NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION
PolarityTE,
Inc. (the “Company”) is a commercial-stage biotechnology and regenerative biomaterials company focused on transforming
the lives of patients by discovering, designing and developing a range of regenerative tissue products and biomaterials for the
fields of medicine, biomedical engineering and material sciences.
Discontinued
Operations
. On June 23, 2017, the Company sold Majesco Entertainment Company, a Nevada corporation and wholly-owned subsidiary
of the Company (“Majesco Sub”), to Zift Interactive LLC, a Nevada limited liability company (“Zift”),
pursuant to a purchase agreement. Pursuant to the terms of the agreement, the Company sold 100% of the issued and outstanding
shares of common stock of Majesco to Zift, including all of the right, title and interest in and to Majesco Sub’s business
of developing, publishing and distributing video game products through mobile and online digital downloading. Pursuant to the
terms of the agreement, the Company will receive total cash consideration of approximately $100,000 ($5,000 upon signing the agreement
and 19 additional monthly payments of $5,000) plus contingent consideration based on net revenues with a fair value of $0. As
of July 31, 2018, the Company received $70,000 in cash consideration and $30,000 remains receivable.
Segments
.
The Company’s operations involve dissimilar products which are managed separately. Accordingly, it operates in two segments:
1) regenerative medicine and 2) veterinary sciences (“IBEX”).
The
accompanying interim condensed consolidated financial statements of the Company are unaudited, but in the opinion of management,
reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim
period. Accordingly, they do not include all information and notes required by generally accepted accounting principles for complete
financial statements. The results of operations for interim periods are not necessarily indicative of results to be expected for
the entire fiscal year. The balance sheet at October 31, 2017 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, 2017 filed with the
Securities and Exchange Commission on Form 10-K on January 30, 2018.
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: PolarityTE, Inc., a Nevada corporation, Utah CRO Services, Inc., IBEX Preclinical Research,
Inc., IBEX Property, LLC, Majesco Acquisition Corp. II and Majesco Sub (through the date sold). Majesco Sub was sold
on June 23, 2017. Significant intercompany accounts and transactions have been eliminated in consolidation. Utah CRO Services,
Inc., IBEX Preclinical Research, Inc., and IBEX Property, LLC are included from the date of acquisition, May 3, 2018.
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.
Accounts receivable consists of amounts due to the Company related to the sale of the Company’s core product SkinTE
and veterinary science services. Accounts that are outstanding longer than the contractual payment terms are considered
past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length
of time trade accounts receivable are past due and the customer’s current ability to pay its obligation to the Company.
The Company writes off accounts receivable when they become uncollectible. As of July 31, 2018, there was no allowance for doubtful
accounts.
Inventory.
Inventory comprises finished goods, 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.
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 range from three to eight years. Amortization of leasehold improvements
is provided for over the shorter of the term of the lease or the life of the asset.
Capitalized
Software Development Costs
. Software development costs are capitalized once technological feasibility is established and management
expects such costs to be recoverable against future revenues. Amounts related to software development that are not capitalized
are charged immediately to expense. Capitalized costs are amortized straight-line over the estimated useful life of three
years.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Goodwill
and Intangible Assets.
Goodwill represents the excess acquisition cost over the fair value of net tangible and intangible
assets acquired. Goodwill is not amortized and is subject to annual impairment testing at the end of the third fiscal quarter
or between annual tests if an event or change in circumstance occurs that would more likely than not reduce the fair value of
a reporting unit below its carrying value. In testing for goodwill impairment, the Company has the option to first assess qualitative
factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not
that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances,
the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount,
then performing the two-step impairment test is not required. If the Company concludes otherwise, it is required to perform the
two-step impairment test. The goodwill impairment test is performed at the reporting unit level by comparing the estimated fair
value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwill
at the reporting unit level is not impaired. If the estimated fair value is less than carrying value, further analysis is necessary
to determine the amount of impairment, if any, by comparing the implied fair value of the reporting unit’s goodwill to the
carrying value of the reporting unit’s goodwill.
The
fair value of reporting units is based on widely accepted valuation techniques that the Company believes market participants would
use, although the valuation process requires significant judgment and often involves the use of significant estimates and assumptions.
The Company utilizes a market cap approach in estimating the fair value of reporting units. The estimates and assumptions used
in determining fair value could have a significant effect on whether or not an impairment charge is recorded and the magnitude
of such a charge. Adverse market or economic events could result in impairment charges in future periods.
Intangible
assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives, which generally
range from one to eleven years. The useful life is the period over which the asset is expected to contribute directly, or
indirectly, to its future cash flows. Intangible assets are reviewed for impairment on an interim basis when certain events or
circumstances exist. For amortizable intangible assets, impairment exists when the undiscounted cash flows exceeds its carrying
value. At least annually, the remaining useful life is evaluated.
Impairment
of Long-Lived Assets.
The Company reviews long-lived assets, including property and equipment, for impairment whenever events
or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that
the Company considers in deciding when to perform an impairment review include significant underperformance of the business in
relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the
use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares
forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying
value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of
an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired
asset over its fair value, determined based on discounted cash flows.
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 and research and development 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. Forfeitures are recognized
as they occur.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 and restricted stock unit 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.
Change
in Fair Value of Derivatives
. 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 expire, and any change
in fair value is recognized as “change in fair value of derivatives” in the consolidated statements of operations.
The fair value of the warrants as well as other derivatives have been estimated using a Monte-Carlo or Black-Scholes valuation
model.
Revenue
Recognition
. The Company recognizes revenue upon the shipment of products or the performance of services when each of the
following four criteria is met: (i) persuasive evidence of an arrangement exists; (ii) products are delivered or services are
performed; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured.
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 valuation of warrant
liability, valuation of derivative liability, stock-based compensation and the valuation allowances for deferred tax benefits.
Actual results could differ from those estimates.
Recently
Adopted Accounting Pronouncements
In
April 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-09,
Share-Based Payment: Simplifying the Accounting for Share-Based Payments
. The standard addresses several aspects
of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory
tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted ASU 2016-09 during
the first quarter of fiscal 2018 and the Company elected to account for forfeitures as they occur. The amendment was applied using
a modified retrospective transition method. The provisions of ASU 2016-09 had no impact on the Company’s consolidated financial
statements.
In
January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
.
This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and
activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or
disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business.
This new standard is effective for the Company on November 1, 2018 but may be adopted early. The ASU is applied prospectively
to any transaction occurring within the period of adoption. The Company early adopted this guidance effective November 1, 2017.
The adoption of this standard did not have a material impact on the Company's financial position, results of operations, or cash
flows.
