represents a decreaseCOVID-19 testing business there remain substantial uncertainties around the COVID-19 testing business due to rapid developments in testing and vaccines. We intend to carefully monitor the performance of $3.382 million, as compared to $4.988 millionour COVID-19 testing business and scale our laboratory testing operations accordingly.
Liquidity and Capital Resources
As of sales and marketing expenses incurred during the three months ended September 30, 2019. There was a reduction in staff that reduced compensation and benefits costs by $0.807 million and stock-based compensation expense of $0.231March 31, 2021, we had $37.2 million in the third quartercash and cash equivalents and working capital of 2020 compared to the third quarter of 2019. Furthermore,approximately $34.5 million. In January 2021, we recognizedraised an additional $17.7 million in gross proceeds before offering expenses in a reduction of marketingregistered direct offering and consultant spending of $1.452 million and travel expense of $0.232 million, and allocatedthrough a lower portion of operating costs to sales and marketing in the third quarter of 2020 compared to the third quarter of 2019. The contract service segment does not have a meaningful sales and marketing component to its business.warrant exercise agreement.
Comparison of the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.
For the Nine Months Ended | Increase (Decrease) | |||||||||||||||
(in thousands) | September 30, 2020 | September 30, 2019 | Amount | % | ||||||||||||
(Unaudited) | ||||||||||||||||
Net revenues | ||||||||||||||||
Products | $ | 2,528 | $ | 1,640 | $ | 888 | 54 | % | ||||||||
Services | 4,008 | 2,546 | 1,462 | 57 | % | |||||||||||
Total net revenues | 6,536 | 4,186 | 2,350 | 56 | % | |||||||||||
Cost of sales | ||||||||||||||||
Products | 825 | 930 | (105 | ) | (11 | )% | ||||||||||
Services | 1,925 | 1,087 | 838 | 77 | % | |||||||||||
Total cost of sales | 2,750 | 2,017 | 733 | 36 | % | |||||||||||
Gross profit | 3,786 | 2,169 | 1,617 | 75 | % | |||||||||||
Operating costs and expenses | ||||||||||||||||
Research and development | 9,235 | 13,072 | (3,837 | ) | (29 | )% | ||||||||||
General and administrative | 22,080 | 48,299 | (26,219 | ) | (54 | )% | ||||||||||
Sales and marketing | 7,324 | 12,922 | (5,598 | ) | (43 | )% | ||||||||||
Restructuring and other charges | 2,536 | – | 2,536 | * | ||||||||||||
Total operating costs and expenses | 41,175 | 74,293 | (33,118 | ) | (45 | )% | ||||||||||
Operating loss | (37,389 | ) | (72,124 | ) | 34,735 | (48 | )% | |||||||||
Other income (expense) | ||||||||||||||||
Change in fair value of common stock warrant liability | 4,444 | – | 4,444 | * | ||||||||||||
Interest income, net | (135 | ) | 126 | (261 | ) | (207 | )% | |||||||||
Other income, net | 282 | 650 | (368 | ) | (57 | )% | ||||||||||
Net loss | $ | (32,798 | ) | $ | (71,348 | ) | $ | 38,550 | (54 | )% |
Net Revenues
For the nine-month period ended September 30, 2020, we recorded net revenues of $6.536 million, which represents an increase of $2.350 million or 56% from the $4.186 million of net revenues recorded for the nine months ended September 30, 2019.
Regenerative Medicine Product Segment
Net revenues for SkinTE in the nine-month period ended September 30, 2020 increased by 54% over the comparable period in 2019 to $2.528 million for the nine months ended September 30, 2020, compared to $1.640 million for the nine months ended September 30, 2019. This change is attributable to an increase of 74% in the number of paid SkinTE cases from 168 in the first nine months of 2019 to 291 for the first nine months of 2020, and the higher average revenue per paid case we experienced in the second and third quarters of 2020. Of SkinTE revenues for the nine months ended September 30, 2020, $0.836 million, or 33%, of net revenues was generated by one hospital system.
As noted above, we plan to submit to FDA an IND and BLA for SkinTE. We are in the process of preparing our IND submission and FDA has not asked us to stop marketing SkinTE pending submission or approval of a BLA. FDA announced in revised final guidance issued in July 2020 that it would generally observe its practice of enforcement discretion established in prior guidance unless there are reported or potential significant safety concerns until May 31, 2021. It is not customary for the FDA to allow wide-spread commercial sales of a product subject to a pending BLA, but we plan to discuss with FDA the possibility of continued marketing of SkinTE as a 361 HCT/P on a limited basis at a future meeting.
