NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION
Asset
Acquisition and Name Change.
On December 1, 2016
,
Majesco Entertainment Company (the “Company”) entered
into an agreement to acquire the assets of PolarityTE, Inc., (the “Seller”), a regenerative medicine company. The
asset acquisition was subject to shareholder approval, which was received on March 10, 2017. In January, 2017, the Company changed
its name to “PolarityTE, Inc.”
On
April 7, 2017, the Seller issued 7,050 shares of the Company’s newly authorized Series E Preferred Stock (the “Preferred
Shares”) convertible into an aggregate of 7,050,000 shares of the Company’s common stock with a fair value of approximately
$104.7 million which is equal to 7,050,000 common shares times $14.85 (the closing price of the Company’s common stock as
of April 7, 2017). Since the assets purchased were in-process research and development assets, the total purchase price was immediately
expensed as research and development – intellectual property acquired since they have no alternative future use.
On
December 1, 2016, the Company hired Dr. Denver Lough as Chief Executive Officer, Chief Scientific Officer and Chairman of our
Board of Directors and Dr. Ned Swanson as Chief Operating Officer of the Company. Until their hiring both doctors were associated
with Johns Hopkins University, Baltimore, Maryland, as full-time residents.
The
doctors lead the Company’s current efforts focused on scientific research and development and in this regard on December
1, 2016, the Company leased laboratory space and purchased laboratory equipment in Salt Lake City, Utah. Subsequent expenditures
during January 2017 include approximately $1.4 million for the purchase of medical equipment, including microscopes for high end
real-time imaging of cells and tissues required for tissue engineering and regenerative medicine research. The Company has added
additional facilities, and established university and scientific relationships and collaborations in order to pursue its business.
None of these activities were performed by Dr. Lough or Dr. Swanson prior to December 1, 2016 in connection with their university
positions or privately.
Dr.
Lough is the named inventor under a pending patent application for a novel regenerative medicine and tissue engineering platform
filed in the United States and elsewhere. The Company believes that its future success depends significantly on its ability to
protect its inventions and technology. Accordingly, the Company is seeking to acquire the pending patent application. Prior to
December 1, 2016, no employees, consultants or partners engaged in any business activity related to the patent application and
no licenses or contracts were granted related to the patent application, other than professional services related to preparation
and filing of the patent. On December 1, 2016, Dr. Lough assigned the patent application as well as all related intellectual property
to a newly-formed Nevada corporation, Polarityte, Inc. (“Polarity NV”), and the Company entered into an Agreement
and Plan of Reorganization (the “Agreement”) with Polarity NV and Dr. Lough.
As
a result, at closing, the patent application would be owned by the Company without the need for further assignments or recordation
with the Patent Trademark Office.
There
was never any intent to acquire an ongoing business and no ongoing business was acquired. The asset is preserved in a stand-alone
entity merely as a vehicle to provide the Company a seamless means to acquire the asset (a patent application) without undue cost,
expense and time. Polarity NV has never had employees and, therefore, no employees were acquired in the transaction.
The
Company adopted ASU 2017-01,
Business Combinations (Topic 805), Clarifying the Definition of a Business
, during the first
quarter of fiscal 2017. In accordance with ASU 2017-01 we analyzed the above transaction as follows:
Step
1 - Is substantially all the fair value of the gross assets acquired concentrated in a single (group of similar) identifiable
asset(s)? – The Company has a proposal to acquire a single intellectual property asset and no employees on the acquisition
date.
Step
2 - Evaluate whether an input and a substantive process exists? Does the set have outputs? – The set does not yet have outputs,
as Polarity NV’s intellectual property does not generate any revenue. Without outputs, the set requires employees that form
an organized workforce with skills, knowledge, or experience to perform an acquired process that is critical to the ability to
create outputs to qualify as a business. Polarity NV never had any employees or workforce. On December 1, 2016, prior to any Polarity
NV acquisition, the Company hired Denver Lough as its Chief Executive and Chief Scientific Officer and Edward Swanson as Chief
Operating Officer (“COO”). Both of these executives were employed full-time by Johns Hopkins University and were not
employed by Polarity NV. In December 2016, the Company established a clinical advisory board and added three members in December
2016 and three more in January 2017. Establishing the clinical advisory board and hiring a COO are critical to establishing at
the Company for the first time a workforce that has the knowledge and experience to obtain regulatory approval of the Company’s
intellectual property. Therefore, the acquisition of an intellectual property asset and no employees from Polarity NV on April
7, 2017 did not represent the acquisition of an organized workforce with the necessary skills and experience to create outputs.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
General.
The accompanying consolidated financial statements present the financial results of PolarityTE, Inc. and its wholly owned
subsidiaries Polarity NV and Majesco Europe Limited. Majesco Europe Limited was dissolved during the year ended October 31,
2016.
Segments.
The Company’s operations involve dissimilar products which are managed separately. Accordingly, it operates in two segments:
1) video games and 2) regenerative medicine.
Video
Games
The
Company is a provider of video game products primarily for the casual-game consumer and has published video games for interactive
entertainment hardware platforms, including Nintendo’s DS, 3DS, Wii and WiiU, Sony’s PlayStation 3 and 4, or PS3 and
PS4, Microsoft’s Xbox 360 and Xbox One and the personal computer, or PC. The Company sells its products through digital
distribution.
The
Company’s video game titles are targeted at various demographics at a range of price points. Due to the larger budget requirements
for developing and marketing premium console titles for core gamers, the Company has focused on publishing lower-cost games targeting
casual-game consumers and independent game developer fans. In some instances, the Company’s titles are based on licenses
of well-known properties and, in other cases, original properties. The Company enters into agreements with content providers and
video game development studios for the creation of its video games.
The
Company currently has no plans or understandings to discontinue or divest its current existing software business although the
Company has received inquiries from prospective purchasers of various assets and the business. The Company may determine to dispose
of such business in whole or in part, or discontinue such business, and may reevaluate from time to time although presently 4
employees continue to be employed in direct activities related to such software business and administration and the Company is
continuing to generate revenue from its sales of digital online games. The Company is diversifying its business model in an attempt
to mitigate risk associated with focusing on one industry and increase the overall value of the Company for its shareholders.