Recent
Accounting Pronouncements.
In
May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606
), a new accounting standard that
requires recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which an entity expects to be entitled in exchange for those goods or services. The FASB has also issued several
updates to ASU 2014-09. The new standard supersedes U.S. GAAP guidance on revenue recognition and requires the use of more estimates
and judgments than the present standards. It also requires additional disclosures regarding the nature, amount, timing and uncertainty
of cash flows arising from contracts with customers. Topic 606 is effective for our fiscal year 2019 beginning on November 1,
2018. The Company is currently evaluating the overall effect that the standard will have on our consolidated financial statements
and accompanying notes to the consolidated financial statements and which transition method to apply. As of July 31, 2018, the
Company has completed and documented a preliminary assessment of the impact of the new revenue standard on its contracts with
customers. The Company plans to finalize its assessment of the impact of the new revenue standard on its results of operations,
internal controls and disclosures in the fourth quarter of 2018. The Company does not expect this new standard to have a material
effect on the Company’s financial statements.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In
February 2016, FASB issued ASU 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. The Company is currently assessing the potential impact of this guidance, but expects it to have a material
impact on the Company’s balance sheet.
In
August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
,
which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain
cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. The adoption of this update is not expected to have a material impact on the Company’s consolidated
financial statements and related disclosures.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for
Goodwill Impairment.
ASU No. 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase
price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair
value, not to exceed the carrying amount of goodwill. This standard will be applied prospectively and is effective for the Company
beginning November 1, 2020. Early adoption is permitted for annual and interim goodwill impairment testing dates after January
1, 2017. The Company is currently evaluating the impact this standard will have on its financial statements.
In
May 2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
. ASU
2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in
Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should be applied
prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2017. The Company is currently assessing the potential impact of adopting ASU
2017-09 on its consolidated financial statements and related disclosures.
In
June 2018, the FASB issued ASU 2018-07,
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-based
Payment Accounting
. The standard expands the scope of Topic 718 to include share-based payments issued to nonemployees for
goods or services, simplifying the accounting for share-based payments to nonemployees by aligning it with the accounting for
share-based payments to employees, with certain exceptions. The standard is effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years with early adoption permitted, including adoption in an interim
period. The Company does not believe the adoption of this standard will have a significant impact on its financial statements
given the limited number of nonemployee stock-based awards outstanding.
3
.
LIQUIDITY
On
April 12, 2018, the Company completed a public offering providing for the issuance and sale of 2,335,937 shares of the Company’s
common stock, par value $0.001 per share, at an offering price of $16.00 per share, for net proceeds of approximately $34.6 million,
after deducting offering expenses payable by the Company (see Note 10).
On
June 7, 2018, the Company completed an underwritten offering with Cantor Fitzgerald & Co., as underwriter, providing for the
issuance and sale of 2,455,882 shares of the Company’s common stock, par value $0.001 per share, at an offering price of
$23.65 per share, for net proceeds of approximately $58.0 million, after deducting offering expenses payable by the Company (see
Note 10).
Based
upon the current status of our product development and commercialization plans, we believe that our existing cash and cash equivalents
will be adequate to satisfy our capital needs for at least the next 12 months from the date of filing. We anticipate needing
substantial additional financing to continue clinical deployment and commercialization of our lead product SkinTE, development
of our other product candidates, and scaling the manufacturing capacity for our products and product candidates, and prepare for
commercial readiness. We will continue to pursue fundraising opportunities when available, but such financing may not be available
in the future on terms favorable to us, if at all. If adequate financing is not available, we may be required to delay, reduce
the scope of, or eliminate one or more of our product development programs. We plan to meet our capital requirements primarily
through issuances of equity securities, debt financing, revenue from product sales and future collaborations. Failure to generate
revenue or raise additional capital would adversely affect our ability to achieve our intended business objectives.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4
.
IBEX ACQUISITION
On
March 2, 2018, the Company, along with its wholly owned subsidiary, Utah CRO Services, Inc., a Nevada corporation (“Acquisition
Co.”), entered into agreements with Ibex Group, L.L.C., a Utah limited liability company, and Ibex Preclinical Research,
Inc., a Utah corporation (collectively, the “Seller” or “IBEX”) for the purchase of the assets
and rights to the Seller’s preclinical research and veterinary sciences business and related real estate. The Company acquired
this preclinical biomedical research facility in order to accelerate research and development of PolarityTE pipeline products.
The business consists of a “good laboratory practices” (GLP) compliant preclinical research facility, including vivarium,
operating rooms, preparation rooms, storage facilities, and surgical and imaging equipment. The real property includes two parcels
in Cache County, Utah, consisting of approximately 1.75 combined gross acres of land, together with the buildings, structures,
fixtures, and personal property located on the real property. The above was accounted for as a business combination.
The
acquisition closed on May 3, 2018. The aggregate purchase price was $3.8 million, of which $2.3 million was paid at closing and
the balance satisfied by a promissory note payable to the Seller with an initial fair value of $1.2 million (see Note 9, for a
description of the promissory note) and contingent consideration with an initial fair value of approximately $0.3 million.
During the three and nine months ended July 31, 2018, the Company recorded approximately $38,000 of direct and incremental costs
associated with acquisition-related activities. These costs were incurred primarily for banking, legal, and professional fees
associated with the IBEX acquisition. These costs were recorded in general and administrative expenses in the consolidated statement
of operations.
During
the three and nine months ended July 31, 2018, IBEX contributed approximately $172,000 to net revenues and approximately
$124,000 to gross profit, respectively.
Purchase
Price Allocation
The
following table summarizes the preliminary purchase price allocation for the IBEX acquisition (in thousands):
E
quipment
|
|
$
|
430
|
|
Land and buildings
|
|
|
2,000
|
|
Intangible assets
|
|
|
1,057
|
|
Goodwill
|
|
|
278
|
|
Accrued property
taxes
|
|
|
(9
|
)
|
Aggregate
purchase price
|
|
$
|
3,756
|
|
Less:
Promissory note to seller
|
|
|
1,220
|
|
Contingent
consideration
|
|
|
278
|
|
Cash
paid at closing
|
|
$
|
2,258
|
|
As
part of the acquisition of IBEX, the Company recorded a contingent consideration liability of $0.3 million in current liabilities
in the condensed consolidated balance sheets. The contingent consideration represents the estimated
fair value of future payments due to the Seller of IBEX based on IBEX’s revenue generated from studies quoted prior to but
completed after the transaction. Contingent consideration is initially recognized at fair value as purchase consideration and
subsequently remeasured at fair value through earnings. The initial fair value of the contingent consideration was based
on the present value of estimated future cash flows using a 20% discount rate. The total amount of the contingent consideration
to be paid will not exceed $650,000. The subsequent increase in fair value of contingent consideration from acquisition
to July 31, 2018 of approximately $20,000 was recognized in general and administrative expense in the Company’s condensed
consolidated statement of operations for the three and nine months ended July 31, 2018. The excess of the fair value of purchase
consideration over the fair values of identifiable assets and liabilities is recorded as goodwill, including the value of the
assembled workforce.
