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~~

☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~September~~June 30, ~~2021~~2022

☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from __________________________________to___________________________________

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, UT 84104

(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)~~

(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		The 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~~August 5, ~~2021,~~2022, there were ~~81,932,523~~5,632,798 shares of the Registrant’s common stock outstanding.

INDEX

	Page
PART I - FINANCIAL INFORMATION	3

Item 1. Financial Statements:	3
Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2021,~~2022 and December 31, ~~2020~~2021 (unaudited)	3
Condensed Consolidated Statements of Operations ~~for the three~~ and ~~nine months ended September 30, 2021 and 2020 (unaudited)~~	4
~~Condensed Consolidated Statements of~~ Comprehensive Loss for the three and ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 ~~and 2020~~ (unaudited)	54
Condensed Consolidated Statements of Stockholders’ Equity for the three and ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 ~~and 2020~~ (unaudited)	5
Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 ~~and 2020~~ (unaudited)	76
Notes to Condensed Consolidated Financial Statements (unaudited)	87
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2730
Item 3. Quantitative and Qualitative Disclosures about Market Risk	3739
Item 4. Controls and Procedures	39
	37
PART II - OTHER INFORMATION

~~PART II - OTHER INFORMATION~~	38

~~Item 1. Legal Proceedings~~	38
Item 1A. Risk Factors	3839
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4740
Item 6. Exhibits	4842

SIGNATURES	4943

As used in this report, the terms “we,” “us,” “our,” “the Company,” and “PolarityTE” mean PolarityTE, Inc., a Delaware corporation, and our present, and as applicable our former, 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.

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)

							June 30, 2022			December 31, 2021
	September 30, 2021			December 31, 2020
ASSETS
Current assets
Cash and cash equivalents	$	27,351		$	25,522		$	20,518		$	19,375
Accounts receivable, net		1,186			3,819			–			978
Inventory		–			883
Assets held for sale								387			441
Prepaid expenses and other current assets		2,384			992			1,992			1,595
Total current assets		30,921			31,216			22,897			22,389
Property and equipment, net		8,025			10,550			3,670			6,923
Operating lease right-of-use assets		1,411			2,452			554			1,146
Intangible assets, net		400			542
Goodwill		278			278
Other assets		225			472			910			720
TOTAL ASSETS	$	41,260		$	45,510		$	28,031		$	31,178

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses	$	3,685		$	4,148		$	1,944		$	3,115
Other current liabilities		2,053			2,106			1,568			1,520
Current portion of long-term notes payable		–			2,059
Deferred revenue		255			168			–			74
Total current liabilities		5,993			8,481			3,512			4,709
Common stock warrant liability		7,705			5,975			4,222			6,844
Operating lease liabilities		226			1,476			63			43
Other long-term liabilities		435			723			188			338
Long-term notes payable		–			1,517
Total liabilities		14,359			18,172			7,985			11,934

Commitments and Contingencies (Note 14)		-			-
Commitments and Contingencies (Note 16)								-			-

STOCKHOLDERS’ EQUITY
Preferred stock - 25,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2021 and December 31, 2020		–			–
Common stock – $.001 par value; 250,000,000 shares authorized; 81,563,295 and 54,857,099 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively		82			55
Preferred stock – 25,000,000 shares authorized, 0 shares issued and outstanding at June 30, 2022 and December 31, 2021								–			–
Common stock - $.001 par value; 250,000,000 shares authorized; 4,971,236 and 3,299,379 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively^*								5			3
Additional paid-in capital		526,649			505,494			532,278			527,639
Accumulated deficit		(499,830	)		(478,211	)		(512,237	)		(508,398	)
Total stockholders’ equity		26,901			27,338			20,046			19,244
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	41,260		$	45,510		$	28,031		$	31,178

*	Giving retroactive effect to the 1-for-25 reverse stock split effectuated on May 16, 2022

The accompanying notes are an integral part of these condensed consolidated financial statements

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net revenues
Products $ – $ 1,156 $ 2,924 $ 2,528
Services 1,116 2,181 5,438 4,008
Total net revenues 1,116 3,337 8,362 6,536
Cost of sales
Products – 210 448 825
Services 634 1,142 3,275 1,925
Total cost of sales 634 1,352 3,723 2,750
Gross profit 482 1,985 4,639 3,786
Operating costs and expenses
Research and development 3,870 2,698 10,491 9,235
General and administrative 3,687 6,264 14,999 22,080
Sales and marketing 93 1,606 2,718 7,324
Restructuring and other charges 242 – 678 2,536
Total operating costs and expenses 7,892 10,568 28,886 41,175
Operating loss (7,410 ) (8,583 ) (24,247 ) (37,389 )
Other income (expenses)
Gain on extinguishment of debt – – 3,612 –
Change in fair value of common stock warrant liability 6,354 1,503 4,134 4,444
Inducement loss on sale of liability classified warrants – – (5,197 ) –
Interest expense, net (29 ) (58 ) (106 ) (135 )
Other income, net 64 57 185 282
Net loss $ (1,021 ) $ (7,081 ) $ (21,619 ) $ (32,798 )

Net loss per share attributable to common stockholders
Basic $ (0.01 ) $ (0.18 ) $ (0.27 ) $ (0.89 )
Diluted $ (0.01 ) $ (0.18 ) $ (0.27 ) $ (0.89 )
Weighted average shares outstanding
Basic 81,284,678 38,761,141 79,367,407 36,743,864
Diluted 81,754,705 38,761,141 79,419,667 36,743,864

	2022			2021			2022			2021
	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
Net revenues
Products	$	–		$	1,195		$	–		$	2,924
Services		73			1,342			814			4,322
Total net revenues		73			2,537			814			7,246
Cost of revenues
Products		–			207			–			448
Services		125			717			616			2,641
Total costs of revenues		125			924			616			3,089
Gross (loss) profit		(52	)		1,613			198			4,157
Operating costs and expenses
Research and development		3,078			4,190			5,938			6,621
General and administrative		3,562			4,941			9,771			11,312
Sales and marketing		–			1,099			–			2,625
Restructuring and other charges		38			11			38			436
Impairment of assets held for sale		–			–			54			–
Total operating costs and expenses		6,678			10,241			15,801			20,994
Operating loss		(6,730	)		(8,628	)		(15,603	)		(16,837	)
Other income (expense), net
Gain on extinguishment of debt		–			3,612			–			3,612
Change in fair value of common stock warrant liability		6,630			1,807			11,735			(2,220	)
Inducement loss on sale of liability classified warrants		–			–			–			(5,197	)
Interest expense, net		(14	)		(39	)		(29	)		(77	)
Other income, net		46			60			58			121
Net loss and comprehensive loss	$	(68	)	$	(3,188	)	$	(3,839	)	$	(20,598	)

Net loss per share attributable to common stockholders
Basic^*	$	(0.01	)	$	(0.99	)	$	(0.85	)	$	(6.57	)
Diluted^*	$	(0.49	)	$	(1.01	)	$	(1.37	)	$	(6.57	)
Weighted average shares outstanding
Basic^*		5,148,106			3,224,117			4,512,692			3,135,715
Diluted^*		5,418,552			3,246,490			4,803,671			3,135,715

*	Giving retroactive effect to the 1-for-25 reverse stock split effectuated on May 16, 2022

The accompanying notes are an integral part of these condensed consolidated financial statements

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE LOSS~~STOCKHOLDERS’ EQUITY

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

For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net loss $ (1,021 ) $ (7,081 ) $ (21,619 ) $ (32,798 )
Other comprehensive income/(loss):
Unrealized gain on available-for-sale securities – – – 11
Reclassification of realized gains included in net loss – – – (83 )
Comprehensive loss $ (1,021 ) $ (7,081 ) $ (21,619 ) $ (32,870 )

	Number			Amount		Number			*		Capital			Deficit			Equity
	For the Three and Six Months Ended June 30, 2022
	Convertible Preferred Stock					Common Stock*					Additional Paid-in			Accumulated			Total Stockholders’
	Number			Amount		Number			Amount		Capital			Deficit			Equity
Balance – December 31, 2021		–		$	–		3,299,379		$	3	$	527,639		$	(508,398	)	$	19,244
Issuance of preferred stock and warrants through underwritten offering, net of issuance costs of $184		5,000			–		–			–		1,685			–			1,685
Issuance of common stock upon conversion of preferred stock		(5,000	)		–		655,738			1		(1	)		–			–
Stock-based compensation expense		–			–		–			–		762			–			762
Vesting of restricted stock units		–			–		25,676			–		–			–			–
Shares withheld for tax withholding		–			–		(7,402	)		–		(127	)		–			(127	)
Net loss		–			–		–			–		–			(3,771	)		(3,771	)
Balance – March 31, 2022		–			–		3,973,391			4		529,958			(512,169	)		17,793
Issuance of common stock and pre-funded warrants through underwritten offering, net of issuance costs of $173		–			–		445,500			–		1,840			–			1,840
Issuance of common stock upon exercise of pre-funded warrants		–			–		488,659			1		–			–			1
Fractional shares issued for reverse stock split		–			–		17,024			–		–			–			–
Stock-based compensation expense		–			–		–			–		530			–			530
Purchase of ESPP Shares		–			–		1,800			–		2			–			2
Vesting of restricted stock units		–			–		58,738			–		–			–			–
Shares withheld for tax withholding		–			–		(13,876	)				(52	)					(52	)
Net loss		–			–		–			–		–			(68	)		(68	)
Balance – June 30, 2022		–		$	–		4,971,236		$	5	$	532,278		$	(512,237	)	$	20,046

					**
	For the Three and Six Months Ended June 30, 2021
	Common Stock*					Additional Paid-in			Accumulated			Total Stockholders’
	Number			Amount		Capital			Deficit			Equity
Balance – December 31, 2020		2,194,284		$	2	$	505,547		$	(478,211	)	$	27,338
Issuance of common stock and pre-funded warrants through underwritten offering, net of issuance costs of $114		266,800			–		1,255			–			1,255
Issuance of common stock upon exercise of warrants		428,542			1		6,670			–			6,671
Reclassification of warrant liability upon exercise		–			–		8,964			–			8,964
Issuance of common stock upon exercise of pre-funded warrants		306,358			–		8			–			8
Stock-based compensation expense		–			–		1,651			–			1,651
Stock option exercises		100			–		3			–			3
Vesting of restricted stock units		22,617			–		–			–			–
Shares withheld for tax withholding		(4,664	)		–		(139	)		–			(139	)
Forfeiture of restricted stock awards		(1,385	)		–		–			–			–
Net loss		–			–		–			(17,410	)		(17,410	)
Balance – March 31, 2021		3,212,652			3		523,959			(495,621	)		28,341
Beginning balance		3,212,652			3		523,959			(495,621	)		28,341
Stock-based compensation expense		–			–		1,640			–			1,640
Purchase of ESPP shares		1,970			–		28			–			28
Vesting of restricted stock units		17,366			–		–			–			–
Shares withheld for tax withholding		(2,290	)		–		(53	)		–			(53	)
Net loss		–			–		–			(3,188	)		(3,188	)
Balance – June 30, 2021		3,229,698		$	3	$	525,574		$	(498,809	)	$	26,768
Ending balance		3,229,698		$	3	$	525,574		$	(498,809	)	$	26,768

*	Giving retroactive effect to the 1-for-25 reverse stock split effectuated on May 16, 2022

The accompanying notes are an integral part of these condensed consolidated financial statements

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~STOCKHOLDERS’ EQUITY~~CASH FLOWS

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

For the Three and Nine Months Ended September 30, 2021
Common Stock Additional
Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders’
Number Amount Capital Income Deficit Equity
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 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
Issuance of common stock, net of issuance costs of $1,319 -
Issuance of common stock, net of issuance costs of $1,319, shares -
Stock-based compensation expense – – 1,651 - – 1,651
Purchase of ESPP shares -
Purchase of ESPP shares, shares -
Stock option exercises 2,500 – 3 - – 3
Vesting of restricted stock units 565,427 – – - – –
Shares withheld for tax withholding (116,593 ) – (139 ) - – (139 )
Forfeiture of restricted stock awards (34,620 ) – – - – –
Cancellation of restricted stock awards -
Cancellation of restricted stock awards, shares -
Other comprehensive loss -
Net loss – – – - (17,410 ) (17,410 )
Balance – March 31, 2021 80,316,309 $ 80 $ 523,882 - $ (495,621 ) $ 28,341
Stock-based compensation expense – – 1,640 - – 1,640
Purchase of ESPP shares 49,248 – 28 - – 28
Vesting of restricted stock units 434,144 1 (1 ) - – –
Shares withheld for tax withholding (57,258 ) – (53 ) - – (53 )
Net loss – – – - (3,188 ) (3,188 )
Balance – June 30, 2021 80,742,443 $ 81 $ 525,496 - $ (498,809 ) $ 26,768
Stock-based compensation expense – – 1,317 - – 1,317
Vesting of restricted stock units 1,025,865 1 (1 ) - – –
Shares withheld for tax withholding (205,013 ) – (163 ) - (163 )
Net loss – – – - (1,021 ) (1,021 )
Balance – September 30, 2021 81,563,295 $ 82 $ 526,649 - $ (499,830 ) $ 26,901

Number Amount Capital Income Deficit Equity
For the Three and Nine Months Ended September 30, 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
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 )
Cancellation 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
Beginning balance, value 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
Ending balance, value 38,912,005 $ 39 $ 492,676 $ – $ (468,155 ) $ 24,560

	2022			2021
	For the Six Months Ended June 30,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(3,839	)	$	(20,598	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		1,292			3,124
Depreciation and amortization		858			1,437
Impairment of assets held for sale		54			–
Amortization of intangible assets		–			95
Bad debt expense		–			134
Inventory write-off		–			697
Gain on extinguishment of debt – PPP loan		–			(3,612	)
Change in fair value of common stock warrant liability		(11,735	)		2,220
Inducement loss on sale of liability classified warrants		–			5,197
Loss on restructuring and other charges		–			269
(Gain) loss on sale of property and equipment		(36	)		7
Gain on sale of subsidiary and property		(32	)		–
Changes in operating assets and liabilities:
Accounts receivable		396			1,643
Inventory		–			110
Prepaid expenses and other current assets		(187	)		(1,294	)
Operating lease right-of-use assets		592			666
Other assets/liabilities, net		–			245
Accounts payable and accrued expenses		(1,015	)		(221	)
Other current liabilities		–			(14	)
Deferred revenue		(51	)		(82	)
Operating lease liabilities		(564	)		(728	)
Net cash used in operating activities		(14,267	)		(10,705	)
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Purchase of property and equipment		(31	)		(18	)
Proceeds from sale of property and equipment		165			10
Proceeds from sale of subsidiary and property, net of selling expenses and cash sold		2,327			–
Net cash provided by/(used in) investing activities		2,461			(8	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from insurance financing arrangements		1,027			1,028
Principal payments on term note payable and financing arrangements		(353	)		(359	)
Principal payments on financing leases		(186	)		(272	)
Net proceeds from the sale of common stock, warrants and pre-funded warrants		7,823			9,884
Proceeds from the sale of warrants		–			1,002
Proceeds from warrants exercised		–			6,671
Proceeds from pre-funded warrants exercised		1			8
Net proceeds from the sale of preferred stock and warrants		4,814			–
Cash paid for tax withholdings related to net share settlement		(179	)		(188	)
Proceeds from stock options exercised		–			3
Proceeds from ESPP purchase		2			28
Net cash provided by financing activities		12,949			17,805
Net increase in cash and cash equivalents		1,143			7,092
Cash and cash equivalents - beginning of period		19,375			25,522
Cash and cash equivalents - end of period	$	20,518		$	32,614

Supplemental cash flow information:
Cash paid for interest	$	39		$	66

Supplemental schedule of non-cash investing and financing activities:
Fair value of placement agent warrants issued in connection with offerings	$	417		$	838
Reclassification of warrant liability to stockholders’ equity upon exercise of warrant	$	–		$	8,964
Conversion of Series A and Series B preferred stock into common stock	$	16		$	–
Allocation of financing to warrant liability	$	9,113		$	8,629
Deferred and accrued offering costs	$	98		$	400
Sale of assets held for sale in exchange for a note receivable	$	400		$	–
Reclassification of lease deposit to short term	$	210		$	–

The accompanying notes are an integral part of these condensed consolidated financial statements

POLARITYTE, INC. AND SUBSIDIARIES

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(Unaudited, in thousands)~~

For the Nine Months Ended September 30,
2021 2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (21,619 ) $ (32,798 )
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense 4,389 5,963
Depreciation and amortization 2,083 2,337
Amortization of intangible assets 142 142
Amortization of debt discount – 17
Bad debt expense 99 –
Inventory write-off 747 –
Gain on extinguishment of debt – PPP loan (3,612 ) –
Change in fair value of common stock warrant liability (4,134 ) (4,444 )
Inducement loss on sale of liability classified warrants 5,197 –
Loss on restructuring and other charges 321 –
Loss on abandonment and disposal of property and equipment – 1,566
Loss on sale of property and equipment 7 –
Other non-cash adjustments – (21 )
Changes in operating assets and liabilities:
Accounts receivable 2,534 (1,648 )
Inventory 136 (655 )
Prepaid expenses and other current assets (1,392 ) (332 )
Operating lease right-of-use assets 1,011 1,348
Other assets 247 130
Accounts payable and accrued expenses (456 ) (2,349 )
Other current liabilities (29 ) –
Deferred revenue 87 (73 )
Operating lease liabilities (1,082 ) (1,353 )
Net cash used in operating activities (15,324 ) (32,170 )
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (18 ) (1,225 )
Proceeds from sale of property and equipment 23 –
Purchase of available-for-sale securities – (14,144 )
Proceeds from maturities of available-for-sale securities – 16,945
Proceeds from sale of available-for-sale securities – 16,171
Net cash provided by investing activities 5 17,747
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from term note payable and financing arrangements 1,028 4,630
Principal payments on term note payable and financing arrangements (708 ) (1,096 )
Principal payments on financing leases (413 ) (376 )
Net proceeds from the sale of common stock, warrants and pre-funded warrants 9,884 24,276
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 (355 ) (114 )
Proceeds from stock options exercised 3 31
Proceeds from ESPP purchase 28 40
Net cash provided by financing activities 17,148 27,391
Net increase in cash and cash equivalents 1,829 12,968
Cash and cash equivalents - beginning of period 25,522 10,218
Cash and cash equivalents - end of period $ 27,351 $ 23,186

Supplemental cash flow information:
Cash paid for interest $ 96 $ 139

Supplemental schedule of non-cash investing and financing activities:
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 $ –
Unpaid tax liability related to net share settlement $ – $ 5
Unpaid liability for acquisition of property and equipment $ – $ 10
Accrued offering costs $ 400 $ –
Allocation of proceeds to warrant liability $ 8,629 $ 11,677

~~The accompanying notes are an integral part of these condensed consolidated financial statements~~

~~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 clinical stage biotechnology company developing regenerative tissue products and biomaterials. The Company also ~~operates~~operated a laboratory testing and clinical research business ~~using equipment, personnel, and facilities it acquired to advance~~until the ~~development~~end of ~~regenerative tissue products.~~April 2022.

The Company’s first regenerative tissue product is SkinTE. In July 2021, the Company submitted an investigational new drug application (“IND”) for SkinTE to the United States Food and Drug Administration (the “FDA”) through its subsidiary, PolarityTE MD, Inc. Prior to June 1, 2021, the Company sold SkinTE under Section 361 of the Public Health Service Act in 2020 and into 2021 and, after the Company’s decision to file an IND under Section 351 of that Act, under an enforcement discretion position stated by the FDA in a regenerative medicine policy framework to help facilitate regenerative medicine therapies. The FDA’s stated period of enforcement discretion ended May 31, 2021. Consequently, the Company terminated commercial sales of SkinTE on May 31, 2021, ~~and~~ ceased its SkinTE commercial operations, and ~~has~~ transitioned to a clinical stage company pursuing an IND for SkinTE. As a result, there ~~are~~were no ~~revenues~~product sales from commercial SkinTE ~~sales~~ after June 2021. The only revenues recognized subsequent to June 2021 for SkinTE were nominal amounts collected on accounts for product shipped prior to the end of May 2021 that were not previously recognized because of concerns with collectability. No revenue for SkinTE was recognized during the three and six months ended June 30, 2022.

At the beginning of May 2018, the Company acquired a preclinical research and veterinary sciences business, which has ~~eliminated or reduced costs associated with commercial sale~~been used for preclinical studies on the Company’s regenerative tissue products and to offer preclinical research services to unrelated third parties on a contract basis. The Company sold the business at the end of April 2022 and ceased to recognize services revenues after the sale. Consequently, the Company is no longer engaged in any revenue generating business activity and its operations are now focused on advancing the IND for SkinTE.

The accompanying interim condensed consolidated financial statements of the Company are unaudited, but in the opinion of management, reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented. Accordingly, they do not include all information and notes required by accounting principles generally accepted ~~accounting principles~~in the United States of America (U.S. GAAP) for complete financial statements. The results of operations for interim periods are not necessarily indicative of results to be expected for the entire fiscal year. The balance sheet at December 31, ~~2020,~~2021, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by ~~accounting principles generally accepted in the United States of America (U.S. GAAP)~~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, ~~2020,~~2021, filed with the Securities and Exchange Commission on Form 10-K on March 30, ~~2021.~~2022.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

Use of estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Among the more significant estimates included in these financial statements is the extent of progress toward completion of contracts, stock-based compensation, the valuation allowance for deferred tax assets, the valuation of common stock warrant liabilities, and the impairment of property and equipment. Actual results could differ from those estimates.

Cash and cash equivalents. Cash equivalents consist of highly liquid investments with original maturities of three months or less from the date of purchase. As of ~~September~~June 30, ~~2021,~~2022, the Company did not hold any cash equivalents.

~~Inventory~~. 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. The Company recorded inventory charges of $~~0.7~~ ~~million for the nine months ended September 30, 2021, of which $0.3~~ ~~million and $0.4~~ ~~million were recorded in research and development and cost of sales, respectively, within the accompanying consolidated statement of operations.~~ ~~NaN~~ ~~inventory reserve was recorded as of September 30, 2021, or December 31, 2020.~~

Assets and Liabilities Held for Sale. Assets and liabilities to be disposed (“disposal group”) of by sale are reclassified into assets held for sale and liabilities held for sale on the Company’s condensed consolidated balance sheet. The reclassification occurs when an agreement to sell exists, or management has committed to a plan to sell the assets within one year. Disposal groups are measured at the lower of carrying value or fair value less costs to sell and are not depreciated or amortized. The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value of the disposal group.

Leases. The Company determines if an arrangement is a lease at inception. Right-of-use ~~(ROU)~~(“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Finance leases are reported in the condensed consolidated balance sheet in property and equipment and other current and long-term liabilities. The current portion of operating lease obligations are included in other current liabilities. The classification of the Company’s leases as operating or finance leases along with the initial measurement and recognition of the associated ROU assets and lease liabilities is performed at the lease commencement date. The measurement of lease liabilities is based on the present value of future lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The ROU asset is based on the measurement of the lease liability and also includes any lease payments made prior to or on lease commencement and excludes lease incentives and initial direct costs incurred, as applicable. The lease terms may include options to extend or terminate the lease when it is reasonably certain the Company will exercise any such options. Rent expense for the Company’s operating leases is recognized on a straight-line basis over the lease term. Amortization expense for the ROU asset associated with its finance leases is recognized on a straight-line basis over the term of the lease and interest expense associated with its finance leases is recognized on the balance of the lease liability using the effective interest method based on the estimated incremental borrowing rate.

The Company has lease agreements with lease and non-lease components. As allowed under ASC 842, the Company has elected not to separate lease and non-lease components for any leases involving real estate and office equipment classes of assets and, as a result, accounts for the lease and non-lease components as a single lease component. The Company has also elected not to apply the recognition requirement of ASC 842 to leases with a term of 12 months or less for all classes of assets.

Impairment of Long-Lived Assets. The Company reviews long-lived assets, including property and equipment for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows.

Revenue Recognition. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

The Company recorded product revenues primarily from the sale of SkinTE, its regenerative tissue product. When the Company marketed its SkinTE product, it was sold to healthcare providers (customers), primarily through direct sales representatives. Product revenues consisted of a single performance obligation that the Company ~~satisfies~~satisfied at a point in time. In general, the Company recognized product revenue upon delivery to the customer.

