NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION
PolarityTE,
Inc. and subsidiaries (the “Company”) is a commercial-stage biotechnology and regenerative biomaterials company focused
on transforming the lives of patients by discovering, designing and developing a range of regenerative tissue products and biomaterials
for the fields of medicine, biomedical engineering and material sciences.
Change
in Fiscal Year end. On January 11, 2019, the Board approved an amendment to the Restated Bylaws of the Company changing the
Company’s fiscal year end from October 31 to December 31. As such, the end of the quarters in the new fiscal year do not
coincide with the end of the quarters in the Company’s previous fiscal years. The Company made this change to align its
fiscal year end with other companies within its industry.
The
accompanying interim condensed consolidated financial statements of the Company are unaudited, but in the opinion of management,
reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim
period. Accordingly, they do not include all information and notes required by generally accepted accounting principles for complete
financial statements. The 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, 2018 has been derived from the audited financial statements at that
date but does not include all of the information and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. These interim condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes thereto for the two-month period ended December 31,
2018 included in the Company’s Transition Report on Form 10-KT filed with the Securities and Exchange Commission on March
18, 2019.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation. The accompanying 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 accounting principles generally accepted in the United
States of America (“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 allowances for deferred
tax benefits, and the valuation of tangible and intangible assets included in acquisitions. Actual results could differ from those
estimates.
Segments.
The Company’s operations are based in the United States and involve products and services which are managed separately.
Accordingly, it operates in two segments: 1) regenerative medicine products and 2) contract services. The Chief Operating Decision
Maker (CODM) is our Office of the Chief Executive consisting of the Chief Operating Officer, the Chief Financial Officer, and
the President of Corporate Development. The CODM allocates resources to and assesses the performance of each operating segment
using information about its revenue and operating income (loss). Prior to the acquisition of IBEX, the Company operated in one
segment.
Cash
and cash equivalents. Cash equivalents consist of highly liquid investments with original maturities of three months or less
from the date of purchase.
Investments.
Investments in debt securities have been classified as available-for-sale and are carried at fair value, with unrealized gains
and losses reported as a component of accumulated other comprehensive income. Realized gains and losses are included in other
income (expenses), net. The cost of securities sold is based on the specific-identification method. Interest on marketable securities
is included in interest income, net. Investments with original maturities of greater than three months but less than one year
from the date of purchase are classified as current. Investments with original maturities of greater than one year from the date
of purchase are classified as non-current.
Loss
Per Share. Basic loss per share of common stock is computed by dividing net loss attributable to common stockholders by the
weighted average number of shares of common stock outstanding for the period. Since the Company was in a loss position for all
periods presented, basic net loss per share is the same as diluted net loss per share since the effects of potentially dilutive
securities are antidilutive.
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 our consolidated balance sheet in property and equipment and other
current and long-term liabilities. The short-term 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 Topic 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 Topic 842 to leases with a term of 12 months or less for all classes of assets.
Stock-
Based Compensation. The Company measures all stock-based compensation to employees using a fair value method and records such
expense in general and administrative, research and development, and sales and marketing expenses. For stock options with graded
vesting, the Company recognizes compensation expense over the service period for each separately vesting tranche of the award
as though the award were in substance, multiple awards based on the fair value on the date of grant.
The
fair value for options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate
is derived from the U.S. Treasury yield curve in effect at the time of the grant. The volatility factor is determined based on
the Company’s historical stock prices. Forfeitures are recognized as they occur.
The
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 over the vesting period of, generally, six months to three years.
The
accounting for non-employee options and restricted stock is similar to that of employees. Stock-based compensation expense for
nonemployee services has historically been subject to remeasurement at each reporting date as the underlying equity instruments
vest and was recognized as an expense over the period during which services are received. Upon the adoption of ASU 2018-07, Compensation
– Stock Compensation on January 1, 2019, the valuation was fixed at the implementation date and will be recognized as an
expense on a straight-line basis over the remaining service period.
Research
and Development Expenses. Costs incurred for research and development are expensed as incurred.
Nonrefundable
advance payments for goods or services that have the characteristics that will be used or rendered for future research and development
activities pursuant to executory contractual arrangements with third party research organizations are deferred and recognized
as an expense as the related goods are delivered or the related services are performed.
Accruals
for Research and Development Expenses and Clinical Trials. As part of the process of preparing its financial statements, the
Company is required to estimate its expenses resulting from its obligations under contracts with vendors, clinical research organizations
and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these
contracts are subject to negotiations, which vary from contract to contract and may result in payment terms that do not match
the periods over which materials or services are provided under such contracts. The Company’s objective is to reflect the
appropriate expenses in its financial statements by matching those expenses with the period in which services are performed and
efforts are expended. The Company accounts for these expenses according to the timing of various aspects of the expenses. The
Company determines accrual estimates by taking into account discussion with applicable personnel and outside service providers
as to the progress of clinical trials, or the services completed. During the course of a clinical trial, the Company adjusts its
clinical expense recognition if actual results differ from its estimates. The Company makes estimates of its accrued expenses
as of each balance sheet date based on the facts and circumstances known to it at that time. The Company’s clinical trial
accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors.
Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding
of the status and timing of services performed relative to the actual status and timing of services performed may vary and may
result in it reporting amounts that are too high or too low for any particular period.
Revenue
Recognition. Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects
the consideration which the entity 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.
In
the regenerative medicine products segment, the Company records products revenues primarily from the sale of its regenerative
tissue products. The Company sells its products to healthcare providers, primarily through direct sales representatives. Products
revenues consists of a single performance obligation that the Company satisfies at a point in time. In general, the Company recognizes
products revenues upon delivery to the customer.