27 |
AtIn the same time asfirst calendar quarter of 2021 the regulatory development describedgross profit on sales of SkinTE was $1.5 million, which contributed to covering our operating costs for the period. As discussed above, we were experiencingexpect SkinTE sales will be phased out in the effectssecond calendar quarter of 2021, so the COVID-19 pandemic. Throughoutcontribution of SkinTE sales to defraying our operating costs will be lower in the country, healthcare assetssecond quarter and SkinTE sales in termsthe third quarter of facilities and providers were dedicated in March, April, and May2021 are expected to the care and treatment of COVID-19 patients while still tryingbe nil. We plan to meet the acute and traumatic care needs of the general population. The substantial rise in COVID-19 cases since the spring of 2020 indicates that the dedication of resources to the treatment of COVID-19 will continue for the immediate future. Consequently, medical care and procedures that are considered “elective” have been put on hold in many regions across the country. We experiencedmitigate the effect of this lost revenue by eliminating staff and resources that supported the COVID-19 pandemic inSkinTE commercial effort. Nevertheless, the termination of our commercial operationsSkinTE operation in March 2020, when there was a dropthe second quarter could have an adverse effect on our working capital in paid cases infuture periods that month followed by cancellation or postponementwe cannot predict at this time.
In the first calendar quarter of SkinTE procedures scheduled2021 the gross profit from services amounted to approximately $1.1 million, which contributed to covering our operating costs for April 2020. This negative impact was most evident in chronic wounds without amputation risk andthe period. As discussed above, we expect this impactour service revenue will be substantially diminished on a go forward basis due to continuethe loss of business from our major COVID-19 testing client. We expect the loss of revenues in subsequent periods as long as the pandemic continues to surge.
We do not know,service segment will be significant in the second quarter of 2021, and we cannot predict whether FDAor to what extent our COVID-19 testing business will allow usrecover, if at all, in future periods, so the contribution of our services business to continue selling SkinTE whiledefraying our BLA is pending. Accordingly, management determined it was prudent under the circumstances discussed above to focus our commercialization effort on the territories where we have current and repeat users of SkinTE. As a result, in May 2020 we eliminated 40 positionsoperating costs will be lower in the regenerative medicine product segment, including 24 positions engaged in performing salessecond quarter and marketing functions.
Contract Services Segment
Net revenues for contractare unpredictable beyond June 30, 2021. We plan to mitigate the effect of this lost revenue by scaling staff and resources that support our laboratory and research services segmentto be commensurate with the amount of business we believe we can generate. Nevertheless, the loss of business in the nine months ended September 30, 2020 are $4.008 million compared to $2.546 million for the nine months ended September 30, 2019, which is an increasesecond quarter of 57% for the first nine months of 2020 over the comparable period in 2019. This change is attributable to net revenues generated by the new COVID-19 testing services offered by Arches. COVID-19 testing service contributed $2.462 million to net revenues for the contract services segment in the first nine months of 20202021 and the remainder was generated byuncertainty regarding future periods will likely have an adverse effect on our historical clinical service offerings. Net revenues from our historical clinical service offerings decreased from $2.546 million for the nine months ended September 30, 2019 to $1.546 million for the nine months ended September 30, 2020. As noted aboveworking capital in future periods that we began COVID-19 testingcannot predict at the end of May 2020. At September 30, 2020, we had testing agreements with 29 nursing homes and three pharmacies in the northeast, controlled by a single company, 29 of which are located in the state of New York. These 32 facilities accounted for accounted for $2.362 million, or 96%, of COVID-19 testing revenues for the nine-month ended September 30, 2020, most of which was generated in New York.this time.
Gross Profit
Cost of sales for the product segment as a percentage of product revenues was 57% in the first nine months of 2019 compared to 33% for the first nine months of 2020. Built in production capacity resulted in a lower incremental cost per unit as product sales increased in 2020. There was also a reduction in staff during 2020 that reduced fixed overhead costs increasing gross profit. Cost of sales for the services segment as a percentage of service revenues was 43% in the first nine months of 2019 compared to 48% for the first nine months of 2020, which we primarily attribute to the higher cost of sales for the COVID-19 testing service in the first nine months of 2020, which was not being performed in 2019. As a result of the changes in net revenues and cost of sales in both segments, the combined effect is that gross profit increased as a percentage higher than net revenues period over period from $2.169 million for the nine-month period ended September 30, 2019 to $3.786 million for the nine-month period ended September 30, 2020, or an increase in gross profit of 75%.
Research and Development
For the nine-month period ended September 30, 2020, we recorded research and development expenses totaling $9.235 million, which represents a decrease of $3.837 million, or 29%, from $13.072 million of research and development expenses for the nine months ended September 30, 2019. There was a reduction in staff in research and development that reduced compensation and benefits costs by $1.427 million and stock-based compensation expense decreased $1.646 million.