Regenerative
Medicine
Through
its regenerative medicine efforts, the Company is developing the proprietary tissue engineering platform invented by Dr. Denver
Lough to translate regenerative products into clinical application. Preliminarily, the technological platform has demonstrated
the potential capacity to grow fully functional tissue across the entire spectrum of the musculoskeletal and integumentary systems,
including skin, muscle, bone, cartilage, peripheral nerve, fat, and fascia. Preliminary results indicate it has applications across
solid organ and specialty tissue regeneration as well, including bowel, liver, kidney, and urethra. The product furthest in the
development pipeline is an autologous (tissue from the patient themselves) skin regeneration construct, SkinTE
TM
, to
regenerate fully functional skin with all of its layers, including epidermis, dermis, hypodermis, and all appendages including
hair and glands. SkinTE
TM
is preparing for clinical testing and market entry, and targeting a global wound care market
of $40 billion. The platform provides a pipeline of products to follow in parallel, with plans for serial clinical and market
entry, and each addressing separate and similarly sized potential markets. The Company’s approach seeks to benefit from
fewer regulatory and capital barriers to market entry, avoiding the long timelines associated with three phase trials and their
associated costs seen with other competing technologies and therapeutics. The regenerative medicine business model being pursued
takes advantage of the smaller regulatory hurdles, with streamlined product development from cell/tissue in vitro and ex vivo
testing, to small and large animal preclinical models, manufacturing technology transfer, and ultimately clinical application
and market entry occurring in a mapped out stepwise fashion for each product. Although skin regeneration and wound care is a robust
market in and of itself, the platform technology provides a base that the Company believes will support a strategy to build a
company that can diversify and grow continuously.
NASDAQ
listing.
On January 6, 2017, PolarityTE, Inc., was notified by The NASDAQ Stock Market, LLC of failure to comply with Nasdaq
Listing Rule 5605(b)(1) which requires that a majority of the directors comprising the Company’s Board of Directors be considered
“independent”, as defined under the Rule. The notice had no immediate effect on the listing or trading of the Company’s
common stock on The NASDAQ Capital Market and the common stock continued to trade on The NASDAQ Capital Market under the symbol
“COOL”.
On
February 22, 2017, the Company regained compliance with Listing Rule 5605(b)(1), the independent director requirement for continued
listing on The NASDAQ Stock Market, with the appointment of Mr. Steve Gorlin and Dr. Jon Mogford, and the matter is now closed.
PolarityTE’s common stock will continue to be listed on The NASDAQ Capital Market.
Major
customers.
Sony, Microsoft, Entrophy and Valve accounted for 33%, 29%, 13%, and 11%, respectively, of sales for the six months
ended April 30, 2017. Microsoft, Sony, and Valve accounted for 40%, 28%, and 18%, respectively, of sales for the six months ended
April 30, 2016. Sony and Microsoft accounted for 43% and 23%, respectively, of accounts receivable as of April 30, 2017.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Concentrations.
The Company develops and distributes video game software for proprietary platforms under licenses from Nintendo, Sony and
Microsoft, which must be periodically renewed. The Company’s agreements with these manufacturers also grant them certain
control over the Company’s products. In addition, for the six months ended April 30, 2017 and 2016 sales of the Company’s
Zumba Fitness games accounted for approximately 11% and 10% of net revenues, respectively.
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 Company’s financial results are impacted by the seasonality of the retail selling season and the
timing of the release of new titles. 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 October 31, 2016 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 Company’s consolidated financial statements and notes thereto for the year ended October
31, 2016 filed with the Securities and Exchange Commission on Form 10-K on December 30, 2016.
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 Polarity NV and Majesco Europe Limited. Majesco Europe Limited was dissolved during the year ended
October 31, 2016. Significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue
Recognition.
The Company’s software products are sold exclusively as downloads of digital content for which the consumer
takes possession of the digital content for a fee. Revenue from product downloads is generally recognized when the download is
made available (assuming all other recognition criteria are met).
Cash
and cash equivalents.
Cash equivalents consist of highly liquid investments with original maturities of three months or less
at the date of purchase. At various times, the Company has deposits in excess of the Federal Deposit Insurance Corporation limit.
The Company has not experienced any losses on these accounts.
Accounts
Receivable and Accounts Payable and Accrued Expenses.
The carrying amounts of accounts receivable and accounts payable and
accrued expenses approximate fair value as these accounts are largely current and short term in nature.
Allowance
for Doubtful Accounts
. The Company recognizes an allowance for losses on accounts receivable for estimated probable losses.
The allowance is based on historical experiences, current aging of accounts, and other expected future write-offs, including specific
identifiable customer accounts considered at risk or uncollectible. Any related expense associated with an allowance for doubtful
accounts is recognized as general and administrative expense. As of April 30, 2017 and 2016, there was no allowance for doubtful
accounts.
Capitalized
Software Development Costs and License Fees.
Software development costs include fees in the form of milestone payments made
to independent software developers and licensors. Software development costs are capitalized once technological feasibility of
a product is established and management expects such costs to be recoverable against future revenues. For products where proven
game engine technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product
basis. Amounts related to software development that are not capitalized are charged immediately to product research and development
costs. Commencing upon a related product’s release, capitalized costs are amortized to cost of sales based upon the higher
of (i) the ratio of current revenue to total projected revenue or (ii) straight-line charges over the expected marketable life
of the product.
Prepaid
license fees represent license fees to owners for the use of their intellectual property rights in the development of the Company’s
products. Minimum guaranteed royalty payments for intellectual property licenses are initially recorded as an asset (prepaid license
fees) and a current liability (accrued royalties payable) at the contractual amount upon execution of the contract or when specified
milestones or events occur and when no significant performance remains with the licensor. Licenses are expensed to cost of sales
at the higher of (i) the contractual royalty rate based on actual sales or (ii) an effective rate based upon total projected revenue
related to such license. Capitalized software development costs and prepaid license fees are classified as non-current if they
relate to titles for which the Company estimates the release date to be more than one year from the balance sheet date.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
amortization period for capitalized software development costs and prepaid license fees is usually no longer than one year from
the initial release of the product. If actual revenues or revised forecasted revenues fall below the initial forecasted revenue
for a particular license, the charge to cost of sales may be larger than anticipated in any given quarter. The recoverability
of capitalized software development costs and prepaid license fees is evaluated quarterly based on the expected performance of
the specific products to which the costs relate. When, in management’s estimate, future cash flows will not be sufficient
to recover previously capitalized costs, the Company expenses these capitalized costs to “cost of sales-software development
costs and license fees,” in the period such a determination is made. These expenses may be incurred prior to a game’s
release for games that have been developed. If a game is cancelled prior to completion of development and never released to market,
the amount is expensed to operating costs and expenses. If the Company was required to write off licenses, due to changes in market
conditions or product acceptance, its results of operations could be materially adversely affected.