In
the contract services segment, the Company records services revenues from the sale of its contract research services, which includes
delivery of preclinical studies and other research services to unrelated third parties. Services 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
a faithful depiction of the transfer of services over the term of the performance obligation based on the remaining services needed
to satisfy the obligation. This requires the Company 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 study, with most studies completing
in less than a year. As of September 30, 2019 and December 31, 2018, the Company had unbilled receivables of $222,000 and $157,000
and deferred revenue of $134,000 and $170,000, respectively. The unbilled receivables balance is included in consolidated accounts
receivable. Revenues of $170,000 were recognized during the nine months ended September 30, 2019 that were included in the deferred
revenue balance at the beginning of the period.
Costs
to obtain the contract are incurred for products revenues as they are shipped and are expensed as incurred.
Recent
Accounting Pronouncements
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure
Requirements for Fair Value Measurement. The ASU modifies the disclosure requirements for fair value measurements by removing,
modifying or adding certain disclosures. The standard is effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact that the
standard will have on its consolidated financial statements and related disclosures.
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. The Company is currently evaluating
the impact that the standard will have on its consolidated financial statements and related disclosures.
Recently
Adopted Accounting Pronouncements
On
January 1, 2019 the Company adopted ASU 2016-02, Leases (ASC 842) and related amendments, which require lease assets and
liabilities to be recorded on the balance sheet for leases with terms greater than twelve months. The new standard requires lessees
to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the
lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized
based on an effective interest method or on a straight-line basis over the term of the lease, respectively. The standard was adopted
using the modified retrospective transition approach by applying the new standard to all leases existing at the date of the initial
application and not restating comparative periods.
We
elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical
lease classification, our assessment on whether a contract was or contains a lease, and our initial direct costs for any leases
that existed prior to January 1, 2019. The impact of the adoption of ASC 842 on the accompanying Condensed Consolidated Balance
Sheet as of January 1, 2019 was as follows (in thousands):
|
|
December 31, 2018
|
|
|
Adjustments Due to the
Adoption of ASC 842
|
|
|
January 1, 2019
|
|
Operating lease right-of-use assets
|
|
$
|
–
|
|
|
$
|
5,305
|
|
|
$
|
5,305
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
6,508
|
|
|
$
|
(75
|
)
|
|
$
|
6,433
|
|
Other current liabilities
|
|
|
316
|
|
|
|
1,432
|
|
|
|
1,748
|
|
Operating lease liabilities
|
|
|
–
|
|
|
|
3,948
|
|
|
|
3,948
|
|
The
adjustments due to the adoption of ASC 842 related to the recognition of operating lease right-of-use assets and operating lease
liabilities for the existing operating leases. A cumulative-effect adjustment to beginning accumulated deficit was not required.
In
June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-based
Payment Accounting. The standard expands the scope of Topic 718 to include share-based payments issued to nonemployees for
goods or services, simplifying the accounting for share-based payments to nonemployees by aligning it with the accounting for
share-based payments to employees, with certain exceptions. The standard is effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years with early adoption permitted, including adoption in an interim
period. The Company adopted this ASU on January 1, 2019. The adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements and related disclosures.
3.
LIQUIDITY
The
Company has experienced recurring losses and cash outflows from operating activities. Since inception through September 30, 2019,
the Company has an accumulated deficit of $414.2 million. As of September 30, 2019, the Company had cash and cash equivalents
and short-term investments of $45.9 million.
On
April 10, 2019, the Company completed an underwritten offering providing for the issuance and sale of 3,418,918 shares of the
Company’s common stock, par value $0.001 per share, at an offering price of $8.51 per share, for net proceeds of approximately
$27.9 million, after deducting offering expenses payable by the Company.
Based
upon the current status of the Company’s product development and commercialization plans, the Company believes that its
existing cash, cash equivalents and short-term investments will be adequate to satisfy its capital needs for at least the next
12 months from the date of filing. The Company anticipates needing substantial additional financing to continue clinical
deployment and commercialization of its lead product SkinTE, development of its other product candidates, and scaling the manufacturing
capacity for its products and product candidates and prepare for commercial readiness. However, the Company will continue to pursue
fundraising opportunities when available, but such financing may not be available in the future on terms favorable to the Company,
if at all. If adequate financing is not available, the Company may be required to delay, reduce the scope of, or eliminate one
or more of its product development programs. The Company may also implement additional spending reductions. The Company plans
to meet its capital requirements primarily through issuances of equity securities, debt financing, revenue from product sales
and future collaborations. Failure to generate revenue or raise additional capital would adversely affect the Company’s
ability to achieve its intended business objectives.
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. This methodology applies to our Level
1 investments, which are composed of money market funds.
|
|
|
|
|
●
|
Level
2: Quoted prices for similar instruments that are directly or indirectly observable in the market. This methodology applies
to our Level 2 investments, which are composed of corporate debt securities, commercial paper, and U.S. government debt securities.
|
|
|
|
|
●
|
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. This methodology applies to our Level 3 financial instruments, which are composed of contingent
consideration.
|
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.
In
connection with the offering of Units in September 2017 (see Note 10), the Company issued Series F Preferred Shares and warrants
to purchase an aggregate of 322,727 shares of common stock. The Series F Preferred Shares contained an embedded conversion feature
that was not clearly and closely related to the identified host instrument and, as such, was recognized as a derivative liability
measured at fair value. The Company classified these derivatives on the consolidated balance sheet as a current liability. The
warrants were exercisable at $30.00 per share and had a two year expiration. The warrants were liabilities pursuant to ASC 815.
