UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended
Commission
File No.
(Exact name of registrant as specified in its charter)
| (State or Other Jurisdiction of | (I.R.S. Employer | |
| Incorporation or Organization) | Identification No.) |
(Address of principal executive offices)
Registrant’s
Telephone Number, Including Area Code:
(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 | ||
| Nasdaq
Capital Market |
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.
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).
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 | ☐ | |
| ☒ | 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
☐
As of November 5, 2021, there were shares of the Registrant’s common stock outstanding.
INDEX
As used in this report, the terms “we,” “us,” “our,” “the Company,” and “PolarityTE” mean PolarityTE, Inc., a Delaware corporation, and our wholly owned Nevada subsidiaries (direct and indirect), PolarityTE, Inc., PolarityTE MD, Inc., Arches Research, Inc., Utah CRO Services, Inc., IBEX Preclinical Research, Inc., and IBEX Property LLC., unless otherwise indicated or required by the context.
POLARITYTE, the PolarityTE Logo, WELCOME TO THE SHIFT, WHERE SELF REGENERATES SELF, COMPLEX SIMPLICITY, IBEX, ARCHES, and SKINTE are all trademarks or registered trademarks of PolarityTE. Solely for convenience, the trademarks and trade names in this report may be referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto.
| 2 |
Item 1. Financial Statements:
POLARITYTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and per share amounts)
September 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Other current liabilities | ||||||||
| Current portion of long-term notes payable | ||||||||
| Deferred revenue | ||||||||
| Total current liabilities | ||||||||
| Common stock warrant liability | ||||||||
| Operating lease liabilities | ||||||||
| Other long-term liabilities | ||||||||
| Long-term notes payable | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (Note 14) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock - shares authorized, shares issued and outstanding at September 30, 2021 and December 31, 2020 | ||||||||
| Common stock – $ par value; shares authorized; and shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 3 |
POLARITYTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share and per share amounts)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net revenues | ||||||||||||||||
| Products | $ | $ | $ | $ | ||||||||||||
| Services | ||||||||||||||||
| Total net revenues | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Products | ||||||||||||||||
| Services | ||||||||||||||||
| Total cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating costs and expenses | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Restructuring and other charges | ||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses) | ||||||||||||||||
| Gain on extinguishment of debt | ||||||||||||||||
| Change in fair value of common stock warrant liability | ||||||||||||||||
| Inducement loss on sale of liability classified warrants | ( | ) | ||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income, net | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share attributable to common stockholders | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 4 |
POLARITYTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive income/(loss): | ||||||||||||||||
| Unrealized gain on available-for-sale securities | ||||||||||||||||
| Reclassification of realized gains included in net loss | ( | ) | ||||||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements
POLARITYTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands, except share and per share amounts)
| For the Three and Nine Months Ended September 30, 2021 | ||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||
| Number | Amount | Capital | Deficit | Equity | ||||||||||||||||||
| Balance – December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Issuance of common stock and pre-funded warrants through underwritten offering, net of issuance costs of $ | ||||||||||||||||||||||
| Issuance of common stock upon exercise of warrants | ||||||||||||||||||||||
| Reclassification of warrant liability upon exercise | – | |||||||||||||||||||||
| Issuance of common stock upon exercise of pre-funded warrants | ||||||||||||||||||||||
| Stock-based compensation expense | – | |||||||||||||||||||||
| Stock option exercises | ||||||||||||||||||||||
| Vesting of restricted stock units | ||||||||||||||||||||||
| Shares withheld for tax withholding | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Forfeiture of restricted stock awards | ( | ) | ||||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||
| Balance – March 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Stock-based compensation expense | – | |||||||||||||||||||||
| Purchase of ESPP shares | ||||||||||||||||||||||
| Vesting of restricted stock units | ( | ) | ||||||||||||||||||||
| Shares withheld for tax withholding | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||
| Balance – June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Stock-based compensation expense | – | |||||||||||||||||||||
| Vesting of restricted stock units | ( | ) | ||||||||||||||||||||
| Shares withheld for tax withholding | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||
| Balance – September 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| 5 |