In the contract services segment, the Company ~~records~~recorded service revenues from the sale of its preclinical research services, which ~~includes~~included delivery of preclinical studies and other research services to unrelated third parties. Service revenues generally ~~consist~~consisted of a single performance obligation that the Company ~~satisfies~~satisfied over time using an input method based on costs incurred to date relative to the total costs expected to be required to satisfy the performance obligation. The Company believes that this method provides an appropriate measure of the transfer of services over the term of the performance obligation based on the remaining services needed to satisfy the obligation. This ~~requires~~required the Company to make reasonable estimates of the extent of progress toward completion of the contract. As a result, unbilled receivables and deferred revenue ~~are~~were recognized based on payment timing and work completed. Generally, a portion of the payment iswas due upfront and the remainder upon completion of the contract, with most contracts completing in less than a year. Contract services ~~include~~also included research and laboratory testing services to unrelated third parties on a contract basis. ~~These~~Due to the short-term nature of the services, these customer contracts generally ~~consist~~consisted of a single performance obligation that the Company ~~satisfies~~satisfied at a point in time. The Company ~~recognizes~~satisfied the single performance obligation and recognized revenue upon delivery of testing results to the customer. As of ~~September~~June 30, ~~2021,~~2022 and December 31, ~~2020,~~2021, the Company had unbilled receivables of $~~0.5~~0 ~~million~~ and $~~0.2~~0.5 million, respectively, and deferred revenue of $~~0.3~~0 ~~million~~ and $~~0.2~~0.1 million, respectively. ~~The unbilled receivables balance is included in consolidated accounts receivable.~~ Revenue of $~~0.2~~0.1 million was recognized during the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022 that was included in the deferred revenue balance as of December 31, ~~2020.~~2021.

Research and Development Expenses. Costs incurred for research and development are expensed as incurred. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities pursuant to executory contractual arrangements with third party research organizations are deferred and recognized as an expense as the related goods are delivered or the related services are performed.

Accruals for Clinical Trials. As part of the process of preparing its financial statements, the Company is required to estimate its expenses resulting from its obligations under contracts with vendors, clinical research organizations and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment terms that do not match the periods over which materials or services are provided under such contracts. The Company’s objective is to reflect the appropriate expenses in its financial statements by matching those expenses with the period in which services are performed and efforts are expended. The Company accounts for these expenses according to the timing of various aspects of the expenses. The Company determines accrual estimates by taking into account discussion with applicable personnel and outside service providers as to the progress of clinical trials, or the services completed. During the course of a clinical trial, the Company adjusts its clinical expense recognition if actual results differ from its estimates. The Company makes estimates of its accrued expenses as of each balance sheet date based on the facts and circumstances known to it at that time. The Company’s clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in it reporting amounts that are too high or too low for any particular period.

Common Stock Warrant Liability. The Company accounts for common stock warrants issued as freestanding instruments in accordance with applicable accounting guidance as either liabilities or as equity instruments depending on the specific terms of the warrant ~~agreements.~~agreement. Under certain change of control provisions, some warrants issued by the Company could require cash settlement which necessitates such warrants to be recorded as liabilities. Warrants classified as liabilities are remeasured at fair value each period until settled or until classified as equity.

Stock-Based Compensation. The Company measures all stock-based compensation to employees and non-employees using a fair value method and records such expense in general and administrative, research and development, and sales and marketing expenses. For stock options with graded vesting, the Company recognizes compensation expense over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards based on the fair value on the date of grant.

The fair value offor options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the grant commensurate with the expected term of the ~~option.~~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~~recognized as compensation expense over the vesting period of, generally, six months to three years.

Reverse Stock Split. On May 12, 2022, the Company’s Board of Directors approved a reverse stock split in the ratio of 1-for-25 (“Reverse Stock Split”). The Reverse Stock Split became effective as of May 16, 2022. Fractional shares resulting from the reverse stock split were rounded up to the nearest whole share, which resulted in the issuance of a total of 17,024 shares of common stock to implement the reverse stock split.

The Company accounted for the reverse stock split on a retrospective basis pursuant to ASC 260, Earnings Per Share. All issued and outstanding common stock, common stock warrants, stock option awards, exercise prices and per share data have been adjusted in these condensed consolidated financial statements, on a retrospective basis, to reflect the reverse stock split for all periods presented. The number of authorized shares and par value of the preferred stock and common stock were not adjusted because of the reverse stock split.

Net Loss Per Share. Basic net loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Gains on warrant liabilities are only considered dilutive when the average market price of the common stock during the period exceeds the exercise price of the warrants. All common stock warrants issued participate on a one-for-one basis with common stock in the distribution of dividends, if and when declared by the Board of Directors, on the Company’s common stock. For purposes of computing earnings per share (EPS), ~~these~~outstanding warrants and preferred stock are considered to participate with common stock in earnings of the Company. Therefore, the Company calculates basic and diluted EPS using the two-class method. Under the two-class method, net ~~income~~loss for the period is allocated between common stockholders and participating securities according to dividends declared and participation rights in undistributed ~~earnings.~~losses. No ~~income~~loss was allocated to the warrants or preferred stock for the three and ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 as ~~results of operations were~~the Company incurred a loss for each period and the warrant ~~holders~~and preferred stockholders are not required to absorb losses. The Company has issued pre-funded warrants from time to time at an exercise price of $~~0.001~~0.025 per share. The shares of common stock into which the pre-funded warrants may be exercised are considered outstanding for the purposes of computing basic earnings per share because the shares may be issued for little or no consideration, are fully vested, and are exercisable after the original issuance date.

~~Impairment of Long-Lived Assets~~. The Company reviews long-lived assets, including property and equipment, and intangible assets 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.

~~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 nine months ended September 30, 2021 and 2020.~~

~~Offering Costs.~~ The Company capitalizes direct and incremental costs (i.e., consisting of legal, accounting, and other fees and costs) associated with equity financings until such financings are consummated, at which time such costs are recorded in additional paid-in capital against the gross proceeds of the equity financings. If the related equity financing is abandoned, the previously deferred offering costs will be charged to expense in the period in which the offering is abandoned.

Recent Accounting Pronouncements

In June 2016, the ~~FASB~~Financial Accounting Standards Board (FASB) issued ~~ASU~~Accounting Standards Update (ASU) No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This standard iswas effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which defers the effective date of Topic 326. As a smaller reporting company, Topic 326 will now be effective for the Company beginning January 1, 2023. As such, the Company plans to adopt this ASU beginning January 1, 2023. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Those instruments that do not have a separately recognized embedded conversion feature will no longer recognize a debt issuance discount related to such a conversion feature and would recognize less interest expense on a periodic basis. It also removes from ASC 815-40-25-10 certain conditions for equity classification and amends certain guidance in ASC Topic 260 on the computation of EPS for convertible instruments and contracts in an entity’s own equity. An entity can use either a full or modified retrospective approach to adopt the ASU’s guidance. ~~As a smaller reporting company, the~~The Company ~~is required to adopt~~early adopted this ASU for the fiscal year beginning January 1, ~~2024, with early adoption permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.~~2022. The ~~Company is currently assessing the impact and timing of~~ adoption of this ~~ASU.~~ASU did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

1110

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, which specifies that the effects of modifications or exchanges of freestanding equity-classified written call options that remain equity after modification or exchange should be recognized depending on the substance of the transaction, whether it be a financing transaction to raise equity (topic 340), to raise or modify debt (topic 470 and 835), or other modifications or exchanges. If the modification or exchange does not fall under topics 340, 470, or 835, an entity may be required to account for the effects of such modifications or exchanges as dividends which should adjust net income (or loss) in the basic EPS calculation. The Company ~~is required to apply the amendments within~~adopted this ASU prospectively ~~to modifications or exchanges occurring on or after~~for the ~~effective date of the amendment. The Company plans to adopt this ASU on~~fiscal year beginning January 1, 2022. ~~The Company does not expect the adoption of the new guidance to have a significant impact 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, 2021. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

3. LIQUIDITY AND ~~NEED FOR ADDITIONAL CAPITAL~~GOING CONCERN

The Company is a clinical stage biotechnology company that has ~~experienced~~incurred recurring losses and negative cash ~~outflows~~flows from ~~operating activities.~~operations since commencing its biotechnology business in 2017. As of ~~September~~June 30, ~~2021,~~2022, the Company had an accumulated deficit of $~~499.8~~512.2 million. As of ~~September~~June 30, ~~2021,~~2022, the Company had cash and cash equivalents of $~~27.4~~20.5 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~~ ~~6,670,000~~ ~~shares of its common stock, par value $0.001~~ ~~per share, pre-funded warrants to purchase up to~~ ~~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 $~~1.100~~ ~~and for each pre-funded warrant and accompanying common warrant was $1.099. The pre-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 Company’s 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.~~ 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 the 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 the 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 offering, 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 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 new common warrants to purchase up to~~ ~~8,016,033~~ ~~shares of the Company’s common stock, par value $0.001~~ ~~per share, at a price of $0.125. Each new warrant is exercisable 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 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 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 25, 2021.~~

These financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and settle its liabilities in the normal course of business. The Company’s significant operating losses raise substantial doubt regarding the Company’s ability to continue as a going concern for at least one year from the date of issuance of these ~~condensed~~ consolidated financial statements. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might result from the outcome of this uncertainty. ~~The Company is a clinical stage biotechnology company that has historically incurred losses and negative cash flows.~~ Consequently, the future success of the Company depends on its ability to attract additional capital and, ultimately, on its ability to successfully complete the regulatory approval process for its product, SkinTE, and develop future profitable operations. The Company will seek additional capital through equity offerings or debt financing. However, such financing may not be available in the future on favorable terms, if at all.

4. FAIR VALUE

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

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

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

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

Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. There were no transfers within the hierarchy for any of the periods presented.

The following table sets forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy (in thousands):

SCHEDULE OF FAIR VALUE OF FINANCIAL INSTRUMENTS MEASURED ON RECURRING BASIS

	September 30, 2021								Level 1		Level 2		Level 3		Total
	Level 1		Level 2		Level 3		Total		June 30, 2022
Liabilities:
									Level 1		Level 2		Level 3		Total
Liabilities
Common stock warrant liability	$	–	$	–	$	7,705	$	7,705	$	–	$	–	$	4,222	$	4,222
Total	$	–	$	–	$	7,705	$	7,705	$	–	$	–	$	4,222	$	4,222

December 31, 2020
Level 1 Level 2 Level 3 Total
Liabilities:
Common stock warrant liability $ – $ – $ 5,975 $ 5,975
Total $ – $ – $ 5,975 $ 5,975

	December 31, 2021
	Level 1		Level 2		Level 3		Total
Liabilities
Common stock warrant liability	$	–	$	–	$	6,844	$	6,844
Total	$	–	$	–	$	6,844	$	6,844

The Company assesses its assets held for sale, long-lived assets, including property, plant, and equipment and ROU assets at fair value on a non-recurring basis. The Company reviews the carrying amounts of such assets when events indicate that their carrying amounts may not be recoverable. Any resulting impairment would require that the asset be recorded at its fair value. During the six months ended June 30, 2022, the Company recognized an impairment charge of $0.1 million related to equipment classified in assets held for sale. During the six months ended June 30, 2021, the Company recognized an impairment charge of $0.4 million related to property and equipment. As of each measurement date, the fair value of assets held for sale and property and equipment was determined utilizing Level 3 inputs and were based on a market approach. See Notes 7 and Note 15 for additional details.

The following table presents the change in fair value of the liability classified common stock warrants for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 (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 September 30, 2021		Fair Value at December 31, 2021		Initial Fair Value at Issuance		(Gain) Loss Upon Change in Fair Value			Liability Reduction Due to Exercises		Fair Value at June 30, 2022
Warrant liabilities
February 14, 2020 issuance	$	328	$	–	$	(6	)	$	–		$	322	$	291	$	–	$	(268	)	$	–	$	23
December 23, 2020 issuance		5,647		–		3,585			(8,964	)		268		239		–		(228	)		–		11
January 14, 2021 issuance		–		8,629		(4,858	)		–			3,771		3,345		–		(3,097	)		–		248
January 25, 2021 issuance		–		6,199		(2,855	)		–			3,344		2,969		–		(2,748	)		–		221
Inducement loss on initial fair value ⁽¹⁾		–		–		5,197			–			–
March 16, 2022 issuance														–		3,129		(2,905	)		–		224
June 8, 2022 issuance														–		5,984		(2,489	)		–		3,495
Total	$	5,975	$	14,828	$	1,063		$	(8,964	)	$	7,705	$	6,844	$	9,113	$	(11,735	)	$	–	$	4,222

The following table presents the change in fair value of the liability classified common stock warrants for the six months ended June 30, 2021 (in thousands):

	Fair Value at December 31, 2020		Initial Fair Value at Issuance		(Gain) Loss Upon Change in Fair Value			Liability Reduction Due to Exercises			Fair Value at June 30, 2021
Warrant liabilities
February 14, 2020 issuance	$	328	$	–	$	168		$	–		$	496
December 23, 2020 issuance		5,647		–		3,802			(8,964	)		485
January 14, 2021 issuance		–		8,629		(1,700	)		–			6,929
January 25, 2021 issuance⁽¹⁾		–		6,199		(50	)		–			6,149
Total	$	5,975	$	14,828	$	2,220		$	(8,964	)	$	14,059

(1)

Concurrent with the issuance of the January 25, 2021 warrants, upon the exercise of the December 23, 2020 warrants, an inducement loss of $5.2million was recorded during the six-month period ended June 30, 2021, as the fair value of the initial warrant liability for the new warrants of $6.2 million exceeded the gross proceeds received upon sale of the new warrants of approximately $1.0 ~~million~~million.

~~The following table presents the change in fair value of the liability classified common stock warrants for the nine months ended September 30, 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 September 30,
2020
Warrant liabilities
February 14, 2020 issuance $ – $ 11,677 $ (4,444 ) $ – $ 7,233

The Company uses the Monte Carlo simulation model to determine the fair value of the liability classified warrants. ~~Input assumptions used to measure the fair value of these freestanding instruments during the nine months ended September 30, 2021, are as follows:~~

~~SCHEDULE OF FAIR VALUE ASSUMPTIONS OF WARRANTS LIABILITY~~

		~~For the Nine Months ended September 30, 2021~~

~~Stock price~~	$	~~0.65~~ – ~~1.21~~
~~Exercise price~~	$	~~0.10~~ – ~~1.38~~
~~Risk-free rate~~		~~0.42~~ – ~~1.13~~	%
~~Volatility~~		~~99.0~~ – ~~102.8~~	%
~~Remaining term (years)~~		~~4.23~~ – ~~5.87~~

Input assumptions used to measure the fair value of these freestanding instruments ~~during the nine months ended September 30, 2020,~~ are as follows:

SCHEDULE OF FAIR VALUE ASSUMPTIONS OF WARRANTS LIABILITY

		For the Six Months ended
		June 30, 2022
Stock price	$	1.45 – 8.55
Exercise price	$	2.40 – 34.50
Risk-free rate		1.95 – 3.03	%
Volatility		98.4 – 123.6	%
Remaining term (years)		1.71 – 5.00

		For the Six Months ended
		June 30,2021
Stock price	$	25.50 – 30.25
Exercise price	$	2.50 – 34.50
Risk-free rate		0.42 – 1.13	%
Volatility		99.0 – 102.8	%
Remaining term (years)		4.48 – 5.87

5. ASSETS AND LIABILITIES HELD FOR SALE

For the Nine Months ended September 30,
2020
Stock price $ 1.04 – 1.69
Exercise price $ 2.80
Risk-free rate 0.41 – 1.51 %
Volatility 93.4 – 99.6 %
Remaining term (years) 6.37 – 6.99

In November 2021, the Company committed to a plan to sell a variety of lab equipment within the regenerative medicine products reporting segment. The lab equipment has been designated as held for sale and is presented as such within the condensed consolidated balance sheet as of December 31, 2021 and June 30, 2022. During the six months ended June 30, 2022 the Company recorded an impairment of $0.1 million related the lab equipment designated as held for sale within the regenerative medicine products reporting segment.

At the beginning of May 2018, the Company acquired a preclinical research and veterinary sciences business, which has been used for preclinical studies on the Company’s regenerative tissue products and to offer preclinical research services to unrelated third parties on a contract basis. The Company operated this business through its indirect subsidiary, IBEX Preclinical Research, Inc. (“IBEX”). Utah CRO Services, Inc., a Nevada corporation (“Utah CRO”), is a direct subsidiary of the Company and held all the outstanding capital stock of IBEX (the “IBEX Shares”). Utah CRO also holds all the member interest of IBEX Property LLC, a Nevada limited liability company (“IBEX Property”), that owned two unencumbered parcels of real property in Logan, Utah, consisting of approximately 1.75 combined gross acres of land, together with the buildings, structures, fixtures, and personal property (the “Property”), which was leased by IBEX Property to IBEX for IBEX to conduct its preclinical research and veterinary sciences business.

In March 2022, the Company reached a nonbinding understanding with an unrelated third party that contemplated the sale of IBEX, which operates within the contract services reporting segment, along with IBEX Property. The assets and liabilities related to IBEX were designated as held for sale. The Company measured the assets and liabilities held for sale at the lower of their carrying value or fair value less costs to sell. The operating results of IBEX did not qualify for reporting as discontinued operations.

1413

On April 14, 2022, Utah CRO entered into a Stock Purchase Agreement (the “Stock Agreement”) with an unrelated third party (“Buyer”), pursuant to which Utah CRO agreed to sell all the outstanding IBEX Shares to Buyer in exchange for an unsecured promissory note in the principal amount of $0.4 million bearing simple interest at the rate of 10% per annum with interest only payable on a quarterly basis and all principal and remaining accrued interest due on the five-year anniversary of the closing of the sale of the IBEX Shares to Buyer. Furthermore, on April 14, 2022, IBEX Property entered into a Real Estate Purchase and Sale Agreement (the “Real Estate Agreement”) with another unrelated third party (“Purchaser”) pursuant to which IBEX Property agreed to sell to Purchaser the Property at a gross purchase price of $2.8 million payable in cash at closing of the transaction. The Buyer and Purchaser are affiliates of each other as a result of common ownership. On April 28, 2022, the parties to the Stock Agreement and Real Estate Agreement closed the transactions contemplated thereby and on April 29, 2022, the Company received the promissory note described above in the principal amount of $0.4 million and net cash proceeds of $2.3 million, after deducting closing costs and advisory fees, from sale of the Property under the Real Estate Agreement. As of a result of this transaction, the Company recorded $0.4 million as a long-term note receivable in other assets within the accompanying condensed consolidated balance sheets as of June 30, 2022. As the sale price less cost to sell was greater than the carrying value of these assets the Company recognized an insignificant net gain on sale in the second quarter of fiscal year 2022 in other income, net within the accompanying condensed consolidated statement of operations and comprehensive loss for the three and six months ended June 30, 2022.

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

The following table presents the major components of prepaid expenses and other current assets (in thousands):

SCHEDULE OF PREPAID EXPENSE AND OTHER CURRENT ASSETS

	June 30, 2022		December 31, 2021
Other current receivable	$	104	$	67
Short term deposit		359		150
Prepaid insurance		1,015		239
Prepaid expenses		416		445
Deferred offering costs		98		694
Total prepaid expenses and other current assets	$	1,992	$	1,595

5.7. PROPERTY AND EQUIPMENT, NET

The following table presents the components of property and equipment, net (in thousands):

SCHEDULE OF PROPERTY AND EQUIPMENT, NET

	September 30, 2021			December 31, 2020			June 30, 2022			December 31, 2021
Machinery and equipment	$	11,113		$	12,232		$	7,460		$	8,502
Land and buildings		2,000			2,000			–			2,000
Computers and software		1,129			1,240			1,107			1,129
Leasehold improvements		2,107			2,107			2,038			2,107
Construction in progress		6			87			–			133
Furniture and equipment		144			148			119			123
Total property and equipment, gross		16,499			17,814			10,724			13,994
Accumulated depreciation and amortization		(8,474	)		(7,264	)
Accumulated depreciation								(7,054	)		(7,071	)
Total property and equipment, net	$	8,025		$	10,550		$	3,670		$	6,923

The Company sold SkinTE under Section 361 of the Public Health Service Act in 2020 and into 2021 and, after the Company’s decision to file an IND under Section 351 of that Act, under an enforcement discretion position stated by the FDA in a regenerative medicine policy framework to help facilitate regenerative medicine therapies. The FDA’s stated period of enforcement discretion ended May 31, 2021. Consequently, the Company terminated commercial sales of SkinTE on May 31, 2021, and ceased its SkinTE commercial operations. As a result, there are no ~~revenues~~product sales from commercial SkinTE ~~sales~~ after June 1, 2021 and the Company has eliminated or reduced costs associated with commercial sale of SkinTE. ~~At March 31, 2021, approximately $~~

~~3.0~~ ~~million of total property and equipment was related to commercial SkinTE operations, of which approximately $~~

~~2.5~~ ~~million was repurposed by the Company 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~~six months ended June 30, 2021. The impairment ~~charges~~charge occurred within the Company’s regenerative medicine products business segment and ~~are~~is included in restructuring and other charges within the accompanying condensed consolidated statement of operations and comprehensive loss for the ~~nine~~six months ended ~~September~~June 30, ~~2021. There was~~ 0 ~~impairment charge recorded during the third quarter of~~ 2021. See Note ~~13.~~15.

Depreciation and amortization expense for property and equipment, including assets acquired under financing leases was as follows (in thousands):

SCHEDULE OF DEPRECIATION AND AMORTIZATION EXPENSE

									2022		2021		2022		2021
	For the Three Months Ended				For the Nine Months Ended				For the Three Months Ended				For the Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2021		2020		2021		2020		2022		2021		2022		2021
General and administrative expense	$	71	$	402	$	667	$	1,202	$	12	$	292	$	61	$	596
Research and development expense		575		386		1,416		1,135		391		444		797		841
Total depreciation and amortization expense	$	646	$	788	$	2,083	$	2,337	$	403	$	736	$	858	$	1,437

6.8. LEASES

The Company leases facilities and certain equipment under noncancelable leases that expire at various dates through ~~June~~November 2024. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases may include options to extend or terminate the lease at the election of the Company. These optional periods have not been considered in the determination of the right-of-use-assets or lease liabilities associated with these leases as the Company did not consider it reasonably certain it would exercise the options.

Operating Leases

On December 27, 2017, the Company entered into a commercial lease agreement (the “Lease”) with Adcomp LLC ~~a Utah limited liability company,~~(the “Landlord”) pursuant to which the Company ~~leased~~leases approximately 178,528 rentable square feet of warehouse, manufacturing, office, and lab space in Salt Lake City, Utah (the “Property”) from the landlord. The initial term of the ~~lease~~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.~~years and an option to purchase the Property at a purchase price of $17.5 million. The initial base rent under ~~this lease~~the Lease is $98,190 per month ($0.55 per sq. ft.) for the first year of the initial lease term and increases ~~3.0%~~3.0% per annum ~~thereafter.~~thereafter. Because the rate implicit in the lease is not readily determinable, the Company has used an incremental borrowing rate of 10%10% to determine the present value of the lease payments.

On December 16, 2021, the Company gave written notice to the Landlord of its election to exercise the option to purchase the Property, and on March 14, 2022, the Company and Landlord entered into a definitive purchase and sale agreement that provides for a closing of the transaction on November 15, 2022 (the “Purchase Agreement”). In connection with exercising the option to purchase the Property, the Company made an earnest money deposit of $150,000 that may be refunded if closing conditions or contingencies running in the Company’s favor are not satisfied or the Landlord defaults in its obligations under the lease or the purchase agreement for the Property. On October 25, 2021, the Company signed a Purchase and Sale Agreement, the terms of which were finalized on December 10, 2021, and subsequently amended by Amendment No. 1 thereto dated March 15, 2022 (the “BCG Agreement”), with BCG Acquisitions LLC (“BCG”). Under the BCG Agreement the Company agreed to sell the Property to BCG or its assigns for $17.5 million after the Company’s purchase of the Property from the Landlord. Under the BCG Agreement, BCG made an initial earnest money deposit totaling $200,000, which the parties subsequently agreed to reduce to $150,000, that will be refunded if the Company is unable to complete the purchase of the Property from the Landlord under the Purchase Agreement on a timely basis, closing conditions or contingencies running in favor of BCG are not satisfied, or the Company defaults in its obligations under the BCG Agreement. Closing of the foregoing transactions are subject to a number of risks and uncertainties including, but not limited to, satisfaction of all closing conditions, including obtaining financing for the purchase, and closing on the purchase of the Property from the Landlord under the Purchase Agreement, and satisfaction of all closing conditions, including obtaining financing for the purchase, and closing on the sale of the Property to BCG under the BCG Agreement.

In April 2019, the Company entered into an operating lease to obtain 6,307 square feet of manufacturing, laboratory, and office space. The ~~original term of the~~ lease ~~expired in April 2024 and required~~provided for monthly lease payments subject to annual ~~increases.~~increases and had an expiration date in April 2024. During ~~the third quarter of~~ 2020, the Company initiated a business analysis to determine the long-term strategy of the remote facility and cost to remain operational. ~~During the fourth quarter of fiscal year 2020, it~~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 represented a triggering event requiring the long-lived assets attributable to the disposal group be assessed for impairment. Given the facts and circumstances, the Company determined that the carrying value of the related assets of the disposal group were not recoverable. As a result, the carrying values were reduced to $0 ~~as of December 31, 2020. During the second quarter of 2021, the~~The Company terminated the lease ~~effective~~on June 30, 2021.