The warrant agreement provided for an adjustment to the number of common shares issuable under the warrant or adjustment to the
exercise price, including but not limited to, if: (a) the Company issues shares of common stock as a dividend or distribution
to holders of its common stock; (b) the Company subdivides or combines its common stock (i.e., stock split); or (c) the Company
issues new securities for consideration less than the exercise price. Under ASC 815, warrants that provide for down-round exercise
price protection are recognized as derivative liabilities.
As
discussed in Note 10, both the warrants and the Series F Preferred Shares were exchanged for common stock on March 6, 2018.
The
fair value of the bifurcated embedded conversion feature was estimated to be approximately $7.2 million at March 5, 2018, as calculated
using the Monte Carlo simulation with the following assumptions:
|
|
Series F
Conversion
Feature
|
|
|
|
March 5, 2018
|
|
Stock price
|
|
$
|
20.05
|
|
Exercise price
|
|
$
|
27.50
|
|
Risk-free rate
|
|
|
2.2
|
%
|
Volatility
|
|
|
88.2
|
%
|
Term
|
|
|
1.5
|
|
The
fair value of the warrant liability was estimated to be approximately $2.5 million at March 5, 2018 as calculated using the Monte
Carlo simulation with the following assumptions:
|
|
Warrant Liability
|
|
|
|
March 5, 2018
|
|
Stock price
|
|
$
|
20.05
|
|
Exercise price
|
|
$
|
30.00
|
|
Risk-free rate
|
|
|
2.2
|
%
|
Volatility
|
|
|
88.2
|
%
|
Term
|
|
|
1.5
|
|
The
following table sets forth the changes in the estimated fair value for our Level 3 classified derivative liabilities (in thousands):
|
|
2017 Series F Preferred Stock – Warrant Liability
|
|
|
2017 Series F Preferred Stock – Embedded Derivative
|
|
|
Total Warrant and Derivative Liability
|
|
Fair value – December 31, 2017
|
|
$
|
3,388
|
|
|
$
|
8,150
|
|
|
$
|
11,538
|
|
Change in fair value
|
|
|
(863
|
)
|
|
|
(987
|
)
|
|
|
(1,850
|
)
|
Exchange / conversion to common shares
|
|
|
(2,525
|
)
|
|
|
(7,163
|
)
|
|
|
(9,688
|
)
|
Fair value – September 30, 2018
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
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 as of September 30, 2019 and December 31, 2018 (in thousands):
|
|
Fair Value Measurement as of September 30, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
7
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
7
|
|
Commercial paper
|
|
|
–
|
|
|
|
12,053
|
|
|
|
–
|
|
|
|
12,053
|
|
Corporate debt securities
|
|
|
–
|
|
|
|
13,995
|
|
|
|
–
|
|
|
|
13,995
|
|
U.S. government debt securities
|
|
|
–
|
|
|
|
4,632
|
|
|
|
–
|
|
|
|
4,632
|
|
Total
|
|
$
|
7
|
|
|
$
|
30,680
|
|
|
$
|
–
|
|
|
$
|
30,687
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
135
|
|
|
$
|
135
|
|
Total
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
135
|
|
|
$
|
135
|
|
|
|
Fair Value Measurement as of December 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
7
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
7
|
|
Commercial paper
|
|
|
–
|
|
|
|
21,392
|
|
|
|
–
|
|
|
|
21,392
|
|
Corporate debt securities
|
|
|
–
|
|
|
|
5,448
|
|
|
|
–
|
|
|
|
5,448
|
|
U.S. government debt securities
|
|
|
–
|
|
|
|
3,226
|
|
|
|
–
|
|
|
|
3,226
|
|
Total
|
|
$
|
7
|
|
|
$
|
30,066
|
|
|
$
|
–
|
|
|
$
|
30,073
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
261
|
|
|
$
|
261
|
|
Total
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
261
|
|
|
$
|
261
|
|
In
May 2018, the Company purchased the assets of a preclinical research sciences business and related real estate from Ibex Group,
L.L.C., a Utah limited liability company, and Ibex Preclinical Research, Inc., a Utah corporation (collectively, “IBEX”).
The aggregate purchase price was $3.8 million, of which $2.3 million was paid at closing and the balance satisfied by a promissory
note payable to IBEX with an initial fair value of $1.2 million and contingent consideration with an initial fair value of $0.3
million.
The
contingent consideration represents the estimated fair value of future payments due to the Seller of IBEX based on IBEX’s
revenue generated from studies quoted prior to but completed after the transaction. Contingent consideration was initially recognized
at fair value as purchase consideration and is subsequently remeasured at fair value through earnings. The initial fair value
of the contingent consideration was based on the present value of estimated future cash flows using a 20% discount rate. The contingent
consideration is the payment of 15% of the actual revenues received for work on any study initiated within 18 months following
the closing of the purchase on the basis of certain specific customer prospects that received service proposals prior to the closing,
provided that the total payments will not exceed $650,000. Adjustments to the fair value of the contingent consideration liability
is included in general and administrative expense in the accompanying consolidated statements of operations.
The
following table sets forth the changes in the estimated fair value of our contingent consideration liability (in thousands) which
is included in other current liabilities:
|
|
Contingent Consideration
|
|
Fair value – December 31, 2018
|
|
$
|
261
|
|
Change in fair value
|
|
|
(48
|
)
|
Earned and paid
|
|
|
(78
|
)
|
Fair value – September 30, 2019
|
|
$
|
135
|
|
5.