| 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 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Issuance of common stock, net of issuance costs of $ | ||||||||||||||||||||||||
| Stock-based compensation expense | – | |||||||||||||||||||||||
| Stock option exercises | ||||||||||||||||||||||||
| Vesting of restricted stock units | ||||||||||||||||||||||||
| Shares withheld for tax withholding | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Other comprehensive loss | – | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||||
| Balance – March 31, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock-based compensation expense | – | |||||||||||||||||||||||
| Purchase of ESPP shares | ||||||||||||||||||||||||
| Vesting of restricted stock units | ||||||||||||||||||||||||
| Shares withheld for tax withholding | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Cancellation of restricted stock awards | ( | ) | ||||||||||||||||||||||
| Other comprehensive loss | – | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||||
| Balance – June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock-based compensation expense | – | |||||||||||||||||||||||
| Stock option exercises | ||||||||||||||||||||||||
| Vesting of restricted stock units | ( | ) | ||||||||||||||||||||||
| Shares withheld for tax withholding | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||||
| Balance – September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 6 |
POLARITYTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| For the Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation expense | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of debt discount | ||||||||
| Bad debt expense | ||||||||
| Inventory write-off | ||||||||
| Gain on extinguishment of debt – PPP loan | ( | ) | ||||||
| Change in fair value of common stock warrant liability | ( | ) | ( | ) | ||||
| Inducement loss on sale of liability classified warrants | ||||||||
| Loss on restructuring and other charges | ||||||||
| Loss on abandonment and disposal of property and equipment | ||||||||
| Loss on sale of property and equipment | ||||||||
| Other non-cash adjustments | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Operating lease right-of-use assets | ||||||||
| Other assets | ||||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Other current liabilities | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of property and equipment | ||||||||
| Purchase of available-for-sale securities | ( | ) | ||||||
| Proceeds from maturities of available-for-sale securities | ||||||||
| Proceeds from sale of available-for-sale securities | ||||||||
| Net cash provided by investing activities | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from term note payable and financing arrangements | ||||||||
| Principal payments on term note payable and financing arrangements | ( | ) | ( | ) | ||||
| Principal payments on financing leases | ( | ) | ( | ) | ||||
| Net proceeds from the sale of common stock, warrants and pre-funded warrants | ||||||||
| Proceeds from the sale of new warrants | ||||||||
| Proceeds from warrants exercised | ||||||||
| Proceeds from pre-funded warrants exercised | ||||||||
| Cash paid for tax withholdings related to net share settlement | ( | ) | ( | ) | ||||
| Proceeds from stock options exercised | ||||||||
| Proceeds from ESPP purchase | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents - beginning of period | ||||||||
| Cash and cash equivalents - end of period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Fair value of placement agent warrants issued in connection with offering | $ | $ | ||||||
| Reclassification of warrant liability to stockholders’ equity upon exercise of warrant | $ | $ | ||||||
| Unpaid tax liability related to net share settlement | $ | $ | ||||||
| Unpaid liability for acquisition of property and equipment | $ | $ | ||||||
| Accrued offering costs | $ | $ | ||||||
| Allocation of proceeds to warrant liability | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 7 |
POLARITYTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION
PolarityTE, Inc. (together with its subsidiaries, the “Company”) is a clinical stage biotechnology company developing regenerative tissue products and biomaterials. The Company also operates a laboratory testing and clinical research business using equipment, personnel, and facilities it acquired to advance the development of regenerative tissue products.
The 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 no revenues from commercial SkinTE sales after June 2021, and the Company has eliminated or reduced costs associated with commercial sale of 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 generally accepted accounting principles for complete financial statements. The results of operations for interim periods are not necessarily indicative of results to be expected for the entire fiscal year. The balance sheet at December 31, 2020, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (U.S. GAAP) for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2020, filed with the Securities and Exchange Commission on Form 10-K on March 30, 2021.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Among the more significant estimates included in these financial statements is the extent of progress toward completion of contracts, stock-based compensation, the valuation of common stock warrant liabilities, and the impairment of property and equipment. Actual results could differ from those estimates.