General and Administrative Expenses
General and administrative expenses totaled $22.080 million forWe believe the nine-month period ended September 30, 2020, which represents a decrease of $26.219 million as compared to $48.299 million of general and administrative expenses incurred during the nine months ended September 30, 2019. The primary driver for this decrease is a $15.876 million reduction in stock-based compensation expense due to restricted stock and option forfeitures in addition to lower stock price and option values in the first nine months of 2020 compared to the first nine months of 2019.In addition, there was a decrease of $2.631 million in legal and consulting expense, a reduction of $2.422 million in compensation and benefit expense, severance expense decreased by $2.386 million, and a reduction in travel expense of $0.848 million in the first nine months of 2020 compared to the first nine months of 2019.
Sales and Marketing
Sales and marketing expenses totaled $7.324 million for the nine-month period ended September 30, 2020, compared to $12.922 million of sales and marketing expenses incurred during the nine months ended September 30, 2019. There was a reduction in staff that reduced compensation and benefit costs by $1.540 million and stock-based compensation expense of $0.447 million for the first nine months of 2020 compared to the same period in 2019. In addition, we recognized a reduction of marketing and consultant spending of $3.169 million and travel expense of $0.843 million, offset by an increase in severance expense of $0.447 million in the first nine months of 2020 compared to the same period in 2019. The contract service segment does not have a meaningful sales and marketing component to its business.
Restructuring and Other Charges
Restructuring and other charges totaled $2.536 million for the nine-month period ended September 30, 2020. There were no restructuring and other charges for the nine-month period ended September 30, 2019. Management approved several actions designed to improve operational efficiency and financial results including a reduction in force taken during the first nine months of 2020 that increased severance expense by $1.007 million. Management also recorded $1.566 million of asset abandonments within the Company’s regenerative medicine business segment during the nine-month period ended September 30, 2020.
Liquidity and Capital Resources
As of September 30, 2020, our cash and cash equivalents totaled $23.186on our balance sheet will fund our business activities through the end of 2021 and into the third quarter of 2022. In the first quarter of 2021 cash used in operating activities was $6.6 million, or an average of $2.2 million per month. After our IND is filed and our working capital was $20.027then accepted by the FDA, we will move to begin clinical trials as soon as possible. Preliminary estimates indicate one clinical trial could cost approximately $5.0 million comparedover two years, and we believe we will need to cash and cash equivalents and short-term investments of $29.240 million and our working capital of $22.428 millionconduct at December 31, 2019. Our accumulated deficit at September 30, 2020, was $468.155 million.
On April 12, 2020, our subsidiary PolarityTE MD, Inc. (the “Borrower”) entered into a promissory note evidencing an unsecured loanleast two clinical trials for SkinTE. Clinical trials are the major expense we see in the amountnear and long term, and while we are pursuing clinical trials we will continue to incur the costs of $3,576,145 mademaintaining our business. In addition to us underclinical trials, the Paycheck Protection Program (the “Loan”). The Paycheck Protection Program (or “PPP”) was established under the Coronavirus Aid, Relief,most significant uses of cash to maintain our business going forward are compensation and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The Loancosts of occupying our facilities.
We will need to the Borrower was made through KeyBank, N.A., a national banking association (the “Lender”). The interest rate on the Loan is 1.00%. Beginning seven months from the date of the Loan the Borrower is required to make 24 monthly payments of principal and interest in the amount of $150,563. The promissory note evidencing the Loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or Lender, or breaching the terms of the Loan documents. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Borrower, or filing suit and obtaining judgment against the Borrower. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of a loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. No assurance is provided that the Borrower will obtain forgiveness of the Loan in whole or in part. On October 15, 2020, the Borrower applied to the Lender for forgiveness of the PPP loan described under Note 12 in its entirety based on the Borrower’s use of the PPP loan for payroll costs, rent, and utilities. On October 26, 2020, the Borrower was advised that the Lender approved the application and that the Lender was submitting the application to the SBA for a final decision. The SBA may take up to 90 days to make a decision on the Borrower’s forgiveness application. If the Borrower’s application for forgiveness of the PPP loan is not approved or approved only in part, it will be obligated to repay the unforgiven portion of the loan after the SBA makes its decision on the application for forgiveness.
On February 14, 2020, we completed an underwritten offering of 10,638,298 shares of our common stock and warrants to purchase 10,638,298 shares of common stock. Each common share and warrant were sold together for a combined public purchase price of $2.35 before underwriting discount and commission. Each warrant has an exercise price of $2.80 per share, was exercisable immediately, and will expire February 12, 2027. The net proceeds to the Company from the offering were $22.5 million, after offering expenses payable by the Company. In connection with this offering, the Company agreed not to sell any additional shares under the Keystone Purchase Agreement described below for a period of 90 days after the closing date of the offering.
