UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

Commission File No. 001-32404

POLARITYTE, INC.

(Exact name of registrant as specified in its charter)

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

1960 S. 4250 West, Salt Lake City, UT 84104

(Address of principal executive offices)

Registrant’s Telephone Number, Including Area Code: (800) 560-3983

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock, Par Value $0.001		PTE		Nasdaq Capital Market NASDAQ

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of May 10, 2021, there were 80,633,096 shares of the Registrant’s common stock outstanding.

INDEX

	Page
PART I - FINANCIAL INFORMATION	3

Item 1. Financial Statements:	3
Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 (unaudited)	3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020 (unaudited)	4
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2021 and 2020 (unaudited)	5
Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2021 and 2020 (unaudited)	6
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)	7
Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3. Quantitative and Qualitative Disclosures about Market Risk	32
Item 4. Controls and Procedures	32

PART II - OTHER INFORMATION	33

Item 1A. Risk Factors	33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 6. Exhibits	33

SIGNATURES	34

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.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements:

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

	March 31, 2021			December 31, 2020
ASSETS
Current assets
Cash and cash equivalents	$	37,237		$	25,522
Accounts receivable, net		4,320			3,819
Inventory		373			883
Prepaid expenses and other current assets		2,631			992
Total current assets		44,561			31,216
Property and equipment, net		9,414			10,550
Operating lease right-of-use assets		2,087			2,452
Intangible assets, net		495			542
Goodwill		278			278
Other assets		227			472
TOTAL ASSETS	$	57,062		$	45,510

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses	$	4,295		$	4,148
Other current liabilities		3,039			2,106
Current portion of long-term notes payable		2,508			2,059
Deferred revenue		207			168
Total current liabilities		10,049			8,481
Common stock warrant liability		15,866			5,975
Operating lease liabilities		1,142			1,476
Other long-term liabilities		596			723
Long-term notes payable		1,068			1,517
Total liabilities		28,721			18,172

Commitments and Contingencies (Note 13)		-

STOCKHOLDERS’ EQUITY
Preferred stock - 25,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2021 and December 31, 2020		–			–
Common stock – $.001 par value; 250,000,000 shares authorized; 80,316,309 and 54,857,099 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively		80			55
Additional paid-in capital		523,882			505,494
Accumulated deficit		(495,621	)		(478,211	)
Total stockholders’ equity		28,341			27,338
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	57,062		$	45,510

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

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

	2021			2020
	For the Three Months Ended March 31,
	2021			2020
Net revenues
Products	$	1,729		$	428
Services		2,980			505
Total net revenues		4,709			933
Cost of sales
Products		241			340
Services		1,924			176
Total cost of sales		2,165			516
Gross profit		2,544			417
Operating costs and expenses
Research and development		2,431			3,373
General and administrative		6,371			10,605
Sales and marketing		1,526			3,694
Restructuring and other charges		425			452
Total operating costs and expenses		10,753			18,124
Operating loss		(8,209	)		(17,707	)
Other income (expenses)
Change in fair value of common stock warrant liability		(4,027	)		4,532
Inducement loss on sale of liability classified warrants		(5,197	)		–
Interest expense, net		(38	)		(12	)
Other income, net		61			147
Net loss	$	(17,410	)	$	(13,040	)

Net loss per share attributable to common stockholders
Basic	$	(0.23	)	$	(0.39	)
Diluted	$	(0.24	)	$	(0.39	)
Weighted average shares outstanding
Basic		76,158,275			33,019,994
Diluted		76,396,078			33,019,994

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

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)

	2021			2020
	For the Three Months Ended March 31,
	2021			2020
Net loss	$	(17,410	)	$	(13,040	)
Other comprehensive income/(loss):
Unrealized gain on available-for-sale securities		–			4
Reclassification of realized gains included in net loss		–			(73	)
Comprehensive loss	$	(17,410	)	$	(13,109	)

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)