Cash and cash equivalents. Cash equivalents consist of highly liquid investments with original maturities of three months or less from the date of purchase. As of September 30, 2021, 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 $
| 8 |
Leases. The Company determines if an arrangement is a lease at inception. Right-of-use (ROU) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Finance leases are reported in the condensed consolidated balance sheet in property and equipment and other current and long-term liabilities. The current portion of operating lease obligations are included in other current liabilities. The classification of the Company’s leases as operating or finance leases along with the initial measurement and recognition of the associated ROU assets and lease liabilities is performed at the lease commencement date. The measurement of lease liabilities is based on the present value of future lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The ROU asset is based on the measurement of the lease liability and also includes any lease payments made prior to or on lease commencement and excludes lease incentives and initial direct costs incurred, as applicable. The lease terms may include options to extend or terminate the lease when it is reasonably certain the Company will exercise any such options. Rent expense for the Company’s operating leases is recognized on a straight-line basis over the lease term. Amortization expense for the ROU asset associated with its finance leases is recognized on a straight-line basis over the term of the lease and interest expense associated with its finance leases is recognized on the balance of the lease liability using the effective interest method based on the estimated incremental borrowing rate.
The Company has lease agreements with lease and non-lease components. As allowed under ASC 842, the Company has elected not to separate lease and non-lease components for any leases involving real estate and office equipment classes of assets and, as a result, accounts for the lease and non-lease components as a single lease component. The Company has also elected not to apply the recognition requirement of ASC 842 to leases with a term of 12 months or less for all classes of assets.
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 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 service revenues from the sale of its preclinical research services, which includes
delivery of preclinical studies and other research services to unrelated third parties. Service revenues generally consist of a single
performance obligation that the Company satisfies over time using an input method based on costs incurred to date relative to the total
costs expected to be required to satisfy the performance obligation. The Company believes that this method provides an appropriate measure
of the transfer of services over the term of the performance obligation based on the remaining services needed to satisfy the obligation.
This requires the Company to make reasonable estimates of the extent of progress toward completion of the contract. As a result, unbilled
receivables and deferred revenue are recognized based on payment timing and work completed. Generally, a portion of the payment is due
upfront and the remainder upon completion of the contract, with most contracts completing in less than a year. Contract services include
research and laboratory testing services to unrelated third parties on a contract basis. These customer contracts generally consist of
a single performance obligation that the Company satisfies at a point in time. The Company recognizes revenue upon delivery of testing
results to the customer. As of September 30, 2021, and December 31, 2020, the Company had unbilled receivables of $
| 9 |
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. 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 each period until settled or until classified as equity.
The fair value of options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the grant commensurate with the expected term of the option. The volatility factor is determined based on the Company’s historical stock prices. Forfeitures are recognized as they occur.
The fair value of restricted stock grants is measured based on the fair market value of the Company’s common stock on the date of grant and amortized to compensation expense over the vesting period of, generally, six months to three years.
| 10 |
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
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 issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which defers the effective date of Topic 326. As a smaller reporting company, Topic 326 will now be effective for the Company beginning January 1, 2023. As such, the Company plans to adopt this ASU beginning January 1, 2023. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.