CASH EQUIVALENTS AND AVAILABLE FOR SALE MARKETABLE SECURITIES
Cash
equivalents and available-for-sale marketable securities consisted of the following as of September 30, 2019 and December 31,
2018 (in thousands):
|
|
September 30, 2019
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Market Value
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
7
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
7
|
|
Commercial paper
|
|
|
10,037
|
|
|
|
32
|
|
|
|
–
|
|
|
|
10,069
|
|
U.S. government debt securities
|
|
|
1,930
|
|
|
|
6
|
|
|
|
–
|
|
|
|
1,936
|
|
Total cash equivalents (1)
|
|
|
11,974
|
|
|
|
38
|
|
|
|
–
|
|
|
|
12,012
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
1,980
|
|
|
|
4
|
|
|
|
–
|
|
|
|
1,984
|
|
U.S. government debt securities
|
|
|
2,686
|
|
|
|
10
|
|
|
|
–
|
|
|
|
2,696
|
|
Corporate debt securities
|
|
|
13,984
|
|
|
|
11
|
|
|
|
–
|
|
|
|
13,995
|
|
Total short-term investments
|
|
|
18,650
|
|
|
|
25
|
|
|
|
–
|
|
|
|
18,675
|
|
Total
|
|
$
|
30,624
|
|
|
$
|
63
|
|
|
$
|
–
|
|
|
$
|
30,687
|
|
|
(1)
|
Included
in cash and cash equivalents in the Company’s consolidated balance sheet as of September 30, 2019 in addition to $15.3
million of cash.
|
|
|
December 31, 2018
|
|
|
|
Amortized Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Market Value
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
7
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
7
|
|
Commercial paper
|
|
|
20,648
|
|
|
|
30
|
|
|
|
–
|
|
|
|
20,678
|
|
U.S. government debt securities
|
|
|
3,224
|
|
|
|
2
|
|
|
|
–
|
|
|
|
3,226
|
|
Total cash equivalents (1)
|
|
|
23,879
|
|
|
|
32
|
|
|
|
–
|
|
|
|
23,911
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
714
|
|
|
|
–
|
|
|
|
–
|
|
|
|
714
|
|
Corporate debt securities
|
|
|
5,444
|
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
5,448
|
|
Total short-term investments
|
|
|
6,158
|
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
6,162
|
|
Total
|
|
$
|
30,037
|
|
|
$
|
37
|
|
|
$
|
(1
|
)
|
|
$
|
30,073
|
|
|
(1)
|
Included
in cash and cash equivalents in the Company’s consolidated balance sheet as of December 31, 2018 in addition to $31.8
million of cash.
|
All
investments in debt securities held as of September 30, 2019 and December 31, 2018 had maturities of less than one year. For the
three and nine months ended September 30, 2019, the Company recognized net realized gains on available-for-sale securities and
cash equivalents of $0.1 million and $0.4 million, respectively.
6.
PROPERTY AND EQUIPMENT, NET
The
following table presents the components of property and equipment, net (in thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Machinery and equipment
|
|
$
|
11,814
|
|
|
$
|
8,276
|
|
Land and buildings
|
|
|
2,000
|
|
|
|
2,000
|
|
Computers and software
|
|
|
1,173
|
|
|
|
1,372
|
|
Leasehold improvements
|
|
|
2,272
|
|
|
|
1,230
|
|
Construction in progress
|
|
|
1,903
|
|
|
|
2,402
|
|
Furniture and equipment
|
|
|
470
|
|
|
|
614
|
|
Total property and equipment, gross
|
|
|
19,632
|
|
|
|
15,894
|
|
Accumulated depreciation
|
|
|
(3,970
|
)
|
|
|
(2,158
|
)
|
Total property and equipment, net
|
|
$
|
15,662
|
|
|
$
|
13,736
|
|
Depreciation
and amortization expense for property and equipment, including assets acquired under financing leases for the three and nine months
ended September 30, 2019 and 2018 was as follows (in thousands):
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
General and administrative expense
|
|
$
|
407
|
|
|
$
|
80
|
|
|
$
|
1,171
|
|
|
$
|
89
|
|
Research and development expense
|
|
|
390
|
|
|
|
336
|
|
|
|
1,072
|
|
|
|
999
|
|
Total depreciation and amortization expense
|
|
$
|
797
|
|
|
$
|
416
|
|
|
$
|
2,243
|
|
|
$
|
1,088
|
|
For
the three and nine months ended September 30, 2019, the Company recognized a loss on disposal of property and equipment of $265,000.
7.
LEASES
The
Company leases facilities and certain equipment under noncancelable leases that expire at various dates through 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.
In
April 2019, the Company entered into an operating lease to obtain 6,307 square feet of manufacturing, laboratory, and office space.
The lease expires April 2024 and requires monthly lease payments subject to annual increases. During the nine months ended September
30, 2019, the Company also increased office space under an existing lease, which requires additional monthly lease payments.