Costs
of developing online free-to-play social games, including payments to third-party developers, are expensed as research and development
expenses. Revenue from these games is largely dependent on players’ future purchasing behavior in the game and currently
the Company cannot reliably project that future net cash flows from developed games will exceed related development costs.
Prepaid
license fees and milestone payments made to the Company’s third-party developers are typically considered non-refundable
advances against the total compensation they can earn based upon the sales performance of the products. Any additional royalty
or other compensation earned beyond the milestone payments is expensed to cost of sales as incurred.
Property
and Equipment.
Property and equipment is stated at cost. Depreciation and amortization is being provided for by the straight-line
method over the estimated useful lives of the assets, generally five years. Amortization of leasehold improvements is provided
for over the shorter of the term of the lease or the life of the asset.
Income
Taxes.
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. The Company evaluates the potential for realization of deferred tax
assets at each quarterly balance sheet date and records a valuation allowance for assets for which realization is not more likely
than not.
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 expenses. Compensation expense for stock options with cliff vesting is recognized on a straight-line
basis over the vesting period of the award, based on the fair value of the option on the date of grant. 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.
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.
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.
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. Diluted loss per share excludes the potential impact
of common stock options, unvested shares of restricted stock and outstanding common stock purchase warrants because their effect
would be anti-dilutive due to our net loss.
Commitments
and Contingencies.
We are subject to claims and litigation in the ordinary course of our business. We record a liability for
contingencies when the amount is both probable and reasonably estimable. We record associated legal fees as incurred.
Accounting
for Warrants
. The Company accounts for the issuance of common stock purchase warrants issued in connection with the equity
offerings in accordance with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies
as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash
settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or
liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an
event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement
or settlement in shares (physical settlement or net-share settlement). In addition, under ASC 815, registered common stock warrants
that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement
are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the condensed consolidated
balance sheet as a current liability.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Change
in Fair Value of Warrant Liability.
The Company assessed the classification of common stock purchase warrants as of the date
of each offering and determined that certain instruments met the criteria for liability classification. Accordingly, the Company
classified the warrants as a liability at their fair value and adjusts the instruments to fair value at each reporting period.
This liability is subject to re-measurement at each balance sheet date until the warrants are exercised or expired, and any change
in fair value is recognized as “change in fair value of warrant liability” in the condensed consolidated statements
of operations. The fair value of the warrants has been estimated using a Black-Scholes valuation model (see Note 7).
Reverse
stock-split
. On July 27, 2016, Majesco Entertainment Company (the “Company”) filed a certificate of amendment
(the “Amendment”) to its Restated Certificate of Incorporation with the Secretary of State of the State of Delaware
in order to effectuate a reverse stock split of the Company’s issued and outstanding common stock, par value $0.001 per
share on a one (1) for six (6) basis, effective on July 29, 2016 (the “Reverse Stock Split”).
The
Reverse Stock Split was effective with The NASDAQ Capital Market (“NASDAQ”) at the open of business on August 1, 2016.
The par value and other terms of Company’s common stock were not affected by the Reverse Stock Split. The Company’s
post-Reverse Stock Split common stock has a new CUSIP number, 560690 406. The Company’s transfer agent, Equity Stock Transfer
LLC, acted as exchange agent for the Reverse Stock Split.
As
a result of the Reverse Stock Split, every six shares of the Company’s pre-Reverse Stock Split common stock was combined
and reclassified into one share of the Company’s common stock. No fractional shares of common stock were issued as a result
of the Reverse Stock Split. Stockholders who otherwise would be entitled to a fractional share shall receive a cash payment in
an amount equal to the product obtained by multiplying (i) the closing sale price of our common stock on the business day immediately
preceding the effective date of the Reverse Stock Split as reported on NASDAQ by (ii) the number of shares of our common stock
held by the stockholder that would otherwise have been exchanged for the fractional share interest.
All
common share and per share amounts have been restated to show the effect of the Reverse Stock Split.
Estimates.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities or the
disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Among the more significant estimates included in these financial statements are the recoverability
of advance payments for capitalized software development costs and intellectual property licenses, the valuation of warrant liability,
stock based compensation and the valuation allowances for deferred tax benefits. Actual results could differ from those estimates.
Recently
Adopted Accounting Pronouncements
In
August 2014, the FASB issued ASU No. 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as a
Going Concern
(“ASU No. 2014-15”) that requires management to evaluate whether there are conditions and events
that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial
statements are issued on both an interim and annual basis. Management is required to provide certain footnote disclosures if it
concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue
as a going concern. The Company adopted ASU No. 2014-15 on November 1, 2016 and its adoption did not have a material impact on
the Company’s financial statements.
In
January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805) Clarifying the Definition of a Business
. The
amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business
affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for
annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted this guidance
effective November 1, 2016.
Recent
Accounting Pronouncements.
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”)
creating a new Topic 606,
Revenue from Contracts with Customers
, which broadly establishes new standards for the recognition
of certain revenue and updates related disclosure requirements. The update becomes effective for the Company on November 1, 2018.
The Company is reviewing the potential impact of the statement on its financial position, results of operations, and cash flows.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In
February 2016, FASB issued ASU No. 2016-02,
Leases (Topic 842),
which supersedes FASB ASC Topic 840,
Leases (Topic 840)
and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors.
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. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater
than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to
existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15,
2018, with early adoption permitted upon issuance. When adopted, the Company does not expect this guidance to have a material
impact on our financial statements.