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 Company is required to adopt 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. The Company is currently assessing the impact and timing of adoption of this ASU.
| 11 |
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40) (ASU 2021-04). ASU 2021-04 updates current accounting guidance for modifications or exchanges of freestanding equity-classified written call options that remain equity-classified after modification or exchange as an exchange of the original instrument for a new instrument. The ASU specifies that the effects of modifications or exchanges of freestanding equity-classified written call options that remain equity after modification or exchange should be recognized depending on the substance of the transaction, whether it be a financing transaction to raise equity (topic 340), to raise or modify debt (topic 470 and 835), or other modifications or exchanges. If the modification or exchange does not fall under topics 340, 470, or 835, an entity may be required to account for the effects of such modifications or exchanges as dividends which should adjust net income (or loss) in the basic EPS calculation. The Company is required to apply the amendments within this ASU prospectively to modifications or exchanges occurring on or after the effective date of the amendment. The Company plans to adopt this ASU on January 1, 2022. 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
The
Company has experienced recurring losses and cash outflows from operating activities. As of September 30, 2021, the Company had an accumulated
deficit of $
On
January 14, 2021, the Company completed a registered direct offering of shares of its common stock, par value $ per share,
pre-funded warrants to purchase up to
On
January 22, 2021, the Company entered into a letter agreement with the holder of warrants to purchase
| 12 |
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):
| September 30, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Common stock warrant liability | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Common stock warrant liability | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 13 |
The following table presents the change in fair value of the liability classified common stock warrants for the nine months ended September 30, 2021 (in thousands):
| Fair Value at December 31, 2020 | Initial Fair Value at Issuance | (Gain) Loss Upon Change in Fair Value | Liability Reduction Due to Exercises | Fair Value on September 30, 2021 | ||||||||||||||||
| Warrant liabilities | ||||||||||||||||||||
| February 14, 2020 issuance | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| December 23, 2020 issuance | ( | ) | ||||||||||||||||||
| January 14, 2021 issuance | ( | ) | ||||||||||||||||||
| January 25, 2021 issuance | ( | ) | ||||||||||||||||||
| Inducement loss on initial fair value (1) | ||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| (1) |
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 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
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:
| For the Nine Months ended September 30, 2021 | ||||
| Stock price | $ | – | ||
| Exercise price | $ | – | ||
| Risk-free rate | – | % | ||
| Volatility | – | % | ||
| Remaining term (years) | – |
Input assumptions used to measure the fair value of these freestanding instruments during the nine months ended September 30, 2020, are as follows:
| For the Nine Months ended September 30, | ||||
| 2020 | ||||
| Stock price | $ | – | ||
| Exercise price | $ | |||
| Risk-free rate | – | % | ||
| Volatility | – | % | ||
| Remaining term (years) | – | |||
| 14 |
5. PROPERTY AND EQUIPMENT, NET
The following table presents the components of property and equipment, net (in thousands):
| September 30, 2021 | December 31, 2020 | |||||||
| Machinery and equipment | $ | $ | ||||||
| Land and buildings | ||||||||
| Computers and software | ||||||||
| Leasehold improvements | ||||||||
| Construction in progress | ||||||||
| Furniture and equipment | ||||||||
| Total property and equipment, gross | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
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 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 $
Depreciation and amortization expense for property and equipment, including assets acquired under financing leases was as follows (in thousands):
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| General and administrative expense | $ | $ | $ | $ | ||||||||||||
| Research and development expense | ||||||||||||||||
| Total depreciation and amortization expense | $ | $ | $ | $ | ||||||||||||
6. LEASES
The Company leases facilities and certain equipment under noncancelable leases that expire at various dates through June 2024. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases may include options to extend or terminate the lease at the election of the Company. These optional periods have not been considered in the determination of the right-of-use-assets or lease liabilities associated with these leases as the Company did not consider it reasonably certain it would exercise the options.