We are party to an Equity Purchase Agreement dated as of December 5, 2019 (the “Purchase Agreement”), with Keystone Capital Partners, LLC (“Keystone”), pursuant to which Keystone has agreed to purchase from us up to $25.0 million of shares of our common stock, subject to certain limitations including a minimum purchase price of $2.00 per share, at our direction from time to time during the 36-month term of the Purchase Agreement. Concurrently, we entered into a Registration Rights Agreement with Keystone, pursuant to which we agreed to register the sales of our common stock pursuant to the Purchase Agreement under our existing shelf registration statement on Form S-3 or a new registration statement. During the period from the date of the Purchase Agreement to the date of this filing, we have sold 270,502 shares of our common stock under the Purchase Agreement generating total gross proceeds of $725,000 and have up to $24,275,000 available for future sale under the Purchase Agreement. In connection with the underwritten offering described in the preceding paragraph, we agreed not to sell any additional shares under the Purchase Agreement for a period of 90 days after the closing date of the offering.
As of the date of issuance of these unaudited interim condensed financial statements, the Company expects that its cash and cash equivalents of $23.186 million as of September 30, 2020, will not be sufficient to fund its current business plan including related operating expenses and capital expenditure requirements into the second quarter of 2021. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern as the Company does not believe that its cash and cash equivalents will be sufficient to fund such business plan for at least twelve months from the date of issuance of these interim financial statements. The Company plans to address this condition by raisingraise additional capital to finance its operations.fund our effort to obtain FDA approval of SkinTE and maintain our operations in the future. Although the Company haswe have been successful in raising capital in the past, financing may not be available on terms favorable to us, if at all, so there is no assurance that itwe will be successful in obtaining additional financing. Therefore, it is not considered probable, as defined in applicable accounting standards, that the Company’s plans to raise additional capital will alleviate the substantial doubt regarding its ability to continue as a going concern.
For the foreseeable future we will continue to pursue fundraising opportunities when available. If adequate funds are not available to us in the future, we may be required to delay, reduce the scope of, or eliminate one or more of our product development programsplans for obtaining regulatory approval for SkinTE or be unable to continue operations over a longer term. We plan to meet our future capital requirements primarily through issuances
Results of equity securities, debt financing, or strategic partnership arrangements. Failure to generate revenue or raise additional capital would adversely affect our ability to achieve our intended business objectivesOperations
Our actual capital requirements will depend on many factors, including the cost and timing of pursuing a biologics license application for SkinTE we intend to file with FDA, the cost and timing of pre-clinical and clinical trials, the cost of establishing and maintaining our facilities in compliance with cGMP regulations, and the cost and timing of advancing our product development initiatives related to SkinTE. Our forecastComparison of the period of time through which our financial resources will be adequatethree months ended March 31, 2021 compared to 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 10-Q 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. If we elect to pursue collaborative arrangements, the terms of such arrangements may require us to relinquish rights to certain of our technologies, products, or marketing territories. Our failure to raise additional capital when needed, and on acceptable terms, would require us to reduce our operating expenses and would limit our ability to develop our product candidates and to continue operations, any of which would have a material adverse effect on our business, financial condition, and results of operation.three months ended March 31, 2020.
For the Three Months Ended | Increase (Decrease) | |||||||||||||||
(in thousands) | March 31, 2021 | March 31, 2020 | Amount | % | ||||||||||||
(Unaudited) | ||||||||||||||||
Net revenues | ||||||||||||||||
Products | $ | 1,729 | $ | 428 | $ | 1,301 | 304 | % | ||||||||
Services | 2,980 | 505 | 2,475 | 490 | % | |||||||||||
Total net revenues | 4,709 | 933 | 3,776 | 405 | % | |||||||||||
Cost of sales | ||||||||||||||||
Products | 241 | 340 | (99 | ) | (29 | )% | ||||||||||
Services | 1,924 | 176 | 1,748 | 993 | % | |||||||||||
Total cost of sales | 2,165 | 516 | 1,649 | 320 | % | |||||||||||
Gross profit | 2,544 | 417 | 2,127 | 510 | % | |||||||||||
Operating costs and expenses | ||||||||||||||||
Research and development | 2,431 | 3,373 | (942 | ) | (28 | )% | ||||||||||
General and administrative | 6,371 | 10,605 | (4,234 | ) | (40 | )% | ||||||||||
Sales and marketing | 1,526 | 3,694 | (2,168 | ) | (59 | )% | ||||||||||
Restructuring and other charges | 425 | 452 | (27 | ) | (6 | )% | ||||||||||
Total operating costs and expenses | 10,753 | 18,124 | (7,371 | ) | (41 | )% | ||||||||||
Operating loss | (8,209 | ) | (17,707 | ) | 9,498 | (54 | )% | |||||||||
Other income (expense) | ||||||||||||||||
Change in fair value of common stock warrant liability | (4,027 | ) | 4,532 | (8,559 | ) | (189 | )% | |||||||||
Inducement loss on sale of liability classified warrants | (5,197 | ) | – | (5,197 | ) | * | ||||||||||
Interest income (expense), net | (38 | ) | (12 | ) | (26 | ) | 217 | % | ||||||||
Other income, net | 61 | 147 | (86 | ) | (59 | )% | ||||||||||
Net loss | $ | (17,410 | ) | $ | (13,040 | ) | $ | (4,370 | ) | 34 | % |
* Not meaningful
Net Revenues
Net revenues increased by 405% to $4.709 million for the three-month period ended March 31, 2021, compared to $0.933 million for the same period in 2020. The increase in net revenues for sale of products was the result of a sales strategy adopted in May 2020 to focus on regions and facilities where we had repeat users of SkinTE. During the first quarter of 2021 the average wound size treated with SkinTE was 637 cm2 compared to 62 cm2 in the first quarter of 2020, which corresponds with the difference in revenue between those periods. The increase in net revenues for services was the result of new COVID-19 testing services we began to offer through Arches at the end of May 2020, which we did not offer in the first three months of 2020.