	Number			Amount		Capital			Income		Deficit			Equity
	For the Three Months Ended March 31, 2021
	Common Stock					Additional Paid-in			Accumulated Other Comprehensive		Accumulated			Total Stockholders’
	Number			Amount		Capital			Income		Deficit			Equity
Balance – December 31, 2020		54,857,099		$	55	$	505,494		$	–	$	(478,211	)	$	27,338
Issuance of common stock and pre-funded warrants through underwritten offering, net of issuance costs of $114		6,670,000			7		1,248			–		–			1,255
Issuance of common stock, net of issuance costs of $1,319
Issuance of common stock, net of issuance costs of $1,319, shares
Issuance of common stock upon exercise of warrants		10,713,543			10		6,661			–		–			6,671
Reclassification of warrant liability upon exercise		–			–		8,964			–		–			8,964
Issuance of common stock upon exercise of pre-funded warrants		7,658,953			8		–			–		–			8
Stock-based compensation expense		–			–		1,651			–		–			1,651
Stock option exercises		2,500			–		3					–			3
Vesting of restricted stock units		565,427			–		–			–		–			–
Shares withheld for tax withholding		(116,593	)		–		(139	)		–		–			(139	)
Forfeiture of restricted stock awards		(34,620	)		–		–			–		–			–
Other comprehensive loss
Net loss		–			–		–			–		(17,410	)		(17,410	)
Balance – March 31, 2021		80,316,309		$	80	$	523,882		$	–	$	(495,621	)	$	28,341

	Number			Amount		Capital			Income			Deficit			Equity
	For the Three Months Ended March 31, 2020
	Common Stock					Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Number			Amount		Capital			Income			Deficit			Equity
Balance – December 31, 2019		27,374,653		$	27	$	474,174		$	72		$	(435,357	)	$	38,916
Issuance of common stock, net of issuance costs of $1,319		10,854,710			11		12,588			–			–			12,599
Stock-based compensation expense		–			–		3,221			–			–			3,221
Stock option exercises		10,000			–		31			–			–			31
Vesting of restricted stock units		158,513			–		–			–			–			–
Shares withheld for tax withholding		(4,587	)		–		(5	)		–			–			(5	)
Other comprehensive loss		–			–		–			(69	)		–			(69	)
Net loss		–			–		–			–			(13,040	)		(13,040	)
Balance – March 31, 2020		38,393,289		$	38	$	490,009		$	3		$	(448,397	)	$	41,653

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

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	2021			2020
	For the Three Months Ended March 31,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(17,410	)	$	(13,040	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		1,651			3,221
Depreciation and amortization		701			752
Amortization of intangible assets		47			48
Amortization of debt discount		–			8
Bad debt expense		97			–
Change in inventory reserve		391			–
Change in fair value of common stock warrant liability		4,027			(4,532	)
Inducement loss on sale of liability classified warrants		5,197			–
Loss on restructuring and other charges		425			–
Loss on sale of property and equipment		7			–
Other non-cash adjustments		–			(16	)
Changes in operating assets and liabilities:
Accounts receivable		(598	)		545
Inventory		119			19
Prepaid expenses and other current assets		(1,639	)		(1,543	)
Operating lease right-of-use assets		328			448
Other assets		245			4
Accounts payable and accrued expenses		138			818
Other current liabilities		(15	)		(61	)
Deferred revenue		39			(75	)
Operating lease liabilities		(360	)		(450	)
Net cash used in operating activities		(6,610	)		(13,854	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(12	)		(999	)
Proceeds from sale of property and equipment		10			–
Purchase of available-for-sale securities		–			(14,144	)
Proceeds from maturities of available-for-sale securities		–			15,945
Proceeds from sale of available-for-sale securities		–			16,171
Net cash (used in) provided by investing activities		(2	)		16,973
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from term note payable and financing arrangements		1,028			1,053
Principal payments on term note payable and financing arrangements		(9	)		(55	)
Principal payments on financing leases		(135	)		(123	)
Net proceeds from the sale of common stock and warrants		–			24,276
Net proceeds from the sale of common stock, warrants and pre-funded warrants		9,884			–
Proceeds from the sale of new warrants		1,002			–
Proceeds from warrants exercised		6,671			–
Proceeds from pre-funded warrants exercised		8			–
Cash paid for tax withholdings related to net share settlement		(125	)		(2	)
Proceeds from stock options exercised		3			31
Net cash provided by financing activities		18,327			25,180
Net increase in cash and cash equivalents		11,715			28,299
Cash and cash equivalents - beginning of period		25,522			10,218
Cash and cash equivalents - end of period	$	37,237		$	38,517