Operating Leases
On
December 27, 2017, the Company entered into a commercial lease agreement with Adcomp LLC, a Utah limited liability company, pursuant
to which the Company leased approximately
| 15 |
In
April 2019, the Company entered into an operating lease to obtain
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
As of September 30, 2021, the maturities of operating and finance lease liabilities were as follows (in thousands):
| Operating leases | Finance leases | |||||||
| 2021 (excluding the nine months ended September 30, 2021) | $ | $ | ||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| Total lease payments | ||||||||
| Less: | ||||||||
| Imputed interest | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Supplemental balance sheet information related to leases was as follows (in thousands):
Finance leases
| September 30, 2021 | December 31, 2020 | |||||||
| Finance lease right-of-use assets included within property and equipment, net | $ | $ | ||||||
| Current finance lease liabilities included within other current liabilities | $ | $ | ||||||
| Non-current finance lease liabilities included within other long-term liabilities | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| 16 |
Operating leases
| September 30, 2021 | December 31, 2020 | |||||||
| Current operating lease liabilities included within other current liabilities | $ | $ | ||||||
| Operating lease liabilities – non current | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
The components of lease expense were as follows (in thousands):
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Operating lease costs included within operating costs and expenses | $ | $ | $ | $ | ||||||||||||
| Finance lease costs: | ||||||||||||||||
| Amortization of right-of-use assets | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Supplemental cash flow information related to leases was as follows (in thousands):
| For the Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash out flows from operating leases | $ | $ | ||||||
| Operating cash out flows from finance leases | $ | $ | ||||||
| Financing cash out flows from finance leases | $ | $ | ||||||
| Lease liabilities arising from obtaining right-of-use assets: | ||||||||
| Remeasurement of operating lease liability due to lease modification/termination | $ | $ | ||||||
As
of September 30, 2021, and December 31, 2020, the weighted average remaining lease term for operating leases was
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table presents the major components of accounts payable and accrued expenses (in thousands):
| September 30, 2021 | December 31, 2020 | |||||||
| Accounts payable | $ | $ | ||||||
| Salaries and other compensation | ||||||||
| Legal and accounting | ||||||||
| Accrued severance | ||||||||
| Benefit plan accrual | ||||||||
| Clinical trials | ||||||||
| Accrued offering costs | ||||||||
| Other | ||||||||
| Total accounts payable and accrued expenses | $ | $ | ||||||
| 17 |
8. OTHER CURRENT LIABILITIES
The following table presents the major components of other current liabilities (in thousands):
| September 30, 2021 | December 31, 2020 | |||||||
| Current finance lease liabilities | $ | $ | ||||||
| Current operating lease liabilities | ||||||||
| Short-term financing arrangement | ||||||||
| Other | ||||||||
| Total other current liabilities | $ | $ | ||||||
The
short-term financing balance is related to a financing arrangement entered into during the nine months ended September 30, 2021 to fund
an insurance contract. Under the financing arrangement, the amounts will be repaid in nine equal monthly installments, with an interest
rate of
2020, 2019 and 2017 Equity Incentive Plans
2020 Plan
On October 25, 2019, the Company’s Board of Directors (the “Board”) approved the Company’s 2020 Stock Option and Incentive Plan (the “2020 Plan”). The 2020 Plan became effective on December 19, 2019, the date approved by the stockholders. The 2020 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, unrestricted stock awards, dividend equivalent rights, and cash-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the Board will administer the 2020 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to shares of common stock are issuable pursuant to awards under the 2020 Plan. No grants of awards may be made under the 2020 Plan after the later of , or the tenth anniversary of the latest material amendment of the 2020 Plan and no grants of incentive stock options may be made after October 25, 2029. The 2020 Plan provides that effective on January 1 of each year the number of shares of common stock reserved and available for issuance under the 2020 Plan shall be cumulatively increased by the lesser of 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the 2020 plan administrator. As of September 30, 2021, the Company had shares available for future issuances under the 2020 Plan.
2019 Plan
On October 5, 2018, the Company’s Board approved the Company’s 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the Board will administer the 2019 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to shares of common stock are issuable pursuant to awards under the 2019 Plan. Unless earlier terminated by the Board, the 2019 Plan shall terminate at the close of business on . As of September 30, 2021, the Company had shares available for future issuances under the 2019 Plan.