In
March 2016, the FASB issued ASU No. 2016-08, Revenue
from Contracts with Customers (Topic 606): Principal versus Agent Considerations
.
The purpose of ASU No. 2016-08 is to clarify the implementation of guidance on principal versus agent considerations. For public
entities, the amendments in ASU No. 2016-08 are effective for interim and annual reporting periods beginning after December 15,
2017. The Company is currently assessing the impact of ASU No. 2016-08 on its condensed consolidated financial statements and
related disclosures.
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based
Payment Accounting
. Under ASU No. 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies
in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as
income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates
the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies
to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore,
ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception
to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer
with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of
taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a
company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding
obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash
flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments
by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting
the estimate when it is likely to change, as is currently required. The amendments of this ASU are effective for reporting periods
beginning after December 15, 2016, with early adoption permitted but all of the guidance must be adopted in the same period. The
Company is currently assessing the impact that ASU No. 2016-09 will have on its condensed consolidated financial statements.
In
April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customer
. The new guidance is an update to ASC
606 and provides clarity on: identifying performance obligations and licensing implementation. For public companies, ASU No. 2016-10
is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. The
Company is currently evaluating the impact that ASU No. 2016-10 will have on its condensed consolidated financial statements.
3.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets consist of the following (in thousands):
|
|
April
30,
2017
|
|
|
October
31,
2016
|
|
Legal
retainer
|
|
$
|
105
|
|
|
$
|
-
|
|
Prepaid
insurance
|
|
|
151
|
|
|
|
22
|
|
Tax
receivable
|
|
|
-
|
|
|
|
18
|
|
Other
prepaids
|
|
|
38
|
|
|
|
-
|
|
Deposits
|
|
|
32
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
7
|
|
Total
prepaid expenses and other current assets
|
|
$
|
326
|
|
|
$
|
47
|
|
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4.
PROPERTY AND EQUIPMENT, NET
Property
and equipment, net, consist of the following (in thousands):
|
|
April
30,
2017
|
|
|
October
31,
2016
|
|
Medical
equipment
|
|
$
|
1,935
|
|
|
$
|
-
|
|
Computers
and software
|
|
|
139
|
|
|
|
61
|
|
Furniture
and equipment
|
|
|
109
|
|
|
|
78
|
|
Total
property and equipment, gross
|
|
|
2,183
|
|
|
|
139
|
|
Accumulated
depreciation
|
|
|
(305
|
)
|
|
|
(121
|
)
|
Total
property and equipment, net
|
|
$
|
1,878
|
|
|
$
|
18
|
|
5.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consist of the following (in thousands):
|
|
April
30,
2017
|
|
|
October
31,
2016
|
|
Accounts
payable-trade
|
|
$
|
358
|
|
|
$
|
130
|
|
Royalties,
fees and development
|
|
|
462
|
|
|
|
680
|
|
Medical
equipment purchase
|
|
|
83
|
|
|
|
-
|
|
Salaries
and other compensation
|
|
|
500
|
|
|
|
463
|
|
Other
accruals
|
|
|
6
|
|
|
|
11
|
|
Total
accounts payable and accrued expenses
|
|
$
|
1,409
|
|
|
$
|
1,284
|
|
Salaries
and other compensation include accrued payroll expense and employer 401K plan contributions.
6.
STOCKHOLDERS’ EQUITY
Convertible
preferred stock as of April 30, 2017 consisted of the following (in thousands, except share amounts):
|
|
Shares
Authorized
|
|
|
Shares
Issued and Outstanding
|
|
|
Net
Carrying Value
|
|
|
Aggregate
Liquidation Preference
|
|
|
Common
Shares Issuable Upon Conversion
|
|
Series
A
|
|
|
8,830,000
|
|
|
|
3,801,458
|
|
|
$
|
929
|
|
|
$
|
2,585
|
|
|
|
861,664
|
|
Series
B
|
|
|
54,250
|
|
|
|
48,109
|
|
|
|
4,055
|
|
|
|
-
|
|
|
|
801,820
|
|
Series
C
|
|
|
26,000
|
|
|
|
20,115
|
|
|
|
1,569
|
|
|
|
-
|
|
|
|
467,791
|
|
Series
D
|
|
|
170,000
|
|
|
|
60,000
|
|
|
|
702
|
|
|
|
-
|
|
|
|
100,000
|
|
Series
E
|
|
|
7,050
|
|
|
|
7,050
|
|
|
|
104,693
|
|
|
|
-
|
|
|
|
7,050,000
|
|
Other
authorized, unissued
|
|
|
912,700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
10,000,000
|
|
|
|
3,936,732
|
|
|
$
|
111,948
|
|
|
$
|
2,585
|
|
|
|
9,281,275
|
|
Convertible
preferred stock as of October 31, 2016 consisted of the following (in thousands, except share amounts):
|
|
Shares
Authorized
|
|
|
Shares
Issued and Outstanding
|
|
|
Net
Carrying Value
|
|
|
Aggregate
Liquidation Preference
|
|
|
Common
Shares Issuable Upon Conversion
|
|
Series
A
|
|
|
8,830,000
|
|
|
|
7,138,158
|
|
|
$
|
1,745
|
|
|
$
|
4,854
|
|
|
|
1,189,693
|
|
Series
B
|
|
|
54,250
|
|
|
|
54,201
|
|
|
|
4,569
|
|
|
|
-
|
|
|
|
903,362
|
|
Series
C
|
|
|
26,000
|
|
|
|
25,763
|
|
|
|
2,010
|
|
|
|
-
|
|
|
|
429,392
|
|
Series
D
|
|
|
170,000
|
|
|
|
156,332
|
|
|
|
1,829
|
|
|
|
-
|
|
|
|
260,553
|
|
Other
authorized, unissued
|
|
|
919,750
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
10,000,000
|
|
|
|
7,374,454
|
|
|
$
|
10,153
|
|
|
$
|
4,854
|
|
|
|
2,783,000
|
|
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Series
A Preferred Shares
The
Series A Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value
of such Series A Preferred Share, plus all accrued and unpaid dividends, if any, on such Series A Preferred Share, as of such
date of determination, divided by the conversion price. The stated value of each Preferred Share is $0.68 and the initial conversion
price is $4.08 (current conversion price is $3.00) per share, each subject to adjustment for stock splits, stock dividends,
recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells,
or is deemed to issue or sell, shares of its common stock at a per share price that is less than the conversion price then in
effect, the conversion price shall be reduced to such lower price, subject to certain exceptions. Pursuant to the Certificate
of Designations, Preferences and Rights of the 0% Series A Convertible Preferred Stock of PolarityTE, Inc., the Company is prohibited
from incurring debt or liens, or entering into new financing transactions without the consent of the lead investor (as defined
in the December Subscription Agreements) as long as any of the Series A Preferred Shares are outstanding. The Series A Preferred
Shares bear no dividends.