Supplemental cash flow information:
Cash paid for interest	$	31		$	46

Supplemental schedule of non-cash investing and financing activities:
Unpaid liability for acquisition of property and equipment	$	–		$	137
Fair value of placement agent warrants issued in connection with offering	$	838		$	–
Reclassification of warrant liability to stockholders’ equity upon exercise of warrant	$	8,964		$	–
Accrued offering costs	$	500		$	–
Allocation of proceeds to warrant liability	$	8,629		$	11,677

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

POLARITYTE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION

PolarityTE, Inc. (together with its subsidiaries, the “Company”) is a biotechnology company developing regenerative tissue products and biomaterials. The Company also operates a laboratory testing and clinical research business using equipment, personnel, and facilities it acquired to advance the development of regenerative tissue products.

The accompanying interim condensed consolidated financial statements of the Company are unaudited, but in the opinion of management, reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented. Accordingly, they do not include all information and notes required by generally accepted accounting principles for complete financial statements. The results of operations for interim periods are not necessarily indicative of results to be expected for the entire fiscal year. The balance sheet at December 31, 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.

Reclassifications. Certain reclassifications of amounts previously reported have been made to the accompanying consolidated statement of operations to maintain consistency and comparability between periods presented. Restructuring and other charges of $0.5 million were reclassified from general and administrative, research and development, and sales and marketing expenses for the three-month period ended March 31, 2020 on the condensed consolidated statement of operations. These reclassifications had no impact on previously reported operating loss or net loss within the consolidated results of operations.

Cash and cash equivalents. Cash equivalents consist of highly liquid investments with original maturities of three months or less from the date of purchase. As of March 31, 2021, the Company did not hold any cash equivalents.

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. An inventory reserve of $0.4 million was recorded as of March 31, 2021. There was no inventory reserve recorded as of December 31, 2020.

Leases. The Company determines if an arrangement is a lease at inception. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Finance leases are reported in the condensed consolidated balance sheet in property and equipment and other current and long-term liabilities. The 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 records product revenues primarily from the sale of its regenerative tissue products. The Company sells its products to healthcare providers (customers), primarily through direct sales representatives. Product revenues consist of a single performance obligation that the Company satisfies at a point in time. In general, the Company recognizes product revenue upon delivery to the customer.

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 March 31, 2021 and December 31, 2020, the Company had unbilled receivables of $0.4 million and $0.2 million, respectively, and deferred revenue of $0.2 million as of each period. The unbilled receivables balance is included in consolidated accounts receivable. Revenue of $0.2 million was recognized during the three months ended March 31, 2021 that was included in the deferred revenue balance as of December 31, 2020.

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.

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

The fair value 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.