2017 Plan
On December 1, 2016, the Company’s Board approved the Company’s 2017 Equity Incentive Plan (the “2017 Plan”). The purpose of the 2017 Plan is to promote the success of the Company and to increase stockholder value by providing an additional means through the grant of awards to attract, motivate, retain and reward selected employees, consultants and other eligible persons. The 2017 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the Board will administer the 2017 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to shares of common stock are issuable pursuant to awards under the 2017 Plan. Unless earlier terminated by the Board, the 2017 Plan shall terminate at the close of business on . As of September 30, 2021, the Company had shares available for future issuances under the 2017 Plan.
| 18 |
Number of Shares | Weighted- Average Exercise Price | |||||||
| Outstanding – December 31, 2020 | $ | |||||||
| Granted | $ | |||||||
| Exercised (1) | ( | ) | $ | |||||
| Forfeited | ( | ) | $ | |||||
| Outstanding – September 30, 2021 | $ | |||||||
| Options exercisable, September 30, 2021 | $ | |||||||
| (1) |
Employee Stock Purchase Plan (ESPP)
In May 2018, the Company adopted the Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved shares of common stock for purchase under the ESPP. The initial offering period began January 1, 2019, and ended on June 30, 2019, with the first purchase date. Subsequent offering periods will automatically commence on each January 1 and July 1 and will have a duration of six months ending with a purchase date June 30 and December 31 of each year. On each purchase date, ESPP participants will purchase shares of common stock at a price per share equal to % of the lesser of (1) the fair market value per share of the common stock on the offering date or (2) the fair market value of the common stock on the purchase date.
Restricted Stock
Number of Shares | ||||
| Unvested - December 31, 2020 | ||||
| Granted | ||||
| Vested (1) | ( | ) | ||
| Forfeited | ( | ) | ||
| Unvested – September 30, 2021 | ||||
| (1) |
| 19 |
Stock-Based Compensation Expense
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| General and administrative expense | $ | $ | $ | $ | ||||||||||||
| Research and development expense | ||||||||||||||||
| Sales and marketing expense | ||||||||||||||||
| Restructuring and other charges | ||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
10. SALE OF COMMON STOCK, WARRANTS AND PRE-FUNDED WARRANTS
On
January 14, 2021, the Company completed a registered direct offering of shares of its common stock, par value $ per share,
pre-funded warrants to purchase up to
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 $
| January 14, 2021 | September 30, 2021 | |||||||
| Stock price | $ | $ | ||||||
| Exercise price | $ | $ | ||||||
| Risk-free rate | % | % | ||||||
| Volatility | % | % | ||||||
| Remaining term (years) | ||||||||
| January 14, 2021 | September 30, 2021 | |||||||
| Stock price | $ | $ | ||||||
| Exercise price | $ | $ | ||||||
| Risk-free rate | % | % | ||||||
| Volatility | % | % | ||||||
| Remaining term (years) | ||||||||
| 20 |
On
January 22, 2021, the Company entered into a letter agreement with the holder of warrants to purchase
Immediately
prior to the exercise of the existing
| January 22, 2021 | ||||
| Stock price | $ | |||
| Exercise price | $ | |||
| Risk-free rate | % | |||
| Volatility | % | |||
| Remaining term (years) | ||||
As
the new common stock warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the
new common stock warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded
at estimated fair values of $
| January 25, 2021 | September 30, 2021 | |||||||
| Stock price | $ | $ | ||||||
| Exercise price | $ | $ | ||||||
| Risk-free rate | % | % | ||||||
| Volatility | % | % | ||||||
| Remaining term (years) | ||||||||
| 21 |
| January 22, 2021 | September 30, 2021 | |||||||
| Stock price | $ | $ | ||||||
| Exercise price | $ | $ | ||||||
| Risk-free rate | % | % | ||||||
| Volatility | % | % | ||||||
| Remaining term (years) | ||||||||
The following table summarizes warrant activity for the nine months ended September 30, 2021.