The
purchase price allocation for the IBEX acquisition is preliminary and subject to revision as additional information about fair
value of assets acquired becomes available. Additional information that existed as of the acquisition date but at that time was
unknown may become known during the remainder of the measurement period, a period not to exceed 12 months from the acquisition
date.
Disclosure
of pro-forma revenues and earnings attributable to the acquisition is excluded because it is impracticable to obtain complete historical financial records for IBEX Preclinical Research, Inc.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
following table shows the valuation of the individual identifiable intangible assets acquired along with their estimated remaining
useful lives (in thousands):
|
|
Approximate
Fair
Value
|
|
|
Remaining
Useful
Life
(in years)
|
Non-compete agreement
|
|
$
|
410
|
|
|
4
|
Customer contracts / relationships
|
|
|
534
|
|
|
7 to 8
|
Trade names / trademarks
|
|
|
101
|
|
|
10 to 11
|
Backlog
|
|
|
12
|
|
|
Less than 1
|
Total
intangible assets
|
|
$
|
1,057
|
|
|
|
5
.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets consist of the following (in thousands):
|
|
July
31, 2018
|
|
|
October
31, 2017
|
|
Legal retainer
|
|
$
|
45
|
|
|
$
|
15
|
|
Prepaid insurance
|
|
|
84
|
|
|
|
69
|
|
Other prepaids
|
|
|
586
|
|
|
|
126
|
|
Other assets
|
|
|
-
|
|
|
|
27
|
|
Total
prepaid expenses and other current assets
|
|
$
|
715
|
|
|
$
|
237
|
|
6.
PROPERTY AND EQUIPMENT, NET
Property
and equipment, net, consists of the following (in thousands):
|
|
July
31, 2018
|
|
|
October
31, 2017
|
|
Machinery and equipment
|
|
$
|
6,873
|
|
|
$
|
2,418
|
|
Land and buildings
|
|
|
2,000
|
|
|
|
-
|
|
Computers and software
|
|
|
1,194
|
|
|
|
211
|
|
Leasehold improvements
|
|
|
890
|
|
|
|
-
|
|
Construction in progress
|
|
|
667
|
|
|
|
-
|
|
Furniture and
equipment
|
|
|
90
|
|
|
|
30
|
|
Total property
and equipment, gross
|
|
|
11,714
|
|
|
|
2,659
|
|
Accumulated depreciation
|
|
|
(1,407
|
)
|
|
|
(486
|
)
|
Total
property and equipment, net
|
|
$
|
10,307
|
|
|
$
|
2,173
|
|
Depreciation
expense for the three months ended July 31, 2018 and 2017 was approximately $396,000 and $122,000, respectively. Depreciation
expense for the nine months ended July 31, 2018 and 2017 was approximately $1,002,000 and $295,000, respectively.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7.
INTANGIBLE ASSETS
Intangible
assets, net, consist of the following (in thousands):
|
|
July
31, 2018
|
|
|
October
31, 2017
|
|
Customer contracts / relationships
|
|
$
|
534
|
|
|
$
|
-
|
|
Trade names / trademarks
|
|
|
101
|
|
|
|
-
|
|
Non-compete agreement
|
|
|
410
|
|
|
|
-
|
|
Backlog
|
|
|
12
|
|
|
|
|
|
Total intangible
assets, gross
|
|
|
1,057
|
|
|
|
-
|
|
Accumulated amortization
|
|
|
(50
|
)
|
|
|
-
|
|
Total
intangible assets, net
|
|
$
|
1,007
|
|
|
$
|
-
|
|
Amortization
expense for the three months and nine months ended July 31, 2018 was approximately $50,000.
The
future amortization of these intangible assets is expected to be as follows (in thousands):
Fiscal year 2018 (three months remaining)
|
|
$
|
50
|
|
Fiscal year 2019
|
|
|
195
|
|
Fiscal year 2020
|
|
|
189
|
|
Fiscal year 2021
|
|
|
189
|
|
Fiscal year 2022
|
|
|
138
|
|
Thereafter
|
|
|
246
|
|
|
|
$
|
1,007
|
|
8.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consist of the following (in thousands):
|
|
July
31, 2018
|
|
|
October
31, 2017
|
|
Accounts payable
|
|
$
|
82
|
|
|
$
|
25
|
|
Due to Zift
|
|
|
-
|
|
|
|
36
|
|
Medical study and supplies
|
|
|
186
|
|
|
|
362
|
|
Property and equipment purchases
|
|
|
368
|
|
|
|
54
|
|
Salaries and other compensation
|
|
|
1,108
|
|
|
|
574
|
|
Legal and accounting
|
|
|
1,050
|
|
|
|
555
|
|
Other accruals
|
|
|
1,073
|
|
|
|
333
|
|
Total
accounts payable and accrued expenses
|
|
$
|
3,867
|
|
|
$
|
1,939
|
|
Salaries
and other compensation include accrued payroll expense and employer 401K plan contributions.
9.
LONG TERM NOTES PAYABLE
In
connection with the IBEX Acquisition, described in Note 4, the Company issued a promissory note payable to the Seller with an
initial fair value of $1.22 million. The promissory note has a principal balance of $1,333,333 and bears interest at a rate of
3.5% interest per annum. Principal and interest are payable in five equal installments beginning on November 3, 2018 and continuing
on each six-month anniversary thereafter (“Payment Date”). The promissory note may be prepaid by the Company at anytime
and becomes due and payable at the earlier of the maturity date of November 3, 2020 or upon an event of default, which includes
failure to pay any installment on each Payment Date, breach of any negative covenants, insolvency or bankruptcy. Upon the occurrence
of an event of default, the promissory note will bear an accelerated interest of 7% per annum from the date of the event of default.
The
Company initially recognized the promissory note at its fair value, using an estimated market rate of interest for the
Company, which was higher than the promissory note’s stated rate. The result of imputing a market rate of interest resulted
in an initial discount to the principal balance of approximately $113,000, which is being amortized to interest expense over the
term of the promissory note using the effective interest method. Amortization of debt discount of $18,000 was included in interest
expense for the three and nine months ended July 31, 2018.