Net Loss Per Share. Basic net loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Gains on warrant liabilities are only considered dilutive when the average market price of the common stock during the period exceeds the exercise price of the warrants. All common stock warrants issued participate on a one-for-one basis with common stock in the distribution of dividends, if and when declared by the Board of Directors, on the Company’s common stock. For purposes of computing EPS, these warrants are considered to participate with common stock in earnings of the Company. Therefore, the Company calculates basic and diluted EPS using the two-class method. Under the two-class method, net income for the period is allocated between common stockholders and participating securities according to dividends declared and participation rights in undistributed earnings. No income was allocated to the warrants for the year ended December 31, 2020, as results of operations were a loss for the period and the warrant holders are not required to absorb losses. The Company has issued pre-funded warrants from time to time at an exercise price of $0.001 per share. The shares of common stock into which the pre-funded warrants may be exercised are considered outstanding for the purposes of computing earnings per share because the shares may be issued for little or no consideration, are fully vested, and are exercisable after the original issuance date.

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

Goodwill. Under accounting guidelines, goodwill is not amortized, but must be tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below the carrying amount. The Company reviews goodwill for impairment annually and whenever events or changes indicate that the carrying value of an asset may not be recoverable. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of significant assets or products. Application of these impairment tests requires significant judgment. There were no goodwill impairments recorded during the three months ended March 31, 2021 and 2020.

Recent Accounting Pronouncements

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

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.

In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2021-04”). ASU 2021-04 updates current accounting guidance for modifications or exchanges of freestanding equity-classified written call options that remain equity-classified after modification or exchange as an exchange of the original instrument for a new instrument. The ASU specifies that the effects of modifications or exchanges of freestanding equity-classified written call options that remain equity after modification or exchange should be recognized depending on the substance of the transaction, whether it be a financing transaction to raise equity (topic 340), to raise or modify debt (topic 470 and 835), or other modifications or exchanges. If the modification or exchange does not fall under topics 340, 470, or 835, an entity may be required to account for the effects of such modifications or exchanges as dividends which should adjust net income (or loss) in the basic EPS calculation. The Company is required to apply the amendments within this ASU prospectively to modifications or exchanges occurring on or after the effective date of the amendment. The Company plans to adopt this ASU on January 1, 2022 and is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the current guidance, and improving the consistent application of and simplification of other areas of the guidance. The Company adopted this standard prospectively on January 1, 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

The Company has experienced recurring losses and cash outflows from operating activities. As of March 31, 2021, the Company had an accumulated deficit of $495.6 million. As of March 31, 2021, the Company had cash and cash equivalents of $37.2 million. The Company has been funded historically through sales of equity and debt.

On January 14, 2021, the Company completed a registered direct offering of 6,670,000 shares of its common stock, par value $0.001 per share, pre-funded warrants to purchase up to 2,420,910 shares of common stock and accompanying common warrants to purchase up to 9,090,910 shares of common stock. Each share of common stock and pre-funded warrant were sold together with a common warrant. The combined offering price of each common share and accompanying common warrant was $1.100 and for each pre-funded warrant and accompanying common warrant was $1.099. The pre-funded warrants had an exercise price of $0.001 each and were exercised in full in January 2021. Each common warrant is exercisable for one share of the Company’s common stock at an exercise price of $1.20 per share. The warrants are immediately exercisable and will expire five years from the date of issuance. The holder of the warrants may not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent for the registered direct offering, warrants to purchase up to 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 545,455 shares of common stock). The placement agent warrants have substantially the same terms as the common warrants, except that the placement agent warrants have an exercise price equal to 125% of the purchase price per share (or $1.375 per share). The Company received net proceeds of $9.2 million in connection with the offering, after deducting placement agent fees and related offering expenses.

On January 22, 2021, the Company entered into a letter agreement with the holder of warrants to purchase 10,688,043 shares of common stock at an exercise price of $0.624 per share that were issued to the holder in the registered direct offering that closed on December 23, 2020. Under the letter agreement the holder agreed to exercise the 10,688,043 warrants in full and the Company agreed to issue and sell to the holder new common warrants to purchase up to 8,016,033 shares of the Company’s common stock, par value $0.001 per share, at a price of $0.125. Each new warrant is exercisable for one share of common stock at an exercise price of $1.20 per share. The new warrants are immediately exercisable and will expire five years from the date of issuance. The holder of the warrants may not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent for the registered direct offering in December 2020, warrants to purchase 6.0% of the aggregate number of new warrants issued under the letter agreement (or warrants to purchase up to 480,962 shares of common stock). The placement agent warrants have substantially the same terms as the new warrants. The Company received net proceeds of $6.7 million from the exercise of the existing warrants and $0.9 million from the sale of the newly issued warrants, after deducting placement agent fees and related offering expenses. The offering closed on January 25, 2021.