In November 2021, the Company entered into an operating lease to obtain office equipment with Pacific Office Automation, Inc. The ~~Company recorded~~initial term of the lease is three years and it expires on November 2024. The initial base rent under this lease is $3,983 per month for the entire lease term and includes a ~~net gain on termination~~cash incentive of $~~0.3~~0.1 million ~~which was included~~. Because the rate implicit in ~~restructuring and other charges on~~ the ~~condensed consolidated statement~~lease is not readily determinable, the Company has used an incremental borrowing rate of ~~operations.~~7.42% to determine the present value of the lease payments.

Financing Leases

In November 2018 and April 2019, the Company entered into financing leases primarily for laboratory equipment used in research and development activities. The financing leases have remaining terms that range from less than 61 month to 3122 months as of ~~September~~June 30, ~~2021,~~2022 and include options to purchase equipment at the end of the lease. Because the rate implicit in the lease is not readily determinable, the Company has used an incremental borrowing rate of ~~approximately~~ 10% to determine the present value of the lease payments for these leases.

As of ~~September~~June 30, ~~2021,~~2022, the maturities of operating and finance lease liabilities were as follows (in thousands):

SCHEDULE OF OPERATING AND FINANCE LEASE LIABILITIES

Operating leases Finance leases
2021 (excluding the nine months ended September 30, 2021) $ 350 $ 164
2022 1,219 405
2023 3 336
2024 2 42
Total lease payments 1,574 947
Less:
Imputed interest (82 ) (93 )
Total $ 1,492 $ 854

	Operating leases			Finance leases
2022 (excluding the six months ended June 30, 2022)	$	576		$	161
2023		48			312
2024		42			42
Total lease payments		666			515
Less:
Imputed interest		(18	)		(40	)
Total	$	648		$	475

Supplemental balance sheet information related to leases was as follows (in thousands):

SCHEDULE OF SUPPLEMENTAL BALANCE SHEET INFORMATION RELATED TO FINANCE AND OPERATING LEASES

Finance leases

September 30, 2021 December 31, 2020
Finance lease right-of-use assets included within property and equipment, net $ 798 $ 1,301

Current finance lease liabilities included within other current liabilities $ 420 $ 556
Non-current finance lease liabilities included within other long-term liabilities 434 711
Total finance lease liabilities $ 854 $ 1,267

	June 30, 2022		December 31, 2021
Finance lease right-of-use assets included within property and equipment, net	$	355	$	461

Current finance lease liabilities included within other current liabilities	$	287	$	329
Non-current finance lease liabilities included within other long-term liabilities		188		338
Total	$	475	$	667

Operating leases

September 30, 2021 December 31, 2020
Current operating lease liabilities included within other current liabilities $ 1,266 $ 1,485
Operating lease liabilities – non current 226 1,476
Total operating lease liabilities $ 1,492 $ 2,961

	June 30, 2022		December 31, 2021
Current operating lease liabilities included within other current liabilities	$	585	$	1,169
Operating lease liabilities – non-current		63		43
Total	$	648	$	1,212

The components of lease expense were as follows (in thousands):

SUMMARY OF COMPONENTS OF LEASE EXPENSE

	2021		2020		2021		2020		2022		2021		2022		2021
	For the Three Months Ended				For the Nine Months Ended				For the Three Months Ended				For the Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Operating lease costs included within operating costs and expenses	$	385	$	531	$	1,172	$	1,635	$	318	$	393	$	636	$	787
Finance lease costs:
Amortization of right-of-use assets	$	163	$	175	$	491	$	524	$	50	$	163	$	101	$	328
Interest on lease liabilities		24		36		80		118		14		26		30		56
Total	$	187	$	211	$	571	$	642	$	64	$	189	$	131	$	384

Supplemental cash flow information related to leases was as follows (in thousands):

SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO LEASES

	2021		2020		2022		2021
	For the Nine Months Ended September 30,				For the Six Months Ended June 30,
	2021		2020		2022		2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash out flows from operating leases	$	1,243	$	1,640	$	608	$	849
Operating cash out flows from finance leases	$	80	$	118	$	30	$	56
Financing cash out flows from finance leases	$	413	$	376	$	186	$	272
Lease liabilities arising from obtaining right-of-use assets:
Remeasurement of operating lease liability due to lease modification/termination	$	386	$	131	$	–	$	386

As of ~~September~~June 30, ~~2021,~~2022 and December 31, ~~2020,~~2021, the weighted average remaining lease term for operating leases was ~~1.2~~0.7 and ~~2.1~~1.0 years, respectively, and the weighted average discount rate used for operating leases was ~~10.01~~9.63% and ~~9.75~~9.96%, respectively. As of ~~September~~June 30, ~~2021,~~2022 and December 31, ~~2020,~~2021, the weighted average remaining lease term for finance leases was ~~2.1~~1.7 and ~~2.6~~2.0 years, respectively, and the weighted average discount rate used for finance leases was ~~9.78~~9.63% ~~for both periods.~~, respectively.

7.9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The following table presents the major components of accounts payable and accrued expenses (in thousands):

SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES

	September 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Accounts payable	$	457	$	1,193	$	480	$	173
Salaries and other compensation		1,113		1,129		548		722
Legal and accounting		159		241		220		1,082
Accrued severance		64		330		1		111
Benefit plan accrual		565		659		66		102
Clinical trials		140		–		195		161
Accrued offering costs		400		–		–		400
Accrued property taxes						196		166
Other		787		596		238		198
Total accounts payable and accrued expenses	$	3,685	$	4,148	$	1,944	$	3,115

8.10. OTHER CURRENT LIABILITIES

The following table presents the major components of other current liabilities (in thousands):

SCHEDULE OF OTHER CURRENT LIABILITIES

	September 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Current finance lease liabilities	$	420	$	556	$	287	$	329
Current operating lease liabilities		1,266		1,485		585		1,169
Short-term financing arrangement		363		20		692		–
Other		4		45		4		22
Total other current liabilities	$	2,053	$	2,106	$	1,568	$	1,520

The short-term financing balance is related to a financing arrangement entered into during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 to fund an insurance contract. Under the financing arrangement, the amounts will be repaid in nine equal monthly installments, with an interest rate of 3.85%.

9.11. STOCK-BASED COMPENSATION

2020, 2019 and 2017 Equity Incentive Plans

2020 Plan

On October 25, 2019, the Company’s Board of Directors (the “Board”) approved the Company’s 2020 Stock Option and Incentive Plan (the “2020 Plan”). The 2020 Plan became effective on December 19, 2019, the date approved by the stockholders. The 2020 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, unrestricted stock awards, dividend equivalent rights, and cash-based awards to the Company’s employees, officers, directors, and consultants. The Board designated the Compensation Committee of the Board ~~will administer~~the administrator of the 2020 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to ~~7,191,917~~419,549 shares of common stock are issuable pursuant to awards under the 2020 Plan. No grants of awards may be made under the 2020 Plan after the later of December 19, 2029, or the tenth anniversary of the latest material amendment of the 2020 Plan and no grants of incentive stock options may be made after October 25, 2029. The 2020 Plan provides that effective on January 1 of each year the number of shares of common stock reserved and available for issuance under the 2020 Plan shall be cumulatively increased by the lesser of 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the 2020 plan administrator. Pursuant to the 2020 Plan, the number of shares of common stock available for issuance increased by 131,872 shares during January 2022. As of ~~September~~June 30, ~~2021,~~2022, the Company had ~~1,265,210~~166,878 shares available for future issuances under the 2020 Plan.

2019 Plan

On October 5, 2018, the Company’s Board approved the Company’s 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors, and consultants. The Board designated the Compensation Committee of the Board ~~will administer~~the administrator of the 2019 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to ~~3,000,000~~120,000 shares of common stock are issuable pursuant to awards under the 2019 Plan. Unless earlier terminated by the Board, the 2019 Plan shall terminate at the close of business on October 5, 2028. As of ~~September~~June 30, ~~2021,~~2022, the Company had ~~49,097~~2,374 shares available for future issuances under the 2019 Plan.

2017 Plan

On December 1, 2016, the ~~Company’s~~Company��s Board approved the Company’s 2017 Equity Incentive Plan (the “2017 Plan”). The purpose of the 2017 Plan is to promote the success of the Company and to increase stockholder value by providing an additional means through the grant of awards to attract, motivate, retain and reward selected employees, consultants and other eligible persons. The 2017 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors, and consultants. The Board designated the Compensation Committee of the Board ~~will administer~~the administrator of the 2017 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to ~~7,300,000~~292,000 shares of common stock are issuable pursuant to awards under the 2017 Plan. Unless earlier terminated by the Board, the 2017 Plan shall terminate at the close of business on December 1, 2026. As of ~~September~~June 30, ~~2021,~~2022, the Company had ~~211,134~~23,819 shares available for future issuances under the 2017 Plan.

A summary of the Company’s employee and non-employee stock option activity ~~for the nine months ended September 30, 2021,~~ is presented below:

SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY

Number of
Shares

Weighted-
Average
Exercise Price

Outstanding – December 31, 2020 4,794,567 $ 10.03
Granted 1,412,731 $ 1.29
Exercised (1) (2,500 ) $ 1.10
Forfeited (306,067 ) $ 11.19
Outstanding – September 30, 2021 5,898,731 $ 7.88
Options exercisable, September 30, 2021 4,613,866 $ 9.68

~~(1)~~

~~The number of exercised options includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements.~~

	Number of Shares			Weighted-Average Exercise Price
Outstanding – December 31, 2021		230,912		$	197.75
Granted		400		$	13.23
Forfeited		(25,167	)	$	264.34
Outstanding – June 30, 2022		206,145		$	189.16
Options exercisable, June 30, 2022		187,286		$	204.40

Employee Stock Purchase Plan (ESPP)

In May 2018, the Company adopted the Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved ~~500,000~~20,000 shares of common stock for purchase under the ESPP. The initial offering period began January 1, 2019, and ended on June 30, 2019, with the first purchase date. Subsequent offering periods will automatically commence on each January 1 and July 1 and will have a duration of six months ending with a purchase date June 30 and December 31 of each year. On each purchase date, ESPP participants will purchase shares of common stock at a price per share equal to 85% of the lesser of (1) the fair market value per share of the common stock on the offering date or (2) the fair market value of the common stock on the purchase date.

Restricted Stock

A summary of the Company’s employee and non-employee ~~restricted-stock~~restricted stock activity is presented below:

SCHEDULE OF SHARE-BASED COMPENSATION, RESTRICTED STOCK ACTIVITY

	Number of Shares ~~Shares~~
Unvested - December 31, ~~2020~~2021		~~3,468,969~~206,547
Granted		~~3,903,044~~–
Vested⁽¹⁾		(~~2,375,905~~88,946	)
Forfeited		(~~364,510~~7,384	)
Unvested – ~~September~~June 30, ~~2021~~2022		~~4,631,598~~110,217

(1)

The number of vested restricted stock units and awards includes shares that were withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements.

Stock-Based Compensation Expense

The stock-based compensation expense related to stock options, restricted stock awards, and the employee stock purchase plan was as follows (in thousands):

SCHEDULE OF SHARE-BASED COMPENSATION RELATED TO RESTRICTED STOCK AWARDS AND STOCK OPTIONS

	2021		2020		2021		2020
	For the Three Months Ended				For the Nine Months Ended				For the Three Months Ended				For the Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2021		2020		2021		2020		2022		2021		2022		2021
General and administrative expense	$	911	$	1,655	$	3,245	$	4,875	$	382	$	1,104	$	928	$	2,333
Research and development expense		354		388		950		755		148		273		364		596
Sales and marketing expense		–		136		194		333		–		96		–		195
Restructuring and other charges		52		–		219		–		–		167		–		167
Total stock-based compensation expense	$	1,317	$	2,179	$	4,608	$	5,963	$	530	$	1,640	$	1,292	$	3,291

~~10.~~12. ~~SALE OF COMMON STOCK, WARRANTS AND PRE-FUNDED WARRANTS~~STOCKHOLDERS’ EQUITY

December 2020 Offering

On ~~January 14, 2021,~~December 23, 2020, the Company completed a registered direct offering of ~~6,670,000~~218,000 shares of its common stock, par value $0.001 per share, pre-funded warrants to purchase up to ~~2,420,910~~209,522 shares of common stock and accompanying common warrants to purchase up to ~~9,090,910~~427,522 shares of common ~~stock.~~stock (the “December 2020 Warrants”). Each share of common stock and pre-funded warrant was sold together with a warrant. The combined offering price of each common stock share and accompanying warrant was $~~1.10~~18.7125 and for each pre-funded warrant and accompanying warrant was $~~1.099~~18.6875. The pre-funded warrants had an exercise price of $~~0.001~~0.025 each and were exercised in full in January 2021. Each warrant was exercisable for one share of the Company’s common stock at an exercise price of $15.60 per share. The warrants were immediately exercisable and expire five years from the date of issuance. The holder of the warrants could not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage could be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent for the registered direct offering warrants to purchase up to 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 25,651 shares of common stock). The placement agent warrants have substantially the same terms as the warrants, except that the placement agent warrants have an exercise price equal to 125% of the purchase price per share (or $23.39 per share). The net proceeds to the Company from the offering were $7.2 million, after offering expenses payable by the Company.

As the common stock warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the common stock warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $5.2 million and $0.3 million, respectively. Since the pre-funded warrants did not contain the same cash settlement provision, these warrants were classified as a component of stockholders’ equity within additional paid-in-capital. The pre-funded warrants are equity classified because they meet characteristics of the equity classification criteria. The total proceeds from the offering were first allocated to the liability classified warrants, based on their fair values, with the residual $2.5 million allocated on a relative fair value basis to the common stock and pre-funded common stock warrants. Issuance costs allocated to the equity classified pre-funded common stock warrants and common stock of $0.3 million were recorded as a reduction to paid-in capital. Issuance costs allocated to the liability classified warrants of $0.5 million were recorded as an expense.

January 2021 Offerings

On January 14, 2021, the Company completed a registered direct offering of 266,800 shares of its common stock, par value $0.001 per share, pre-funded warrants to purchase up to 96,836 shares of common stock and accompanying common warrants to purchase up to 363,636 shares of common stock (the “January 14 Warrants”). Each share of common stock and pre-funded warrant was sold together with a warrant. The combined offering price of each common stock share and accompanying warrant was $27.50 and for each pre-funded warrant and accompanying warrant was $27.475. The pre-funded warrants had an exercise price of $0.025 each and were exercised in full in January 2021. Each January 14 Warrant is exercisable for one share of the Company’s common stock at an exercise price of $~~1.20~~30.00 per share. The ~~warrants~~January 14 Warrants are immediately exercisable and will expire five years ~~years~~ from the date of issuance. The holder of the ~~warrants~~January 14 Warrants may not exercise any portion of ~~the~~such warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent warrants to purchase 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to ~~545,455~~21,818 shares of common stock). The placement agent warrants have substantially the same terms as the warrants, except that the placement agent warrants have an exercise price equal to ~~125~~125%% of the purchase price per share (or $~~1.375~~34.375 per share). The net proceeds to the Company from the offering were $9.2 million, after direct offering expenses of $0.8 million payable by the Company.

As the ~~common stock warrants~~January 14 Warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the ~~common stock warrants~~January 14 Warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $8.1 million and $0.5 million, respectively. Since the pre-funded warrants did not contain the same cash settlement provision, these warrants ~~were~~are classified as a component of stockholders’ equity within additional paid-in-capital. The pre-funded warrants were equity classified because they met characteristics of the equity classification criteria. The total proceeds from the offering were first allocated to the liability classified warrants, based on their ~~estimated~~ fair values, with the residual $1.4 million allocated on a relative fair value basis to the common stock and pre-funded common stock ~~warrants in equity.~~warrants. Issuance costs allocated to the equity classified pre-funded common stock warrants and common stock of $0.1 million were recorded as a reduction to ~~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 September 30, 2021, using the following inputs:

~~Accompanying common warrants:~~

~~SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON WARRANTS~~

January 14, 2021 September 30, 2021
Stock price $ 1.21 $ 0.65
Exercise price $ 1.20 $ 1.20
Risk-free rate 0.49 % 0.82 %
Volatility 100.1 % 99.7 %
Remaining term (years) 5.0 4.3

~~Placement agent warrants:~~

~~SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON WARRANTS~~

January 14, 2021 September 30, 2021
Stock price $ 1.21 $ 0.65
Exercise price $ 1.38 $ 1.38
Risk-free rate 0.49 % 0.82 %
Volatility 99.3 % 99.7 %
Remaining term (years) 5.0 4.3

On January 22, 2021, the Company entered into a letter agreement with the holder of warrants to exercise the warrants and purchase ~~10,688,043~~427,522 shares of common stock at an exercise price of $~~0.624~~15.60 per share that were issued to the holder in the registered direct offering that closed on December 23, 2020. Under the letter agreement the holder agreed to exercise the ~~10,688,043~~427,522 warrants in full and the Company agreed to issue and sell to the holder common warrants to purchase up to ~~8,016,033~~320,641 shares of the Company’s common stock, par value $0.001 per share, at a price of $~~0.125~~3.125 (the “January 25 Warrants”) (and together with the January 14 Warrants, the “Existing 2021 Warrants”). Each ~~warrant~~January 25 Warrant is exercisable for one share of Common Stock at an exercise price of ~~$1.20~~$30.00 per share. The ~~warrants~~January 25 Warrants are immediately exercisable and will expire five years from the date of issuance. A holder may not exercise any portion of the ~~warrants~~January 25 Warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent, warrants to purchase 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to~~480,962~~19,238 shares of common stock). The placement agent warrants have substantially the same terms as the new warrants. The ~~10,688,043~~427,522 warrants issued on December 23, 2020, were exercised on January 22, 2021, and closing of the offering occurred on January 25, 2021. The Company received gross proceeds of approximately $6.7 million from the exercise of the ~~existing warrants~~December 2020 Warrants and gross proceeds of approximately $1.0 million from the sale of the new warrants.

Immediately prior to the exercise of the existing ~~10,688,043~~427,522 liability classified ~~common stock warrants,~~December 2020 Warrants in January 2021, a remeasurement loss of $3.6 million was recorded. ~~The Company measured the fair value of the common stock warrants using the Monte Carlo simulation model on January 22, 2021, using the following inputs:~~

~~SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON WARRANTS~~

January 22, 2021
Stock price $ 1.05
Exercise price $ 0.62
Risk-free rate 0.43 %
Volatility 99.4 %
Remaining term (years) 4.9

As the new ~~common stock warrants~~January 25 Warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the new ~~common stock warrants~~January 25 Warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $5.8 million and $0.4 million, respectively. Cash issuance costs of $0.1 million were recorded as an expense.

March 2022 Offering

On March 16, 2022, the Company completed a registered direct offering of 3,000.000435 shares of Series A convertible preferred stock, 2,000.00029 shares of Series B convertible preferred stock and 655,738 warrants to purchase 655,738 shares of common stock (the “March 2022 Warrants”). Gross proceeds generated by the offering were $5.0 million. The exercise price of each warrant is $8.75 per share, the warrants become exercisable six months after the date of the offering and will expire two years from the offering date.

Concurrent with the closing of the offering on March 16, 2022, the Company modified the exercise price of the Existing 2021 Warrants. 363,636 warrants issued on January 14, 2021, and 320,641 warrants issued on January 25, 2021 were modified to reduce the exercise price from $30 to $8.75 per share. The exercise price of the placement agent warrants was not modified. The Existing 2021 Warrants remain outstanding and unexercised as of June 30, 2022.

The holders of Series A and Series B convertible preferred stock were entitled to receive dividend payments in the same form as dividends paid on shares of the common stock when, as and if such dividends were paid on shares of the common stock, on an if converted basis. In the event of a liquidation event, the holders of each series of convertible preferred stock were entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder of common stock would receive if the preferred stock were fully converted. Each share of preferred stock was convertible at any time after the offering at the option of the holder into a number of shares of the Company’s common stock, equal to $1,000 stated value per share, divided by the conversion price of $7.625. On March 17, 2022 all shares of Series B preferred stock were converted into 262,295 shares of common stock. On March 29, 2022, all shares of Series A preferred stock were converted into 393,443 shares of common stock.

The holder of the March 2022 Warrants may not exercise any portion of such warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company.

The Company also issued to designees of the placement agent warrants to purchase 5.0% of the aggregate number of March 2022 Warrants sold in the offering, or 32,787 warrants to purchase common stock. The placement agent warrants have substantially the same terms as the March 2022 Warrants, except that the placement agent warrants have an exercise price $9.525 per share, which is 125% of the price at which each share of preferred stock sold in the offering is convertible to common stock.

As the March 2022 Warrants and placement agent warrants could each require cash settlement in certain scenarios, the common stock warrants and placement agent warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $3.0 million and $0.1 million, respectively. The Series A and Series B preferred stock were equity classified because they met characteristics of the equity classification criteria. The total proceeds from the offering were first allocated to the liability classified warrants, based on their fair values, with the residual $1.9 million allocated to the preferred stock. The net proceeds to the Company from the offering were $4.5 million, after direct offering expenses of $0.2 attributable to equity classified preferred stock, which were recorded as a reduction to paid-in capital, and $0.3 million attributable to the liability classified March 2022 Warrants and private placement common stock warrants, which are included in general and administrative within the accompanying condensed consolidated statement of operations and comprehensive loss for the six months ended June 30, 2022.

June 2022 Offering

On June 5, 2022, the Company entered into a securities purchase agreement with a single healthcare-focused institutional investor for the purchase and sale of shares of its common stock (or pre-funded warrants in lieu thereof) in a registered direct offering. In a concurrent private placement (together with the registered direct offering, the “Offerings”), the Company entered into a separate securities purchase agreement with the same investor for the unregistered purchase and sale of shares of common stock (or pre-funded warrants in lieu thereof).

On June 8, 2022, the Company completed the registered direct offering of 445,500 shares of its common stock, par value $0.001 per share at a purchase price of $2.525 per share and 1,138,659 pre-funded warrants at a purchase price of $2.524 per warrant. The Company also sold 1,584,159 pre-funded warrants at a purchase price of $2.524 per warrant in the private placement offering. Each pre-funded warrant sold in the registered direct offering and private placement offering is exercisable for one share of common stock at an exercise price of $0.001 per share, is immediately exercisable, and will not expire until fully exercised. Under the securities purchase agreements for the Offerings, the Company agreed to issue to the investor in the Offerings unregistered preferred investment options (the “June 2022 Warrants”) to purchase up to an aggregate of 3,168,318 shares of common stock, which were issued at the closing of the Offerings. The June 2022 Warrants are exercisable for one share immediately upon issuance at an exercise price of $2.40 per share and will expire five yearsfrom the date of issuance. The holder of the pre-funded warrants sold in the registered direct offering has exercised 488,659 of such warrants in June 2022 leaving 5,402,477 pre-funded warrants and June 2022 Warrants that remain outstanding and unexercised as of June 30, 2022.The holder of the warrants may not exercise any portion of such warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent, warrants to purchase 5.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 158,416 shares of common stock).The placement agent warrants have substantially the same terms as the warrants, except that the placement agent warrants have an exercise price equal to 125% of the purchase price per share (or $3.156 per share). None of the placement agent warrants have been exercised as of June 30, 2022. The net proceeds to the Company from the offering were $7.3 million, after direct offering expenses of $0.7 million payable by the Company.

As the June 2022 Warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $5.7 million and $0.3 million, respectively. Since the pre-funded warrants did not contain the same cash settlement provision, these warrants are classified as a component of stockholders’ equity within additional paid-in-capital. The pre-funded warrants were equity classified because they met characteristics of the equity classification criteria. The total proceeds from the offering were first allocated to the liability classified warrants, based on their fair values, with the residual $2.0 million allocated on a relative fair value basis to the common stock and pre-funded common stock warrants. Issuance costs allocated to the equity classified pre-funded common stock warrants and common stock of $0.2 million were recorded as a reduction to paid-in capital. Issuance costs allocated to the liability classified warrants of $0.5 million were recorded as an expense.