10.
PREFERRED SHARES AND COMMON SHARES
Common
Stock Issuance
On
April 12, 2018, the Company completed a public offering providing for the issuance and sale of 2,335,937 shares of the Company’s
common stock, par value $0.001 per share, at an offering price of $16.00 per share, for net proceeds of approximately $34.6 million,
after deducting offering expenses payable by the Company.
On
June 7, 2018, the Company completed an underwritten offering with Cantor Fitzgerald & Co., as underwriter, providing for the
issuance and sale of 2,455,882 shares of the Company’s common stock, par value $0.001 per share, at an offering price of
$23.65 per share, for net proceeds of approximately $58.0 million, after deducting offering expenses payable by the Company.
Exchange
of 100% of Outstanding Series F Preferred Stock Shares and Warrants
On
September 20, 2017, the Company sold an aggregate of $17,750,000 worth of units (the “Units”) of the Company’s
securities to accredited investors at a purchase price of $2,750 per Unit with each Unit consisting of (i) one share of the Company’s
newly authorized 6% Series F Convertible Preferred Stock, par value $0.001 per share (the “Series F Preferred Shares”),
which were each convertible into one hundred (100) shares of the Company’s common stock, and (ii) a two-year warrant to
purchase up to 322,727 shares of the Company’s common stock, at an exercise price of $30.00 per share.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
Series F Preferred Shares were convertible into shares of the Company’s common stock based on a conversion calculation equal
to the stated value of the Series F Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series F Preferred
Shares, as of such date of determination, divided by the conversion price. The stated value of each Series F Preferred Share was
$2,750 and the initial conversion price was $27.50 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations,
combinations, subdivisions or other similar events.
On
the two-year anniversary of the initial issuance date, any Series F Preferred Shares outstanding and not otherwise already converted,
shall, at the option of the holder, will either (i) automatically convert into common stock of the Company at the conversion price
then in effect or (ii) be repaid by the Company based on the stated value of such outstanding Series F Preferred Shares.
The
warrants issued in connection with the Series F Preferred Shares were determined to be liabilities pursuant to ASC 815. The warrant
agreement provided for an adjustment to the number of common shares issuable under the warrant and/or adjustment to the exercise
price, including but not limited to, if: (a) the Company issued shares of common stock as a dividend or distribution to holders
of its common stock; (b) the Company subdivided or combined its common stock (i.e., stock split); (c) adjustment of exercise price
upon issuance of new securities at less than the exercise price. Under ASC 815, warrants that provide for down-round exercise
price protection are recognized as derivative liabilities.
The
conversion feature within the Series F Preferred Shares was determined to not be clearly and closely related to the identified
host instrument and, as such, was recognized as a derivative liability measured at fair value pursuant to ASC 815.
The
initial fair value of the warrants and bifurcated embedded conversion feature, estimated to be approximately $4.3 million and
$9.3 million, respectively, was deducted from the gross proceeds of the Unit offering to arrive at the initial discounted carrying
value of the Series F Preferred Shares. The resulting discount to the aggregate stated value of the Series F Preferred Shares
of approximately $13.6 million was recognized as accretion using the effective interest method similar to preferred stock dividends,
over the two-year period prior to optional redemption by the holders.
On
March 6, 2018, the Company entered into separate exchange agreements (the “Exchange Agreements”) with holders (each
a “Holder”, and collectively the “Holders”) of 100% of the Company’s outstanding Series F Preferred
Shares, and the Company’s warrants to purchase shares of the Company’s common stock issued in connection with the
Series F Preferred Shares (such “Warrants” and Series F Preferred Shares collectively referred to as the “Exchange
Securities”) to exchange the Exchange Securities and unpaid dividends on the Series F Preferred Shares for common stock
(the “Exchange”).
The
Exchange resulted in the following issuances: (A) all outstanding Series F Preferred Shares were converted into 972,070 shares
of restricted common stock at an effective conversion price of $18.26 per share of common stock (the closing price of Common Stock
on the NASDAQ Capital Market on February 26, 2018); (B) the right to receive 6% dividends underlying Series F Preferred Shares
was terminated in exchange for 31,321 shares of restricted common stock; (C) 322,727 Warrants to purchase common stock were exchanged
for 151,871 shares of restricted common stock; and (D) the Holders of the Warrants relinquished any and all other rights pursuant
to the Warrants, including exercise price adjustments.
As
part of the Exchange, the Holders also relinquished any and all other rights related to the issuance of the Exchange Securities,
the respective governing agreements and certificates of designation, including any related dividends, adjustment of conversion
and exercise price, and repayment option. The existing registration rights agreement with the holders of the Series F Preferred
Shares was also terminated and the holders of the Series F Preferred Shares waived the obligation of the Company to register the
common shares issuable upon conversion of Series F Preferred Shares or upon exercise of the warrants, and waived any damages,
penalties and defaults related to the Company failing to file or have declared effective a registration statement covering those
shares.
The
exchange of all outstanding Series F Preferred Shares, and the holders’ right to receive 6% dividends, for common stock
of the Company was recognized as follows:
Fair market value of
1,003,391 shares of common stock issued at $20.05 (Company’s closing stock price on March 5, 2018) in exchange for Series
F Preferred Shares and accrued dividends
|
|
$
|
20,117,990
|
|
Carrying value of Series F Preferred
Shares at March 5, 2018, including dividends
|
|
|
(5,898,274
|
)
|
Carrying value
of bifurcated conversion option at March 5, 2018
|
|
|
(7,162,587
|
)
|
Deemed dividend
on Series F Preferred Shares exchange
|
|
$
|
7,057,129
|
|
As
the Warrants were classified as a liability, the exchange of the Warrants for common shares should be recognized as a liability
extinguishment. As of March 5, 2018, the fair market value of the 151,871 common shares issued in the Exchange was $3,045,034
and the fair value of the common stock warrant liability was $2,525,567 resulting in a loss on extinguishment of warrant liability
of $519,467 during the nine months ended July 31, 2018.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
Company recognized accretion of the discount to the stated value of the Series F Preferred Shares of approximately $1,290,000
in the nine months ended July 31, 2018, respectively, as a reduction of additional paid-in capital and an increase in the carrying
value of the Series F Preferred Shares. The accretion is presented in the Statement of Operations as a deemed dividend, increasing
net loss to arrive at net loss attributable to common stockholders.
Preferred
Stock Conversion and Elimination
On
February 6, 2018, 15,756 shares of Series B Convertible Preferred Stock (“Series B Preferred Shares”) were converted
into 262,606 shares of common stock.