The Company believes that its existing cash and cash equivalents will be adequate to satisfy its capital and operating needs for at least the next 12 months from the date of filing. The Company will continue to pursue fundraising opportunities when available, but such financing may not be available in the future on favorable terms, if at all. If adequate financing is not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its product development programs, or be unable to continue operations over a longer term. The Company plans to meet its capital requirements primarily through issuances of equity securities, debt financing, or strategic partnership arrangements. Failure to raise additional capital would adversely affect the Company’s ability to fully 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.

	●	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):

	March 31, 2021
	Level 1		Level 2		Level 3		Total
Liabilities:
Common stock warrant liability	$	–	$	–	$	15,866	$	15,866
Total	$	–	$	–	$	15,866	$	15,866

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

The following table presents the change in fair value of the liability classified common stock warrants for the three months ended March 31, 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 March 31, 2021
Warrant liabilities
February 14, 2020 issuance	$	328	$	–	$	217		$	–		$	545
December 23, 2020 issuance		5,647		–		3,861			(8,964	)		544
January 14, 2021 issuance		–		8,629		(797	)		–			7,832
January 25, 2021 issuance		–		6,199		746			–			6,945
Inducement loss on initial fair value (1)		–		–		5,197			–			–
Total	$	5,975	$	14,828	$	9,224		$	(8,964	)	$	15,866

(1)

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

The following table presents the change in fair value of the liability classified common stock warrants for the three months ended March 31, 2020 (in thousands):

	Fair Value at December 31, 2019		Initial Fair Value at Issuance		(Gain) Loss Upon Change in Fair Value			Liability Reduction Due to Exercises		Fair Value on March 31, 2020
Warrant liabilities
February 14, 2020 issuance	$	–	$	11,677	$	(4,532	)	$	–	$	7,145

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 three months ended March 31, 2021 are as follows:

	For the Three Months ended March 31, 2021
Stock price	$	1.02–1.21
Exercise price	$	0.10 –1.38
Risk-free rate		0.42 –1.13	%
Volatility		99.0 –102.7	%
Remaining term (years)		4.73 –5.87

Input assumptions used to measure the fair value of these freestanding instruments during the three months ended March 31, 2020 are as follows:

	For the Three Months ended March 31, 2020
Stock price	$	1.08 – 1.69
Exercise price	$	2.80
Risk-free rate		0.54 – 1.51	%
Volatility		93.4 – 94.2	%
Remaining term (years)		6.87 – 6.99

5. PROPERTY AND EQUIPMENT, NET

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

SCHEDULE OF PROPERTY AND EQUIPMENT, NET

	March 31, 2021			December 31, 2020
Machinery and equipment	$	11,604		$	12,232
Land and buildings		2,000			2,000
Computers and software		1,207			1,240
Leasehold improvements		2,107			2,107
Construction in progress		–			87
Furniture and equipment		148			148
Total property and equipment, gross		17,066			17,814
Accumulated depreciation and amortization		(7,652	)		(7,264	)
Total property and equipment, net	$	9,414		$	10,550