The
holders of Series A Preferred Shares shall vote together with the holders of common stock on all matters on an as if converted
basis, subject to certain conversion and ownership limitations, and shall not vote as a separate class. Notwithstanding the foregoing,
the conversion price for purposes of calculating voting power shall in no event be lower than $3.54 per share. At no time may
all or a portion of the Series A Preferred Shares be converted if the number of shares of common stock to be issued pursuant to
such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number
of shares of common stock which would result in such Holder beneficially owning (as determined in accordance with Section 13(d)
of the 1934 Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time; provided, however,
that the holder may waive the 4.99% limitation at which time he may not own beneficially own more than 9.99% of all the common
stock outstanding at such time.
The
Series A Preferred Shares do not represent an unconditional obligation to be settled in a variable number of shares of common
stock, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly,
the Series A Preferred Shares are considered equity hosts and recorded in stockholders’ equity.
The
Company entered into separate Registration Rights Agreements with each Series A Preferred Shares Investor, (as amended on January
30, 2015 and March 31, 2015, the “December Registration Rights Agreement”). The Company agreed to use its best efforts
to file by March 31, 2015 a registration statement covering the resale of the shares of common stock issuable upon exercise or
conversion of the Series A Preferred Shares and to maintain its effectiveness until all such securities have been sold or may
be sold without restriction under Rule 144 of the Securities Act. In the event the Company fails to satisfy its obligations under
the December Registration Rights Agreements, the Company is required to pay to the Investors on a monthly basis an amount equal
to 1% of the investors’ investment, up to a maximum of 12%. On March 31, 2015, the Company and the required holders of Series
A Preferred Shares amended the registration rights agreement to extend the filing deadline for the registration statement to June
30, 2015.
Series
B Preferred Shares
The
Series B Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value
of such Series B Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series B Preferred Shares, as of such
date of determination, divided by the conversion price. The stated value of each Preferred Share is $140.00 and the initial conversion
price is $8.40 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions
or other similar events. The Company is prohibited from effecting a conversion of the Series B Preferred Shares to the extent
that, as a result of such conversion, such holder would beneficially own more than 4.99% of the number of shares of common stock
outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series B Preferred
Shares, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Subject to such
beneficial ownership limitations, each holder is entitled to vote on all matters submitted to stockholders of the Company on an
as converted basis, based on a conversion price of $8.40 per shares. The Series B Preferred Shares rank junior to the Series A
Preferred Shares and bear no dividends. All of the convertible preferred shares do not represent an unconditional obligation to
be settled in a variable number of shares, are not redeemable and do not contain fixed or indexed conversion provisions similar
to debt instruments. Accordingly, the convertible preferred shares are considered equity hosts and recorded in stockholders’
equity.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Series
C Preferred Shares
The
Series C Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated
value of such Series C Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series C Preferred Shares, as
of such date of determination, divided by the conversion price. The stated value of each Series C Preferred Share is $120.00
per share, and the initial conversion price is $7.20 (current conversion price is $5.16) per share, each
subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar
events. In addition, in the event the Company issues or sells, or is deemed to issue or sell, shares of common stock at a per
share price that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price,
subject to certain exceptions and provided that the conversion price may not be reduced to less than $5.16, unless and until
such time as the Company obtains shareholder approval to allow for a lower conversion price. The Company is prohibited from
effecting a conversion of the Series C Preferred Shares to the extent that, as a result of such conversion, such May Investor
would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to
the issuance of shares of common stock upon conversion of the Series C Preferred Shares, which beneficial ownership
limitation may be increased by the holder up to, but not exceeding, 9.99%. Subject to the beneficial ownership
limitations discussed previously, each holder is entitled to vote on all matters submitted to stockholders of the Company,
and shall have the number of votes equal to the number of shares of common stock issuable upon conversion of such
holder’s Series C Preferred Shares, based on a conversion price of $7.80 per share. The Series C Preferred Shares bear
no dividends and shall rank junior to the Company’s Series A Preferred Shares but senior to the Company’s Series
B Preferred Shares.
In
connection with the sale of the Series C Preferred Shares, the Company also entered into separate registration rights agreements
(the “May Registration Rights Agreement”) with each Investor. The Company agreed to use its best efforts to file a
registration statement to register the Shares and the common stock issuable upon the conversion of the Series C Preferred Shares,
within thirty days following the Closing Date, to cause such registration statement to be declared effective within ninety days
of the filing day and to maintain the effectiveness of the registration statement until all of such shares of common stock have
been sold or are otherwise able to be sold pursuant to Rule 144 without restriction. In the event the Company fails to satisfy
its obligations under the Registration Rights Agreement, the Company is obligated to pay to the Investors on a monthly basis,
an amount equal to 1% of the Investor’s investment, up to a maximum of 12%. Effective as of the original filing deadline
of the registration statement, the Company obtained the requisite approval from the Investors for the waiver of its obligations
under the May Registration Rights Agreement.
The
Company evaluated the guidance ASC 480-10
Distinguishing Liabilities from Equity and
ASC 815-40
Contracts in an Entity’s
Own Equity
to determine the appropriate classification of the instruments. The Series C Preferred Shares do not represent
an unconditional obligation to be settled in a variable number of shares of common stock, are not redeemable and do not contain
fixed or indexed conversion provisions similar to debt instruments. Accordingly, the Series C Preferred Shares are considered
equity hosts and recorded in stockholders’ equity.