The Company measured the fair value of the ~~accompanying~~ common ~~stock~~ warrants and placement agent ~~common stock~~ warrants using the Monte Carlo simulation model at issuance and again ~~at September~~on June 30, ~~2021,~~2022 using the following inputs:

~~Accompanying new common stock~~Common warrants:

SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF ~~COMMON~~ WARRANTS

	January 25, 2021			September 30, 2021			March 16, 2022			June 30, 2022
Stock price	$	1.02		$	0.65		$	8.55		$	1.45
Exercise price	$	1.20		$	1.20		$	8.75		$	8.75
Risk-free rate		0.42	%		0.83	%		1.95	%		2.89	%
Volatility		99.0	%		99.7	%		101.5	%		123.6	%
Remaining term (years)		5.0			4.3			2.0			1.71

	June 8, 2022			June 30, 2022
Stock price	$	2.30		$	1.45
Exercise price	$	2.40		$	2.40
Risk-free rate		3.03	%		3.01	%
Volatility		107.1	%		107.7	%
Remaining term (years)		5.0			4.94

2123

Placement agent warrants:

~~SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON WARRANTS~~

	January 22, 2021			September 30, 2021			March 16, 2022			June 30, 2022
Stock price	$	1.05		$	0.65		$	8.55		$	1.45
Exercise price	$	1.20		$	1.20		$	9.53		$	9.53
Risk-free rate		0.44	%		0.83	%		1.95	%		2.89	%
Volatility		99.6	%		99.7	%		101.5	%		123.6	%
Remaining term (years)		5.0			4.3			2.0			1.71

	June 8, 2022			June 30, 2022
Stock price	$	2.30		$	1.45
Exercise price	$	3.16		$	3.16
Risk-free rate		3.03	%		3.01	%
Volatility		107.1	%		107.7	%
Remaining term (years)		5.0			4.94

The following table summarizes warrant activity for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022:

SUMMARY OF WARRANT ACTIVITY

	Outstanding and exercisable December 31, 2020		Warrants Issued		Warrants Exercised			Outstanding and exercisable September 30, 2021		Outstanding December 31, 2021		Warrants Issued		Warrants Exercised		Outstanding June 30, 2022
Transaction
February 14, 2020 common warrants		565,000		–		(25,500	)		539,500		21,580		–		–		21,580
December 23, 2020 common warrants		10,688,043		–		(10,688,043	)		–
December 23, 2020 placement agent warrants		641,283		–		–			641,283		25,651		–		–		25,651
December 23, 2020 pre-funded warrants		5,238,043		–		(5,238,043	)		–
January 14, 2021 common warrants		–		9,090,910		–			9,090,910		363,636		–		–		363,636
January 14, 2021 placement agent warrants		–		545,455		–			545,455		21,818		–		–		21,818
January 14, 2021 pre-funded warrants		–		2,420,910		(2,420,910	)		–
January 25, 2021 common warrants		–		8,016,033		–			8,016,033		320,641		–		–		320,641
January 22, 2021 placement agent warrants		–		480,962		–			480,962		19,238		–		–		19,238
March 16, 2022 common warrants											–		655,738		–		655,738
March 16, 2022 placement agent warrants											–		32,787		–		32,787
June 8, 2022 common warrants											–		3,168,318		–		3,168,318
June 8, 2022 placement agent warrants											–		158,416		–		158,416
Total		17,132,369		20,554,270		(18,372,496	)		19,314,143		772,564		4,015,259		–		4,787,823

On March 30, 2021, the Company entered into a sales agreement (“Sales Agreement”) with ~~Cantor Fitzgerald & Co.~~an investment banking firm to sell shares of common stock having aggregate sales proceeds of up to $50.0 million, from time to time, through an “at the market” equity offering program under which ~~Cantor Fitzgerald & Co. will~~the investment banking firm would act as sales agent. On February 28, 2022, the Company exercised its right to terminate the Sales Agreement and was obligated to make a one-time payment to the investment banking firm of $0.4 million. As a result of ~~September~~the termination of the Sales Agreement, the Company expensed previously capitalized deferred offering costs of $0.7 million which are included in general and administrative expense within the accompanying condensed consolidated statement of operations and comprehensive loss for the six months ended June 30, ~~2021, no~~2022. No common stock ~~had been sold.~~was sold under the Sales Agreement.

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.

~~11.~~13. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

The following tables present reconciliations for the numerators and denominators of basic and diluted net loss per share:

SCHEDULE OF EARNINGS PER SHARE, BASIC AND DILUTED

September 30, September 30, September 30, September 30,
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
Numerator: 2021 2020 2021 2020
Net loss $ (1,021 ) $ (7,081 ) $ (21,619 ) $ (32,798 )
Less: Gain from change in fair value of warrant liabilities (174 ) – (27 ) –
Net loss available to common stockholders $ (1,195 ) $ (7,081 ) $ (21,646 ) $ (32,798 )

	2022			2021			2022			2021
	For the Three Months Ended						For the Six Months Ended
	June 30,			June 30,			June 30,			June 30,
Numerator:	2022			2021			2022			2021
Net loss, primary	$	(68	)	$	(3,188	)	$	(3,839	)	$	(20,598	)
Less: gain from change in fair value of warrant liabilities		(2,578	)		(107	)		(2,757	)		–
Net loss, diluted	$	(2,646	)	$	(3,295	)	$	(6,596	)	$	(20,598	)

									2022		2021		2022		2021
	For the Three Months Ended				For the Nine Months Ended				For the Three Months Ended				For the Six Months Ended
	September 30,		September 30,		September 30,		September 30,		June 30,		June 30,		June 30,		June 30,
Denominator:	2021		2020		2021		2020		2022		2021		2022		2021
Basic weighted average number of common shares (1)		81,284,678		38,761,141		79,367,407		36,743,864		5,148,106		3,224,117		4,512,692		3,135,715
Incremental shares from assumed exercise of warrants		470,027		–		52,260		–
Potentially dilutive effect of warrants										270,446		22,373		290,979		–
Diluted weighted average number of common shares		81,754,705		38,761,141		79,419,667		36,743,864		5,418,552		3,246,490		4,803,671		3,135,715

(1)

In December 2020, ~~and~~ January 2021, and June 2022, the Company sold pre-funded warrants to purchase up to ~~5,238,043~~209,522, 96,836, and ~~2,420,910~~2,722,818 shares of common stock, respectively. The shares of common stock associated with the pre-funded warrants are considered outstanding for the purposes of computing earnings per share prior to exercise because the shares may be issued for little or no consideration, are fully vested, and are exercisable after the original issuance date. The pre-funded warrants sold in December 2020 and January 2021 were exercised ~~during~~in January 2021 and 488,659 of the ~~period~~pre-funded warrants sold in June 2022 were exercised in June 2022 and included in the denominator for the period of time the warrants were outstanding.

The following outstanding potentially dilutive ~~securities~~shares have been excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect:

SCHEDULE OF ANTI-DILUTIVE POTENTIAL SHARES OUTSTANDING ACTIVITY

	For the Three Months Ended				For the Nine Months Ended				2022		2021		2022		2021
	September 30,		September 30,		September 30,		September 30,		For the Three Months Ended				For the Six Months Ended
	2021		2020		2021		2020		June 30,		June 30,		June 30,		June 30,
Stock Options		5,898,731		5,038,914		5,898,731		5,038,914
									2022		2021		2022		2021
Stock options										206,145		237,609		206,145		237,609
Restricted stock		4,631,598		3,874,945		4,631,598		3,874,945		110,217		217,349		110,217		217,349
Common stock warrants		18,774,643		10,638,298		18,672,860		10,638,298		1,439,510		725,334		1,439,510		772,566
Shares committed under ESPP		27,197		–		27,197		–

~~12.~~

14. DEBT

PPP Loan

On April 12, 2020, our subsidiary PolarityTE MD, Inc. (the “Borrower”) entered into a promissory note evidencing an unsecured loan in the amount of $3,576,145 made to it under the Paycheck Protection Program (the “Loan”). The Paycheck Protection Program (or “PPP”) was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The Loan to the Borrower was made through KeyBank, N.A., a national banking association (the “Lender”). The interest rate on the Loan is 1.00%. Beginning seven months from the date of the Loan the Borrower is required to make 24 monthly payments of principal and interest in the amount of $150,563. The promissory note evidencing the Loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or Lender, or breaching the terms of the Loan documents. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Borrower, or filing suit and obtaining judgment against the Borrower. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of a loan granted under the PPP. On October 15, 2020, the Borrower applied to the Lender for forgiveness of the PPP ~~loan~~Loan in its entirety based on the Borrower’s use of the PPP ~~loan~~Loan for payroll costs, rent, and utilities. In June of 2021, the Company received notice of forgiveness of the PPP ~~loan~~Loan in whole and the Lender was paid by the SBA, including all accrued unpaid interest. The Company recorded the forgiveness of $3.6 million of principal and accrued interest, which were included in gain on extinguishment of debt on the ~~condensed~~ consolidated statement of operations and comprehensive loss for the ~~nine~~six months ended ~~September~~June 30, 2021.

On September 17, 2021, the Company received notice from the Lender that the SBA is continuing to review the PPP Loan. As part of this review, the SBA requested documents that the Company is required to maintain but may not have been required to submit with its application for the PPP Loan. These documents included an affiliation worksheet showing the relationship between the Company and ~~PTE-MD~~Borrower and affiliated subsidiaries, documents showing the use of the PPP Loan proceeds, documents showing the calculation of the loan amount requested in the Company’s loan application, federal tax returns, and documents showing employee compensation information. The Company submitted the documents to the SBA through the Lender on September 28, 2021.

~~13.~~ ~~RESTRUCTURING AND OTHER CHARGES~~ There has been no additional communication from the SBA through the date of filing.

15. RESTRUCTURING

As discussed in Note 5,7, the Company decided to file an IND in the second half of 2021, cease commercial sales of SkinTE by May 31, 2021, and wind down its SkinTE commercial operations. As a result, management approved several actions as part of a restructuring plan. ~~Costs associated with~~During the first quarter of 2021, the Company recorded $0.4 million of restructuring ~~plan were~~ ~~included in restructuring and other~~ charges ~~on the condensed consolidated statement of operations.~~

~~The Company evaluated the future use of its commercial~~related to property and equipment ~~and recorded an impairment charge of approximately $0.4~~ ~~million for the three months ended March 31, 2021. No property and equipment impairment charges were recorded during the three months ended June 30, 2021 or the three months ended September 30, 2021.~~ impairment. The Company recognized $~~0.2~~0.1 ~~million and $0.4~~ million of expense related to employee severance and benefit arrangements for the three and ~~nine month periods~~six months ended ~~September~~June 30, 2021. ~~Remaining severance costs will be paid by the end of the fourth quarter of 2021.~~ The Company also recognized incremental expense of $0.2 million for the ~~nine month period~~three and six months ended ~~September~~June 30, 2021 related to the remeasurement of employee stock options that were modified due to restructuring. ~~Lastly,~~Further, during the second quarter of 2021 and effective June 30, 2021, the Company terminated a lease which included manufacturing, laboratory, and office ~~space. The Company~~space and recorded a net gain on termination of $0.3 ~~million which was included~~ million. During the three and six months ended June 30, 2022, the Company recognized nominal expenses related to employee severance due to a reduction of headcount in ~~restructuring~~the Company’s research and ~~other charges on the condensed consolidated statement of operations during the second quarter of 2021.~~development department.

16. COMMITMENTS AND CONTINGENCIES

~~14.~~ ~~COMMITMENTS AND CONTINGENCIES~~

~~Commitments~~Contingencies

On September 2, 2020, Arches Research, Inc., a subsidiary of PolarityTE, Inc. (“Arches”) entered into two agreements with Co-Diagnostics, Inc. (“Co-Diagnostics”). The COVID-19 Laboratory Services Agreement between the parties provided that Arches would perform specimen testing services for customers referred by Co-Diagnostics to Arches. Co-Diagnostics would arrange all logistics for delivering specimens to Arches for COVID-19 testing for those customers of Co-Diagnostics electing to use the service. Arches would bill Co-Diagnostics for the testing servicesSecurities Class Action and Co-Diagnostics would manage all customer billing. The Rental Agreement for LGC Genomics Oktopure Extraction Machine between Arches and Co-Diagnostics provided that Co-Diagnostics would make available to Arches the Oktopure high throughput extraction machine that Arches will use to perform COVID-19 testing. The term of the rental agreement was 12 months and required Arches to use Co-Diagnostics tests exclusively in the machine. In the second quarter of 2021, the rental agreement was amended to remove the minimum monthly purchase obligation of reagents and was replaced by a $~~3,300~~ monthly rental fee. The COVID-19 Laboratory Services Agreement could be canceled by the Company at any time by providing 60 days written notice, and the Rental Agreement could be canceled at any time by written notice given within 60 days after termination of the Laboratory Services Agreement. On May 27, 2021, the Company gave written notice to Co-Diagnostics of termination of the COVID-19 Laboratory Services Agreement, so the last day of that agreement was July 26, 2021, and no longer in effect on July 27, 2021. On July 27, 2021, the Company gave written notice to Co-Diagnostics of termination of the Rental Agreement, so the last day of that agreement was July 29, 2021.

On June 25, 2021, the Company entered into a statement of work with a contract research organization to provide services for a proposed clinical trial described as a multi-center, prospective, randomized controlled trial evaluating the effects of SkinTE in the treatment of full-thickness diabetic foot ulcers at a cost of approximately $~~5.1~~ ~~million consisting of $3.1~~ ~~million of service fees and $2.0~~ ~~million of estimated costs. In July 2021 the Company prepaid 10% of the total cost recited in the work order, or $0.5~~ million, which will be applied to payment of the final invoice under the work order. Over the approximately three-year term of the clinical trial the service provider shall submit to the Company for payment invoices on a monthly basis for units of work stated in the work order that are completed and billable expenses incurred. During the three-month period ended September 30, 2021, the Company received invoices for work performed and expenses incurred totalling $~~0.2~~ ~~million. Either party may terminate the agreement without cause on 60 days’ notice to the other party.~~

~~Legal Proceedings~~Derivative Lawsuits

On September 24, 2021, a class action complaint alleging violations of the Federal securities laws was filed in the United States District Court, District of Utah, by Marc Richfield against the Company and ~~two present~~certain officers ~~and one former officer~~ of the Company, Case No. 2:~~21-cv-00561-DAO~~21-cv-00561-BSJ. The Court subsequently appointed a Lead Plaintiff and ordered the Lead Plaintiff to file an amended Complaint by February 7, 2022, which was extended to February 21, 2022. The Lead Plaintiff filed an amended complaint on February 21, 2022, against the Company, two current officers of the Company, and three former officers of the Company (the “Complaint”). The Complaint alleges that during the period from January 30, 2018, through November 9, 2021, the defendants made or were responsible for, disseminating information to the public through reports filed with the Securities and Exchange Commission and other channels that contained material misstatements or omissions in violation of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 adopted thereunder. Specifically, the Complaint alleges that the defendants misrepresented or failed to disclose that: (i) the ~~IND for the~~ Company’s product, SkinTE, ~~filed with~~was improperly registered as a 361 HCT/P under Section 361 of the Public Health Service Act and that, as a result, the Company’s ability to commercialize SkinTE as a 361 HCT/P was not sustainable because it was inevitable SkinTE would need to be registered under Section 351 of the Public Health Service Act; (ii) the Company characterized itself as a commercial stage company when it knew sales of SkinTE as a 361 HCT/P were unsustainable and that, as a result, it would need to file an IND and become a development stage company; (iii) issues arising from an FDA inspection of the Company’s facility in July 2018, were not resolved even though the Company stated they were resolved; and (iv) the IND for SkinTE was deficient with respect to certain chemistry, manufacturing, and control ~~items; (ii)~~items, including items identified by the FDA in July 2018, and as a result it was unlikely that the FDA would approve the IND in the form it was originally filed. The Company filed a motion to dismiss the complaint for failure to state a claim, on April 22, 2022. The Lead Plaintiff filed its ~~current form; (iii) accordingly,~~memorandum in opposition to the Company’s motion to dismiss on July 18, 2022. The Company ~~had materially overstated~~is required to file its reply memorandum to the ~~likelihood that~~Lead Plaintiff’s opposition memorandum by August 11, 2022, and oral argument on the ~~SkinTE IND would obtain FDA approval;~~motion to dismiss is scheduled for September 8, 2022. We cannot predict when the Court may issue its decision. The Company believes the allegations in the Complaint are without merit, and ~~(iv) as a result,~~intends to defend the ~~public statements regarding the IND were materially false and misleading.~~litigation, vigorously. At this early stage of the proceedings, ~~the Company has not yet filed any pleading responding to the complaint and is~~we are unable to make any prediction regarding the outcome of the litigation.

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 stated above, at September 30, 2021, the Company was not party to any legal or arbitration proceedings that may have significant effects on its financial position or results of operations. No governmental proceedings are pending or, to the Company’s knowledge, contemplated against the Company. The Company is not a party to any material proceedings in which any director, member of senior management or affiliate of the Company’s is either a party adverse to the Company or its subsidiaries or has a material interest adverse to the Company or its subsidiaries.

~~15.~~ ~~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 $~~1,500,000~~ ~~in cash on October 1, 2019 and an additional $1,500,000~~ ~~in cash in equal monthly installments beginning November 1, 2019 and ending April 1, 2021. In addition, the Company agreed to award to Dr. Lough~~ ~~200,000~~ restricted stock units that vest in 18 equal monthly installments beginning October 1, 2019. As of September 30, 2021, the Company has no remaining liability related to future cash payments under the agreement. The fair value of the restricted stock units was $~~0.8~~ ~~million and was fully expensed upon Dr. Lough’s termination.~~

~~In October 2018, the Company entered into an office lease covering approximately~~ ~~7,250~~ ~~square feet of rental space in the building located at 40 West 57th Street in New York City.~~ ~~The lease is for a term of three years. The annual lease rate is $~~60 ~~per square foot.~~ Initially the Company will occupy and pay 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 it 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. The Company is using 1,099 square feet, and Cohen LLC is using approximately 3,648 square feet as of September 30, 2021. The monthly lease payment for 4,747 square feet is $~~23,737~~. Of this amount $18,243 is allocated pro rata to Cohen, LLC based on square footage occupied. Additional lease charges for operating expenses and taxes are allocated under the sublease based on the ratio of rent paid by the Company and Cohen LLC to total rent. Once the space is 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 $52,000~~ ~~of sublease income for the three months ended September 30, 2021 and 2020, respectively, and $165,000~~ ~~and $184,000~~ for the nine months ended September 30, 2021 and 2020, respectively. The sublease income is included in other income, net in the statement of operations. As of September 30, 2021, and December 31, 2020, there were 0 ~~amounts due from the related party under this agreement.~~

2526

~~16.~~ ~~SEGMENT REPORTING~~

~~Reportable segments are presented in a manner consistent with the internal reporting provided to the chief operating decision maker (CODM), the Chief Executive Officer of the Company.~~

The CODM allocates resources to and assesses the performance of each segment using information about its revenue and operating income (loss). These measures are presented in the following tables (in thousands).

~~SCHEDULE OF SEGMENT INFORMATION~~

For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net revenues by segment:
Reportable segments:
Regenerative medicine $ – $ 1,156 $ 2,924 $ 2,528
Contract services 1,116 2,181 5,438 4,008
Total net revenues $ 1,116 $ 3,337 $ 8,362 $ 6,536

Net (loss)/income by segment:
Reportable segments:
Regenerative medicine $ (972 ) $ (7,246 ) $ (21,903 ) $ (32,516 )
Contract services (49 ) 165 284 (282 )
Total net loss $ (1,021 ) $ (7,081 ) $ (21,619 ) $ (32,798 )

~~17.~~ ~~SUBSEQUENT EVENTS~~

The Company planned to vacate the rental space in the building located at 40 West 57th Street in New York City when the office lease described in Note 15, above, was scheduled to expire on October 31, 2021. Cohen LLC wished to remain in the space, so the Company assigned the lease for the space to Cohen LLC under an agreement that relieved the Company of any further liability under the lease, made Cohen LLC the tenant under the lease, and provided for Cohen LLC’s month-to-month tenancy after October 31, 2021. The landlord consented to the assignment and was a party to the agreement.

On October 25, 2021, a stockholder derivative complaint alleging violations of the Federal securities laws was filed in the United States District Court, District of Utah, by Steven Battams against the Company, each member of the Board of directors, and two officers of the Company, Case No. 2:21-cv-00632-DBB (the “Stockholder Derivative Complaint”). The Stockholder Derivative Complaint alleges that the defendants made, or were responsible for, disseminating information to the public through reports filed with the Securities and Exchange Commission and other channels that contained material misstatements or omissions in violation of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 adopted thereunder. Specifically, the Stockholder Derivative Complaint alleges that the defendants misrepresented or failed to disclose that: (i) the IND for the Company’s product, SkinTE, filed with the FDA was deficient with respect to certain chemistry, manufacturing, and control items; (ii) as a result, it was unlikely that the FDA would approve the IND in its current form; (iii) accordingly, the Company had materially overstated the likelihood that the SkinTE IND would obtain FDA approval; and ~~(iv)~~(Iv) as a result, the public statements regarding the IND were materially false and misleading. The parties have stipulated to stay the Stockholder Derivative Complaint until (1) the dismissal of the Complaint described above, (2) denial of a motion to dismiss the Complaint, or (3) notice is given that any party is withdrawing its consent to the stipulated stay of the Stockholder Derivative Complaint proceeding. At this early stage of the proceedings the Company ~~has not yet filed any pleading responding to the complaint and~~ is unable to make any prediction regarding the outcome of the litigation.

Other Matters

In the ordinary course of business, the Company may become involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements, employment, regulatory compliance, and other matters. Except as noted above, at June 30, 2022, the Company was not party to any legal or arbitration proceedings that may have significant effects on its financial position or results of operations. No governmental proceedings are pending or, to the Company’s knowledge, contemplated against the Company. The Company is not a party to any material proceedings in which any director, member of senior management or affiliate of the Company’s is either a party adverse to the Company or its subsidiaries or has a material interest adverse to the Company or its subsidiaries.

Commitments

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

On September 2, 2020, Arches Research, Inc., a subsidiary of PolarityTE, Inc. (“Arches”) entered into two agreements with Co-Diagnostics, Inc. (“Co-Diagnostics”). The COVID-19 Laboratory Services Agreement between the parties provided that Arches would perform specimen testing services for customers referred by Co-Diagnostics to Arches. Co-Diagnostics would arrange all logistics for delivering specimens to Arches for COVID-19 testing for those customers of Co-Diagnostics electing to use the service. Arches would bill Co-Diagnostics for the testing services and Co-Diagnostics would manage all customer billing. The Rental Agreement for LGC Genomics Oktopure Extraction Machine between Arches and Co-Diagnostics provided that Co-Diagnostics would make available to Arches the Oktopure high throughput extraction machine that Arches will use to perform COVID-19 testing. The term of the rental agreement was 12 months and required Arches to use Co-Diagnostics tests exclusively in the machine. In the second quarter of 2021, the rental agreement was amended to remove the minimum monthly purchase obligation of reagents and was replaced by a $3,300 monthly rental fee. The COVID-19 Laboratory Services Agreement could be canceled by the Company at any time by providing 60 days written notice, and the Rental Agreement could be canceled at any time by written notice given within 60 days after termination of the Laboratory Services Agreement. On May 27, 2021, the Company gave written notice to Co-Diagnostics of termination of the COVID-19 Laboratory Services Agreement, so the last day of that agreement was July 26, 2021, and no longer in effect on July 27, 2021. On July 27, 2021, the Company gave written notice to Co-Diagnostics of termination of the Rental Agreement, so the last day of that agreement was July 29, 2021.

2627

On June 25, 2021, the Company entered into a statement of work with a contract research organization to provide services for a proposed clinical trial described as a multi-center, prospective, randomized controlled trial evaluating the effects of SkinTE in the treatment of full-thickness diabetic foot ulcers at a cost of approximately $6.5 million consisting of $3.1 million of service fees and $3.4 million of estimated costs. In July 2021 the Company prepaid 10% of the total cost recited in the original work order, or $0.5 million, which will be applied to payment of the final invoice under the work order. Over the approximately three-year term of the clinical trial the service provider shall submit to the Company for payment invoices on a monthly basis for units of work stated in the work order that are completed and billable expenses incurred. During the three and six months ended June 30, 2022, the Company received invoices for work performed and expenses incurred totaling $0.3 and $0.5 million, respectively. Either party may terminate the agreement without cause on 60 days’ notice to the other party.

17. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On August 21, 2019, the Company and Dr. Denver Lough, a principal shareholder and former officer and director, signed a settlement terms agreement that provides, in part, that the Company pay to Dr. Lough $1,500,000 in cash on October 1, 2019 and an additional $1,500,000 in cash in equal monthly installments beginning November 1, 2019 and ending April 1, 2021. In addition, the Company agreed to award to Dr. Lough 200,000 restricted stock units that vest in 18 equal monthly installments beginning October 1, 2019. As of June 30, 2022, the Company has no remaining liability related to future cash payments under the agreement. The fair value of the restricted stock units was $0.8 million and was fully expensed upon Dr. Lough’s termination.

In October 2018, the Company entered into an office lease covering approximately 7,250 square feet of rental space in the building located at 40 West 57^th Street in New York City. The lease is for a term of three years. The annual lease rate is $60 per square foot. Initially the Company would occupy and pay for only 3,275 square feet of space, and the Company was not obligated under the lease to pay for the remaining 3,975 square feet covered by the lease unless it elected to occupy that additional space. The Company believes the terms of the lease were very favorable to it, and the Company obtained the favorable terms through the assistance of Peter A. Cohen, a director, which he provided so that the company he owns, Peter A. Cohen, LLC (“Cohen LLC”), could sublease a portion of the office space. The lease expired on October 31, 2021. The Company recognized 0 and $55,000 of sublease income for the three months ended June 30, 2022 and 2021, respectively, and 0 and $109,000 for the six months ended June 30, 2022 and 2021, respectively. The sublease income is included in other income, net in the condensed consolidated statement of operations and comprehensive loss.