Cost of Sales
Cost of sales increased by 320% to $2.165 million in 2021, which is largely attributable to the cost of sales for providing COVID-19 testing services we began to offer through Arches at the end of May 2020, which we did not offer in the first three months of 2020.
Operating Costs and Expenses
Total operating costs and expenses decreased to $10.753 million for the three-month period ended March 31, 2021, compared to $18.124 million for the same period in 2020, which is largely attributable to the substantial reduction in personnel effectuated in May 2020 that reduced salary and benefit costs across the Company. Salary and benefits totaled $3.862 million for the first three months of 2021 compared to $6.665 million for the same period in 2020. Severance expenses decreased from $0.495 million in the first quarter of 2020 to $0.004 million in the first quarter of 2021. Stock-based compensation decreased from $3.221 million in the first quarter of 2020 to $1.651 million in the first quarter of 2021. In addition to the reduction of salary and benefit costs, the following table sets forthsignificant changes also contributed to the primary sources and uses of cash for each period indicated:
Nine Months Ended | ||||||||
(in thousands) | September 30, 2020 | September 30, 2019 | ||||||
Net cash provided by (used in) | ||||||||
Operating activities | $ | (32,170 | ) | $ | (40,650 | ) | ||
Investing activities | 17,747 | (14,875 | ) | |||||
Financing activities | 27,391 | 27,125 | ||||||
Net increase/(decrease) in cash and cash equivalents | $ | 12,968 | $ | (28,400 | ) |
Cash useddecrease in operating activities
During the nine-month period ended September 30, 2020, net cash used incosts and expenses, which are a consequence of our reduction of personnel and adjustment of our operating activities was $32.170 million, which included $1.16 million of issuance fees related to the February equity raise. The cash usedthat began in operating activities was due to a net loss of $32.798 million plus $4.444 million due to remeasurement of the warrant liability arising from the underwritten offering of common stock and warrants in February 2020, which was offset by the non-cash expenses of $5.963 million for stock-based compensation expense.May 2020:
● | Travel and related costs decreased from $0.525 million in the first quarter of 2020 to $0.123 million in the first quarter of 2021; | |
● | Issuance costs, which are included in operating expenses, decreased from $1.156 million in the first quarter of 2020 to $0.824 million in the first quarter of 2021; | |
● | Consulting costs, including legal, accounting, and audit fees, decreased from $1.301 million in the first quarter of 2020 to $0.897 million in the first quarter of 2021; |
● | Promotional consulting and expense decreased from $0.701 million in the first quarter of 2020 to $0.045 million in the first quarter of 2021; and |
● | Lease expenses for our corporate office facility was $0.119 million in the first quarter of 2020, which did not recur in the first quarter of 2021 because the lease expired in 2020. |
During the nine-month period ended September 30, 2019, net cash used in operating activities was $40.650 million, which was due to a net loss of $71.348 million offset primarily by the non-cash expenses of $23.932 million for stock-based compensation expense.
Cash provided by (used in) investing activities
During the nine-month period ended September 30, 2020, net cash provided by investing activities was $17.747 million, which was due primarily to proceeds from the sale and maturities of available for sale securities.
During the nine-month period ended September 30, 2019, net cash used in investing activities was $14.875 million, which was due primarily due to purchases of available for sale securities.
Cash provided by financing activities
During the nine-month period ended September 30, 2020, net cash provided by financing activities was $27.391 million due to proceeds from financing arrangements and net proceeds received from the sale of common stock and warrants.