On
March 6, 2018, the Company received conversion notices (in accordance with original terms) from holders of 100% of the outstanding
shares of Series A Convertible Preferred Stock (the “Series A Preferred Shares”), Series B Preferred Shares and Series
E Convertible Preferred Stock (the “Series E Preferred Shares”) and issued an aggregate of 7,945,250 shares of common
stock to such holders.
The
Series E Preferred Shares were held by Dr. Denver Lough, the Company’s Chief Executive Officer. On March 6, 2018, the Company
entered into a new registration rights agreement (the “Lough Registration Rights Agreement”) with Dr. Lough, pursuant
to which the Company agreed to file a registration statement to register the resale of 7,050,000 shares of Common Stock issued
upon conversion of the Series E Preferred Shares within six months, to cause such registration statement to be declared effective
by the Securities and Exchange Commission as promptly as possible following its filing and, with certain exceptions set forth
in the Lough Registration Rights Agreement, to maintain the effectiveness of the registration statement until all of such shares
have been sold or are otherwise able to be sold pursuant to Rule 144 under the Securities Act without restriction. Any sales of
shares under the registration statement were subject to certain limitations as specified with more particularity in the Lough
Registration Rights Agreement. In April 2018, Dr. Lough entered into a lock up agreement for 180 days, which prohibits him from
selling any shares that may be registered until October 2018.
On
March 7, 2018, the Company filed a Certificate of Elimination with the Secretary of State of the State of Delaware terminating
the Company’s Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock. As a result, the Company has
10,000,000 shares of authorized and unissued preferred stock with no designation as to series.
Convertible
preferred stock activity for the nine months ended July 31, 2018 consisted of the following:
|
|
Shares
Outstanding
-
October
31, 2017
|
|
|
First
Quarter 2018 -Preferred Stock Conversions
|
|
|
First
Quarter 2018 - Common Stock Shares Issued
|
|
|
Second
Quarter 2018 -Preferred Stock Conversions and Series F Exchange
|
|
|
Second
Quarter 2018 - Common Stock Shares Issued
|
|
|
Year
to Date 2018 -Preferred Stock Conversions and Series F Exchange
|
|
|
Year
to Date 2018 - Common Stock Shares Issued
|
|
Series
A
|
|
|
3,146,671
|
|
|
|
(1,544,572
|
)
|
|
|
350,000
|
|
|
|
(1,602,099
|
)
|
|
|
363,036
|
|
|
|
(3,146,671
|
)
|
|
|
713,036
|
|
Series
B
|
|
|
47,689
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(47,689
|
)
|
|
|
794,820
|
|
|
|
(47,689
|
)
|
|
|
794,820
|
|
Series
C
|
|
|
2,578
|
|
|
|
(2,578
|
)
|
|
|
59,950
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,578
|
)
|
|
|
59,950
|
|
Series
D
|
|
|
26,667
|
|
|
|
(26,667
|
)
|
|
|
44,445
|
|
|
|
-
|
|
|
|
|
|
|
|
(26,667
|
)
|
|
|
44,445
|
|
Series
E
|
|
|
7,050
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,050
|
)
|
|
|
7,050,000
|
|
|
|
(7,050
|
)
|
|
|
7,050,000
|
|
Series
F
|
|
|
6,455
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,455
|
)
|
|
|
972,070
|
|
|
|
(6,455
|
)
|
|
|
972,070
|
|
Total
|
|
|
3,237,110
|
|
|
|
(1,573,817
|
)
|
|
|
454,395
|
|
|
|
(1,663,293
|
)
|
|
|
9,179,926
|
|
|
|
(3,237,110
|
)
|
|
|
9,634,321
|
|
11.
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.
|
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In
connection with the offering of Units in September 2017, the Company issued warrants to purchase an aggregate of 322,727 shares
of common stock. These warrants were exercisable at $30.00 per share and expire in two years. The warrants were liabilities pursuant
to ASC 815. The warrant agreement provided for an adjustment to the number of common shares issuable under the warrant and/or
adjustment to the exercise price, including but not limited to, if: (a) the Company issues shares of common stock as a dividend
or distribution to holders of its common stock; (b) the Company subdivides or combines its common stock (i.e., stock split); (c)
adjustment of exercise price upon issuance of new securities at less than the exercise price. Under ASC 815, warrants that provide
for down-round exercise price protection are recognized as derivative liabilities.
The
Series F Preferred Shares contained an embedded conversion feature that was not clearly and closely related to the identified
host instrument and, as such, was recognized as a derivative liability measured at fair value. The Company classified these derivatives
on the consolidated balance sheet as a current liability.
As
noted in Note 10. above, both the warrants and the Series F Preferred Shares were exchanged for common stock on March 6, 2018.
The
fair value of the bifurcated embedded conversion feature was estimated to be approximately $7.2 million and $9.2 million, respectively,
at March 5, 2018 and October 31, 2017 as calculated using a Monte Carlo simulation with the following assumptions:
|
|
Series
F Conversion Feature
|
|
|
|
|
March
5, 2018
|
|
|
|
October
31, 2017
|
|
Stock price
|
|
$
|
20.05
|
|
|
$
|
25.87
|
|
Exercise price
|
|
$
|
27.50
|
|
|
$
|
27.50
|
|
Risk-free rate
|
|
|
2.158
|
%
|
|
|
1.581
|
%
|
Volatility
|
|
|
88.2
|
%
|
|
|
96.0
|
%
|
Term
|
|
|
1.54
|
|
|
|
1.89
|
|
The
fair value of the warrant liability was estimated to be approximately $2.5 million and $4.3 million, respectively, at March 5,
2018 and October 31, 2017 as calculated using the Monte Carlo simulation with the following assumptions:
|
|
|
Warrant
Liability
|
|
|
|
|
March
5, 2018
|
|
|
|
October
31, 2017
|
|
Stock price
|
|
$
|
20.05
|
|
|
$
|
25.87
|
|
Exercise price
|
|
$
|
30.00
|
|
|
$
|
30.00
|
|
Risk-free rate
|
|
|
2.158
|
%
|
|
|
1.581
|
%
|
Volatility
|
|
|
88.2
|
%
|
|
|
96.0
|
%
|
Term
|
|
|
1.54
|
|
|
|
1.89
|
|
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.