18. SEGMENT REPORTING

Reportable segments are presented in a manner consistent with the internal reporting provided to the chief operating decision maker (CODM), the Chief Executive Officer of the Company. The CODM allocates resources to and assesses the performance of each segment using information about its revenue and operating income (loss). The Company’s operations involve products and services which are managed separately. Accordingly, it operates in two segments: 1) regenerative medicine products and 2) contract services. In April 2022, the Company sold IBEX and IBEX Property, the Company’s subsidiaries which operate within the contract services reporting segment. The remaining contract services business is no longer a reportable segment due to immateriality. Contract services ceased to be a reportable segment upon disposal of IBEX and historical information from prior to the disposal date is reported here. See Note 5 for detail on management’s disposal of IBEX.

Certain information concerning the Company’s segments is presented in the following tables (in thousands):

SCHEDULE OF SEGMENT INFORMATION

	2022			2021			2022			2021
	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
Net revenues:
Reportable segments:
Regenerative medicine	$	–		$	1,195		$	–		$	2,924
Contract services		73			1,342			814			4,322
Total net revenues	$	73		$	2,537		$	814		$	7,246

Net (loss)/income:
Reportable segments:
Regenerative medicine	$	122		$	(3,229	)	$	(3,423	)	$	(20,931	)
Contract services		(190	)		41			(416	)		333
Total net loss	$	(68	)	$	(3,188	)	$	(3,839	)	$	(20,598	)

19. SUBSEQUENT EVENTS

June 2022 Offering

The holder of the pre-funded warrants sold in the registered direct offering that closed on June 8, 2022, exercised pre-funded warrants for the purchase of 545,000 shares of the Company’s common stock at a total purchase price of $545.00 on July 13, 2022, pre-funded warrants for the purchase of 105,000 shares of the Company’s common stock at a total purchase price of $105.00 on August 1, 2022, and pre-funded warrants for the purchase of 359,159 shares of the Company’s common stock at a total purchase price of $359.16 on August 10, 2022. Consequently, 4,393,318 pre-funded warrants and investment options issued in the June 2022 Offering remain outstanding and unexercised.

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 for the year ended December 31, ~~2020, Current~~2021 (“2021 Annual Report”), and in this Quarterly Report on Form ~~8-K filed with the Securities and Exchange Commission (“SEC”) on July 26, 2021, and this report,~~10-Q 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 risk factors disclosed in our reports and disclosure under the heading “Disclosure Regarding Forward-Looking Statements” below.

Overview

PolarityTE ~~Inc., headquartered in Salt Lake City, Utah,~~ is a clinical stage biotechnology company developing regenerative tissue products and biomaterials. ~~We also operate a laboratory testing and clinical research business using equipment, personnel, and facilities we acquired to advance our development of~~PolarityTE’s first regenerative tissue ~~products.~~product is SkinTE, which is intended for the repair, reconstruction, replacement, and supplementation of skin in patients who have a need for treatment of acute or chronic wounds, burns, surgical reconstruction events, scar revision, or removal of dysfunctional skin grafts.

Since the beginning of 2017, PolarityTE has incurred substantial operating losses and its operations have been financed primarily by public equity financings. The clinical trials for SkinTE and the regulatory process will likely result in an increase in PolarityTE’s expenses. PolarityTE will continue to incur substantial operating losses as we pursue an investigational new drug application (“IND”) and biologics license application (“BLA”), and PolarityTE expects to seek financing from external sources over the foreseeable future to fund its operations.

Regenerative Tissue Product

Our first regenerative tissue product is SkinTE. On July 23, 2021, we submitted an investigational new drug application (“IND”) for SkinTE to the ~~United States~~U.S. Food and Drug Administration (the “FDA”) through our subsidiary, PolarityTE MD, Inc. (“PTE-MD”)., as the first step in the regulatory process for obtaining licensure for SkinTE under Section 351 of the Public Health Service Act. The FDA subsequently issued clinical hold correspondence to us identifying certain issues that needed to be addressed before the IND could be approved. We provided responses to the FDA, and on January 14, 2022, the FDA notified us that the clinical hold had been removed. Our ~~business resources are, and will be for the foreseeable future, focused primarily on the advancement of~~first planned pivotal study under our ~~IND and subsequent biologic license application (“BLA”) to attain a license to manufacture and distribute SkinTE in interstate commerce for one or more therapeutic indications. An~~ IND is a ~~request for authorization from the FDA to ship and administer an investigational drug or biological product to humans.~~

~~The proposed therapeutic indication listed in the IND for SkinTE is chronic cutaneous ulcers. The IND proposes an initial Phase 2/3 clinical trial described as a~~ multi-center, ~~prospective,~~ randomized controlled trial evaluating ~~the effects of~~ SkinTE in the treatment of ~~full-thickness~~ diabetic foot ulcers ~~(the “DFU Trial”). As proposed, we will seek~~(DFUs) classified as Grade 2 in the Wagner classification system entitled “Closure Obtained with Vascularized Epithelial Regeneration for DFUs with SkinTE,” or “COVER DFUs Trial.” We plan to ~~qualify approximately~~enroll up to 100 subjects at up to 20 sites ~~for~~in the ~~DFU~~U.S. in the COVER DFUs Trial, which will compare treatment with SkinTE plus the standard-of-care to the standard-of-care alone. We have been enrolling subjects in the COVER DFUs Trial since the end of April 2022. The primary endpoint is the incidence of DFUs closed at 24 weeks. Secondary endpoints include percent area reduction (“PAR”) at 4, 8, 12, 16, and ~~enroll 100 subjects,~~24 weeks, improved quality of life, and ~~the estimated length~~new onset of infection of the DFU Trial is approximately 32 months from commencement after acceptance of our IND by the FDA, assuming the IND is accepted. The IND includes a proposal for a second clinical trial for diabetic foot ulcer or another form of chronic cutaneous ulcer, such as venous leg ulcer or pressure ulcer, which we plan to determine through a dialogue with the FDA. A separate submission to our IND must be made for each successive clinical trial to be conducted under the IND.being evaluated.

~~On August 20, 2021,~~In March 2022, we submitted to the FDA a request for a Regenerative Medicine Advanced Therapy (RMAT) designation to SkinTE under our IND. Established under the 21st Century Cures Act, RMAT designation is a dedicated program designed to expedite the drug development and review processes for promising regenerative medicine products, including human cellular and tissue-based therapies. A regenerative medicine therapy is eligible for RMAT designation if it is intended to treat, modify, reverse, or cure a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug or therapy has the potential to address unmet medical needs for such disease or condition. RMAT designation provides the benefits of intensive FDA guidance on efficient drug development, including the ability for early interactions with the FDA to discuss potential ways to support accelerated approval and satisfy post-approval requirements, potential priority review of a BLA, and other opportunities to expedite development and review. By letter dated May 11, 2022, we were advised by the FDA that ~~certain chemistry, manufacturing, and control (“CMC”) items need to be addressed prior to proceeding with a pivotal study and, therefore,~~it concluded SkinTE meets the FDA was placing the study on clinical hold and planned to issue a clinical hold letter to the Company by September 21, 2021. A clinical hold means that the pivotal study may not begin unless and until the clinical hold is lifted. On September 17, 2021, we received the clinical hold letter from the FDA, which described the FDA’s requestcriteria for ~~information and modifications to the IND that are necessary~~RMAT designation for the clinical hold to be lifted, as well as non-clinical hold comments. The clinical hold issues that must be resolved before the clinical hold can be lifted involve, our proposed potency assay; drug product dosage, storage, shipping,treatment of DFUs and release specifications; antibiotics residuals; bacteriostasis and fungistasis testing; and delivery device. Since our receipt of the clinical hold letter, we have engaged informally with the FDA regarding certain items, most notably the proposed potency assay for SkinTE. We have received helpful feedback from the FDA and are currently preparing a complete response to the clinical hold letter.venous leg ulcers (VLUs).

2730

~~Our preliminary experience indicates that SkinTE may benefit patients~~As a result of the RMAT designation we were able to engage in an expedited dialogue with ~~immediately life-threatening conditions and other serious diseases or conditions. In 2009,~~ the FDA ~~implemented new regulations related~~on the tasks that are likely to ~~Expanded Access Investigational New Drug Applications (“Expanded Access INDs”), which are often colloquially referred~~be necessary 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~~support 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 our IND for SkinTE. Under FDA regulations the amount that may be chargedBLA submission for SkinTE ~~used~~as a treatment of DFUs and VLUs, which were identified in the RMAT designation. Based on that dialogue we plan to run a second multi-center, randomized controlled trial under ~~an Expanded Access~~our current IND ~~must be authorized by~~to support approval of a broad DFU indication for SkinTE in a BLA, and we plan to engage in discussions with the FDA regarding the design and ~~if authorized at all, may be limited to our direct costs~~implementation of ~~manufacture.~~the second clinical trial. We believe ~~however, that an Expanded Access IND may enable us~~this strategy will be the fastest and least costly approach to ~~provide~~achieving our first BLA submission for SkinTE, with DFUs representing the largest market opportunity within the category of chronic cutaneous ulcers. We plan to ~~providers treating persons~~further engage with ~~life-threatening or serious diseases and conditions, and thereby maintain existing, and develop new, relationships with physicians in~~ the FDA to fully define our development plan for other wound ~~care industry.~~indications.

We expect to incur significant operating costs in the next three to four years as we pursue the regulatory process for SkinTE with the FDA, conduct clinical trials and studies, and pursue product research, all while operating our business and incurring continuing fixed costs related to the maintenance of our assets and business. We expect to incur significant losses in the future, and those losses could be more severe as a result of unforeseen expenses, difficulties, complications, delays, and other unknown events. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending upon the timing, progress, and outcomes of our clinical trials and our expenditures for satisfying all the conditions of obtaining FDA ~~premarket approval~~licensure 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~~Recent Developments

~~Beginning~~June 2022 Offering

On June 5, 2022, we entered into a securities purchase agreement with a single healthcare-focused institutional investor for the purchase and sale of shares of our common stock (or pre-funded warrants in ~~2017~~lieu thereof) in a registered direct offering. In a concurrent private placement (together with the registered direct offering, the “Offerings”), we ~~developed internally~~entered into a ~~laboratory~~separate securities purchase agreement with the same investor for the unregistered purchase and ~~research capability~~sale of shares of common stock (or pre-funded warrants in lieu thereof). On June 8, 2022, the Offerings closed, and we sold in the registered direct offering 445,500 shares of our common stock at a purchase price of $2.525 per share and 1,138,659 pre-funded warrants at a purchase price of $2.524 per warrant, and in the private placement offering we sold 1,584,159 pre-funded warrants at a purchase price of $2.524 per warrant. Each pre-funded warrant sold in the registered direct offering and private placement offering is exercisable for one share of common stock at an exercise price of $0.001 per share, is immediately exercisable, and will not expire until fully exercised. Under the securities purchase agreements for the Offerings, we agreed to ~~advance~~issue to the ~~development~~investor in the Offerings unregistered preferred investment options (the “investment options”) to purchase up to an aggregate of ~~SkinTE~~3,168,318 shares of common stock, which we issued at the closing of the Offerings. The investment options are exercisable immediately upon issuance at an exercise price of $2.40 per share and will expire five years from the date of issuance. As of the date of this report the holder of the pre-funded warrants sold in the registered direct offering has exercised 1,033,659 of such warrants at a total exercise price of $1,034 leaving 105,000 of such warrants unexercised. None of the pre-funded sold in the private placement offering or investment options issued in the Offerings have been exercised as of the date of this report. We received net proceeds of approximately $7.3 million in the Offerings after deducting placement agent fees and related ~~technologies, which we operate through our subsidiary, Arches Research, Inc. (“Arches”).~~ offering expenses.

Sale of IBEX

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~~operated through our indirect subsidiary, IBEX Preclinical Research, Inc. (“IBEX”). ~~Through Arches~~Utah CRO Services, Inc., a Nevada corporation (“Utah CRO”), is our direct subsidiary and held all the outstanding capital stock of IBEX we(the “IBEX Shares”). Utah CRO also ~~offer~~held all the member interest of IBEX Property LLC, a Nevada limited liability company (“IBEX Property”), that owned two unencumbered parcels of real property in Logan, Utah, consisting of approximately 1.75 combined gross acres of land, together with the buildings, structures, fixtures, and personal property (the “Property”), which was leased by IBEX Property to IBEX for IBEX to conduct its preclinical research and ~~laboratory testing services to unrelated third parties on a contract basis.~~

~~PPP Loan~~

As previously reported in the Current Report on Form 8-K filed with the SEC on April 15, 2020, PTE-MD entered into a promissory note with KeyBank, N.A., a national banking association (the “Lender”) evidencing an unsecured loan in the amount of $3,576,145 made to PTE-MD under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program 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 “SBA”).veterinary sciences business.

On ~~October 15, 2020, PTE-MD applied~~April 14, 2022, Utah CRO entered into a Stock Purchase Agreement (the “Stock Agreement”) with an unrelated third party (the “Buyer”), pursuant to which Utah CRO agreed to sell all the outstanding IBEX Shares to the ~~Lender~~Buyer in exchange for ~~forgiveness~~an unsecured promissory note in the principal amount of $400,000 bearing simple interest at the rate of 10% per annum payable interest only on a quarterly basis and all principal and remaining accrued interest due on the five-year anniversary of the ~~PPP Loan~~closing of the sale of the IBEX Shares to the Buyer. Furthermore, on April 14, 2022, IBEX Property entered into that certain Real Estate Purchase and Sale Agreement (the “Real Estate Agreement”) with another unrelated third party (the “Purchaser”) pursuant to which IBEX Property agreed to sell to the Purchaser the Property at a gross purchase price of $2.8 million payable in ~~its entirety (as provided for~~cash at closing of the transaction. The Buyer and Purchaser are affiliates as a result of common ownership. On April 28, 2022, the parties to the Stock Agreement and Real Estate Agreement closed the transactions contemplated thereby and on April 29, 2022, we received the promissory note described above in the ~~CARES Act) based on PTE-MD’s use~~principal amount of $0.4 million and net cash proceeds of $2.3 million, after deducting closing costs and advisory fees, from sale of the ~~PPP Loan for payroll costs, rent, and utilities. On October 26, 2020, PTE-MD was advised that~~Property under the Lender approved the application, and that the Lender was submitting the application to the SBA for a final decision. The SBA subsequently approved PTE-MD’s application for forgiveness of the PPP Loan, and the principal and interest of $3,612,376 was fully paid by the SBAReal Estate Agreement. We recognized an insignificant net gain on ~~June 12, 2021.~~sale.

Reverse Stock Split

~~On September 17, 2021, we received notice from~~At a special meeting of stockholders held on May 12, 2022, the ~~Lender that~~stockholders approved an amendment to our certificate of incorporation to effectuate a reverse stock split of our outstanding shares of common stock by a ratio of any whole number between 1-for-10 and 1-for-25, the ~~SBA~~implementation and timing of which is ~~reviewing~~subject to the ~~PPP Loan. As part~~discretion of ~~this review, the SBA requested that we provide documents that we are required to maintain but may not have been required to submit with~~ our ~~application for the PPP Loan. These documents included an affiliation worksheet showing the relationship between us and PTE-MD and affiliated subsidiaries, documents showing the use~~board of directors. The primary goal of the ~~PPP Loan proceeds, documents showing~~reverse stock split was to increase the per share market price of our ~~calculation~~common stock to meet the minimum per share bid price requirements for continued listing on The Nasdaq Capital Market. The board of directors subsequently determined to set the reverse stock split ratio at 1-for-25 (the “Reverse Stock Split”). The Reverse Stock Split become effective as of 4:15 p.m., Eastern Time on May 16, 2022, pursuant to a Certificate of Amendment to our (Third) Restated Certificate of Incorporation filed with the Secretary of State of the ~~loan amount we requested~~State of Delaware. All issued and outstanding common stock, common stock warrants, stock option awards, exercise prices, and per share data presented in ~~our loan application, our federal tax returns, and documents showing employee compensation information. We submitted~~this report has been adjusted on a retrospective basis to reflect the ~~documents to the SBA through the Lender on September 28, 2021.~~reverse stock split.

Liquidity and Capital Resources

Available Capital Resources and Potential Sources of Liquidity

As of ~~September~~June 30, ~~2021,~~2022, we had ~~$27.4~~$20.5 million in cash and cash equivalents and working capital of approximately ~~$24.9~~$19.4 million. ~~We believe~~For the ~~cash and cash equivalents on our balance sheet will fund our business activities into the fourth calendar quarter of 2022. In the third quarter of 2021~~six-month period ended June 30, 2022, cash used in operating activities was ~~$4.6~~$14.3 million, or an average of ~~$1.5~~$4.8 million per month, compared to ~~$6.8~~$10.7 million of cash used in operating activities, or an average of ~~$2.3~~$3.6 million per month, ~~in the third quarter of 2020. In June 2021 our PPP Loan in the amount of $3.6 million was forgiven.~~

As noted above, we are focused primarily on the advancement of our IND and subsequent BLA to attain a license to manufacture and distribute SkinTE. To that end, in June 2021, we engaged a contract research organization to provide services for the DFU Trial at a cost of approximately $5.1 million consisting of $3.1 million of service fees and $2.0 million of estimated costs. In July 2021 we prepaid 10% of the total cost recited in the work order, or $0.5 million, which will be applied to payment of the final invoice under the work order. Over the approximately three-year term of the DFU Trial the service provider shall submit to us for payment invoices on a monthly basis for units of work stated in the work order that are completed and billable expenses incurred. Our expectation is that the second clinical trial would be similar to the DFU Trial with respect to size, length of time to complete, and cost. In the course of advancing our IND and subsequent BLA we may propose additional clinical trials to advance our applications or broaden the therapeutic indications of use for SkinTE. Clinical trials are the major expense we see in the near and long term, and while we are pursuing clinical trials we will continue to incur the costs of maintaining our business. In addition to clinical trials, the most significant uses of cash to maintain our business going forward are compensation and costs of occupying, operating, and maintaining our facilities.

In the six-month period ended June 30, ~~2021,~~2021. For the ~~gross profit on sales~~three-month period ended June 30, 2022, cash used in operating activities was $8.3 million, or an average of ~~SkinTE was $2.5~~$2.8 million ~~which contributed~~per month, compared to ~~covering our~~$4.1 million of cash used in operating ~~costs~~activities, or an average of $1.4 million per month, for the ~~period.~~ three-month period ended June 30, 2021.

As ~~discussed~~a result of the sale of IBEX described above, after April 2022 we ~~ceased SkinTE sales at~~are not engaged in any business activity that will generate cash flows from operations, which in the ~~end of May 2021, so SkinTE sales did not contribute~~past contributed to defraying our operating costs in the third quarter of 2021. To mitigate the effect of this lost revenue we eliminated some staff and resources that supported the SkinTE commercial effort, but we do not expect to see the benefit of these cost reductions until the fourth quarter of 2021 because of severance and other costs associated with winding down our SkinTE commercial activity.

In the nine-month period ended September 30, 2021, the gross profit from services amounted to approximately $2.2 million, which contributed to covering our operating costs for the period. We made the decision to cease COVID-19 testing in August 2021. Beginning in April 2021 there was a significant loss of COVID-19 testing revenues, which was only partially offset by increased preclinical research revenues generated by IBEX. Consequently, services revenues decreased in the third quarter of 2021, compared to the third quarter of 2020. We took steps in the second quarter of 2021 to mitigate the effect of losing COVID-19 testing revenue, including reduction of temporary labor and other resources used for COVID-19 testing. The volatility in revenues generated by our services business makes it impossible to predict whether or to what extent our services business will contribute to defray our operating costs in future periods.costs.

As of the date of ~~issuance of these unaudited interim condensed financial statements,~~this quarterly report we do not expect that our cash and cash equivalents of ~~$27.4~~$20.5 million as of ~~September~~June 30, ~~2021,~~2022, will ~~not~~ be sufficient to fund our current business plan including related operating expenses and capital expenditure requirements beyond the ~~fourth~~first calendar quarter of ~~2022.~~2023. Accordingly, there is substantial doubt about our ability to continue as a going concern, as we do not believe that our cash and cash equivalents will be sufficient to fund our business plan for at least twelve months from the date of issuance of ~~these interim~~our quarterly financial ~~statements.~~statements in this report. We plan to address this condition by raising additional capital to finance our operations.

Although we 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~~ we ~~will~~may not be successful in obtaining additional financing. Therefore, it is not considered probable, as defined in applicable accounting standards, that our ~~plans~~plan to raise additional capital will alleviate the substantial doubt regarding our ability to continue as a going concern.

Anticipated Uses of Capital Resources

As noted above, we are focused primarily on the advancement of our IND and subsequent BLA to attain a license to manufacture and distribute SkinTE. To that end, in June 2021 we engaged a contract research organization (“CRO”) to provide services for the COVER DFUs Trial at a cost of approximately $6.5 million consisting of $3.1 million of service fees and $3.4 million of estimated costs. In 2021 we prepaid $0.5 million, which will be applied to payment of the final invoice under the work order. Over the approximately three-year term of the COVER DFUs Trial the service provider will submit to us for payment monthly invoices for units of work stated in the work order that are completed and billable expenses incurred. We began enrolling subjects in our COVER DFUs at the end of April 2022, and we believe we may be able to complete enrollment of 100 subjects by the end of calendar year 2023. As enrollment increases, we expect our monthly CRO and related costs of conducting the trial will ramp up.

Our expectation is that the second DFU clinical trial under the IND for SkinTE will be similar to the COVER DFUs Trial with respect to size, length of time to complete, and cost. To the extent we decide to pursue additional indications for the application of SkinTE, such as VLUs, we expect we will need to submit separate IND applications for those indications and conduct additional clinical trials to support BLAs for those indications.

Clinical trials are the major expense we see in the near and long term, and while we are pursuing clinical trials, we will continue to incur the costs of maintaining our business. In addition to clinical trials, our most significant uses of cash to maintain our business going forward are expected to be compensation, costs of occupying, operating, and maintaining our facilities, and the costs associated with maintaining our status as a publicly traded company listed on Nasdaq. During the 12-month period following the filing of this report our plan is to preserve the facilities, equipment, and staff we need to advance the COVER DFUs Trial and other work necessary for advancing the process for obtaining regulatory approval of SkinTE.

With the acceptance of our IND for SkinTE and the beginning of the COVER DFUs Trial, we do not expect to have the same need for research and development staff associated with product development and, as a result, we reduced research and development staff in April 2022.

During the latter part of 2021 and into February 2022, we engaged in discussions with certain third parties regarding potential M&A transactions and strategic initiatives. In the first quarter of 2022 we recognized $1.2 million of one-time costs for professional services associated with such M&A and strategic initiatives, which is in addition to $1.2 million of such costs recognized in the fourth quarter of 2021.

Our actual capital requirements will depend on many factors, including the cost and timing of advancing our IND and subsequent BLA for the use of SkinTE on DFUs, the cost and timing of additional INDs and BLAs for other indications where SkinTE may be used, the cost and timing of clinical trials, the cost of establishing and maintaining our facilities in compliance with ~~cGMP and cGTP (current~~current good tissue ~~practices) regulations,~~practices and current good manufacturing practice requirements, and the cost and timing of advancing our product development initiatives related to SkinTE. Our ~~forecast~~projection of the period of time ~~through~~for which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

We will need to raise additional capital in the future to fund our effort to obtain FDA approval of SkinTE and maintain our operations in the future. On March 30, 2021, we entered into a sales agreement (the “Sales Agreement”) with Cantor, Fitzgerald & Co. (“Cantor”), to sell shares of our 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 will act as sales agent. We have not sold any shares under the Sales Agreement as of the date of this filing. Although we 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 we will be successful in obtaining additional financing.operations. Any additional equity financing including financings involving convertible securities, if able to be obtained, may be highly dilutive, on unfavorable terms, or otherwise disadvantageous, to existing stockholders, and debt financing, if available, may involve restrictive ~~covenants.~~covenants or require us to grant a security interest in our assets. 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 continue operations, any of which would have a material adverse effect on our business, financial condition, ~~and~~ results of ~~operation.~~operation, and prospects.

Results of Operations

Changes in ~~Our~~Polarity’s Operations

There have been significant changes in our operations affecting our results of operations for the ~~three and nine-month periods~~six-month period ended ~~September~~June 30, ~~2021,~~2022, compared to ~~the three and nine-month periods~~six-month period ended ~~September~~June 30, ~~2020.~~2021.