During the nine-month period ended September 30, 2019, net cash provided by financing activities was $27.125 million primarily due to proceeds received from the sale of common stock.
Critical Accounting Policies and Estimates
For a description of our significant accounting policies, see note 3 to our condensed consolidated financial statements.
Our discussion and analysis of the financial condition and results of operations is based upon our condensed 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 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 is the extent of progress toward completion of contracts, stock-based compensation, the valuation allowances for deferred tax benefits, and the valuation of tangible and intangible assets included in acquisitions. Actual results could differ from those estimates.
Revenue RecognitionIn connection with terminating commercial sales of SkinTE, the Company recorded as a restructuring charge a loss on impairment of property and equipment in the amount of $0.425 million during the first quarter of 2021, while the $0.452 million of restructuring and other charges in the first quarter of 2020 were severance costs arising from a reduction in force in March 2020.
Operating Loss and Net Loss
As a result of the developments described above, our operating loss decreased from an operating loss of $17.707 million for the three-month period ended March 31, 2020, to an operating loss of $8.209 million for the comparable period in 2021. Net loss, however, increased from $13.040 million for the three-month period ended March 31, 2020, to $17.410 million for the comparable period in 2021. The increase in net loss is attributable to a day one loss on warrants issued in January 2021 of approximately $5.0 million plus a loss on the change in fair value of common stock warrant liability of approximately $4.0 million in addition to the drivers previously noted. Warrants issued in connection with financings we completed in January 2021 are classified as liabilities and remeasured each period until settled or until classified as equity, which resulted in our recording a charge for common stock warrants of $9.224 million for the three months ended March 31, 2021. For additional information on the change in fair value of common stock warrant liability please see note 10 to the Condensed Consolidated Financial Statements (unaudited) included in this report.
The table below shows adjusted net loss, which is a non-GAAP measure that shows net loss before fair value adjustments relating to our common stock warrant liability and warrant inducement loss. We believe this measure is useful to investors because it eliminates the effect of non-operating items that can significantly fluctuate from period to period due to fair value remeasurements. For purposes of calculating non-GAAP per share metrics, the same denominator is used as that which would be used in calculating net loss per share under GAAP.
Adjusted Net Loss Attributable to Common Stockholders
(in thousands - unaudited non-GAAP measure)
For the Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
GAAP Net loss | $ | (17,410 | ) | $ | (13,040 | ) | ||
Change in fair value of common stock warrant liability | 4,027 | (4,532 | ) | |||||
Inducement loss on sale of liability classified warrants | 5,197 | – | ||||||
Non-GAAP adjusted net loss attributable to common stockholders | $ | (8,186 | ) | $ | (17,572 | ) | ||
GAAP net loss per share attributable to common stockholders | ||||||||
Basic | $ | (0.23 | ) | $ | (0.39 | ) | ||
Diluted | $ | (0.24 | ) | $ | (0.39 | ) | ||
Non-GAAP adjusted net loss per share attributable to common stockholders | ||||||||
Basic | $ | (0.11 | ) | $ | (0.53 | ) | ||
Diluted | $ | (0.12 | ) | $ | (0.53 | ) |
Critical Accounting Policies and Estimates
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expectsRecognition. With respect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
The Company records product revenues primarily from the sale of its regenerative tissue products. The Company sells its products to healthcare providers, primarily through direct sales representatives. Product revenues consists of a single performance obligation that the Company satisfies at a point in time. In general, the Company recognizes product revenue upon delivery to the customer.
The Company records service revenues from the sale of its preclinical researchcontract services and contract services. Preclinical research services includes delivery of preclinical studies and other research services to unrelated third parties. Serviceprovided by IBEX, revenues generally consist of a single performance obligation that the CompanyIBEX satisfies over time using an input method based on costs incurred to date relative to the total costs expected to be required to satisfy the performance obligation. The Company believesWe believe that this method provides a faithful depiction of the transfer of services over the term of the performance obligation based on the remaining services needed to satisfy the obligation. This requires the Company tothat our services personnel at IBEX make reasonable estimates of the extent of progress toward completion of the contract. Ascontract and, as a result, unbilled receivables and deferred revenue are recognized based on payment timing and work completed. Generally, a portion of the payment is due upfront and the remainder upon completion of the contract, with most contracts completing in less than a year. Contract services includes research and laboratory testing services to unrelated third parties on a contract basis. These customer contracts generally consist of a single performance obligation that the Company satisfies at a point in time. The Company recognizes revenue upon delivery of testing results to the customer.
Costs to obtain the contract are incurred for products revenues as they are shipped and are expensed as incurred.