The
fair value hierarchy of financial instruments, measured at fair value on a recurring basis on the consolidated balance sheets
as of July 31, 2018 is as follows (in thousands):
|
|
Fair
Value Measurement as of July 31, 2018
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
268
|
|
|
$
|
268
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
268
|
|
|
$
|
268
|
|
The
fair value hierarchy of financial instruments, measured at fair value on a recurring basis on the consolidated balance sheets
as of October 31, 2017 is as follows (in thousands):
|
|
Fair
Value Measurement as of October 31, 2017
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,256
|
|
|
$
|
4,256
|
|
Derivative
liability
|
|
|
-
|
|
|
|
-
|
|
|
|
9,246
|
|
|
|
9,246
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,502
|
|
|
$
|
13,502
|
|
The
following table sets forth the changes in the estimated fair value for our Level 3 classified contingent consideration (in thousands):
|
|
Contingent
Consideration
|
|
Fair value – October 31, 2017
|
|
$
|
-
|
|
IBEX acquisition –
May 3, 2018
|
|
$
|
278
|
|
Change in fair value
|
|
|
20
|
|
Earned
and moved to accounts payable
|
|
|
(30
|
)
|
Fair value
- July 31, 2018
|
|
$
|
26
8
|
|
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
following table sets forth the changes in the estimated fair value for our Level 3 classified derivative liabilities (in thousands):
|
|
2017
Series F
Preferred
Stock -
Warrant
Liability
|
|
|
2017
Series F
Preferred
Stock - Embedded Derivative
|
|
|
Total
Warrant and Derivative Liability
|
|
Fair value - October 31, 2017
|
|
$
|
4,256
|
|
|
$
|
9,246
|
|
|
$
|
13,502
|
|
Change in fair value
|
|
|
(1,731
|
)
|
|
|
(2,083
|
)
|
|
|
(3,814
|
)
|
Exchange / conversion
to common shares
|
|
|
(2,525
|
)
|
|
|
(7,163
|
)
|
|
|
(9,688
|
)
|
Fair value - July 31, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The carrying value
of the long-term promissory note approximates fair value, due to the imputation of interest on the note to an estimated market
rate of interest. The carrying amounts of accounts payable, accrued expenses, and accounts receivable approximate fair value as
these accounts are largely current and short term in nature.
12.
STOCK BASED COMPENSATION ARRANGEMENTS
In
the three and nine months ended July 31, 2018 and 2017, the Company recorded stock-based compensation expense related to restricted
stock awards and stock options as follows (in thousands):
|
|
For
the Three Months Ended
July
31,
|
|
|
|
2018
|
|
|
2017
|
|
General and administrative
expense:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
8,718
|
|
|
$
|
2,464
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
274
|
|
|
|
|
8,718
|
|
|
|
2,738
|
|
Research and development
expense:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
1,204
|
|
|
|
452
|
|
Total
stock-based compensation expense
|
|
$
|
9,922
|
|
|
$
|
3,190
|
|
|
|
For
the Nine Months Ended
July
31,
|
|
|
|
2018
|
|
|
2017
|
|
General and administrative
expense:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
22,783
|
|
|
$
|
10,057
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
1,118
|
|
|
|
|
22,783
|
|
|
|
11,175
|
|
Research and development
expense:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
4,891
|
|
|
|
639
|
|
Total
stock-based compensation expense
|
|
$
|
27,674
|
|
|
$
|
11,814
|
|
A
summary of the Company’s employee stock option activity in the nine months ended July 31, 2018 is presented below:
|
|
Number
of
shares
|
|
|
Weighted-Average
Exercise
Price
|
|
Outstanding - October 31, 2017
|
|
|
3,525,530
|
|
|
$
|
6.34
|
|
Granted
|
|
|
1,768,000
|
|
|
$
|
25.22
|
|
Exercised
|
|
|
(30,794
|
)
|
|
$
|
3.87
|
|
Forfeited
|
|
|
(34,167
|
)
|
|
$
|
18.90
|
|
Outstanding - July 31, 2018
|
|
|
5,228,569
|
|
|
$
|
12.65
|
|
Options exercisable - July 31,
2018
|
|
|
3,028,208
|
|
|
$
|
7.64
|
|
Weighted-average
fair value of options granted during the period
|
|
|
|
|
|
$
|
18.33
|
|
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A
summary of the Company’s non-employee stock option activity in the nine months ended July 31, 2018 is presented below:
|
|
Number
of
shares
|
|
|
Weighted-Average
Exercise
Price
|
|
Outstanding - October 31, 2017
|
|
$
|
293,000
|
|
|
$
|
19.61
|
|
No activity
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding – July 31, 2018
|
|
|
293,000
|
|
|
$
|
19.61
|
|
Options exercisable - July 31,
2018
|
|
|
136,542
|
|
|
$
|
17.12
|
|
Stock
options are generally granted to employees or non-employees at exercise prices equal to the fair market value of the Company’s
common stock at the dates of grant. Stock options generally vest over one to three years and have a term of five to ten years.
The total fair value of employee options granted during the nine months ended July 31, 2018 was approximately $32.4 million. The
intrinsic value of options outstanding at July 31, 2018 was $60.1 million. The intrinsic value of options exercised during the
nine months ended July 31, 2018 was $583,000. The weighted average remaining contractual term of outstanding and exercisable options
at July 31, 2018 was 8.8 years and 8.5 years, respectively. As of July 31, 2018, there was approximately $19.6 million of unrecognized
compensation cost related to stock options, which is expected to be recognized over a remaining weighted-average vesting period
of 0.6 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
assumptions for the nine months ended July 31, 2018:
Risk free annual interest
rate
|
|
|
2.01%-3.04
|
%
|
Expected volatility
|
|
|
80.86-85.62
|
%
|
Expected life
|
|
|
5.00-6.01
|
|
Assumed dividends
|
|
|
None
|
|
Restricted
stock and restricted stock units activity for employees and non-employees in the nine months ended July 31, 2018:
|
|
Number
of
shares
|
|
|
Weighted-Average
Grant-Date
Fair
Value
|
|
Unvested - October 31, 2017
|
|
|
227,132
|
|
|
$
|
7.83
|
|
Granted
|
|
|
308,387
|
|
|
$
|
27.48
|
|
Vested
|
|
|
(187,488
|
)
|
|
$
|
11.53
|
|
Unvested – July 31, 2018
|
|
|
348,031
|
|
|
$
|
23.25
|
|
The
total fair value of restricted stock and restricted stock units granted during the nine months ended July 31, 2018 was approximately
$8.5 million.
The
fair value of restricted stock and restricted stock unit 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. As of July 31,
2018, there was approximately $6.0 million of unrecognized compensation cost related to unvested restricted stock and restricted
stock unit awards, which is expected to be recognized over a remaining weighted-average vesting period of 1.0 year.
13.