On July 23, 2021, we submitted an IND for SkinTE ~~was registered and listed with~~to the FDA through our subsidiary, PTE-MD, as the first step in ~~August 2017 based on our determination that SkinTE should be 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 361 HCT/P) and that, as a result, no premarket review or approval by the FDA was required. We proceeded to develop sales and manufacturing capabilitiesregulatory process for obtaining licensure for SkinTE and focused on advancing commercialization of SkinTE. We began a regional commercial rollout of SkinTE in October 2018, and while it was marketed it was used in complex wounds, such as diabetic foot ulcers penetrating to tendon, capsule, and bone classified, Stage 3 and 4 pressure injuries, and acute wounds. Given our significant real-world experience with the application of SkinTE and several supporting publications, we believe SkinTE could significantly improve clinical outcomes. 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 preliminary 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 was prudent to submit an IND for SkinTE and an eventual BLA rather than engage in a protracted dispute with the FDA. On July 23, 2021, we submitted an IND through PTE-MD and our business resources and activities are now focused primarily on advancing our IND, including addressing aThe FDA subsequently issued clinical hold correspondence to us identifying certain issues that needed to be addressed before the IND could be approved. We provided responses to the FDA, and on ~~our~~January 14, 2022, the FDA sent correspondence informing us that the clinical hold had been removed. Acceptance of the IND ~~imposed~~ by the FDA ~~on August 20, 2021.~~enables us to commence the first of two expected pivotal studies needed to support a BLA for SkinTE. We ceased selling SkinTE at the end of May 2021, when the period of enforcement discretion previously announced by the FDA with respect to its IND and premarket approval requirements for ~~361 HCT/Ps~~regenerative medicine therapies, such as SkinTE, came to an ~~end. As a result,~~end, and we ~~generated~~do not expect to be able to commercialize SkinTE until our BLA is approved, which we believe will take at least three to four years. Consequently, we recognized products net revenues ~~from~~in the ~~sale~~six months of SkinTE and related sales, marketing, and administrative expenses related to that sales effort during the three and nine months ended September 30, 2020, which were not present during the period beginning in June 2021, and ~~ending September 30, 2021.~~did not have any such revenues in the first six months of 2022.

Our subsidiary, Arches Research, Inc. (“Arches”) began offering COVID-19 testing services in May 2020 under 30-day renewable testing agreements with multiple nursing home and pharmacy facilities in the state of New York controlled by a single company, which substantially added to our services net revenues in the ~~last seven months of 2020 and~~ first three months of 2021. When the New York nursing homes and pharmacies adopted on-site employee testing at the end of March 2021, our COVID-19 testing revenues declined substantially, and ~~on or about~~in August ~~17,~~ 2021, we decided to cease COVID-19 testing. Arches focused its research and development resources on supporting our IND and clinical trial efforts for the remainder of 2021 and continued in that role in the first quarter of 2022. However, going forward we do not expect we will have the same need for research and development staff associated with product development and, as a result, we reduced research and development staff in April 2022, and began to eliminate or sell certain items of equipment that had been leased or purchased for our research and development activity.

~~The COVID-19 pandemic had~~While we were exploring the opportunities for selling IBEX and the IBEX Property, IBEX assumed a ~~significant adverse effect on the preclinical research~~more passive approach to marketing its services, ~~offered by~~which resulted in a decline in IBEX ~~in 2020, but there has been a resurgence in that business during the first nine months of 2021. The increase in revenues from IBEX~~ services ~~helped to offset the loss of COVID-19 testing~~ revenues in the ~~second and third quarters~~first six months of ~~2021. Nevertheless, revenues from our services business declined 63% in the third quarter of 2021~~2022 compared to the first ~~quarter~~six months of 2021. With the ~~year. Due to~~sale of IBEX and the ~~circumstances described above, we expect revenues from~~IBEX Property completed at the end of April 2022, our services ~~business will be derived primarily from IBEX’s preclinical research~~net revenues were nominal in the first six months of 2022 and ~~veterinary sciences business for~~we do not expect any services net revenues in the ~~remainder~~last six months of ~~2021.~~2022.

As a result of the foregoing developments, we made a number of changes to our operations that impacted our results of operations. These included reductions in our work force ~~in 2020 and 2021,~~ and reducing the services and infrastructure needed to support a larger work force and commercial sales effort.

Comparison of the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

	For the Six Months Ended						Increase (Decrease)
(in thousands)	June 30, 2022			June 30, 2021			Amount			%
	(Unaudited)
Net revenues
Products	$	–		$	2,924		$	(2,924	)		(100	)%
Services		814			4,322			(3,508	)		(81	)%
Total net revenues		814			7,246			(6,432	)		(89	)%
Cost of sales
Products		–			448			(448	)		(100	)%
Services		616			2,641			(2,025	)		(77	)%
Total costs of revenues		616			3,089			(2,473	)		(80	)%
Gross profit		198			4,157			(3,959	)		(95	)%

Operating costs and expenses
Research and development		5,938			6,621			(683	)		(10	)%
General and administrative		9,771			11,312			(1,541	)		(14	)%
Sales and marketing		–			2,625			(2,625	)		(100	)%
Restructuring and other charges		38			436			(398	)		(91	)%
Impairment of assets held for sale		54			–			54			100	%
Total operating costs and expenses		15,801			20,994			(5,193	)		(25	)%
Operating loss		(15,603	)		(16,837	)		(1,234	)		(7	)%
Other income (expense), net
Gain on extinguishment of debt		–			3,612			(3,612	)		(100	)%
Change in fair value of common stock warrant liability		11,735			(2,220	)		13,955			629	%
Inducement loss on sale of liability classified warrants		–			(5,197	)		5,197			100	%
Interest income (expense), net		(29	)		(77	)		(48	)		(62	)%
Other income, net		58			121			(63	)		(52	)%
Net loss	$	(3,839	)	$	(20,598	)	$	(16,759	)		(81	)%

3034

Comparison of the three months ended ~~September~~June 30, ~~2021, and the three months ended September 30, 2020.~~

For the Three Months Ended
Increase
(Decrease)

(in thousands) September 30, 2021 September 30, 2020 Amount %
(Unaudited)
Net revenues
Products $ – $ 1,156 $ (1,156 ) (100 )%
Services 1,116 2,181 (1,065 ) (49 )%
Total net revenues 1,116 3,337 (2,221 ) (67 )%
Cost of sales
Products – 210 (210 ) (100 )%
Services 634 1,142 (508 ) (44 )%
Total cost of sales 634 1,352 (718 ) (53 )%
Gross profit 482 1,985 (1,503 ) (76 )%

Operating costs and expenses
Research and development 3,870 2,698 1,172 43 %
General and administrative 3,687 6,264 (2,577 ) (41 )%
Sales and marketing 93 1,606 (1,513 ) (94 )%
Restructuring and other charges 242 – 242 100 %
Total operating costs and expenses 7,892 10,568 (2,676 ) (25 )%
Operating loss (7,410 ) (8,583 ) 1,173 (14 )%
Other income (expense)
Change in fair value of common stock warrant liability 6,354 1,503 4,851 323 %
Interest expense, net (29 ) (58 ) 29 (50 )%
Other income, net 64 57 7 12 %
Net loss $ (1,021 ) $ (7,081 ) $ 6,060 (86 )%

~~Net Revenues. Net revenues decreased $2.2 million, or 67%, for the three months ended September 30, 2021, compared to the same period in 2020.~~

Products net revenues were $0 for the three months ended September 30, 2021, compared to $1.2 million for the three-month period ended September 30, 2020. We will not engage in any products sales activity in the fourth quarter of 2021, so the only products net revenues we may recognize in that period or subsequent, foreseeable periods are nominal amounts collected on accounts for product shipped prior to the end of May 2021 that were not previously recognized because of concerns with collectability.

Net revenues from services decreased by 49% for the three-month period ended September 30, 2021, compared to the corresponding period in 2020. The substantial majority of our services net revenues in the third quarter of 2021 were generated by IBEX’s preclinical research and veterinary sciences business due to the decline in our COVID-19 testing business and cessation of that testing business in August 2021. At this time, we do not plan to offer COVID-19 testing in the future, so services net revenues in future periods will be generated through research services excluding COVID-19 testing that we have offered, historically.

~~Cost of Sales. Cost of sales decreased $0.7 million, or 53%, for the three months ended September 30, 2021,~~2022, compared to the three months ended ~~September~~June 30, ~~2020. There were no costs~~2021.

	For the Three Months Ended						Increase (Decrease)
(in thousands)	June 30, 2022			June 30, 2021			Amount			%
	(Unaudited)
Net revenues
Products	$	–		$	1,195		$	(1,195	)		(100	)%
Services		73			1,342			(1,269	)		(95	)%
Total net revenues		73			2,537			(2,464	)		(97	)%
Cost of sales
Products		–			207			(207	)		(100	)%
Services		125			717			(592	)		(83	)%
Total costs of revenues		125			924			(799	)		(86	)%
Gross (loss) profit		(52	)		1,613			(1,665	)		(103	)%

Operating costs and expenses
Research and development		3,078			4,190			(1,112	)		(27	)%
General and administrative		3,562			4,941			(1,379	)		(28	)%
Sales and marketing		–			1,099			(1,099	)		(100	)%
Restructuring and other charges		38			11			27			245	%
Total operating costs and expenses		6,678			10,241			(3,563	)		(35	)%
Operating loss		(6,730	)		(8,628	)		(1,898	)		(22	)%
Other income (expense), net
Gain on extinguishment of debt		–			3,612			(3,612	)		(100	)%
Change in fair value of common stock warrant liability		6,630			1,807			4,823			267	%
Interest income (expense), net		(14	)		(39	)		(25	)		(64	)%
Other income, net		46			60			(14	)		(23	)%
Net loss	$	(68	)	$	(3,188	)	$	(3,120	)		(98	)%

Net Revenues and Gross Profit. We ceased commercial sales of ~~sales attributable to products net revenues~~SkinTE in the ~~third~~second calendar quarter of 2021 ~~because~~and sold the IBEX services business at the end of April 2022, so we ~~ceased SkinTE sales~~were not engaged in ~~the second quarter of 2021. Cost of sales for services~~any revenue generating business activity at June 30, 2022, and do not expect to generate operating revenues ~~decreased 44% period over period~~from any business activity for the ~~three months~~foreseeable future. The decreases in revenues, cost of revenues, and gross (loss) profit for the six-month and three-month periods ended ~~September~~June 30, ~~2021,~~2022, compared to the ~~three months ended September 30, 2020, which is primarily attributable to the decline~~same periods in 2021 are consistent with our ~~COVID-19 testing business and~~ cessation of ~~that testing~~revenue-generating business ~~in August 2021.~~activity.

Operating Costs and Expenses. Operating costs and expenses decreased ~~$2.7~~$5.2 million, or 25%, for the ~~three months~~six-month period ended ~~September~~June 30, ~~2021,~~2022, compared to the ~~three months~~six-month period ended ~~September~~June 30, ~~2020. The reduction in operating costs~~2021, and ~~expenses is attributable~~decreased $3.6 million, or 35%, for the three-month period ended June 30, 2022, compared to ~~reductions in general and administrative expenses and sales and marketing expenses that were partially offset by increases in research and development expenses and restructuring and other charges.~~the three-month period ended June 30, 2021.

Research and development expenses ~~increased 43% period over period~~decreased 10% for the ~~three months~~six-month period ended ~~September~~June 30, ~~2021,~~2022, compared to the ~~three months~~six-month period ended ~~September~~June 30, ~~2020. The substantial increase in~~2021, and decreased 27%, for the three-month period ended ~~September~~June 30, ~~2021,~~2022, compared to the three-month period ended June 30, 2021. The decrease is primarily attributable to ~~an increase~~costs in the six-month period ended June 30, 2021, for completing our pre-IND diabetic foot ulcers trial, lab ~~supply costs~~supplies for work on preparing the technical items for our IND, and consulting services for ~~work on the CMC elements of~~preparing our IND that did not recur in the six-month period ended June 30, 2022, which was partially offset by an increase primarily attributable to the SkinTE manufacturing and ~~re-allocation of costs for manufacturing supplies and compensation~~overhead personnel redirecting their efforts following the cessation of SkinTE sales ~~from products cost~~to research and development activities and increased costs related to quality control supplies and infrastructure implemented for the COVER DFUs Trial.

The amount of ~~goods,~~ general and administrative expenses decreased 14% for the six-month period ended June 30, 2022, compared to the six-month period ended June 30, 2021, and ~~sales and marketing expenses~~decreased 28%, for the three-month period ended June 30, 2022, compared to ~~research and development costs.~~

the three-month period ended June 30, 2021. We effectuated a ~~substantial~~ reduction in ~~work~~ force for our commercial operations in ~~May 2020 and in May~~the second quarter of 2021. Consequently, there were ~~significant~~ reductions in cash compensation, stock compensation, consulting fees, and travel expense. As we pared down our staff and sales activity, we also reduced expenses related to a larger operation by terminating our lease for the Utah corporate office in September 2020 and ceasing operations at our manufacturing node in Georgia in the fourth quarter of 2020. Furthermore, with the cessation of SkinTE sales we re-allocated manufacturing supplies and compensation from general and administrative expenses to research and development costs. ~~The cost cutting measures and re-allocation of costs described above are the primary causes~~These reductions were offset by professional fees incurred in connection with our pursuit of a ~~41% decrease~~strategic transaction that did not materialize and investment banking fees paid in ~~general and administrative expense period over period for~~connection with an at-the-market offering we terminated in the ~~three months ended September 30, 2021, compared to the three months ended September 30, 2020.~~

When we reduced our commercial sales team and related commercial activities beginning in May 2020 and May 2021, we also took steps to reduce staff and consultants in sales and marketing. With the cessationfirst quarter of SkinTE sales several employees who supported sales and marketing moved into new roles in research and development, so their compensation was allocated to research and development. Consequently, there were significant reductions in cash compensation, stock compensation, consulting fees, and travel expense, which resulted in a 94% decrease in sales and marketing expense for the three months ended September 30, 2021, compared to the three months ended September 30, 2020.2022.

In the ~~three-month period ended September 30,~~first six months of 2021, we ~~paid~~incurred sales and marketing costs related to our commercial sales effort that did not recur in the first six months of 2022. In connection with terminating commercial sales of SkinTE, we realized as a restructuring charge a loss on impairment of property and equipment in the amount of $0.4 million and a charge of $0.3 million for employee severance and ~~recognized costs for adjustment~~revaluing of equity awards ~~arising~~related to severance, which was offset by a gain of $0.3 from early termination of an office/ laboratory lease in Augusta, Georgia. In the ~~reduction in force~~first six months of 2022 we ~~implemented at the end~~realized a nominal amount of ~~May 2021, which were recorded as restructuring and other charges. We did not have~~ restructuring charges ~~in the three-month period ended September 30, 2020.~~on employee severance.

Operating Loss and Net Loss. Operating loss decreased $1.2 million, or ~~14%~~7%, for the ~~three months~~six-month period ended ~~September~~June 30, ~~2021,~~2022, compared to the ~~three months~~six-month period ended ~~September~~June 30, ~~2020. Net loss~~2021, and decreased ~~$6.1~~$1.9 million, or ~~86%~~22%, for the ~~three months~~three-month period ended ~~September~~June 30, ~~2021,~~2022, compared to the ~~three months~~three-month period ended ~~September~~June 30, ~~2020.~~2021.

Net loss decreased $16.8 million, or 81%, for the six-month period ended June 30, 2022, compared to the six-month period ended June 30, 2021, and decreased $3.1 million, or 98%, for the three-month period ended June 30, 2022, compared to the three-month period ended June 30, 2021. Warrants issued in connection with financings we completed in ~~January~~2022, 2021 and 2020 are classified as liabilities and remeasured each period until settled, ~~or until~~ classified as ~~equity.~~equity, or expiration. As a result of the periodic remeasurement, we recorded a gain for change in fair value of common stock warrant liability of ~~$6.4~~$11.7 million for the ~~three months~~six-month period ended ~~September~~June 30, 2022, compared to a loss of $2.2 million for the six-month period ended June 30, 2021, and a gain for change in fair value of common stock warrant liability of $6.6 million for the three-month period ended June 30, 2022, compared to a gain of ~~$1.5~~$1.8 million for the ~~three months~~three-month period ended ~~September~~June 30, ~~2020.~~2021. For additional information on the change in fair value of common stock warrant liability please see Note 104 to the ~~Condensed Consolidated Financial Statements (unaudited)~~condensed consolidated financial statements included in this report.

~~Comparison of the nine months ended September 30, 2021, and the nine months ended September 30, 2020.~~

For the Nine Months Ended
Increase
(Decrease)

(in thousands) September 30, 2021 September 30, 2020 Amount %
(Unaudited)
Net revenues
Products $ 2,924 $ 2,528 $ 396 16 %
Services 5,438 4,008 1,430 36 %
Total net revenues 8,362 6,536 1,826 28 %
Cost of sales
Products 448 825 (377 ) (46 )%
Services 3,275 1,925 1,350 70 %
Total cost of sales 3,723 2,750 973 35 %
Gross profit 4,639 3,786 853 23 %

Operating costs and expenses
Research and development 10,491 9,235 1,256 14 %
General and administrative 14,999 22,080 (7,081 ) (32 )%
Sales and marketing 2,718 7,324 (4,606 ) (63 )%
Restructuring and other charges 678 2,536 (1,858 ) (73 )%
Total operating costs and expenses 28,886 41,175 (12,289 ) (30 )%
Operating loss (24,247 ) (37,389 ) 13,142 (35 )%
Other income (expense)
Gain on extinguishment of debt 3,612 – 3,612 100 %
Change in fair value of common stock warrant liability 4,134 4,444 (310 ) (7 )%
Inducement loss on sale of liability classified warrants (5,197 ) – (5,197 ) (100 )%
Interest expense, net (106 ) (135 ) 29 (21 )%
Other income, net 185 282 (97 ) (34 )%
Net loss $ (21,619 ) $ (32,798 ) $ 11,179 (34 )%

~~Net Revenues. Net revenues increased $1.8 million, or 28%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.~~

~~Products net revenues of $2.9 million were the same for the nine months ended September 30,~~ We issued common stock purchase warrants in January 2021, as ~~they were for the six months ended June 30, 2021, due~~an inducement to ~~the cessation~~holders of ~~our commercial sales operation for SkinTE at the end of May 2021.~~warrants issued in December 2020 to exercise those December warrants. As a result, we recognized an inducement loss of the cessation of our commercial sales operation, products net revenues increased only 16% for the nine months ended September 30, 2021, compared to the corresponding period in 2020. We expect products net revenues for fiscal year 2021 will remain essentially unchanged from the amount recorded$5.2 million for the six-month period ended June 30, ~~2021, except for nominal amounts we may collect on accounts for product shipped prior to~~2021. There was no similar inducement loss in the ~~end~~first six months of ~~May 2021 that were not previously recognized because of concerns with collectability.~~2022.

The mix of business activity generating services net revenues changed from a majority of service revenues generated by COVID-19 testing in the nine months ended September 30, 2020, to a majority of service revenues generated by pre-clinical research services in the nine months ended September 30, 2021. Service revenues generated by our pre-clinical research services business in the nine months ended September 30, 2021, were substantially higher than the comparable period in 2020, as this business activity experienced a strong recovery from the poor results in 2020 attributable to the COVID-19 pandemic. Our COVID-19 testing services were a significant contributor to overall services revenues only in the first three months of 2021. As a result of these developments net revenues from services increased by 36% for the nine months ended September 30, 2021, compared to the corresponding period in 2020.

3336

~~Cost of Sales~~. Cost of sales increased $1.0 million, or 35%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. This increase is a result of a 70% increase in the cost of sales for services revenues during the first nine months of 2021 that is primarily a result of the increase in business generated by our pre-clinical research services, which was only partially offset by lower cost of sales arising from the fall-off in our COVID-19 testing business after March 2021 and the elimination of cost of sales for our products business during the four-month period ended September 30, 2021, resulting from the cessation of SkinTE sales at the end of May 2021.

Cost of sales attributable to products net revenues was the same for the nine months ended September 30, 2021, as it was for the six months ended June 30, 2021, due to the cessation of our commercial sales operation for SkinTE at the end of May 2021. For the nine-month period ended September 30, 2021, cost of sales for products revenues decreased 46% period over period compared to the nine months ended September 30, 2020, even though revenues were higher in 2021 for the nine-month period, which is attributable to the economies of scale we achieved in the first five months of 2021 by selling product for larger wound sizes in 2021 compared to 2020 and the elimination of products cost of sales during the four-month period ended September 30, 2021.

~~Operating Costs and Expenses~~. Operating costs and expenses decreased $12.3 million, or 30%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The reduction in operating costs and expenses is attributable to reductions in general and administrative expenses, sales and marketing expenses, and restructuring and other charges that were partially offset by increases in research and development expenses.

Research and development expenses increased 14% period over period for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The substantial increase in the nine-month period ended September 30, 2021, is primarily attributable to an increase in lab supply costs and consulting services for work on the CMC elements of our IND; re-allocation of costs for manufacturing supplies and compensation following the cessation of SkinTE sales from products cost of goods, general and administrative expenses, and sales and marketing expenses to research and development costs; and, the costs in our pre-IND clinical trials that we concluded during the period.

As noted above, we effectuated a substantial reduction in force for our commercial operations in May 2020 and in May 2021. Consequently, there were significant reductions in cash compensation, stock compensation, consulting fees, and travel expense. As we pared down our staff and sales activity, we also reduced expenses related to a larger operation by terminating our lease for the Utah corporate office in September 2020 and ceasing operations at our manufacturing node in Georgia in the fourth quarter of 2020. Furthermore, with the cessation of SkinTE sales we re-allocated manufacturing supplies and compensation from general and administrative expenses to research and development costs. The cost cutting measures and re-allocation of costs described above are the primary causes of a 32% decrease in general and administrative expense period over period for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.

When we reduced our commercial sales team and related commercial activities beginning in May 2020 and May 2021, we also took steps to reduce staff and consultants in sales and marketing. With the cessation of SkinTE sales several employees who supported sales and marketing moved into new roles in research and development, so their compensation was allocated to research and development. Consequently, there were significant reductions in cash compensation, stock compensation, consulting fees, and travel expense, which resulted in a 63% decrease in sales and marketing expense for the three months ended September 30, 2021, compared to the three months ended September 30, 2020.

We realized restructuring and other charges as a result of the transition to a clinical stage company, much of which was recognized in the nine-month period ended September 30, 2020. The reduction in force in March 2020 resulted in a severance charge of $0.5 million, and the subsequent reduction in May 2020 resulted in a charge of $0.6 million. In the second quarter of 2020 we also decided to abandon equipment in addition to the development of a vivarium research facility at our Salt Lake City location resulting in a charge of $1.5 million. By contrast, during the nine month-period ended September 30, 2021, we recognized a loss on impairment of property and equipment in the amount of $0.4 million and severance charges of $0.6 million, which were offset by a $0.3 million gain on the termination of our Augusta node lease. Consequently, there was a 73% decrease in restructuring and other charges for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.

~~Operating Loss and Net Loss~~. Operating loss decreased $13.1 million, or 35%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. Net loss decreased $11.2 million, or 34%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.

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. As a result of the periodic remeasurement we recorded a gain for change in fair value of common stock warrant liability of $4.1 million for the nine months ended September 30, 2021, compared to a gain of $4.4 million for the nine months ended September 30, 2020. 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.

When the PPP Loan was forgiven in June 2021, we recognized a gain on extinguishment of debt in the amount of $3.6 million. For the nine months ended September 30, 2021, this gain was offset by a day one loss on warrants issued in January 2021 of $5.2 million, which together with the change in fair value of common stock warrant liability, primarily accounts for the difference of $2.6 million between our operating loss and net loss for the nine months ended September 30, 2021.

Non-GAAP Financial Measure

The table below ~~shows~~provides a reconciliation of 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, to GAAP net loss. We believe ~~this measure~~adjusted net loss 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 was used in calculating net loss per share under GAAP. Other companies may calculate adjusted net loss differently than we do. Adjusted net loss has limitations as an analytical tool and you should not consider adjusted net loss in isolation or as a substitute for our financial results prepared in accordance with GAAP.