Outstanding and exercisable December 31, 2020 | Warrants Issued | Warrants Exercised | Outstanding and exercisable September 30, 2021 | |||||||||||||
| Transaction | ||||||||||||||||
| February 14, 2020 common warrants | ( | ) | ||||||||||||||
| December 23, 2020 common warrants | ( | ) | ||||||||||||||
| December 23, 2020 placement agent warrants | ||||||||||||||||
| December 23, 2020 pre-funded warrants | ( | ) | ||||||||||||||
| January 14, 2021 common warrants | ||||||||||||||||
| January 14, 2021 placement agent warrants | ||||||||||||||||
| January 14, 2021 pre-funded warrants | ( | ) | ||||||||||||||
| January 25, 2021 common warrants | ||||||||||||||||
| January 22, 2021 placement agent warrants | ||||||||||||||||
| Total | ( | ) | ||||||||||||||
On
March 30, 2021, the Company entered into a sales agreement with Cantor Fitzgerald & Co. to sell shares of common stock having aggregate
sales proceeds of up to $
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 $
| 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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Less: Gain from change in fair value of warrant liabilities | ( | ) | ( | ) | ||||||||||||
| Net loss available to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 22 |
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| Denominator: | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Basic weighted average number of common shares (1) | ||||||||||||||||
| Incremental shares from assumed exercise of warrants | ||||||||||||||||
| Diluted weighted average number of common shares | ||||||||||||||||
| (1) |
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Stock Options | ||||||||||||||||
| Restricted stock | ||||||||||||||||
| Common stock warrants | ||||||||||||||||
| Shares committed under ESPP | ||||||||||||||||
12. DEBT
PPP Loan
On
April 12, 2020, our subsidiary PolarityTE MD, Inc. (the “Borrower”) entered into a promissory note evidencing an unsecured
loan in the amount of $
| 23 |
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 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
As discussed in Note 5, 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 the 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 property and equipment and recorded an impairment charge of approximately $
14. COMMITMENTS AND CONTINGENCIES
Commitments
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
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 $
| 24 |
Legal Proceedings
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 officers and one former officer of the Company, Case No. 2:21-cv-00561-DAO (the “Complaint”). The 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 Complaint alleges that the defendants misrepresented or failed to disclose that: (i) the IND for the Company’s product, SkinTE, filed with the FDA was deficient with respect to certain chemistry, manufacturing, and control items; (ii) as a result, it was unlikely that the FDA would approve the IND in its current form; (iii) accordingly, the Company had materially overstated the likelihood that the SkinTE IND would obtain FDA approval; and (iv) as a result, the public statements regarding the IND were materially false and misleading. 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.
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 $
In
October 2018, the Company entered into an office lease covering approximately
| 25 |
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).
| 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 | $ | $ | $ | $ | ||||||||||||
| Contract services | ||||||||||||||||
| Total net revenues | $ | $ | $ | $ | ||||||||||||
| Net (loss)/income by segment: | ||||||||||||||||
| Reportable segments: | ||||||||||||||||
| Regenerative medicine | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Contract services | ( | ) | ( | ) | ||||||||||||
| Total net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
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) as a result, the public statements regarding the IND were materially false and misleading. 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.
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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 Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on July 26, 2021, and this report, that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and periods that follow to differ materially from those expressed in or implied by those forward-looking statements. Readers are cautioned that forward-looking statements contained in this Quarterly Report on Form 10-Q should be read in conjunction with our disclosure under the heading “Disclosure Regarding Forward-Looking Statements” below.
Overview
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 regenerative tissue products.
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 Food and Drug Administration (the “FDA”) through our subsidiary, PolarityTE MD, Inc. (“PTE-MD”). Our business resources are, and will be for the foreseeable future, focused primarily on the advancement of 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 to qualify approximately 20 sites for the DFU Trial and enroll 100 subjects, and the estimated length 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.
On August 20, 2021, 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, 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 request for information and modifications to the IND that are necessary 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, 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.