As
of September 30, 2019, the maturities of our operating and finance lease liabilities were as follows (in thousands):
|
|
Operating leases
|
|
|
Finance leases
|
|
2019 (excluding the nine months ended September 30, 2019)
|
|
$
|
551
|
|
|
$
|
149
|
|
2020
|
|
|
2,114
|
|
|
|
597
|
|
2021
|
|
|
1,730
|
|
|
|
594
|
|
2022
|
|
|
1,345
|
|
|
|
329
|
|
2023
|
|
|
132
|
|
|
|
253
|
|
Thereafter
|
|
|
87
|
|
|
|
43
|
|
Total lease payments
|
|
|
5,959
|
|
|
|
1,965
|
|
Less:
|
|
|
|
|
|
|
|
|
Imputed interest
|
|
|
(787
|
)
|
|
|
(310
|
)
|
Total
|
|
$
|
5,172
|
|
|
$
|
1,655
|
|
Supplemental
balance sheet information related to leases was as follows (in thousands):
Finance leases
|
|
As of
September 30, 2019
|
|
Finance lease right-of-use assets included within property and equipment, net
|
|
$
|
2,112
|
|
|
|
|
|
|
Current finance lease liabilities included within other current liabilities
|
|
$
|
456
|
|
Non-current finance lease liabilities included within other long-term liabilities
|
|
|
1,199
|
|
Total
|
|
$
|
1,655
|
|
Operating leases
|
|
As of
September 30, 2019
|
|
Current operating lease liabilities included within other current liabilities
|
|
$
|
1,814
|
|
Operating lease liabilities – non current
|
|
|
3,358
|
|
Total
|
|
$
|
5,172
|
|
The
components of lease expense were as follows (in thousands):
|
|
Three months ended September 30, 2019
|
|
|
Nine months ended September 30, 2019
|
|
Operating lease costs included within operating costs and expenses
|
|
$
|
556
|
|
|
$
|
1,617
|
|
Finance lease costs:
|
|
|
|
|
|
|
|
|
Amortization of right of use assets
|
|
$
|
171
|
|
|
$
|
479
|
|
Interest on lease liabilities
|
|
|
42
|
|
|
|
109
|
|
Total
|
|
$
|
213
|
|
|
$
|
588
|
|
Supplemental
cash flow information related to leases was as follows (in thousands):
|
|
Nine months ended
September 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash out flows from operating leases
|
|
$
|
1,550
|
|
Operating cash out flows from finance leases
|
|
|
109
|
|
Financing cash out flows from finance leases
|
|
|
336
|
|
Lease liabilities arising from obtaining right-of-use assets:
|
|
|
|
|
Finance leases
|
|
$
|
1,828
|
|
Lease payments made in prior period reclassified to property and equipment
|
|
|
535
|
|
Remeasurement of finance lease liability due to lease modification
|
|
|
(22
|
)
|
Operating leases
|
|
|
936
|
|
As
of September 30, 2019, the weighted average remaining operating lease term is 3.0 years and the weighted average discount rate
used to determine the operating lease liability was 9.82%. The weighted average remaining finance lease term is 3.6 years and
the weighted average discount rate used to determine the finance lease liability was 9.70%.
8.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The
following table presents the major components of accounts payable and accrued expenses (in thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Accounts payable
|
|
$
|
3,716
|
|
|
$
|
2,918
|
|
Salaries and other compensation
|
|
|
1,263
|
|
|
|
1,280
|
|
Legal and accounting
|
|
|
1,905
|
|
|
|
640
|
|
Accrued severance
|
|
|
2,519
|
|
|
|
–
|
|
Other accruals
|
|
|
830
|
|
|
|
1,670
|
|
Total accounts payable and accrued expenses
|
|
$
|
10,233
|
|
|
$
|
6,508
|
|
Salaries
and other compensation include accrued payroll expense, accrued bonus, and estimated employer 401(k) plan contributions.
Accrued
severance includes $2.3 million for accrued compensation due to Dr. Denver Lough, a former officer and director, under a settlement
terms agreement dated August 21, 2019. The remaining amount due of $0.6 million is included in other long-term liabilities.
Other
current liabilities are comprised of the current portion of operating lease liabilities and finance lease liabilities, contingent
consideration, and short-term debt. The short-term debt had a balance of $0.2 million as of September 30, 2019, while the other
components are disclosed in the footnotes above.
9.
LONG TERM NOTE PAYABLE
In
connection with the IBEX Acquisition in May 2018, the Company issued a promissory note payable to the Seller with an initial fair
value of $1.2 million. The promissory note has a principal balance of $1.3 million and bears interest at a rate of 3.5% interest
per annum. Principal and interest are payable in five equal installments that began on November 3, 2018 and continuing on each
six-month anniversary thereafter (“Payment Date”). The promissory note may be prepaid by the Company at any time and
becomes due and payable at the earlier of the maturity date of November 3, 2020 or upon an event of default, which includes failure
to pay any installment on each Payment Date, breach of any negative covenants, insolvency or bankruptcy. Upon the occurrence of
an event of default, the promissory note will bear an accelerated interest rate of 7% per annum from the date of the event of
default.
The
Company initially recognized the promissory note at its fair value, using an estimated market rate of interest for the Company,
which was higher than the promissory note’s stated rate. The result of imputing a market rate of interest resulted in an
initial discount to the principal balance of approximately $113,000, which is being amortized to interest expense over the term
of the promissory note using the effective interest method. The unamortized debt discount was approximately $28,000 and $68,000
at September 30, 2019 and December 31, 2018, respectively. Amortization of debt discount of $12,000 and $40,000 was included in
interest income, net for the three and nine months ended September 30, 2019.
10.
PREFERRED SHARES AND COMMON SHARES
Exchange
of 100% of Outstanding Series F Preferred Stock Shares and Warrants
On
September 20, 2017, the Company sold an aggregate of $17,750,000 worth of units of the Company’s securities (the “Units”)
to accredited investors at a purchase price of $2,750 per Unit. Each Unit consisted of (i) one share of the Company’s newly
authorized 6% Series F Convertible Preferred Stock, par value $0.001 per share (the “Series F Preferred Shares”),
convertible into one hundred (100) shares of the Company’s common stock, and (ii) a two-year warrant to purchase up to 322,727
shares of the Company’s common stock, at an exercise price of $30.00 per share.
The
Series F Preferred Shares were convertible into shares of the Company’s common stock based on a conversion calculation equal
to the stated value of the Series F Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series F Preferred
Shares, as of such date of determination, divided by the conversion price. The stated value of each Series F Preferred Share was
$2,750 and the initial conversion price was $27.50 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations,
combinations, subdivisions or other similar events.