Series
D Preferred Shares
The
Preferred D Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of
such Preferred D Shares, plus all accrued and unpaid dividends, if any, on such Preferred D Share, as of such date of determination,
divided by the conversion price. The stated value Preferred D Shares is $1,000 per share and the initial conversion price is $600
per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other
similar events. The Company is prohibited from effecting a conversion of the Preferred D Shares to the extent that, as a result
of such conversion, such investor would beneficially own more than 4.99% of the number of shares of Common Stock outstanding immediately
after giving effect to the issuance of shares of Common Stock upon conversion of the Preferred D Shares. Upon 61 days written
notice, the beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Except as otherwise
required by law, holders of Series D Preferred Shares shall not have any voting rights. Pursuant to the Certificate of Designations,
Preferences and Rights of the 0% Series D Convertible Preferred Stock, the Preferred D Shares bear no dividends and shall rank
senior to the Company’s other classes of capital stock.
Series
E Preferred Shares
The
Preferred E Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of
such Preferred E Shares, plus all accrued and unpaid dividends, if any as of such date of determination, divided by the conversion
price. The stated value of each Preferred E Share is $1,000 and the initial conversion price is $1.00 per share, each subject
to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Preferred
E Shares, with respect to dividend rights and rights on liquidation, winding-up and dissolution, in each case will rank senior
to the Company’s common stock and all other securities of the Company that do not expressly provide that such securities
rank on parity with or senior to the Preferred E Shares. Until converted, each Preferred E Share is entitled to two votes for
every share of common stock into which it is convertible on any matter submitted for a vote of stockholders. The Preferred E Shares
participate on an “as converted” basis with all dividends declared on the Company’s common stock.
April
2016 Registered Common Stock and Warrant Offering
On
April 13, 2016, the Company entered into a Securities Purchase Agreement with certain institutional investors providing for the
issuance and sale by the Company of 250,000 shares of the Company’s common stock, par value $0.001 per share at an offering
price of $6.00 per share, for net proceeds of $1.4 million after deducting placement agent fees and expenses. In addition, the
Company sold to purchasers of common stock in this offering, warrants to purchase 187,500 shares of its common stock. The common
shares and the Warrant Shares were offered by the Company pursuant to an effective shelf registration statement on Form S-3, which
was initially filed with the Securities and Exchange Commission on October 22, 2015 and declared effective on December 7, 2015.
The closing of the offering occurred on April 19, 2016.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Each
Warrant is immediately exercisable for two years, but not thereafter, at an exercise price of $6.90 per share. Subject to limited
exceptions, a holder of warrants will not have the right to exercise any portion of its warrants if the holder, together with
its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately
after giving effect to such exercise. The exercise price and number of warrants are subject to adjustment in the event of any
stock dividends and splits, reverse stock split, stock dividend, recapitalization, reorganization or similar transaction. The
Warrants were classified as liabilities and measured at fair value, with changes in fair value recognized in the Condensed Consolidated
Statements of Operations in other expenses (income). The initial recognition of the Warrants resulted in an allocation of the
net proceeds from the offering to a warrant liability of approximately $318,000, with the remainder being attributable to the
common stock sold in the offering.
Preferred
Share Conversion Activity
During
the six months ended April 30, 2017, 3,336,700 shares of Convertible Preferred Stock Series A, 6,092 shares of Convertible Preferred
Stock Series B, 5,648 shares of Convertible Preferred Stock Series C and 96,332 shares of Convertible Preferred Stock Series D
were converted into 971,860 shares of common stock.
During
the six months ended April 30, 2016, 599,634 shares of Convertible Preferred Stock Series A and 12,001 shares of Convertible Preferred
Stock Series D were converted into 119,941 shares of common stock.
Common
Stock
On
January 4, 2016, the Company declared a special cash dividend of an aggregate of $10.0 million to holders of record on January
14, 2016 of its outstanding shares of: (i) common stock (ii) Series A Convertible Preferred Stock; (iii) Series B Convertible
Preferred Stock; (iv) Series C Convertible Preferred Stock and (v) Series D Convertible Preferred Stock. The holders of record
of the Company’s outstanding preferred stock participated in the dividend on an “as converted” basis. Approximately
$6.0 million of the special cash dividend relates to preferred stock shares.
On
January 6, 2016, certain employees exercised their options at $4.08 in exchange for the Company’s common stock for an aggregated
amount of 31,656 shares.
On
December 16, 2016, the Company sold an aggregate of 759,333 shares of its common stock to certain accredited investors pursuant
to separate subscription agreements at a price of $3.00 per share for gross proceeds of $2.3 million.
On
January 18, 2017, the Company entered into separate exchange agreements (each an “Exchange Agreement”) with certain
accredited investors (the “Investors”) who purchased warrants to purchase shares of the Company’s common stock
(the “Warrants”) pursuant to the prospectus dated April 13, 2016. In 2016, the Company issued 250,000 shares of the
Company’s common stock and Warrants to purchase 187,500 shares of common stock (taking into account the reverse split of
the Company’s common stock on a 1 for 6 basis effective with The NASDAQ Stock Market LLC on August 1, 2016). The common
stock and Warrants were offered by the Company pursuant to an effective shelf registration statement. Under the terms of the Exchange
Agreement, each Investor exchanged each Warrant it purchased in the Offering for 0.3 shares of common stock. Accordingly, the
Company issued an aggregate of 56,250 shares of common stock in exchange for the return and cancellation of 187,500 Warrants.
During
the six months ended April 30, 2017, certain employees exercised their options at a weighted-average exercise price of $4.83 in
exchange for the Company’s common stock for an aggregated amount of 121,698 shares. The Company received approximately $588,000
from the exercise of stock options.
7.
FAIR VALUE MEASUREMENTS
In
accordance with ASC 820, Fair Value Measurements, 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.
|
In
connection with the April 19, 2016 common stock offering, the Company issued warrants to purchase an aggregate of 187,500 shares
of common stock. These warrants were exercisable at $6.90 per share and expire on April 19, 2018. These warrants were analyzed
and it was determined that they require liability treatment. Under ASC 815, registered common stock warrants that require the
issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for
as derivative liabilities. The Company classifies these derivative warrant liabilities on the condensed consolidated balance sheet
as a current liability.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
fair value of these warrants at January 18, 2017 and October 31, 2016 was determined to be approximately $78,000 and $70,000,
respectively, as calculated using Black-Scholes with the following assumptions: (1) stock price of $3.62 and $3.58, respectively;
(2) a risk-free rate of 0.97% and 0.75%, respectively; and (3) an expected volatility of 68% and 61%, respectively.