Stock-Based Compensation
The Company measures. We measure all stock-based compensation to employees and non-employees using a fair value method and records such expense in research and development, general and administrative, and sales and marketing expenses. Compensation expense formethod. For stock options with graded vesting, is recognizedwe recognize compensation expense over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards.
awards based on the fair value on the date of grant. The fair value for options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the grant.grant commensurate with the expected term of the option. The volatility factor is determined based on the Company’sour historical stock prices. Forfeitures are recognized as they occur.
The fair value of restricted stock grants is measured based on the fair market value of the Company’sour common stock on the date of grant and amortized to compensation expense over the vesting period of, generally, six months to three years.
Accruals for Research and Development Expenses and Clinical Trials
As part of the process of preparing its financial statements, the Company is required to estimate its expenses resulting from its obligations under contracts with vendors, clinical research organizations and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment terms that do not match the periods over which materials or services are provided under such contracts. The Company’s objective is to reflect the appropriate expenses in its financial statements by matching those expenses with the period in which services are performed and efforts are expended. The Company accounts for these expenses according to the timing of various aspects of the expenses. The Company determines accrual estimates by taking into account discussion with applicable personnel and outside service providers as to the progress of clinical trials, or the services completed. During the course of a clinical trial, the Company adjusts its clinical expense recognition if actual results differ from its estimates. The Company makes estimates of its accrued expenses as of each balance sheet date based on the facts and circumstances known to it at that time. The Company’s clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in it reporting amounts that are too high or too low for any particular period.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including property and equipment, intangible assets and goodwill 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.
Common Stock and Warrant TransactionsLiability
. The Company issued units consisting of common stock and warrants and subsequently remeasured those warrants at fair value. Determining the fair value of the securities in these transactions requires significant judgment, including adjustments to quoted share prices and expectedcommon stock volatility. Such estimates may significantly impactwarrant liability is estimated using the Monte Carlo simulation model, which involves simulated future stock price amounts over the remaining life of the commitment. The fair value estimate is affected by our resultsstock price as well as estimated change of operations and losses applicable to common stockholders.control considerations.
Disclosure Regarding Forward-Looking Statements
Statements that are not historical facts contained in or incorporated by reference into thisThis Quarterly Report on Form 10-Q contains forward-looking statements. Risks and uncertainties are “forward-looking statements” withininherent in forward-looking statements. Furthermore, such statements may be based on assumptions that fail to materialize or prove incorrect. Consequently, our business development, operations, and results could differ materially from those expressed in forward-looking statements made in this Quarterly Report. We make such forward-looking statements pursuant to the meaning of the Private Securities Litigation Reform Act of 1995,safe harbor provisions in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-lookingAll statements involve risks and uncertainties that could cause actual results to differ from projected results. Theother than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “goal,“believe,” “seek,“contemplate,” “project,“continue,” “strategy,” “future,” “likely,” “may,” “should,” “will,” “believe,“could,” “estimate,” “expect,” “intend,” “may,” “plan,” “intend” and similar expressions and references to future periods, as they relate to us, are intended to identify“potential,” “predict,” “project,” “seek,” “should,” “target,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. We cannot assure you that any of our expectations will be realized. Forward-looking statements include, among others,but are not limited to, statements we make regarding:about:
● | the timing or success of obtaining regulatory licenses or approvals for marketing our products; | |
● | the initiation, timing, progress, and results of our pre-clinical studies or clinical trials; | |
● | sufficiency of our working capital to fund our operations over the next 12 months; | |
● | infrastructure required to support operations in future periods, including the expected costs thereof; | |
● | estimates associated with revenue recognition, asset impairments, and cash flows; | |
● | variance in our estimates of future operating costs; |
● | future vesting and forfeitures of compensatory equity awards; | |
● | the effectiveness of our disclosure controls and our internal control over financial reporting; | |
● | the impact of new accounting pronouncements; | |
● | size and growth of our | |
● | the initiation, timing, progress, and results of our |
Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, without limitation:
● | the ability to comply with regulations applicable to the manufacture | |
● | the ability to | |
● | the ability to | |
● | the scope of protection we can establish and maintain for intellectual property rights covering our product candidates and technology; | |
● | developments relating to our competitors and industry; | |
● | new discoveries or the development of new therapies or | |
● | outbreaks of disease, including the COVID-19 pandemic, and related stay-at-home orders, quarantine policies and restrictions on travel, trade, and business operations; | |
● | political and economic instability, whether resulting from natural disasters, wars, terrorism, pandemics, or other sources; | |
● | the ability to | |
● | the ability to find and retain skilled personnel; | |
● | the need for, and ability to obtain, additional financing in the future; | |
● | general economic conditions; |
31 |
● | inaccuracies in estimates of our expenses, future revenues, and capital requirements; | |
● | future accounting pronouncements; | |
● | unauthorized access to confidential information and data on our information technology systems and security and data breaches; and | |
● |
We undertakeForward-looking statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. Any forward-looking statement in this Quarterly Report on Form 10-Q and the documents incorporated by reference herein reflects our current view with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, industry, and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to publicly update or revise anythese forward-looking statements whether as a result offor any reason, even if new information futurebecomes available in the future.