On
the two-year anniversary of the initial issuance date, any Series F Preferred Shares outstanding and not otherwise already converted,
would, at the option of the holder, either (i) automatically convert into common stock of the Company at the conversion price
then in effect or (ii) be repaid by the Company based on the stated value of such outstanding Series F Preferred Shares.
The
warrants issued in connection with the Series F Preferred Shares were determined to be liabilities pursuant to ASC 815. The warrant
agreement provided for an adjustment to the number of common shares issuable under the warrant or adjustment to the exercise price,
including but not limited to, if: (a) the Company issued shares of common stock as a dividend or distribution to holders of its
common stock; (b) the Company subdivided or combined its common stock (i.e., stock split); or (c) the Company issues new securities
for consideration less than the exercise price. Prior to the adoption of ASU 2017-11, warrants that provide for down-round exercise
price protection were recognized as derivative liabilities.
The
conversion feature within the Series F Preferred Shares was determined to not be clearly and closely related to the identified
host instrument and, as such, was recognized as a derivative liability measured at fair value pursuant to ASC 815.
The
initial fair value of the warrants and bifurcated embedded conversion feature, estimated to be approximately $4.3 million and
$9.3 million, respectively, was deducted from the gross proceeds of the Unit offering to arrive at the initial discounted carrying
value of the Series F Preferred Shares. The resulting discount to the aggregate stated value of the Series F Preferred Shares
of approximately $13.6 million was recognized as accretion using the effective interest method similar to preferred stock dividends,
over the two-year period prior to optional redemption by the holders.
On
March 6, 2018, the Company entered into separate exchange agreements (the “Exchange Agreements”) with holders (each
a “Holder”, and collectively the “Holders”) of 100% of the Company’s outstanding Series F Preferred
Shares, and the Company’s warrants to purchase shares of the Company’s common stock issued in connection with the
Series F Preferred Shares (such “Warrants” and Series F Preferred Shares collectively referred to as the “Exchange
Securities”) to exchange the Exchange Securities and unpaid dividends on the Series F Preferred Shares for common stock
(the “Exchange”).
The
Exchange resulted in the following issuances: (A) all outstanding Series F Preferred Shares were converted into 972,070 shares
of restricted common stock at an effective conversion price of $18.26 per share of common stock (the closing price of Common Stock
on the NASDAQ Capital Market on February 26, 2018); (B) the right to receive 6% dividends underlying Series F Preferred Shares
was terminated in exchange for 31,321 shares of restricted common stock; (C) 322,727 Warrants to purchase common stock were exchanged
for 151,871 shares of restricted common stock; and (D) the Holders of the Warrants relinquished any and all other rights pursuant
to the Warrants, including exercise price adjustments.
As
part of the Exchange, the Holders also relinquished all other rights related to the issuance of the Exchange Securities, the respective
governing agreements and certificates of designation, including any related dividends, adjustment of conversion and exercise price,
and repayment option. The existing registration rights agreement with the holders of the Series F Preferred Shares was also terminated
and the holders of the Series F Preferred Shares waived the obligation of the Company to register the common shares issuable upon
conversion of Series F Preferred Shares or upon exercise of the warrants, and waived any damages, penalties and defaults related
to the Company failing to file or have declared effective a registration statement covering those shares.
The
exchange of all outstanding Series F Preferred Shares, and the holders’ right to receive 6% dividends, for common stock
of the Company was recognized as follows:
Fair market value of 1,003,393 shares of common stock issued at $20.05 (Company’s closing stock price on March 5, 2018) in exchange for Series F Preferred Shares and accrued dividends
|
|
$
|
20,117,990
|
|
Carrying value of Series F Preferred Shares at March 5, 2018, including dividends
|
|
|
(5,898,274
|
)
|
Carrying value of bifurcated conversion option at March 5, 2018
|
|
|
(7,162,587
|
)
|
Deemed dividend on Series F Preferred Shares exchange
|
|
$
|
7,057,129
|
|
As
the Warrants were classified as a liability, the exchange of the Warrants for common shares was recognized as a liability extinguishment.
As of March 5, 2018, the fair market value of the 151,871 common shares issued in the Exchange was $3,045,034 and the fair value
of the common stock warrant liability was $2,525,567 resulting in a loss on extinguishment of warrant liability of $519,467 during
the nine months ended September 30, 2018.
The
Company recognized accretion of the discount to the stated value of the Series F Preferred Shares of approximately $698,000 during
the nine months ended September 30, 2018, as a reduction of additional paid-in capital and an increase in the carrying value of
the Series F Preferred Shares. The accretion is presented in the Statement of Operations as a deemed dividend, increasing net
loss to arrive at net loss attributable to common stockholders.
Preferred
Stock Conversion and Elimination
On
February 6, 2018, 15,756 shares of Series B Convertible Preferred Stock (“Series B Preferred Shares”) were converted
into 262,606 shares of common stock.
On
March 6, 2018, the Company received conversion notices (in accordance with original terms) from holders of 100% of the outstanding
shares of Series A Convertible Preferred Stock (the “Series A Preferred Shares”), Series B Preferred Shares and Series
E Convertible Preferred Stock (the “Series E Preferred Shares”) and issued an aggregate of 7,945,250 shares of common
stock to such holders.