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Our preliminary experience indicates that SkinTE may benefit patients with immediately life-threatening conditions and other serious diseases or conditions. In 2009, the FDA implemented new regulations related to Expanded Access Investigational New Drug Applications (“Expanded Access INDs”), which are often colloquially referred to as “compassionate use,” and pertain to the use of an investigational drug or biologic when the primary purpose is to diagnose, monitor, or treat a patient’s disease or condition, rather than to obtain the kind of information about the drug that is generally derived from clinical trials. The FDA has proposed several processes for obtaining Expanded Access INDs, which we will evaluate for potential implementation in connection with a successful opening of our IND for SkinTE. Under FDA regulations the amount that may be charged for SkinTE used under an Expanded Access IND must be authorized by the FDA and, if authorized at all, may be limited to our direct costs of manufacture. We believe, however, that an Expanded Access IND may enable us to provide SkinTE to providers treating persons with life-threatening or serious diseases and conditions, and thereby maintain existing, and develop new, relationships with physicians in the wound care industry.
Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending upon the timing of our clinical trials and our expenditures for satisfying all the conditions of obtaining FDA premarket approval for SkinTE. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our accounts payable and accrued research and development and other current liabilities.
Testing and Research Services
Beginning in 2017 we developed internally a laboratory and research capability to advance the development of SkinTE and related technologies, which we operate through our subsidiary, Arches Research, Inc. (“Arches”). At the beginning of May 2018, we acquired a preclinical research and veterinary sciences business to be used, in part, for preclinical studies on our regenerative tissue products, which we operate through our subsidiary IBEX Preclinical Research, Inc. (“IBEX”). Through Arches and IBEX we also offer 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”).
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.
On September 17, 2021, we received notice from the Lender that the SBA is reviewing 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.
Liquidity and Capital Resources
As of September 30, 2021, we had $27.4 million in cash and cash equivalents and working capital of approximately $24.9 million. We believe 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 cash used in operating activities was $4.6 million, or an average of $1.5 million per month, compared to $6.8 million cash used in operating activities, or an average of $2.3 million per month, in the third quarter of 2020. In June 2021 our PPP Loan in the amount of $3.6 million was forgiven.
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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, the gross profit on sales of SkinTE was $2.5 million, which contributed to covering our operating costs for the period. As discussed above, we ceased SkinTE sales at the end of May 2021, so SkinTE sales did not contribute 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.
As of the date of issuance of these unaudited interim condensed financial statements, we expect that our cash and cash equivalents of $27.4 million as of September 30, 2021, will not be sufficient to fund our current business plan including related operating expenses and capital expenditure requirements beyond the fourth calendar quarter of 2022. 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 financial statements. 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 be successful in obtaining additional financing. Therefore, it is not considered probable, as defined in applicable accounting standards, that our plans to raise additional capital will alleviate the substantial doubt regarding our ability to continue as a going concern.
Our actual capital requirements will depend on many factors, including the cost and timing of our IND and subsequent BLA for SkinTE, the cost and timing of clinical trials, the cost of establishing and maintaining our facilities in compliance with cGMP and cGTP (current good tissue practices) regulations, and the cost and timing of advancing our product development initiatives related to SkinTE. Our forecast of the period of time through 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. Any additional equity financing may be highly dilutive, or otherwise disadvantageous, to existing stockholders, and debt financing, if available, may involve restrictive covenants. If we elect to pursue collaborative arrangements, the terms of such arrangements may require us to relinquish rights to certain of our technologies, products, or marketing territories. Our failure to raise additional capital when needed, and on acceptable terms, would require us to reduce our operating expenses and would limit our ability to continue operations, any of which would have a material adverse effect on our business, financial condition, and results of operation.
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Results of Operations
Changes in Our Operations
There have been significant changes in our operations affecting our results of operations for the three and nine-month periods ended September 30, 2021, compared to the three and nine-month periods ended September 30, 2020.
SkinTE was registered and listed with the FDA 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 capabilities 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 a clinical hold on our IND imposed by the FDA on August 20, 2021. 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 came to an end. As a result, we generated revenues from the sale 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.
Arches began offering COVID-19 testing services in May 2020 under 30-day renewable testing agreeme