This Quarterly Report on Form 10-Q also contains estimates, projections, and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties, and actual events or otherwise. All forward-looking statements arecircumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly qualifiedstated, we obtained this industry, business, market and other data from reports, research surveys, studies, and similar data prepared by these cautionary statements.market research firms and other third parties, industry, medical and general publications, government data, and similar sources.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Not applicable.
Item 4. Controls and Procedures
Our management, with the participation of our principal executive and financial officers, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2020,March 31, 2021, our principal executive and financial officers concluded that, as of such date, our disclosure controls and procedures were effective. There were no changes in our internal control over financial reporting during the three-month period ended September 30, 2020.March 31, 2021.
PART II. OTHER INFORMATION
Item 1A. Risk Factors
You should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and our Quarterly Reports on Form 10-Q for the periods ended March 31, 2020 and June 30, 2020, which could materially affect our business, financial position, or future results of operations. The risks described in that Annual Report and Quarterly Reports are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially, adversely affect our business, financial position, or future results of operations. The risk factor set forth below updates,
Item 2. Unregistered Sales of Equity Securities and should be read together with,Use of Proceeds
During the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and our Quarterly Reports on Form 10-Q for the periodsthree-month ended March 31, 2020 and June 30, 2020.
Risks Related2021, we withheld or acquired from employees shares of common stock to Our Business
Changessatisfy statutory withholding tax liability upon the vesting of share-based awards. The following table sets forth information on our acquisition of these shares for each month during the period in our relationships with any of our significant customers, including the loss or reduction in business from one or more of them, could have a material adverse effect on us.
Since the beginning of 2020 several factors have contributed to the concentration of net revenues among several customers in both the regenerative medicine product segment and the contract services segment.
Due to the shift in our regulatory approach with FDA we determined it was prudent to focus our commercialization effort on the territories where we have current and repeat users of SkinTE and reduce the number of employees performing sales and marketing functions. For the three months ended September 30, 2020, 55%, of net revenues from the regenerative medicine product segment was generated by two hospital systems, one of which was the source of 44% of the net revenues, and for the nine months ended September 30, 2020, 33% of net revenues was generated by one hospital system, which is the same system that was the major contributor in the three-month period ended September 30, 2020.
At September 30, 2020, we had testing agreements with 29 nursing homes and three pharmacies in the northeast, controlled by a single company, 29 of which are located in the state of New York. These 32 facilities accounted for 94% of COVID-19 testing revenues in the third quarter ended September 30, 2020, and 96% of COVID-19 testing revenues for the nine-month period then ended, most of which was generated in New York. Accordingly, most of this business is dependent on monthly renewal by the state of New York of an order suspending the regulatory requirement that a laboratory outside New York obtain a clinical laboratory permit before providing laboratory testing services in the state, New York State regulations mandating testing for nursing home employees, and our ability to compete with other laboratories that may offer similar services in the state of New York.acquisition occurred.
There is no agreement or arrangement that prevents our significant customers from reducing or ending purchases of our product or services at any time. Purchases in the regenerative medicine product segment by significant customers depends on the demand for SkinTE for patient care, which is not predictable, and our ability to continue offer SkinTE while our BLA is pending. Our COVID-19 testing business in New York facilities is dependent on New York State orders and regulations, which are subject to change at any time, and our ability to compete for the business on the basis of price and service. If the demand by one or more of our significant customers for our product or services significantly decreased or all or a portion of our business dealings or relationships with one or more significant customers were to terminate or be canceled, it could materially adversely affect us and our ability to defray operating expenses with net revenues generated by those customers, thereby increasing our need and dependence on financing activities to fund operations.
Issuer Purchases of Equity Securities
(a) | (b) | (c) | (d) | |||||||||
Period | Total number of shares (or units) purchased | Average price paid per share (or unit) | Total number of shares (or units) purchased as part of publicly announced plans or programs | Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs | ||||||||
January 2021 | 44,324 | $ | 1.08 | N/A | N/A | |||||||
February 2021 | 43,298 | $ | 1.26 | N/A | N/A | |||||||
March 2021 | 28,971 | $ | 1.25 | N/A | N/A | |||||||
Total | 116,593 | $ | 1.19 |
Item 6. Exhibits
Except as otherwise noted, the following exhibits are included in this filing:
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. | |
Date: | /s/ David Seaburg |
David Seaburg | |
Chief Executive Officer | |
Duly Authorized Officer | |
Date: | /s/ Jacob Patterson |
Jacob Patterson | |
Interim Chief Financial Officer | |
Chief Accounting Officer |