Adjusted Net Loss Attributable to Common Stockholders

(in thousands - unaudited non-GAAP measure)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2021 2020 2021 2020
GAAP Net Loss $ (1,021 ) $ (7,081 ) $ (21,619 ) $ (32,798 )
Change in fair value of common stock warrant liability (6,354 ) (1,503 ) (4,134 ) (4,444 )
Inducement loss on sale of liability classified warrants – – 5,197 –
Non-GAAP adjusted net loss attributable to common stockholders - basic $ (7,375 ) $ (8,584 ) $ (20,556 ) $ (37,242 )
Gain from change in fair value of warrant liabilities (174 ) – (27 ) –
Non-GAAP adjusted net loss attributable to common stockholders - diluted $ (7,549 ) $ (8,584 ) $ (20,583 ) $ (37,242 )
GAAP net loss per share attributable to common stockholders
Basic $ (0.01 ) $ (0.18 ) $ (0.27 ) $ (0.89 )
Diluted $ (0.01 ) $ (0.18 ) $ (0.27 ) $ (0.89 )

Non-GAAP adjusted net loss per share attributable to common stockholders
Basic $ (0.09 ) $ (0.22 ) $ (0.26 ) $ (1.01 )
Diluted $ (0.09 ) $ (0.22 ) $ (0.26 ) $ (1.01 )

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2022			2021			2022			2021
GAAP Net Loss	$	(68	)	$	(3,188	)	$	(3,839	)	$	(20,598	)
Change in fair value of common stock warrant liability		(6,630	)		(1,807	)		(11,735	)		2,220
Inducement loss on sale of liability classified warrants		–			–			–			5,197
Non-GAAP adjusted net loss attributable to common stockholders – basic & diluted	$	(6,698	)	$	(4,995	)	$	(15,574	)	$	(13,181	)

GAAP net loss per share attributable to common stockholders
Basic*	$	(0.01	)	$	(0.99	)	$	(0.85	)	$	(6.57	)
Diluted*	$	(0.49	)	$	(1.01	)	$	(1.37	)	$	(6.57	)

Non-GAAP adjusted net loss per share attributable to common stockholders
Basic and diluted*	$	(1.30	)	$	(1.55	)	$	(3.45	)	$	(4.20	)

*Giving retroactive effect to the 1-for-25 reverse stock split effectuated on May 16, 2022

Critical Accounting Policies and Estimates

~~Revenue Recognition. With respect to revenue recognition~~The preparation of financial statements in ~~contract services provided by IBEX, revenues generally consist~~accordance with GAAP requires both the use of ~~a single performance obligation that IBEX satisfies over time using an input method based on costs incurred to date~~estimates and judgment relative to the ~~total costs expected~~application of appropriate accounting policies. We are required to make estimates and assumptions in certain circumstances that affect amounts reported in the Unaudited Condensed Consolidated Financial Statements and related footnotes. We evaluate these estimates and assumptions on an ongoing basis based on historical developments, market conditions, industry trends, and other information that we believe to be ~~required~~reasonable under the circumstances. There can be no assurance that actual results will conform to ~~satisfy~~these estimates and assumptions or that reported results of operations will not be materially and adversely affected by the ~~performance obligation. We believe that this method provides a faithful depiction~~need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. Our critical accounting policies are more fully described in Part II, Item 7 “Management’s Discussion and Analysis of ~~the transfer~~Financial Condition and Results of ~~services over the term of the performance obligation based on the remaining services needed to satisfy the obligation. This requires that~~Operations” presented in our services personnel at IBEX make reasonable estimates of the extent of progress toward completion of the contract and, as a result, unbilled receivables and deferred revenue are recognized based on payment timing and work completed.2021 Annual Report. There have been no changes in our critical accounting policies from December 31, 2021.

~~Stock-Based Compensation~~. We measure all stock-based compensation to employees and non-employees using a fair value method. For stock options with graded vesting, we recognize compensation expense over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards based on the fair value on the date of grant. The fair value for options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the grant commensurate with the expected term of the option. The volatility factor is determined based on our 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 our common stock on the date of grant and amortized to compensation expense over the vesting period of, generally, six months to three years.

~~Common Stock Warrant Liability~~. The fair value of the common stock warrant 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 stock price as well as estimated change of control considerations.

Disclosure Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. Risks and uncertainties are inherent 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 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”). All statements other 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,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

●

our ability to raise capital to fund our operations;

●

the timing or success of obtaining regulatory licenses or approvals for initiating clinical trials or marketing our products;

●

the initiation, timing, progress, cost, and results of clinical trials under our ~~pre-clinical studies or clinical trials;~~open IND for DFUs;

●

the initiation, timing, progress, cost, and results of other INDs for SkinTE in additional indications and the clinical trials that may be required under those INDs;

●

sufficiency of our working capital to fund our operations ~~over~~in the ~~next 12 months;~~near and long term, which raises doubt about our ability to continue as a going concern;

●

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 target markets; and

●

the initiation, timing, progress, and results of our research and development programs.

Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, without limitation:

●

the need for, and ability to obtain, additional financing in the future;

●

the ability to comply with regulations applicable to the ~~delivery~~development, production, and distribution of SkinTE;

●

the timing and requirements associated with obtaining FDA acceptance of our ~~services;~~second clinical trial;

●

the ability to ~~meet demand for~~obtain subject enrollment in our ~~services;~~trials at a pace that allows the trials to progress on the schedules we have established with our CRO;

●

unexpected developments or delays in the ~~ability to deliver~~progress of our ~~services if employees are quarantined due to the impact of COVID-19;~~clinical trials;

●

the scope of protection we can establish and maintain for intellectual property rights covering our product candidates and technology;

●

the ability to gain adoption by healthcare providers of our products for patient care;

●

developments relating to our competitors and industry;

●

new discoveries or the development of new therapies or technologies that render our products or services obsolete or unviable;

●

the ability to find and retain skilled personnel;

●

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 (such as the conflict between Russia and Ukraine), terrorism, pandemics, or other sources;

●

~~the ability to gain adoption by healthcare providers of our products for patient care;~~changes in economic conditions, including inflation, rising interest rates, lower consumer confidence, and volatile equity capital markets;

	●	~~the ability to find and retain skilled personnel;~~
	●	~~the need for, and ability to obtain, additional financing in the future;~~
	●	~~general economic conditions;~~
	●	inaccuracies in estimates of our expenses, future revenues, and capital requirements;

●

future accounting pronouncements; and

	●	unauthorized access to confidential information and data on our information technology systems and security and data ~~breaches; and~~
	●	~~the other risks and uncertainties described in this report under Part II, Item 1A. Risk Factors.~~breaches.

Forward-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 update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report on Form 10-Q may also ~~contains~~contain 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 circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained ~~this~~ industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by 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 such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) 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~~June 30, ~~2021,~~2022, 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~~June 30, ~~2021,~~2022, that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal ~~control~~controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

~~See Notes 14~~For a description of our material pending legal proceedings, see Note 16, “Commitments and ~~17 to~~Contingencies—Contingencies” in the ~~Condensed Consolidated Financial Statements (unaudited)~~condensed consolidated financial statements included in this ~~report for information regarding the status of legal proceedings involving the Company.~~report.

Item 1A. Risk Factors

You should carefully consider the factors discussed below and in Part I, “Item 1A. Risk Factors” in our 2021 Annual Report, ~~on Form 10-K for the fiscal year ended December 31, 2020, and our Current Report on Form 8-K filed with the SEC on July 26, 2021,~~ which could materially affect our business, financial position, or future results of operations. The risks described below and in ~~those reports~~our 2021 Annual Report 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.~~operations, and prospects.

Risks Related to Our Financial Condition

We will need additional funding to pursue the regulatory process for SkinTE and sustain our operations, and we may be unable to raise capital when needed, which would force us to delay, reduce, eliminate, or abandon our product development ~~programs.~~program.

We reported ~~a net~~an operating loss of ~~$21.6~~$15.6 million for the ~~nine months~~six-month period ended ~~September~~June 30, ~~2021,~~2022, and ~~at September 30, 2021,~~on that date we had had an accumulated deficit of ~~$499.8~~$512.2 million. We believe our cash and cash equivalents ~~on our balance~~at June 30, 2022, will fund our current business plan including related operating expenses and capital expenditure requirements into ~~but not beyond,~~ the ~~fourth~~first calendar quarter of ~~2022.~~2023. Accordingly, there is substantial doubt about our ability to continue as a going concern beyond that time unless we can raise additional capital from external sources.

We expect to incur significant operating costs in the near term as we pursue the regulatory process for SkinTE with the FDA, conduct clinical trials and studies, and pursue product research, all while operating our business ~~segments~~ and incurring continuing fixed costs related to the maintenance of our assets and business. We ~~do not expect net revenues from our business segments will be enough to defray our costs of doing business. Consequently, we~~ expect to incur significant losses in the future, and those losses could be more severe as a result of unforeseen expenses, difficulties, complications, delays, and other unknown events. As a result of the disposition of IBEX in April 2022, we are no longer engaged in any revenue generating activity that would contribute to defraying our operating costs in future periods, which will make us entirely dependent on capital obtained from external sources to fund our operations. The impact of COVID-19, inflation, and other macroeconomic issues have and may continue to adversely affect capital markets and could limit our ability to obtain the capital we need to operate our business.

We may not be able to obtain necessary capital in sufficient amounts, on terms favorable to us, or at all. If adequate funds are not available ~~to us~~for our business in the future, we may be required to delay, reduce the scope of, or eliminate ~~our~~the plans for obtaining regulatory licensure or approval for SkinTE or be unable to continue operations over a longer term, any of which would have a material adverse effect on our business, financial condition, ~~and~~ results of ~~operation.~~

~~Our wholly owned subsidiary accepted a loan under the CARES Act pursuant to the Paycheck Protection Program (“PPP”),~~operation, and the loan may subject us to challenges, audits, or investigations regarding qualification for the loan, any of which could reduce our liquidity and have a material adverse effect on our business, financial condition, and results of operations.

On April 15, 2020, PTE-MD entered into a promissory note with the Lender evidencing an unsecured loan in the amount of $3,576,145 made to PTE-MD under the PPP (the “PPP Loan”). On October 15, 2020, PTE-MD applied to the Lender for forgiveness of the PPP Loan in its entirety (as provided for in the CARES Act) based on PTE-MD’s use of the PPP Loan for payroll costs, rent, and utilities. On October 26, 2020, PTE-MD 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 subsequently approved PTE-MD’s application for forgiveness of the PPP Loan, and the principal and interest of $3,612,376 was fully paid by the SBA on June 12, 2021.

Pursuant to the requirements under the CARES Act, in connection with the PPP Loan PTE-MD certified that current economic uncertainty made the Loan request necessary to support the ongoing operations of PTE-MD. We believe that certification was made in a manner consistent with SBA guidance that borrowers must make the certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. In connection with our application for forgiveness of the PPP Loan we provided information on the use of the PPP Loan proceeds for payroll costs, rent, and utilities, which are permitted uses to qualify for forgiveness of the loan.

Under the CARES Act the SBA may review any PPP loan of any size at any time at its discretion. On September 17, 2021, we received notice from the Lender that the SBA is continuing to review the PPP Loan. As part of this review, the SBA requested that we provide documents that we are required to maintain but may not have been required to submit with our application for the PPP Loan. These documents included an affiliation worksheet showing the relationship between us and PTE-MD and affiliated subsidiaries, documents showing the use of the PPP Loan proceeds, documents showing our calculation of the loan amount we requested in our loan application, our federal tax returns, and documents showing employee compensation information. We submitted the documents to the SBA through the Lender on September 28, 2021.

There is no assurance the SBA will conclude PTE-MD properly applied for, and used the proceeds of, the PPP Loan. If there is any adverse finding in the SBA review or if the PTE-MD were alleged, or determined, not to qualify for the Loan or alleged, or found, to have made false certifications in connection with the PPP Loan and its forgiveness, PTE-MD could be required to return the full amount of the Loan, which would reduce its liquidity, and could subject it to fines and penalties, and exclusion from government contracts. In particular, PTE-MD may become subject to actions under the FCA, including its qui tam provisions, which, among other things, prohibits persons from knowingly filing, or knowingly causing to be filed, a false statement, or knowingly using a false statement, to obtain payment from the federal government. Violations of the FCA are subject to treble damages and penalties. In the case of an SBA loan, the government could allege that single damages are the amount of the loan and interest thereon (or more), which under the FCA could then be trebled. Substantial penalties must also be imposed for each submitted false statement when a defendant loses an FCA trial. FCA cases may be initiated by the U.S. Department of Justice or by private persons or entities, often called “whistleblowers,” who bring the action on behalf of the United States. PTE-MD may also face enforcement arising under other federal statutes, including criminal laws, and administrative actions and investigations initiated by SBA or other governmental entities. Furthermore, if PTE-MD is identified as an entity that the media, government officials, or others seek to portray as a business that should not have availed itself of PPP funding, PTE-MD may face negative publicity, which could have a materially adverse impact on its business and operations and on our business and operations as its parent. Generally, the cost of defending claims under the FCA, regardless of merit, could be substantial, even as much as the PPP loan proceeds.prospects.

~~Risks Related to our Research & Development, Clinical, and Commercialization Activities~~General risks

~~Our product is subject to extensive regulation by the FDA or comparable foreign regulatory authorities, which can be costly and time consuming, cause unanticipated delays or prevent the receipt~~The trading price of the ~~required approvals~~shares of our common stock has declined and may continue to ~~commercialize~~be volatile, which could adversely affect an investment in our ~~product.~~stock and our ability to raise capital.

Investors should consider an investment in our securities as risky and invest only if they can withstand a significant loss and wide fluctuations in the market value of their investment. Holders of our stock may be unable to sell their shares of common stock at or above the price paid for the shares due to fluctuations in the market price of our common stock arising. Our stock price has been highly volatile during the 12-month period ended June 30, 2022, with closing stock prices ranging from a high of $24.875 per share to a low of $1.45 per share.

The ~~clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, export, marketing, and distribution of SkinTE is subject~~price at which our common stock trades may continue to extensive regulation by the FDA and other U.S. regulatory agencies, or comparable authorities in foreign markets. In the U.S. we are not permitted, directly or through others, to market our product until the FDA approves a BLA for SkinTE. Similar approval is required in foreign jurisdictions. The process of obtaining these approvals is expensive, often takes many years, and can vary substantially based upon the type, complexity, and novelty of the product candidate involved. Approval policies or regulations may changefluctuate significantly and may be influenced by many factors, including our financial condition; developments generally affecting our industry; general economic, industry and market conditions; the ~~results~~depth and liquidity of the market for our common stock; investor perceptions of our business; reports by industry analysts; announcements by other market participants, including, among others, investors and our competitors; regulatory action affecting our business; and, the impact of other ~~similar or competitive products, making it more difficult for us to achieve such approval~~risk factors discussed in ~~a timely manner or at all. Any guidance that may result from FDA advisory committee discussions may make it more expensive to develop~~our 2021 Annual Report and ~~commercialize our product.~~this Quarterly Report on Form 10-Q. In addition, ~~as a company, we have not previously filed a BLA~~changes in the trading price of our common stock may be inconsistent with ~~the FDA or filed a similar application with other foreign regulatory agencies. This lack of experience may impede~~ our ~~ability to obtain FDA or other foreign regulatory agency approval in a timely manner, if at all, for our product.~~operating results and outlook.

~~Despite~~Declines and volatility in the ~~time~~market price of our common stock have and ~~expense invested, regulatory approval is never guaranteed. The FDA~~may continue to materially and adversely affect our ability to fund our business through public or ~~comparable foreign authorities can delay, limit, or deny approval~~private sales of ~~a product candidate for many reasons, including:~~

●

~~a product candidate may not be deemed safe or effective;~~

	●	agency officials of the FDA or comparable foreign regulatory authorities may not find the data from non-clinical or preclinical studies and clinical trials generated during development to be sufficient;

	●	~~the FDA or comparable foreign regulatory authorities may not approve manufacturing processes or facilities; or~~

	●	~~the FDA or a comparable foreign regulatory authority may change its approval policies or adopt new regulations.~~

~~Our inability~~equity securities and the retentive power of our equity compensation plans, which we rely upon in part to ~~obtain these approvals would prevent us from commercializing our product.~~retain key executives and employees.

~~The FDA regulatory approval process is lengthy and time-consuming, and we~~Unfavorable global economic or political conditions could ~~experience significant delays~~adversely affect our business or ~~other challenges in the clinical development and regulatory approval of our product.~~financial condition.

~~We may experience delays~~Our business and our ability to raise capital are susceptible to general conditions in the global economy and in the global financial markets. Further, the impacts of political unrest, including as a result geopolitical tension, such as a deterioration in the relationship between the U.S. and China or escalation in conflict between Russia and Ukraine, including any additional sanctions, export controls, or other ~~challenges~~restrictive actions that may be imposed by the U.S. or other countries against governmental or other entities in, ~~commencing~~for example, Russia, also could lead to disruption, instability, and ~~completing clinical trials for SkinTE. We do not know whether planned clinical trials will begin~~volatility in the global markets, which may have an adverse impact on ~~time, need~~our business or ability to ~~be redesigned, enroll trial subjects~~access the capital markets. Inflation rates have increased and may continue to rise. A severe or prolonged economic downturn, including a recession or depression resulting from the ongoing COVID-19 pandemic, political disruption, or inflation could result in a variety of risks to our business and our ability to raise additional capital when needed on ~~time, or be completed on schedule,~~acceptable terms, if at all. Any of ~~our future clinical trials may be delayed or precluded for a variety of reasons, including issues related to:~~

	●	~~the availability of financial resources for us to commence and complete our planned clinical trials;~~

	●	reaching agreement on acceptable terms with prospective contract research organizations (“CROs”) and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and clinical trial sites;

	●	~~obtaining approval of each reviewing institutional review board (“IRB”);~~

	●	~~obtaining regulatory approval for clinical trials in each country;~~

	●	~~recruiting sufficient numbers of suitable trial subjects to participate in clinical trials;~~

	●	~~competing priorities at clinical trial sites or departures of study investigators or personnel;~~

	●	~~having trial subjects complete a clinical trial or return for post-treatment follow-up;~~

	●	~~clinical trial sites deviating from trial protocol or dropping out of a trial;~~

	●	~~adding new clinical trial sites;~~

	●	~~developing one or more new formulations or routes of administration; or~~

	●	~~manufacturing sufficient quantities of our product candidate for use in clinical trials.~~

~~Trial subject enrollment, a significant factor in~~ the timing and success of clinical trials, is affected by many factors including the size and nature of the trial subject population, the proximity of trial subjects to clinical sites, the eligibility criteria for the clinical trial, the potential impact of COVID-19 or other pandemic, the design of the clinical trial, competing clinical trials and clinicians, and trial subjects’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any therapies that may be approved for the indications we are investigating. In addition, significant numbers of trial subjects who enroll in our clinical trials may drop out during the clinical trials for various reasons. We endeavor to account for dropout rates in our trials when determining expected clinical trial timelines, but we cannot assure you that our assumptions are correct, or that trials will not experience higher numbers of dropouts than anticipated, which would result in the delay of completion of such trials beyond our expected timelines, if at all.

Weforegoing could encounter delays if physicians encounter unresolved ethical issues associated with enrolling trial subjects in clinical trials of our product candidate in lieu of prescribing existing treatments that have established safety and efficacy profiles. Further, a clinical trial may be delayed, suspended, or terminated by us, any reviewing IRB, the institutions in which such trial is conducted, the data monitoring committee for such trial, or by the FDA or other regulatory authorities due to a number of factors, including inadequate protocols or other information supporting an IND, failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product candidate, changes in governmental regulations, or administrative actions or lack of adequate funding to continue the clinical trial. If we experience suspension or termination of, or delays in the completion of, any clinical trial for our product, the commercial prospects for the product will be harmed, and our ability to generate product revenues will be delayed or diminished. In addition, any delays in initiating or completing our clinical trials will increase our costs, slow down our product development and approval process, and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, prospects, financial condition, and results of operations significantly. Furthermore, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product.

~~In connection with clinical trials, we face risks that:~~

	●	~~regulatory approval of a proposed clinical trial may be delayed or not granted;~~

	●	~~IRBs may delay approval of, or fail to approve, a clinical trial at a prospective site;~~

	●	~~there may be a limited number of, and significant competition for, suitable trial subjects for enrollment in the clinical trials;~~

	●	~~there may be slower than expected rates of trial subject recruitment and enrollment;~~

	●	~~trial subjects may fail to complete the clinical trials;~~

	●	~~there may be an inability or unwillingness of trial subjects or medical investigators to follow our clinical trial protocols;~~

	●	~~there may be an inability to monitor trial subjects adequately during or after treatment;~~

	●	~~there may be termination of the clinical trials by one or more clinical trial sites;~~

	●	~~unforeseen ethical or safety issues may arise;~~

	●	conditions of trial subjects may deteriorate rapidly or unexpectedly, which may cause the trial subjects to become ineligible for a clinical trial or may prevent our product from demonstrating efficacy or safety;

	●	~~trial subjects may die or suffer other adverse effects for reasons that may or may not be related to our product being tested;~~

	●	we may not be able to sufficiently standardize certain of the tests and procedures that are part of our clinical trials because such tests and procedures are highly specialized and involve a high degree of expertise;

	●	~~a product candidate may not prove to be efficacious in all or some trial subject populations;~~

	●	~~the results of the clinical trials may not confirm the results of earlier trials;~~

	●	~~the results of the clinical trials may not meet the level of statistical significance required by the FDA or other regulatory agencies;~~

	●	~~there may be data discrepancies or documentation issues in the clinical trials that raise questions about data integrity or reliability; and~~

	●	~~a product candidate may not have a favorable risk/benefit assessment in the disease areas studied.~~

We cannot assure you that any future clinical trial for our product will be started or completed on schedule, or at all. Any failure or significant delay in completing clinical trials for our product would harm the commercial prospects for the productmaterially and adversely affect our business, financial ~~results. Difficulties~~condition, results of operation, and ~~failures can occur at any stage of clinical development,~~prospects, and we cannot ~~assure you that we will be able to successfully complete the development and commercialization of our product in any indication.~~

Changes in funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new products and services from being developed or commercialized in a timely manner, which could negatively impact our business.

~~The ability~~anticipate all of the FDA to review and approve new products can be affected by a variety of factors, including (i) government budget and funding levels, (ii) the ability to hire and retain key personnel and accept the payment of user fees, and (iii) statutory, regulatory, and policy changes. Average review times at the agency have fluctuatedways in ~~recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to~~which the political, ~~process, which is inherently fluid and unpredictable.~~

~~Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed~~economic, or ~~approved by necessary government agencies, which would~~financial market conditions could adversely affect its business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact ~~the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on~~ our business.

Even if we obtain and maintain regulatory approval for our product in one jurisdiction, we may never obtain regulatory approval for the product in any other jurisdiction, which would limit our market opportunities and adversely affect our business.

Obtaining and maintaining regulatory approval for our product in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory approval in other jurisdictions. For example, even if the FDA grants marketing approval for SkinTE, comparable regulatory authorities in foreign countries must also approve the manufacturing, marketing, and promotion of the product in those countries. Approval procedures vary amongst jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials. In many countries outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for our product is also subject to approval.

Regulatory authorities in countries outside of the United States also have requirements for approval of product candidates that we must comply with prior to marketing in those countries. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties, and costs for us and could delay or prevent the introduction of our product in certain countries.

Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not ensure approval in any other country, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval process in others. Also, regulatory approval for any product may be withdrawn. If we fail to comply with the regulatory requirements in international markets or fail to receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product will be harmed, which would adversely affect our business, prospects, financial condition, and results of operations.

~~Even if any of our product candidates receive regulatory approval, our product candidates may still face future development and regulatory difficulties.~~

If our product receives regulatory approval, the FDA or comparable foreign regulatory authorities may still impose significant restrictions on the indicated uses or marketing of the product or impose ongoing requirements for potentially costly post-approval studies and trials or other risk mitigation measures. In addition, regulatory agencies subject a product, its manufacturer, and the manufacturer’s facilities to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, any future licensee, or us, including requiring withdrawal of the product from the market. Our product candidates will also be subject to ongoing FDA or comparable foreign regulatory authorities’ requirements for the labeling, packaging, storage, advertising, promotion, record-keeping, and submission of safety and other post-market information on the drug. If our product fails to comply with applicable regulatory requirements, a regulatory agency may:

	●	~~issue warning letters or other notices of possible violations;~~

	●	~~impose civil or criminal penalties or fines or seek disgorgement of revenue or profits;~~

	●	~~suspend any ongoing clinical trials;~~

	●	~~refuse to approve pending applications or supplements to approved applications filed by us or our licensees;~~

	●	~~withdraw any regulatory approvals;~~

	●	~~impose restrictions on operations, including costly new manufacturing requirements, or shut down our manufacturing operations; or~~

	●	~~seize or detain product or require a product recall.~~

~~The FDA and comparable foreign authorities actively enforce the laws and regulations prohibiting the promotion of off-label uses.~~

The FDA and comparable foreign authorities strictly regulate the promotional claims that may be made about drug and biological products, such as SkinTE, if approved. In particular, a product may not be promoted for uses that are not approved by the FDA or comparable foreign authorities as reflected in the product’s approved labeling. If we receive marketing approval for our product for our proposed indications, physicians may nevertheless use our products for their patients in a manner that is inconsistent with the approved label, if the physicians personally believe in their professional medical judgment that our products could be used in such manner.

However, if we are found to have promoted our products for any off-label uses, the federal government could levy civil, criminal, or administrative penalties, and seek to impose fines on us. Such enforcement has become more common in the industry. The FDA or comparable foreign authorities could also request that we enter into a consent decree or a corporate integrity agreement or seek a permanent injunction against us under which specified promotional conduct is monitored, changed, or curtailed. If we cannot successfully manage the promotion of our product, if approved, we could become subject to significant liability, which would materially adversely affect our business, financial condition, and results of operations.

We, and any contract manufacturer we may engage in the future, are subject to significant regulation with respect to manufacturing our product. The manufacturing facilities on which we rely may not continue to meet regulatory requirements.