The Company sold SkinTE under Section 361 of the Public Health Service Act in 2020 and into 2021 and, after the Company’s decision to file an investigational new drug application (IND) under Section 351 of that Act, under an enforcement discretion position stated by the FDA in a regenerative medicine policy framework to help facilitate regenerative medicine therapies. On or about April 21, 2021, the FDA announced that enforcement discretion will not be extended beyond May 31, 2021. As a result of this development and the Company’s plan to file its IND in the second half of 2021, the Company has decided it will terminate commercial sales of SkinTE on May 31, 2021, and wind down its SkinTE commercial operation. Approximately $3.0 million of total property and equipment is related to commercial SkinTE operations, of which, the Company has determined approximately $2.5 million can be repurposed primarily as research and development equipment. The Company evaluated the future use of its commercial property and equipment and recorded an impairment charge of approximately $0.4 million during the first quarter of 2021. The impairment charges occurred within the Company’s regenerative medicine business segment and are included in restructuring and other charges within the accompanying consolidated statement of operations for the three months ended March 31, 2021. Certain production assets will remain in use until commercial operations have officially ceased. Accordingly, the lives of such production assets were reduced and will be depreciated over their remaining estimated economic useful lives.

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

	For the Three Months Ended March 31,
	2021		2020
General and administrative expense	$	304	$	392
Research and development expense		397		360
Total depreciation and amortization expense	$	701	$	752

6. LEASES

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

Operating Leases

On December 27, 2017, the Company entered into a commercial lease agreement with Adcomp LLC, a Utah limited liability company, pursuant to which the Company leased approximately 178,528 rentable square feet of warehouse, manufacturing, office, and lab space in Salt Lake City, Utah from the landlord. The initial term of the lease is five years and it expires on November 30, 2022. The Company has a one-time option to renew for an additional five years. The initial base rent under this lease is $98,190 per month ($0.55 per sq. ft.) for the first year of the initial lease term and increases 3.0% per annum thereafter. Because the rate implicit in the lease is not readily determinable, the Company has used an incremental borrowing rate of 10% to determine the present value of the lease payments.

In 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 third quarter of 2020, the Company initiated a business analysis to determine the long-term strategy of the remote facility and cost to remain operational. During the fourth quarter of fiscal year 2020, it was determined that the Company would cease operations and vacate the facility. As a result, the Company determined that the approved plan to vacate the lease represented a triggering event requiring the long-lived assets attributable to the disposal group be assessed for impairment. Given the facts and circumstances, the Company determined that the carrying value of the related assets of the disposal group were not recoverable. As a result, the carrying values were reduced to $0 as of December 31, 2020.

Financing Leases

In November 2018 and April 2019, the Company entered into financing leases primarily for laboratory equipment used in research and development activities. The financing leases have remaining terms that range from 12 to 37 months as of March 31, 2021 and include options to purchase equipment at the end of the lease. Because the rate implicit in the lease is not readily determinable, the Company has used an incremental borrowing rate of approximately 10% to determine the present value of the lease payments for these leases.

As of March 31, 2021, the maturities of operating and finance lease liabilities were as follows (in thousands):

	Operating leases			Finance leases
2021 (excluding the three months ended March 31, 2021)	$	1,231		$	491
2022		1,345			405
2023		132			336
2024		87			42
Total lease payments		2,795			1,274
Less:
Imputed interest		(231	)		(143	)
Total	$	2,564		$	1,131

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

Finance leases

	March 31, 2021		December 31, 2020
Finance lease right-of-use assets included within property and equipment, net	$	1,135	$	1,301

Current finance lease liabilities included within other current liabilities	$	544	$	556
Non-current finance lease liabilities included within other long-term liabilities		587		711
Total finance lease liabilities	$	1,131	$	1,267

Operating leases

	March 31, 2021		December 31, 2020
Current operating lease liabilities included within other current liabilities	$	1,422	$	1,485
Operating lease liabilities – non current		1,142		1,476
Total operating lease liabilities	$	2,564	$	2,961

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

SUMMARY OF COMPONENTS OF LEASE EXPENSE

	2021		2020
	For the Three Months Ended March 31,
	2021		2020
Operating lease costs included within operating costs and expenses	$	394	$	556
Finance lease costs:
Amortization of right-of-use assets	$	165	$	175
Interest on lease liabilities		30		43
Total	$	195	$	218