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. At April 30, 2017, there was no warrant liability balance.
The
following table sets forth the changes in the estimated fair value for our Level 3 classified derivative warrant liability (in
thousands):
|
|
Warrant
Liability
|
|
Fair
value - October 31, 2016
|
|
$
|
70
|
|
Exchanged
- January 18, 2017 (see Note 6)
|
|
|
(78
|
)
|
Change
in fair value
|
|
|
8
|
|
Fair
value - April 30, 2017
|
|
$
|
-
|
|
8.
STOCK BASED COMPENSATION ARRANGEMENTS
Stock-based
compensation expense during the three months ended April 30, 2017 and 2016 amounted to approximately $4.2 million and $446,000
respectively. Stock-based compensation expense during the six months ended April 30, 2017 and 2016 amounted to approximately $8.6
million and $993,000 respectively. Stock-based compensation expense is recorded in general and administrative expenses in the
accompanying consolidated statements of operations.
On
February 8, 2017, the Board appointed Steve Gorlin as a Class II director with a term expiring in 2019 and Dr. Jon Mogford as
a Class III director with a term expiring in 2017 to fill vacancies created upon the resignations of Messrs. Brauser and Honig.
In addition, Mr. Gorlin was appointed as a member of each of the Board’s Audit, Compensation and Nominating and Corporate
Governance Committees. Each of Mr. Gorlin and Dr. Mogford are deemed an “independent” director as such term is defined
by the rules of The NASDAQ Stock Market LLC. There are no family relationships between either of Mr. Gorlin and Dr. Mogford and
any of our other officers and directors. Mr. Gorlin and Dr. Mogford were each granted (i) an option to purchase up to 50,000 shares
of the Company’s common stock at an exercise price equal to $4.72 per share (the “Options”) which Options will
vest in 24 equal monthly installments commencing on the one month anniversary of the grant date and (ii) a restricted stock award
of 50,000 shares of common stock that will vest in 24 equal monthly installments commencing on the one month anniversary of the
grant date (the “RSUs”). The Options and the RSUs were granted pursuant to the Company’s 2017 Equity Incentive
Plan (the “2017 Plan”). The 2017 Plan, the vesting and the exercise of the Options and the vesting of the RSUs are
subject to stockholder approval.
A
summary of the Company’s employee stock option activity in the six months ended April 30, 2017 is presented below:
|
|
Number
of
shares
|
|
|
Weighted-Average
Exercise
Price
|
|
Outstanding
- October 31, 2016
|
|
|
383,210
|
|
|
$
|
5.74
|
|
Granted
|
|
|
2,715,000
|
|
|
$
|
3.49
|
|
Exercised
|
|
|
(121,698
|
)
|
|
$
|
4.83
|
|
Outstanding
- April 30, 2017
|
|
|
2,976,512
|
|
|
$
|
3.72
|
|
Options
exercisable - April 30, 2017
|
|
|
767,342
|
|
|
$
|
4.19
|
|
Weighted-average
fair value of options granted during the period
|
|
|
|
|
|
$
|
2.37
|
|
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A
summary of the Company’s non-employee stock option activity in the six months ended April 30, 2017 is presented below:
|
|
Number
of
shares
|
|
|
Weighted-Average
Exercise
Price
|
|
Outstanding
- October 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
52,000
|
|
|
$
|
4.71
|
|
Outstanding
- April 30, 2017
|
|
|
52,000
|
|
|
$
|
4.71
|
|
Options
exercisable - April 30, 2017
|
|
|
4,333
|
|
|
$
|
4.71
|
|
The
value of employee and non-employee stock option grants is amortized over the vesting period of, generally, one to three years.
As of April 30, 2017, there was approximately $6.3 million of unrecognized compensation cost related to non-vested employee and
non-employee stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 0.8 years.
The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the six months ended April 30, 2017:
Risk
free annual interest rate
|
|
|
1.78-2.28
|
%
|
Expected
volatility
|
|
|
71.65-86.34
|
%
|
Expected
life
|
|
|
5.04-6.00
|
|
Assumed
dividends
|
|
None
|
|
A
summary of the Company’s restricted stock activity in the six months ended April 30, 2017 is presented below:
|
|
Number
of
shares
|
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Unvested
- October 31, 2016
|
|
|
274,829
|
|
|
$
|
6.00
|
|
Granted
|
|
|
1,031,000
|
|
|
$
|
4.56
|
|
Vested
|
|
|
(925,488
|
)
|
|
$
|
4.00
|
|
Unvested
- April 30, 2017
|
|
|
380,341
|
|
|
$
|
6.97
|
|
During
the six months ended April 30, 2017, the Company granted 1,031,000 restricted shares to employees and non-employees.
The
weighted-average fair value of restricted shares granted during the six months ended April 30, 2017 was $4.56. The total fair
value of restricted stock granted during the six months ended April 30, 2017 was approximately $4.7 million.
The
value of restricted stock grants is measured based on its fair value on the date of grant and amortized over the vesting period
of, generally, six months to three years. As of April 30, 2017, there was approximately $2.4 million of unrecognized compensation
cost related to unvested restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting
period of 0.7 years.
9.
INCOME TAXES
Due
to the Company’s history of losses and uncertainty of future taxable income, a valuation allowance sufficient to fully offset
net operating losses and other deferred tax assets has been established. The valuation allowance will be maintained until sufficient
positive evidence exists to support a conclusion that a valuation allowance is not necessary. The Company’s effective tax
rate for the six months ended April 30, 2017 and 2016 differed from the expected U.S. federal statutory rate primarily due to
the change in the valuation allowance. Full conversion of the outstanding shares of Preferred Stock will likely result in limitations
on the utilization of the Company’s net operating loss carryforwards under IRS section 382.
10.