INCOME TAXES
The
Company calculates its provision for federal and state income taxes based on current tax law. The Tax Cuts and Jobs Act (tax reform)
was enacted on December 22, 2017 (“Enactment Date”), and has several key provisions impacting accounting for and reporting
of income taxes. The most significant provision reduces the U.S. corporate statutory tax rate from 35% to 21% beginning on January
1, 2018. Although most provisions of tax reform are not effective until 2018, the Company is required to record the effect of
a change in tax law as of the Enactment Date on its deferred tax assets. As the Company maintains a full valuation allowance against
its deferred tax assets, there is no income tax expense recorded related to this change. As of the Enactment Date, the Company
estimated that its deferred tax asset and related valuation allowance were each reduced by approximately $2.2 million.
In accordance with
Staff Accounting Bulletin 118 (“SAB 118”), income tax effects of the Tax Act may be refined upon obtaining, preparing,
or analyzing additional information during the measurement period and such changes could be material. During the measurement period,
provisional amounts may be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017, by U.S.
regulatory and standard-setting bodies. While we are able to make reasonable estimates of the impact of the reduction in corporate
rate and the deemed repatriation transition tax, the final impact of the Tax Act may differ from these estimates, due to, among
other things, changes in our interpretations and assumptions, additional guidance that may be issued by the I.R.S., and actions
we may take. We are continuing to gather additional information to determine the final impact.
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 issuance of the Series E Preferred
Stock in connection with its original acquisition of the PolarityTE, Inc., a Nevada corporation in April 2017, will likely result
in limitations on the utilization of the Company’s net operating loss carryforwards under IRS section 382.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
14.
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 and nine months ended July 31, 2018 and
2017, as the effect of their inclusion would be anti-dilutive.
For
periods when shares of participating preferred stock (as defined in ASC 260 earnings per share) are outstanding, the two-class
method is used to calculate basic and diluted earnings (loss) per common share. The two-class method is an earnings allocation
formula that determines earnings per share for each class of common stock and participating security according to dividends declared
(or accumulated) and participation rights in undistributed earnings. Under the two-class method, basic earnings (loss) per common
share is computed by dividing net earnings (loss) attributable to common shares after allocation of earnings to participating
securities by the weighted-average number of shares of common stock outstanding during the year. Diluted earnings (loss) per common
share, when applicable, is computed using the more dilutive of the two-class method or the if-converted method. In periods of
net loss, no effect is given to participating securities since they do not contractually participate in the losses of the Company.
The
table below provides total potential shares outstanding, including those that are anti-dilutive, on July 31, 2018 and 2017:
|
|
July
31,
|
|
|
|
2018
|
|
|
2017
|
|
Shares issuable upon conversion
of preferred stock
|
|
|
-
|
|
|
|
9,020,287
|
|
Shares issuable upon exercise of stock options
|
|
|
5,521,569
|
|
|
|
2,918,806
|
|
Non-vested shares under restricted stock
grants
|
|
|
348,031
|
|
|
|
294,363
|
|
15.
COMMITMENTS AND CONTINGENCIES
Contingencies
On
June 26, 2018, a class action complaint alleging violations of the Federal securities laws was filed in the United States District
Court, District of Utah, by Jose Moreno against the Company and two directors of the Company, Case No. 2:18-cv-00510-JNP (the
“Moreno Complaint”). On July 6, 2018, a similar complaint was filed in the same court against the same defendants
by Yedid Lawi, Case No. 2:18-cv-00541-PMW (the “Lawi Complaint”). Both the Moreno Complaint and Lawi Complaint allege
that the defendants made or were responsible for, disseminating information to the public through reports filed with the Securities
and Exchange Commission and other channels that contained material misstatements or omissions in violation of Sections 10 and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 adopted thereunder. Specifically, both complaints allege that the
defendants misrepresented the status of one of the Company’s patent applications while touting the unique nature of the
Company’s technology and its effectiveness. Plaintiffs are seeking damages suffered by them and the class consisting of
the persons who acquired the publicly-traded securities of the Company between March 31, 2017, and June 22, 2018. Plaintiffs have
filed motions to consolidate and for appointment as lead plaintiff, which are pending, so that defendants have not filed any responsive
pleadings to the complaints. The Company believes the allegations in the Moreno Complaint and Lawi Complaint are without merit,
and intends to defend the litigation, vigorously. At this early stage of the proceedings the Company is unable to make any prediction
regarding the outcome of the litigation.
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, Majesco Sub, and a number of other
game publisher defendants. The complaint alleged that the 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 case was subsequently transferred to the Western District of Washington. On June 16, 2017, final judgment
was entered in favor of the defendants finding that the accused products did not literally infringe the asserted patent and that
plaintiff was barred from pursing infringement under the doctrine of equivalents due to prosecution history estoppel. The plaintiff
appealed that decision to the Court of Appeals for the Federal Circuit. On April 9, 2018, the Court of Appeals for the Federal
Circuit affirmed the judgment of the District Court for the Western District of Washington. On May 7, 2018, the plaintiff filed
a petition for panel rehearing and rehearing en banc by the Court of Appeals. The petition for rehearing was denied on June 8,
2018. The plaintiff subsequently filed a petition for a writ of certiorari with the Supreme Court of the United States. That petition
was placed on the docket September 4, 2018 as No. 18-276 and is currently pending. On June 23, 2017, as part of a purchase agreement,
liabilities and claims relating to this litigation were assumed by Zift. The Company cannot be certain about the outcome of the
appeal, or whether litigation regarding the assumption of liabilities by Zift may occur.
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In
addition to the items 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, 2019.
The
Company also leased space in Salt Lake City, Utah at a cost of approximately $24,000 per month under a lease agreement that expired
on March 31, 2018. The Company will continue to lease space in Salt Lake City, Utah at a cost of approximately $12,400 per month
under a lease agreement that expires on September 30, 2018. The Company will exit the property at the termination of the lease.
On
December 27, 2017, the Company signed a five-year lease with one five-year option to renew on approximately 178,528 rentable square
feet in Salt Lake City, Utah. The base rent for the first year of the lease is $1,178,285 and escalates at the rate of 3% per
annum thereafter.
On
July 11, 2018, the Company signed a two-year lease with one five-year option to renew on approximately 44,695 rentable square
feet in Salt Lake City, Utah. The base rent, including building maintenance fees is $478,237 per annum. As of July 31, 2018, this
lease had not commenced and is expected to commence during the fiscal quarter ending October 31, 2018.
Rent
expense for the three months ended July 31, 2018 and 2017 was approximately $356,000 and $87,000, respectively. Rent expense for
the nine months ended July 31, 2018 and 2017 was approximately $994,000 and $147,000, respectively.
The
Company has entered into employment agreements with key executives that contain severance terms and change of control provisions.