The
shares of Series E Preferred Stock were held by Dr. Denver Lough, the Company’s former Chief Executive Officer. On March
6, 2018, the Company entered into a new registration rights agreement (the “Lough Registration Rights Agreement”)
with Dr. Lough, pursuant to which the Company agreed to file a registration statement to register the resale of 7,050,000 shares
of common stock issued upon conversion of the Series E Preferred Shares within six months, to cause such registration statement
to be declared effective by the Securities and Exchange Commission as promptly as possible following its filing. On March 14,
2019, the Company’s registration obligation was waived, and the Lough Registration Rights Agreement amended to provide that
Dr. Lough may demand registration by written request to the Company. Dr. Lough demanded registration of his 7,050,000 common shares
in August 2019, and pursuant to that demand a registration statement on Form S-3 was filed with the Securities and Exchange Commission
in October 2019. Once the registration statement is effective, the Company is obligated to keep it effective until the earlier
of the date all the registered shares have been sold pursuant to the registration statement or the date one year from the date
the registration statement is first effective.
On
March 7, 2018, the Company filed a Certificate of Elimination with the Secretary of State of the State of Delaware terminating
the Company’s Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock. As a result, the Company has
25,000,000 shares of authorized and unissued preferred stock as of September 30, 2019 with no designation as to series.
There
was no convertible preferred stock outstanding as of September 30, 2019 and December 31, 2018.
11.
STOCK-BASED COMPENSATION
For
the three and nine months ended September 30, 2019 and 2018, the Company recorded stock-based compensation expense related to
stock options, restricted stock awards, and the employee stock purchase plan as follows (in thousands):
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
General and administrative expense
|
|
$
|
4,822
|
|
|
$
|
10,118
|
|
|
$
|
20,751
|
|
|
$
|
22,925
|
|
Research and development expense
|
|
|
(164
|
)
|
|
|
335
|
|
|
|
2,401
|
|
|
|
3,317
|
|
Sales and marketing expense
|
|
|
367
|
|
|
|
–
|
|
|
|
780
|
|
|
|
–
|
|
Total stock-based compensation expense
|
|
$
|
5,025
|
|
|
$
|
10,453
|
|
|
$
|
23,932
|
|
|
$
|
26,242
|
|
Incentive
Compensation Plans
2019
Plan
On
October 5, 2018, the Company’s Board of Directors (the “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 3,000,000 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
30, 2019, the Company had approximately 290,875 shares available for future issuances under the 2019 Plan.
2017
Plan
On
December 1, 2016, the Company’s Board of Directors (the “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 7,300,000 (increased from 3,450,000 in October 2017) 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 30, 2019, the Company had approximately 379,641 shares available for future issuances
under the 2017 Plan.
Stock
Options
A
summary of the Company’s employee and non-employee stock option activity for the nine months ended September 30, 2019 is
presented below:
|
|
Number of
shares
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding – December 31, 2018
|
|
|
6,499,885
|
|
|
$
|
14.02
|
|
Granted
|
|
|
818,403
|
|
|
$
|
13.75
|
|
Exercised (1)
|
|
|
(292,417
|
)
|
|
$
|
4.31
|
|
Forfeited
|
|
|
(668,842
|
)
|
|
$
|
20.50
|
|
Outstanding – September 30, 2019
|
|
|
6,357,029
|
|
|
$
|
13.91
|
|
Options exercisable – September 30, 2019
|
|
|
4,815,831
|
|
|
$
|
12.69
|
|
Weighted-average grant date fair value of options granted during the nine months ended September 30, 2019
|
|
|
|
|
|
$
|
9.84
|
|
|
(1)
|
The
number of exercised options includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements.
|
Restricted
Stock
A
summary of the Company’s employee and non-employee restricted-stock activity for the nine months ended September 30, 2019
is presented below:
|
|
Number of
shares
|
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Unvested - December 31, 2018
|
|
|
651,110
|
|
|
$
|
23.65
|
|
Granted
|
|
|
1,919,675
|
|
|
$
|
5.03
|
|
Vested (1)
|
|
|
(415,290
|
)
|
|
$
|
20.84
|
|
Forfeited
|
|
|
(128,395
|
)
|
|
$
|
22.44
|
|
Unvested – September 30, 2019
|
|
|
2,027,100
|
|
|
$
|
7.64
|
|
|
(1)
|
The
number of vested restricted stock units includes shares that were withheld on behalf of employees to satisfy the minimum statutory
tax withholding requirements.
|
Employee
Stock Purchase Plan (ESPP)
In
May 2018, the Company adopted the Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved 500,000
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. Total stock-based
compensation related to the ESPP for the three and nine months ended September 30, 2019 was $14,000 and $33,000, respectively.
A total of 7,260 shares of common stock were purchased pursuant to the ESPP during the nine months ended September 30, 2019 for
total proceeds of $35,000.
12.
INCOME TAXES
The
Company has evaluated its income tax positions and determined that no material uncertain tax positions existed at September 30,
2019. The Company does not expect a significant change in its unrecognized tax benefits within the next twelve months.
As
of September 30, 2019 and December 31, 2018, the Company maintained a valuation allowance to fully offset its net deferred tax
assets primarily attributable to operations in the United States, as the realization of such assets was not considered more likely
than not.
The
Company files income tax returns in the U.S. Federal and various state and local jurisdictions.
13.
LOSS PER SHARE
The
following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share for the
periods presented due to their anti-dilutive effect:
|
|
As of September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
6,357,029
|
|
|
|
6,125,628
|
|
Restricted stock
|
|
|
2,027,100
|
|
|
|
685,730
|
|
Shares committed under ESPP
|
|
|
15,235
|
|
|
|
–
|
|
14.