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

	For the Three Months Ended March 31,
	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash out flows from operating leases	$	426	$	558
Operating cash out flows from finance leases	$	30	$	43
Financing cash out flows from finance leases	$	135	$	123
Lease liabilities arising from obtaining right-of-use assets:
Remeasurement of operating lease liability due to lease modification	$	37	$	–

As of March 31, 2021 and December 31, 2020, the weighted average remaining lease term for operating leases was 1.9 and 2.1 years, respectively, and the weighted average discount rate used for operating leases was 9.81% and 9.75%, respectively. As of March 31, 2021 and December 31, 2020, the weighted average remaining lease term for finance leases was 2.4 and 2.6 years, respectively, and the weighted average discount rate used for finance leases was 9.78% for both periods.

7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

	March 31, 2021		December 31, 2020
Accounts payable	$	339	$	1,193
Salaries and other compensation		1,519		1,129
Legal and accounting		377		241
Accrued severance		83		330
Benefit plan accrual		700		659
Accrued offering costs		500		–
Other		777		596
Total accounts payable and accrued expenses	$	4,295	$	4,148

Accrued severance as of March 31, 2021 and December 31, 2020 consists of accrued compensation owed to Dr. Denver Lough, a former officer and director, under a settlement terms agreement dated August 21, 2019 (Note 14).

8. OTHER CURRENT LIABILITIES

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

SCHEDULE OF OTHER CURRENT LIABILITIES

	March 31, 2021		December 31, 2020
Current finance lease liabilities	$	544	$	556
Current operating lease liabilities		1,422		1,485
Short-term financing arrangement		1,048		20
Other		25		45
Total other current liabilities	$	3,039	$	2,106

The short-term financing balance is related to a financing arrangement entered into during the three months ended March 31, 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 3.85%.

9. STOCK-BASED COMPENSATION

2020, 2019 and 2017 Equity Incentive Plans

2020 Plan

On October 25, 2019, the Company’s Board of Directors (the “Board”) approved the Company’s 2020 Stock Option and Incentive Plan (the “2020 Plan”). The 2020 Plan became effective on December 19, 2019, the date approved by the stockholders. The 2020 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, unrestricted stock awards, dividend equivalent rights, and cash-based awards to the Company’s employees, officers, directors and consultants. The 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 7,191,917 shares of common stock are issuable pursuant to awards under the 2020 Plan. No grants of awards may be made under the 2020 Plan after the later of December 19, 2029, or the tenth anniversary of the latest material amendment of the 2020 Plan and no grants of incentive stock options may be made after October 25, 2029. The 2020 Plan provides that effective on January 1 of each year the number of shares of common stock reserved and available for issuance under the 2020 Plan shall be cumulatively increased by the lesser of 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the 2020 plan administrator. As of March 31, 2021, the Company had 3,583,950 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 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 March 31, 2021, the Company had 392,999 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 7,300,000 shares of common stock are issuable pursuant to awards under the 2017 Plan. Unless earlier terminated by the Board, the 2017 Plan shall terminate at the close of business on December 1, 2026. As of March 31, 2021, the Company had 311,863 shares available for future issuances under the 2017 Plan.

A summary of the Company’s employee and non-employee stock option activity for the three months ended March 31, 2021 is presented below:

	Number of Shares			Weighted- Average Exercise Price
Outstanding – December 31, 2020		4,794,567		$	10.03
Granted		1,352,058		$	1.30
Exercised (1)		(2,500	)	$	1.10
Forfeited		(62,415	)	$	6.26
Outstanding – March 31, 2021		6,081,710		$	8.13
Options exercisable, March 31, 2021		4,030,490		$	11.27

(1)

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

Employee Stock Purchase Plan (ESPP)

In May 2018, the Company adopted the Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved 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.