16.
DISCONTINUED OPERATIONS
The
results of operations from the discontinued business for the three and nine months ended July 31, 2018 and 2017 are as follows
(in thousands):
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
July
31,
|
|
|
July
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
143
|
|
|
$
|
-
|
|
|
$
|
558
|
|
Expenses
|
|
|
-
|
|
|
|
176
|
|
|
|
-
|
|
|
|
1,007
|
|
Gain (loss) from
discontinued operations
|
|
$
|
-
|
|
|
$
|
(33
|
)
|
|
$
|
-
|
|
|
$
|
(449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations
|
|
$
|
-
|
|
|
$
|
100
|
|
|
$
|
-
|
|
|
$
|
100
|
|
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
cash flows from the discontinued business for the nine months ended July 31, 2018 and 2017 are as follows (in thousands):
|
|
For
the nine months ended
July
31,
|
|
|
|
2018
|
|
|
2017
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss from discontinued
operations
|
|
$
|
-
|
|
|
$
|
(349
|
)
|
Adjustments to reconcile net loss from
discontinued operations to net cash used in discontinued operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
-
|
|
|
|
11
|
|
Stock based compensation
expense
|
|
|
-
|
|
|
|
1,118
|
|
Amortization of
capitalized software development costs and license fees
|
|
|
-
|
|
|
|
50
|
|
Gain on sale of
Majesco Sub
|
|
|
|
|
|
|
(100
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
-
|
|
|
|
113
|
|
Accounts
payable and accrued expenses
|
|
|
-
|
|
|
|
(810
|
)
|
Net
cash provided by discontinued operating activities
|
|
$
|
-
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Cash received
from sale of Majesco Sub
|
|
$
|
45
|
|
|
$
|
10
|
|
Net
cash provided by discontinued investing activities
|
|
$
|
45
|
|
|
$
|
10
|
|
17.
SEGMENT REPORTING
The
Company’s operations involve dissimilar products which are managed separately. Accordingly, it operates in two segments:
1) regenerative medicine and 2) veterinary sciences.
Certain
information concerning our segments for the three and nine months ended July 31, 2018 and 2017 and as of July 31, 2018 and 2017
is presented in the following table (in thousands):
|
|
Three Months Ended July 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
Reportable Segments:
|
|
|
|
|
|
|
|
|
Regenerative Medicine
|
|
$
|
244
|
|
|
$
|
—
|
|
Veterinary Sciences
|
|
|
172
|
|
|
|
—
|
|
Discontinued Operations
|
|
|
—
|
|
|
|
—
|
|
Total consolidated revenues
|
|
$
|
416
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Net loss:
|
|
|
|
|
|
|
|
|
Reportable Segments:
|
|
|
|
|
|
|
|
|
Regenerative Medicine
|
|
$
|
(17,157
|
)
|
|
$
|
(5,267
|
)
|
Veterinary Sciences
|
|
|
(88
|
)
|
|
|
—
|
|
Discontinued Operations
|
|
|
—
|
|
|
|
67
|
|
Total net loss
|
|
$
|
(17,245
|
)
|
|
$
|
(5,200
|
)
|
POLARITYTE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
Nine
Months Ended July 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
Reportable Segments:
|
|
|
|
|
|
|
|
|
Regenerative
Medicine
|
|
$
|
260
|
|
|
$
|
—
|
|
Veterinary Sciences
|
|
|
172
|
|
|
|
—
|
|
Discontinued Operations
|
|
|
—
|
|
|
|
—
|
|
Total
consolidated revenues
|
|
$
|
432
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Net loss:
|
|
|
|
|
|
|
|
|
Reportable Segments:
|
|
|
|
|
|
|
|
|
Regenerative Medicine
|
|
$
|
(42,865
|
)
|
|
$
|
(120,872
|
)
|
Veterinary Sciences
|
|
|
(88
|
)
|
|
|
—
|
|
Discontinued Operations
|
|
|
—
|
|
|
|
(349
|
)
|
Total
net loss
|
|
$
|
(42,953
|
)
|
|
$
|
(121,221
|
)
|
|
|
As of
July 31, 2018
|
|
|
As of
October
31, 2017
|
|
Identifiable assets employed:
|
|
|
|
|
|
|
|
|
Reportable Segments:
|
|
|
|
|
|
|
|
|
Regenerative Medicine
|
|
$
|
93,577
|
|
|
$
|
20,152
|
|
Veterinary Sciences
|
|
|
4,310
|
|
|
|
—
|
|
Discontinued Operations
|
|
|
—
|
|
|
|
—
|
|
Total assets
|
|
$
|
97,887
|
|
|
$
|
20,152
|
|
18.
SUBSEQUENT EVENTS
Changes
in Board of Directors and Officers
On
August 7, 2018, Edward Swanson resigned from the position of director of the Company, and the Board of Directors of the Company
(the “Board”) elected Rainer Erdtmann a director of the Company to fill the Class III director vacancy left by the
resignation of Dr. Swanson. The Board determined that Mr. Erdtmann is “independent” pursuant to the definition of
independence under Rule 5605(a)(2) of the Nasdaq Listing Rules. In consideration of Mr. Erdtmann’s agreement to join the
Board the Company issued to Mr. Erdtmann an option to purchase 50,000 shares of the Company’s common stock exercisable over
a term of 10 years and vests in 24 equal monthly installments commencing September 7, 2018, subject to continued service on the
Board. The option was issued under the Company’s 2017 Equity Incentive Plan (the “Plan”), and the exercise price
is $20.47 per share, which is fair value determined under the Plan. Mr. Erdtmann will also be entitled to participate in the annual
compensation package the Company provides to its non-employee directors.
On
August 7, 2018, pursuant to Article II, Section 1.B of the Company’s Bylaws the Board approved an increase in the number
of persons comprising the Board from seven to eight by adding one new director position to Class II of the Board, and the Board
elected David Seaburg a director of the Company to fill the vacancy in Class II of the Board. The Company entered into a consulting
agreement with Mr. Seaburg pursuant to which he will provide investor relations and other services to the Company over a period
of two years for a fee consisting of (a) quarter-annual cash payment of $10,000, (b) 60,000 restricted stock units issued under
the Plan that vest in four equal installments every six months during the term of the agreement subject to continued service,
and (c) an annual award under the Plan of options exercisable over a term of 10 years to purchase common stock with a value of
$150,000 at the time of the award based on a Black-Scholes calculation.
John
Stetson was an executive officer Company serving as the Chief Investment Officer. On September 7, 2018, the employment of John
Stetson in any capacity with the Company, including as Chief Investment Officer, was terminated.