LOSS PER SHARE
Shares
of common stock issuable under convertible preferred stock, warrants and options and shares subject to restricted stock grants
were not included in the calculation of diluted earnings per common share for the three months and six months ended April 30,
2017 and 2016, as the effect of their inclusion would be anti-dilutive.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
table below provides total potential shares outstanding, including those that are anti-dilutive, on April 30, 2017 and 2016:
|
|
April
30,
|
|
|
|
2017
|
|
|
2016
|
|
Shares
issuable upon exercise of warrants
|
|
|
-
|
|
|
|
187,500
|
|
Shares
issuable upon conversion of preferred stock
|
|
|
9,281,275
|
|
|
|
2,956,196
|
|
Shares issuable
upon exercise of stock options
|
|
|
3,028,512
|
|
|
|
53,618
|
|
Non-vested
shares under restricted stock grants
|
|
|
380,341
|
|
|
|
164,201
|
|
11.
COMMITMENTS AND CONTINGENCIES
Contingencies
On
February 26, 2015, a complaint for patent infringement was filed in the United States District Court for the Eastern District
of Texas by Richard Baker, an individual residing in Australia, against Microsoft, Nintendo, the Company and a number of other
game publisher defendants. The complaint alleges that the Company’s Zumba Fitness Kinect game infringed plaintiff’s
patents in motion tracking technology. The plaintiff is representing himself pro se in the litigation and is seeking monetary
damages in the amount of $1.3 million. The Company, in conjunction with Microsoft, is defending itself against the claim and has
certain third-party indemnity rights from developers for costs incurred in the litigation. In August 2015, the defendants jointly
moved to transfer the case to the Western District of Washington. On May 17, 2016, the Washington Court issued a scheduling order
that provides that defendants leave to jointly file an early motion for summary judgement in June 2016. On June 17, 2016, the
defendants jointly filed a motion for summary judgment that stated that none of the defendants, including the Company, infringed
upon the asserted patent. On July 9, 2016, Mr. Baker opposed the motion. On July 15, 2016, the defendants jointly filed a reply.
The briefing on the motion is now closed. The Court has not yet issued a decision or indicated if or when there will be oral argument
on the motion.
Intelligent
Verification Systems, LLC (“IVS”), filed a patent infringement complaint on September 20, 2012, in the United States
District Court for the Eastern District against the Company and Microsoft Corporation. In March 2015, the court issued an order
excluding the evidence proffered by IVS in support of its alleged damages, including the opinion of its damages expert. IVS appealed
that decision. On January 19, 2016, the Federal Circuit denied IVS’ appeal and affirmed the district court’s orders
that excluded the plaintiff’s damages expert and dismissed the case.
In
addition to the item above, the Company at times may be a party to claims and suits in the ordinary course of business. We record
a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably
estimated. The Company has not recorded a liability with respect to the matter above. While the Company believes that it has valid
defenses with respect to the legal matter pending and intends to vigorously defend the matter above, given the uncertainty surrounding
litigation and our inability to assess the likelihood of a favorable or unfavorable outcome, it is possible that the resolution
of the matter could have a material adverse effect on our consolidated financial position, cash flows or results of operations.
Commitments
The
Company leases office space in Hazlet, New Jersey at a cost of approximately $1,100 per month under a lease agreement that expires
on March 31, 2018.
The
Company also leases space in Salt Lake City, Utah at a cost of approximately $24,044 per month under a lease agreement that expires
on March 31 2018.
The
Company has entered into employment agreements with key executives that contain severance terms and change of control provisions.
12.
RELATED PARTIES
In
January 2015, the Company entered into an agreement with Equity Stock Transfer for transfer agent services. A former Board member
of the Company is a co-founder and chief executive officer of Equity Stock Transfer. Fees under the agreement were approximately
$2,000 and $0, in the six months ended April 30, 2017 and 2016, respectively.
13.
SEGMENT REPORTING
The
Company’s operations involve dissimilar products which are managed separately. Accordingly, it operates in two segments:
1) video games and 2) regenerative medicine.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Certain
information concerning our segments for the three months and six months ended April 31, 2017 and 2016 and as of April 30, 2017
and 2016 is presented in the following table (in thousands):
|
|
Three
Months Ended April 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
Reportable
Segments:
|
|
|
|
|
|
|
|
|
Video
Games
|
|
$
|
259
|
|
|
$
|
412
|
|
Regenerative
Medicine
|
|
|
—
|
|
|
|
—
|
|
Total
consolidated revenues
|
|
$
|
259
|
|
|
$
|
412
|
|
|
|
|
|
|
|
|
|
|
Net
loss:
|
|
|
|
|
|
|
|
|
Reportable
Segments:
|
|
|
|
|
|
|
|
|
Video
Games
|
|
$
|
(4,459
|
)
|
|
$
|
(1,101
|
)
|
Regenerative
Medicine
|
|
|
(105,901
|
)
|
|
|
—
|
|
Total
net loss
|
|
$
|
(110,360
|
)
|
|
$
|
(1,101
|
)
|
|
|
Six
Months Ended April 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
Reportable
Segments:
|
|
|
|
|
|
|
|
|
Video
Games
|
|
$
|
415
|
|
|
$
|
1,003
|
|
Regenerative
Medicine
|
|
|
—
|
|
|
|
—
|
|
Total
consolidated revenues
|
|
$
|
415
|
|
|
$
|
1,003
|
|
|
|
|
|
|
|
|
|
|
Net
loss:
|
|
|
|
|
|
|
|
|
Reportable
Segments:
|
|
|
|
|
|
|
|
|
Video
Games
|
|
$
|
(9,425
|
)
|
|
$
|
(7,750
|
)
|
Regenerative
Medicine
|
|
|
(106,596
|
)
|
|
|
—
|
|
Total
net loss
|
|
$
|
(116,021
|
)
|
|
$
|
(7,750
|
)
|
|
|
As
of April 30, 2017
|
|
|
As
of October 31, 2016
|
|
Identifiable
assets employed:
|
|
|
|
|
|
|
|
|
Reportable
Segments:
|
|
|
|
|
|
|
|
|
Video
Games
|
|
$
|
5,151
|
|
|
$
|
6,751
|
|
Regenerative
Medicine
|
|
|
1,895
|
|
|
|
—
|
|
Total
assets
|
|
$
|
7,046
|
|
|
$
|
6,751
|
|