All entities involved in the preparation of therapeutics for clinical trials or commercial sale, including us and any contract manufacturer we may engage in the future, are subject to extensive regulation. Components of a finished therapeutic product approved for commercial sale or used in clinical trials must be manufactured in accordance with current Good Manufacturing Practices (“cGMP”). These regulations govern manufacturing facilities, processes, and procedures and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes or facilities can lead to the introduction of contaminants or to inadvertent changes in the properties or stability of our product candidates that may not be detectable in final product testing. We or our contract manufacturers must supply all necessary documentation in support of a BLA or change in manufacturing site after a BLA is issued on a timely basis and must adhere to cGMP regulations enforced by the FDA or comparable foreign authorities through their facilities inspection program. The facilities and quality systems of our facility where we will manufacture SkinTE must pass a pre-approval inspection for compliance with the applicable regulations as a condition of regulatory approval of our product. In addition, the regulatory authorities may, at any time, with or without cause, audit or inspect a manufacturing facility involved with the preparation of our product or the associated quality systems for compliance with the regulations applicable to the activities being conducted. If our facility does not pass a pre-approval plant inspection, regulatory approval of our product may not be granted or may be substantially delayed until any deficiencies are corrected to the satisfaction of the regulatory authority, if ever. If we engage contract manufacturers in the future we intend to oversee the contract manufacturers, but we cannot control the manufacturing process and will be completely dependent on our contract manufacturing partners for compliance with the regulatory requirements.

The regulatory authorities also may, at any time following approval of a product for sale, audit our facility or the manufacturing facilities of our third-party contractors. If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulations occurs independent of such an inspection or audit, we or the relevant regulatory authority may require remedial measures that may be costly or time consuming for us or a third party to implement, and that may include the temporary or permanent suspension of a clinical trial or commercial sales or the temporary or permanent closure of a facility. Any such remedial measures imposed upon us or third parties with whom we contract could materially harm our business, financial condition, and results of operations.

If we or any of our third-party manufacturers fail to maintain regulatory compliance, the FDA or comparable foreign authorities can impose regulatory sanctions including, among other things, refusal to approve a pending application for a product candidate, withdrawal of an approval, or suspension of production. As a result, our business, financial condition, and results of operations may be materially and adversely affected.

Additionally, if supply from our facility or the facility of a future contract manufacturer is interrupted, an alternative manufacturer would need to be qualified through a BLA supplement, or equivalent foreign regulatory filing, which could result in further delay. The regulatory agencies may also require additional studies or trials if a new manufacturer is relied upon for commercial production. Switching manufacturing facilities may involve substantial costs and is likely to result in a delay in our desired clinical and commercial timelines.

These factors could cause us to incur higher costs and could cause the delay or termination of clinical trials, regulatory submissions, required approvals, or commercialization of our product. Furthermore, if our facility or future contract manufacturers fail to meet production requirements and we are unable to secure one or more replacement manufacturing facilities capable of production at a substantially equivalent cost, our clinical trials may be delayed, or we could lose potential revenue.

~~If we fail to obtain and sustain an adequate level of reimbursement for our product by third-party payors, potential future sales would be materially adversely affected.~~

There will be no viable commercial market for our product, if approved, without reimbursement from third-party payors. Reimbursement policies may be affected by future healthcare reform measures. We cannot be certain that reimbursement will be available for our product. Additionally, even if there is a viable commercial market, if the level of reimbursement is below our expectations, our anticipated revenue and gross margins will be adversely affected.

Third-party payors, such as government or private healthcare insurers, carefully review and increasingly question and challenge the coverage of and the prices charged for drugs. Reimbursement rates from private health insurance companies vary depending on the company, the insurance plan, and other factors. Reimbursement rates may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. There is a current trend in the U.S. healthcare industry toward cost containment.

Large public and private payors, managed care organizations, group purchasing organizations, and similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, may question the coverage of, and challenge the prices charged for, medical products and services, and many third-party payors limit coverage of or reimbursement for newly approved healthcare products. In particular, third-party payors may limit the covered indications. Cost-control initiatives could decrease the price we might establish for products, which could result in product revenues being lower than anticipated. If we are unable to show a significant benefit relative to existing therapies, Medicare, Medicaid, and private payors may not be willing to provide reimbursement for our product, which would significantly reduce the likelihood of our product gaining market acceptance.

We expect that private insurers will consider the efficacy, cost-effectiveness, safety, and tolerability of our product in determining whether to approve reimbursement and at what level. Obtaining these approvals can be a time consuming and expensive process. Our business, financial condition, and results of operations would be materially adversely affected if we do not receive approval for reimbursement of our product from private insurers on a timely or satisfactory basis. Limitations on coverage could also be imposed at the local Medicare carrier level or by fiscal intermediaries. Medicare Part D, which provides a pharmacy benefit to Medicare patients as discussed below, does not require participating prescription drug plans to cover all drugs within a class of products. Our business, financial condition, and results of operations could be materially adversely affected if Part D prescription drug plans were to limit access to, or deny or limit reimbursement of, our product.

Reimbursement systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis. In many countries, the product cannot be commercially launched until reimbursement is approved. In some foreign markets, prescription drug pricing remains subject to continuing governmental control even after initial approval is granted. The negotiation process in some countries can be very long. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our products to other available therapies.

If the prices for our product are reduced or if governmental and other third-party payors do not provide adequate coverage and reimbursement of our product, our future revenue, cash flows, and prospects for profitability will suffer.

~~Current and future legislation may increase the difficulty and cost of commercializing our product and may affect the prices we may obtain if our product is approved for commercialization.~~

In the U.S. and some foreign jurisdictions, there have been a number of adopted and proposed legislative and regulatory changes regarding the healthcare system that could prevent or delay regulatory approval of our product, restrict or regulate post-marketing activities, and affect our ability to profitably sell our product.

In the U.S., the Medicare Modernization Act of 2003 (“MMA”) changed the way Medicare covers and pays for pharmaceutical products. Cost reduction initiatives and other provisions of this legislation could limit the coverage and reimbursement rate that we receive for our product. While the MMA only applies to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.

The Patient Protection and Affordable Care Act (“PPACA”) was intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against healthcare fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry, and impose additional health policy reforms. The PPACA increased manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate amount for both branded and generic drugs and revised the definition of Average Manufacturer Price, which may also increase the amount of Medicaid drug rebates manufacturers are required to pay to states. The legislation also expanded Medicaid drug rebates and created an alternative rebate formula for certain new formulations of certain existing products that is intended to increase the rebates due on those drugs. The Centers for Medicare & Medicaid Services, which administer the Medicaid Drug Rebate Program, also proposed to expand Medicaid rebates to the utilization that occurs in the territories of the U.S., such as Puerto Rico and the Virgin Islands. Further, beginning in 2011, the PPACA imposed a significant annual fee on companies that manufacture or import branded prescription drug products and required manufacturers to provide a 50% discount off the negotiated price of prescriptions filled by beneficiaries in the Medicare Part D coverage gap, referred to as the “donut hole.” Legislative and regulatory proposals have been introduced at both the state and federal level to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products.

There have been prior public announcements by members of the federal government regarding their plans to repeal and replace the PPACA and Medicare. For example, the Tax Cuts and Jobs Act of 2017 eliminated the individual mandate requiring most Americans (other than those who qualify for a hardship exemption) to carry a minimum level of health coverage, effective January 1, 2019. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance, or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing approval testing and other requirements.

We are subject to “fraud and abuse” and similar laws and regulations, and a failure to comply with such regulations or prevail in any adverse claim or proceeding related to noncompliance could harm our business, financial condition, and results of operations.

In the U.S., we are subject to various federal and state healthcare “fraud and abuse” laws, including anti-kickback laws, false claims laws, and other laws intended, among other things, to reduce fraud and abuse in federal and state healthcare programs. The federal Anti-Kickback Statute makes it illegal for any person, including a drug manufacturer, or a party acting on its behalf, to knowingly and willfully solicit, receive, offer, or pay any remuneration that is intended to induce the referral of business, including the purchase, order, or prescription of a particular drug, or other good or service, for which payment in whole or in part may be made under a federal healthcare program, such as Medicare or Medicaid. Although we seek to structure our business arrangements in compliance with all applicable requirements, these laws are broadly written, and it is often difficult to determine precisely how the law will be applied in specific circumstances. Accordingly, it is possible that our practices may be challenged under the federal Anti-Kickback Statute.

The federal False Claims Act prohibits anyone from, among other things, knowingly presenting or causing to be presented for payment to the government, including the federal healthcare programs, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services that were not provided as claimed, or claims for medically unnecessary items or services. Under the Health Insurance Portability and Accountability Act of 1996, we are prohibited from knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious, or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items, or services to obtain money or property of any healthcare benefit program. Violations of fraud and abuse laws may be punishable by criminal or civil sanctions, including penalties, fines, or exclusion or suspension from federal and state healthcare programs such as Medicare and Medicaid, and debarment from contracting with the U.S. government. In addition, private individuals have the ability to bring actions on behalf of the government under the federal False Claims Act as well as under the false claims laws of several states.

Many states have adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare services reimbursed by any source, not just governmental payors. In addition, some states have passed laws that require pharmaceutical companies to comply with the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers or the Pharmaceutical Research and Manufacturers of America’s Code on Interactions with Healthcare Professionals. Several states also impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state. There are ambiguities as to what is required to comply with these state requirements and if we fail to comply with an applicable state law requirement, we could be subject to penalties.

Neither the government nor the courts have provided definitive guidance on the application of fraud and abuse laws to our business. Law enforcement authorities are increasingly focused on enforcing these laws, and it is possible that some of our practices may be challenged under these laws. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. If we are found in violation of one of these laws, we could be subject to significant civil, criminal, and administrative penalties, damages, fines, exclusion from governmental funded federal or state healthcare programs, and the curtailment or restructuring of our operations. If this occurs, our business, financial condition, and results of operations may be materially adversely affected.

If we face allegations of noncompliance with the law and encounter sanctions, our reputation, revenues, and liquidity may suffer, and our product, if approved for commercialization, could be subject to restrictions or withdrawal from the market.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to generate revenues from our product, if approved for commercialization. If regulatory sanctions are applied or if regulatory approval is not granted or is withdrawn, our business, financial condition, and results of operations will be adversely affected. Additionally, if we are unable to generate revenues from product sales, our potential for achieving profitability will be diminished and our need to raise capital to fund our operations will increase.

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

During the three-month period ended ~~September~~June 30, ~~2021,~~2022, we withheld or acquired from employees shares of common stock to satisfy 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 which an acquisition occurred.

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
July 2021 159,243 $ .80 N/A N/A
August 2021 24,769 $ .83 N/A N/A
September 2021 21,001 $ .71 N/A N/A
Total 205,013 $ .78
(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
April 2022 3,149 $ 6.60 N/A N/A
May 2022 5,303 $ 4.35 N/A N/A
June 2022 5,424 $ 1.62 N/A N/A
Total 13,876 $ 3.79

Item 5. Other Information
Departure of Directors or Certain Officers; Compensatory Arrangements of Certain Officers.
On August 11, 2022, our Board of Directors (the “Board”), upon the recommendation of the members of the Compensation Committee of the Board, approved an arrangement pursuant to which Cameron Hoyler, our General Counsel, Corporate Secretary, EVP Corporate Development & Strategy, and Chief Compliance Officer, will become a part-time employee beginning August 16, 2022, through an amendment to the Executive Employment Agreement between Mr. Hoyler and us dated August 18, 2021.
After the effective date of the amendment to the Executive Employment Agreement (as so amended, the “Agreement”), Mr. Hoyler will cease to serve in any of the offices listed in the preceding paragraph and will be employed in the position of “Corporate Counsel” to provide advisory services related to our legal matters and, to that end, provide 250 hours of service to the Company in each calendar quarter during the term of the Agreement. Mr. Hoyler’s salary for the 12-month period ending August 15, 2023, is $205,000, which we are obligated to pay in full should Mr. Hoyler be terminated by us without “Cause” (as defined in the Agreement) prior to the end of that 12-month period. There are no other severance payments or benefits under the Agreement. After August 15, 2023, Mr. Hoyler’s salary will be $10,000 per month. Bonus compensation may be paid at our sole discretion. Prior to the amendment of the Agreement, Mr. Hoyler’s annual salary was $350,000, and if he was terminated without Cause or he terminated employment for “Good Reason” (as defined in the Agreement), he was entitled to receive severance payments equal to 12-months of salary, a bonus payment equal to 60% of his annual salary, and reimbursement of health insurance premiums for 12 months following termination.
Mr. Hoyler will not be entitled to participate in any fringe benefits that may be made available to employees or accrue any paid time off. Due to the limited hours of service, we do not expect that Mr. Hoyler will be eligible to participate in our employee benefit plans in which eligibility requires at least 30 hours of service per week or 130 hours of service per month.
If there is a “Fundamental Transaction,” as defined in the Agreement that closes on or before May 15, 2023, Mr. Hoyler will be entitled to receive a payment of $350,000. Prior to the amendment of the Agreement, Mr. Hoyler was entitled to receive upon the occurrence of a Fundamental Transaction and termination of his employment during the 12-month period ending six months following the closing of the Fundamental Transaction a payment of $700,000, a bonus payment equal to 60% of his annual salary, and reimbursement of health insurance premiums for 12 months following termination.
The foregoing description of the Agreement is not complete and is qualified in its entirety by reference to the Employment Agreement with Cameron Hoyler dated August 18, 2021, and Employment Agreement Amendment No. 1 dated August 11, 2022, filed as Exhibits 10.7 and 10.8 to this report, respectively, and are incorporated by reference herein.
4741

Item 6. Exhibits

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

3.1 ~~PolarityTE, Inc.,~~ Restated Certificate of Incorporation of PolarityTE, Inc. (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on October 1, 2021)
3.2 Certificate of Amendment to the Company’s (Third) Restated Certificate of Incorporation(incorporated by reference to Exhibit 3.1 to our Form 8-K filed with the SEC on May 16, 2022)
3.3 Certificate of Elimination of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to our Form 8-K filed with the SEC on June 16, 2022)
4.1 Form of Pre-Funded Common Stock Purchase Warrant – Registered Direct Offering (incorporated by reference to Exhibit 4.1 to our Form 8-K filed with the SEC on June 8, 2022)
4.2 Form of Pre-Funded Common Stock Purchase Warrant – Private Placement Offering (incorporated by reference to Exhibit 4.2 to our Form 8-K filed with the SEC on June 8, 2022)
4.3 Form of Preferred Investment Option (incorporated by reference to Exhibit 4.3 to our Form 8-K filed with the SEC on June 8, 2022)
4.4 Form of Placement Agent Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.4 to our Form 8-K filed with the SEC on June 8, 2022)
10.1 Stock Purchase Agreement between Utah CRO Services, Inc., and JP Lawrence Biomedical, Inc., dated April 14, 2022 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on ~~October 1, 2021).~~April 18, 2022)
~~3.2~~10.2 ~~PolarityTE, Inc., Amended~~Real Estate Purchase and ~~Restated Bylaws – September~~Sale Agreement between IBEX Property LLC, and JP Lawrence Land and Building LLC, dated April 14, 2022 (incorporated by reference to Exhibit 10.2 to our Form 8-K filed with the SEC on April 18, 2022)
10.3 Promissory Note in the Principal Amount of $400,000 dated April 28, ~~2021~~2022 (incorporated by reference to Exhibit 10.3 to our Form 8-K filed with the SEC on May 2, 2022)
10.4 Form of Registered Direct Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on ~~October 1, 2021).~~June 8, 2022)
~~#10.1~~10.5 ~~Employment~~Form of Private Placement Securities Purchase Agreement ~~with Richard Hague dated August 18, 2021~~ (incorporated by reference to Exhibit ~~10.1~~10.2 to our Form 8-K filed with the SEC on ~~August 24, 2021).~~June 8, 2022)
~~#10.2~~10.6 Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.3 to our Form 8-K filed with the SEC on June 8, 2022)
10.7 Employment Agreement with Cameron Hoyler dated August 18, 2021 (incorporated by reference to Exhibit 10.2 to our Form 8-K filed with the SEC on August 24, 2021).
~~#10.3~~10.8 Employment Agreement Amendment No. 1 with ~~Jacob Patterson~~Cameron Hoyler dated August ~~18, 2021 (incorporated by reference to Exhibit 10.3 to our Form 8-K filed with the SEC on August 24, 2021).~~11, 2022
~~#10.4~~ ~~Consulting Agreement with David Seaburg dated September 1, 2021~~
31.1 Certification Pursuant to Rule 13a-14(a)
31.2 Certification Pursuant to Rule 13a-14(a)
32.1 Certification Pursuant to Rule 13a-14(b) and Section 1350, Chapter 63 of Title 18, United States Code
101.INS Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document
101.SCH Inline XBRL Schema Document
101.CAL Inline XBRL Calculation Linkbase Document
101.DEF Inline XBRL Definition Linkbase Document
101.LAB Inline XBRL Label Linkbase Document
101.PRE Inline XBRL Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

# ~~These items are a management contract, compensatory plan, or arrangement.~~
4842
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: ~~November 10, 2021~~August 11, 2022 /s/ Richard Hague
Richard Hague
Chief Executive Officer
Duly Authorized Officer

Date: ~~November 10, 2021~~August 11, 2022 /s/ Jacob Patterson
Jacob Patterson
Chief Financial Officer
Chief Accounting Officer

4943


	For the Three and Nine Months Ended September 30, 2021
	Common Stock					Additional Paid-in			Accumulated Other Comprehensive	Accumulated			Total Stockholders’
	Number			Amount		Capital			Income	Deficit			Equity
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 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
Issuance of common stock, net of issuance costs of $1,319									-
Issuance of common stock, net of issuance costs of $1,319, shares									-
Stock-based compensation expense		–			–		1,651		-		–			1,651
Purchase of ESPP shares									-
Purchase of ESPP shares, shares									-
Stock option exercises		2,500			–		3		-		–			3
Vesting of restricted stock units		565,427			–		–		-		–			–
Shares withheld for tax withholding		(116,593	)		–		(139	)	-		–			(139	)
Forfeiture of restricted stock awards		(34,620	)		–		–		-		–			–
Cancellation of restricted stock awards									-
Cancellation of restricted stock awards, shares									-
Other comprehensive loss									-
Net loss		–			–		–		-		(17,410	)		(17,410	)
Balance – March 31, 2021		80,316,309		$	80	$	523,882		-	$	(495,621	)	$	28,341
Stock-based compensation expense		–			–		1,640		-		–			1,640
Purchase of ESPP shares		49,248			–		28		-		–			28
Vesting of restricted stock units		434,144			1		(1	)	-		–			–
Shares withheld for tax withholding		(57,258	)		–		(53	)	-		–			(53	)
Net loss		–			–		–		-		(3,188	)		(3,188	)
Balance – June 30, 2021		80,742,443		$	81	$	525,496		-	$	(498,809	)	$	26,768
Stock-based compensation expense		–			–		1,317		-		–			1,317
Vesting of restricted stock units		1,025,865			1		(1	)	-		–			–
Shares withheld for tax withholding		(205,013	)		–		(163	)	-					(163	)
Net loss		–			–		–		-		(1,021	)		(1,021	)
Balance – September 30, 2021		81,563,295		$	82	$	526,649		-	$	(499,830	)	$	26,901

	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 September 30, 2020
Warrant liabilities
February 14, 2020 issuance	$	–	$	11,677	$	(4,444	)	$	–	$	7,233

	For the Nine Months ended September 30,
	2020
Stock price	$	1.04 – 1.69
Exercise price	$	2.80
Risk-free rate		0.41 – 1.51	%
Volatility		93.4 – 99.6	%
Remaining term (years)		6.37 – 6.99

	Operating leases			Finance leases
2021 (excluding the nine months ended September 30, 2021)	$	350		$	164
2022		1,219			405
2023		3			336
2024		2			42
Total lease payments		1,574			947
Less:
Imputed interest		(82	)		(93	)
Total	$	1,492		$	854

	Number of Shares			Weighted- Average Exercise Price
Outstanding – December 31, 2020		4,794,567		$	10.03
Granted		1,412,731		$	1.29
Exercised (1)		(2,500	)	$	1.10
Forfeited		(306,067	)	$	11.19
Outstanding – September 30, 2021		5,898,731		$	7.88
Options exercisable, September 30, 2021		4,613,866		$	9.68

	January 14, 2021			September 30, 2021
Stock price	$	1.21		$	0.65
Exercise price	$	1.20		$	1.20
Risk-free rate		0.49	%		0.82	%
Volatility		100.1	%		99.7	%
Remaining term (years)		5.0			4.3

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2021			2020			2021			2020
GAAP Net Loss	$	(1,021	)	$	(7,081	)	$	(21,619	)	$	(32,798	)
Change in fair value of common stock warrant liability		(6,354	)		(1,503	)		(4,134	)		(4,444	)
Inducement loss on sale of liability classified warrants		–			–			5,197			–
Non-GAAP adjusted net loss attributable to common stockholders - basic	$	(7,375	)	$	(8,584	)	$	(20,556	)	$	(37,242	)
Gain from change in fair value of warrant liabilities		(174	)		–			(27	)		–
Non-GAAP adjusted net loss attributable to common stockholders - diluted	$	(7,549	)	$	(8,584	)	$	(20,583	)	$	(37,242	)
GAAP net loss per share attributable to common stockholders
Basic	$	(0.01	)	$	(0.18	)	$	(0.27	)	$	(0.89	)
Diluted	$	(0.01	)	$	(0.18	)	$	(0.27	)	$	(0.89	)

Non-GAAP adjusted net loss per share attributable to common stockholders
Basic	$	(0.09	)	$	(0.22	)	$	(0.26	)	$	(1.01	)
Diluted	$	(0.09	)	$	(0.22	)	$	(0.26	)	$	(1.01	)

3.1	~~PolarityTE, Inc.,~~ Restated Certificate of Incorporation of PolarityTE, Inc. (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on October 1, 2021)
3.2	Certificate of Amendment to the Company’s (Third) Restated Certificate of Incorporation(incorporated by reference to Exhibit 3.1 to our Form 8-K filed with the SEC on May 16, 2022)
3.3	Certificate of Elimination of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to our Form 8-K filed with the SEC on June 16, 2022)
4.1	Form of Pre-Funded Common Stock Purchase Warrant – Registered Direct Offering (incorporated by reference to Exhibit 4.1 to our Form 8-K filed with the SEC on June 8, 2022)
4.2	Form of Pre-Funded Common Stock Purchase Warrant – Private Placement Offering (incorporated by reference to Exhibit 4.2 to our Form 8-K filed with the SEC on June 8, 2022)
4.3	Form of Preferred Investment Option (incorporated by reference to Exhibit 4.3 to our Form 8-K filed with the SEC on June 8, 2022)
4.4	Form of Placement Agent Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.4 to our Form 8-K filed with the SEC on June 8, 2022)
10.1	Stock Purchase Agreement between Utah CRO Services, Inc., and JP Lawrence Biomedical, Inc., dated April 14, 2022 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on ~~October 1, 2021).~~April 18, 2022)
~~3.2~~10.2	~~PolarityTE, Inc., Amended~~Real Estate Purchase and ~~Restated Bylaws – September~~Sale Agreement between IBEX Property LLC, and JP Lawrence Land and Building LLC, dated April 14, 2022 (incorporated by reference to Exhibit 10.2 to our Form 8-K filed with the SEC on April 18, 2022)
10.3	Promissory Note in the Principal Amount of $400,000 dated April 28, ~~2021~~2022 (incorporated by reference to Exhibit 10.3 to our Form 8-K filed with the SEC on May 2, 2022)
10.4	Form of Registered Direct Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on ~~October 1, 2021).~~June 8, 2022)
~~#10.1~~10.5	~~Employment~~Form of Private Placement Securities Purchase Agreement ~~with Richard Hague dated August 18, 2021~~ (incorporated by reference to Exhibit ~~10.1~~10.2 to our Form 8-K filed with the SEC on ~~August 24, 2021).~~June 8, 2022)
~~#10.2~~10.6	Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.3 to our Form 8-K filed with the SEC on June 8, 2022)
10.7	Employment Agreement with Cameron Hoyler dated August 18, 2021 (incorporated by reference to Exhibit 10.2 to our Form 8-K filed with the SEC on August 24, 2021).
~~#10.3~~10.8	Employment Agreement Amendment No. 1 with ~~Jacob Patterson~~Cameron Hoyler dated August ~~18, 2021 (incorporated by reference to Exhibit 10.3 to our Form 8-K filed with the SEC on August 24, 2021).~~11, 2022
~~#10.4~~	~~Consulting Agreement with David Seaburg dated September 1, 2021~~
31.1	Certification Pursuant to Rule 13a-14(a)
31.2	Certification Pursuant to Rule 13a-14(a)
32.1	Certification Pursuant to Rule 13a-14(b) and Section 1350, Chapter 63 of Title 18, United States Code
101.INS	Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document
101.SCH	Inline XBRL Schema Document
101.CAL	Inline XBRL Calculation Linkbase Document
101.DEF	Inline XBRL Definition Linkbase Document
101.LAB	Inline XBRL Label Linkbase Document
101.PRE	Inline XBRL Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

	POLARITYTE, INC.

Date: ~~November 10, 2021~~August 11, 2022	/s/ Richard Hague
	Richard Hague
	Chief Executive Officer
	Duly Authorized Officer

Date: ~~November 10, 2021~~August 11, 2022	/s/ Jacob Patterson
	Jacob Patterson
	Chief Financial Officer
	Chief Accounting Officer