Restricted Stock

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

	Number of Shares
Unvested - December 31, 2020		3,468,969
Granted		498,628
Vested (1)		(740,657	)
Forfeited		(165,870	)
Unvested – March 31, 2021		3,061,070

(1)

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

Stock-Based Compensation Expense

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

	For the Three Months Ended March 31,
	2021		2020
General and administrative expense	$	1,229	$	3,076
Research and development expense		323		(36	)
Sales and marketing expense		99		181
Total stock-based compensation expense	$	1,651	$	3,221

10. SALE OF COMMON STOCK, WARRANTS AND PRE-FUNDED WARRANTS

On January 14, 2021, the Company completed a registered direct offering of 6,670,000 shares of its common stock, par value $0.001 per share, pre-funded warrants to purchase up to 2,420,910 shares of common stock and accompanying common warrants to purchase up to 9,090,910 shares of common stock. Each share of common stock and pre-funded warrant was sold together with a warrant. The combined offering price of each common stock share and accompanying warrant was $1.10 and for each pre-funded warrant and accompanying warrant was $1.099. The pre-funded warrants had an exercise price of $0.001 each and were exercised in full in January 2021. Each warrant is exercisable for one share of the Company’s common stock at an exercise price of $1.20 per share. The warrants are immediately exercisable and will expire five years form the date of issuance. The holder of the warrants may not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent warrants to purchase 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 545,455 shares of common stock). The placement agent warrants have substantially the same terms as the warrants, except that the placement agent warrants have an exercise price equal to 125% of the purchase price per share (or $1.375 per share). The net proceeds to the Company from the offering were $9.2 million, after direct offering expenses of $0.8 million payable by the Company.

As the common stock warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the common stock warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $8.1 million and $0.5 million, respectively. Since the pre-funded warrants did not contain the same cash settlement provision, these warrants were classified as a component of stockholders’ equity within additional paid-in-capital. The pre-funded warrants were equity classified because they met characteristics of the equity classification criteria. The total proceeds from the offering were first allocated to the liability classified warrants, based on their estimated fair values, with the residual $1.4 million allocated to the common stock and pre-funded common stock warrants in equity. Issuance costs allocated to the equity classified pre-funded common stock warrants and common stock of $0.1 million were recorded as a reduction to additional paid-in capital. Issuance costs allocated to the liability classified warrants of $0.7 million were recorded as an expense. The Company measured the fair value of the accompanying common warrants and placement agent warrants using the Monte Carlo simulation model at issuance and again at March 31, 2021 using the following inputs:

Accompanying common warrants:

	January 14, 2021			March 31, 2021
Stock price	$	1.21		$	1.11
Exercise price	$	1.20		$	1.20
Risk-free rate		0.49	%		0.86	%
Volatility		100.1	%		102.4	%
Remaining term (years)		5.0			4.8

Placement agent warrants:

	January 14, 2021			March 31, 2021
Stock price	$	1.21		$	1.11
Exercise price	$	1.38		$	1.38
Risk-free rate		0.49	%		0.86	%
Volatility		99.3	%		102.4	%
Remaining term (years)		5.0			4.8

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

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

	January 22, 2021
Stock price	$	1.05
Exercise price	$	0.624
Risk-free rate		0.43	%
Volatility		99.4	%
Remaining term (years)		4.92

As the new common stock warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the new common stock warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $5.8 million and $0.4 million, respectively. Cash issuance costs of $0.1 million were recorded as an expense. The Company measured the fair value of the accompanying common stock warrants and placement agent common stock warrants using the Monte Carlo simulation model at issuance and again at March 31, 2021 using the following inputs:

Accompanying new common stock warrants:

	January 25, 2021			March 31, 2021
Stock price	$	1.02		$	1.11
Exercise price	$	1.20		$	1.20
Risk-free rate		0.42	%		0.87	%
Volatility

SEC Form 10-Q filed by PolarityTE, Inc.