COMMITMENTS AND CONTINGENCIES
Contingencies
On
June 26, 2018, a class action complaint alleging violations of the Federal securities laws was filed in the United States District
Court, District of Utah, by Jose Moreno against the Company and two directors of the Company, Case No. 2:18-cv-00510-JNP (the
“Moreno Complaint”). On July 6, 2018, a similar complaint was filed in the same court against the same defendants
by Yedid Lawi, Case No. 2:18-cv-00541-PMW (the “Lawi Complaint”). Both the Moreno Complaint and Lawi Complaint allege
that the defendants made or were responsible for, disseminating information to the public through reports filed with the Securities
and Exchange Commission and other channels that contained material misstatements or omissions in violation of Sections 10 and
20(a) of the Exchange Act and Rule 10b-5 adopted thereunder. Specifically, both complaints allege that the defendants misrepresented
the status of one of the Company’s patent applications while touting the unique nature of the Company’s technology
and its effectiveness. Plaintiffs are seeking damages suffered by them and the class consisting of the persons who acquired the
publicly-traded securities of the Company between March 31, 2017, and June 22, 2018. Plaintiffs have filed motions to consolidate
and for appointment as lead plaintiff. On November 28, 2018, the Court consolidated the Moreno and Lawi cases under the caption
In re PolarityTE, Inc. Securities Litigation (the “Consolidated Securities Litigation”), and requested the appointment
of the plaintiff in Lawi as the lead plaintiff. On January 16, 2019, the Court granted the motion of Yedid Lawi for appointment
as lead plaintiff, and on February 1, 2019, the Court granted the lead plaintiff’s motion for approval of lead counsel and
liaison counsel. The Court ordered that the lead plaintiff file and serve a consolidated complaint no later than 60 days after
February 1, 2019, the defendants shall have 60 days after filing and service of the consolidated complaint to answer or otherwise
respond, and the lead plaintiff must file a motion for class certification within 90 days of service of the consolidated complaint.
The Lead Plaintiff filed a consolidated complaint on April 2, 2019 and asserted essentially the same violations of Federal securities
laws recited in the original complaints. The Company believes the allegations in the consolidated complaint are without merit,
and intends to defend the litigation, vigorously. The Company filed a motion to dismiss the consolidated complaint on June 3,
2019. Plaintiffs’ opposition to the Company’s motion to dismiss was filed on August 2, 2019, and the Company filed
a reply to the opposition on September 13, 2019. A hearing on the Company’s motion to dismiss is scheduled for November
19, 2019. At this early stage of the proceedings the Company is unable to make any prediction regarding the outcome of the litigation.
In
the ordinary course of business, we may become involved in lawsuits, claims, investigations, proceedings, and threats of litigation
relating to intellectual property, commercial arrangements, regulatory compliance, and other matters. Except as noted above, at
September 30, 2019, we were not party to any legal or arbitration proceedings that may have significant effects on our financial
position or results of operations. We are not a party to any material proceedings in which any director, member of senior management
or affiliate of ours is either a party adverse to us or our subsidiaries or has a material interest adverse to us or our subsidiaries.
Commitments
The
Company has entered into employment agreements with key executives that contain severance terms and change of control provisions.
15.
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.
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 we elect 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 1,648 square feet, and Cohen LLC is using approximately 4,584 square feet as of September 30, 2019. The monthly
lease payment for 6,232 square feet is $31,160. Of this amount $22,920 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. The Company recognized $69,000 and $195,000 of sublease income related
to this agreement for the three and nine months ended September 30, 2019, respectively. The sublease income is included in other
income, net in the statement of operations. As of September 30, 2019 and December 31, 2018, there was $17,000 and $0 due from
the related party under this agreement.
16.
SEGMENT REPORTING
The
Company’s current operations involve products and services which are managed separately. Accordingly, it operates in two
segments: 1) regenerative medicine and 2) contract services.
During
the three months ended September 30, 2019, the Company’s CODM changed the reporting of segment net income and loss to allocate
additional noncash expenses from the regenerative medicine segment to the contract services segment. For the three months ended
September 30, 2019 and 2018, this resulted in reallocation of noncash expense of $0.4 million and $0.2 million, respectively.
For the nine months ended September 30, 2019 and 2018, this resulted in reallocation of noncash expense of $1.4 million and $0.3
million, respectively. The change is reflected in the three and nine months ended September 30, 2019 and 2018 net loss amounts
presented below.
Certain
information concerning our segments for the three and nine months ended September 30, 2019 and 2018 is presented in the following
table (in thousands):
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regenerative medicine
|
|
$
|
839
|
|
|
$
|
197
|
|
|
$
|
1,640
|
|
|
$
|
389
|
|
Contract services
|
|
|
556
|
|
|
|
528
|
|
|
|
2,546
|
|
|
|
659
|
|
Total net revenues
|
|
$
|
1,395
|
|
|
$
|
725
|
|
|
$
|
4,186
|
|
|
$
|
1,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regenerative medicine
|
|
$
|
(22,466
|
)
|
|
$
|
(20,332
|
)
|
|
$
|
(70,247
|
)
|
|
$
|
(45,845
|
)
|
Contract services
|
|
|
(517
|
)
|
|
|
(247
|
)
|
|
|
(1,101
|
)
|
|
|
(511
|
)
|
Total net loss
|
|
$
|
(22,983
|
)
|
|
$
|
(20,579
|
)
|
|
$
|
(71,348
|
)
|
|
$
|
(46,356
|
)
|
17.
SUBSEQUENT EVENTS
Pursuant
to the demand made by Dr. Denver Lough under his Registration Rights Agreement in August 2019, the Company filed a registration
statement on Form S-3 with the Securities and Exchange Commission on October 21, 2019 to register 7,050,000 shares of common stock
held by Dr. Lough, which was declared effective November 1, 2019.